Chapter 19

Consolidation: other issues

Prepared by
Emma Holmes
1
Consider the following group structure:
P
T
S
70%
60%
P controls S and S controls T
S and T are both subsidiaries of P
P would have to consolidate S and T into the one group



NCI
S
30%
NCI
T
40%
Direct and indirect
non-controlling interest
2
This structure requires the recognition of:
DNCI direct non-controlling interest
INCI indirect non-controlling interest
The interests of all parties in this group are summarised
as follows:
Direct and indirect
non-controlling interest
S T
Parent Interest Direct
Indirect
Total
Non-controlling Interest
Direct
Indirect
Total
Total ownership interests
70 % -
- 42 % (70% x 60%)
70% 42%
30 % 40 %
- 18% (30% x 60%)
30% 58%
100% 100%
3
T is part of the P Ltd Group (and will therefore be
consolidated), despite the fact that the total NCI in T is >
50% (it is 58%)

This is because we use different rules to determine
WHO to consolidate, as opposed to
HOW to consolidate

To determine WHO to consolidate, we must ask
ourselves who does P control?. As P controls S and S
controls T, then P controls both S and T. Therefore P
should consolidate S AND T

When it comes to HOW to consolidate, we need to
recognise that P only has a 42% interest in T
Direct and indirect
non-controlling interest
4

2 x pre-acquisition elimination entries

NO change to format of consolidation journals re:
BCVR
pre-acquisition elimination
elimination of intragroup transactions

HOWEVER calculation of NCI share of equity changes
from the last chapter

Impact of multiple subsidiaries
(and INCI) on consolidation
5
The major consideration in performing a consolidation with
indirect non-controlling interests is to distinguish between:

Pre acquisition equity of the subsidiary
These amounts are only allocated to the DNCI (STEP 1)

AND

Post acquisition movements of equity of the subsidiary
These amounts are allocated to the DNCI AND the INCI
(STEPS 2 & 3)
Note that any pre-acquisition movements occurring in
steps 2 or 3 are allocated to the DNCI only.

Calculation of NCI share of equity
6
P Ltd. acquired 70% interest in S Ltd. on 1 July 2010 for
$70,000 when the equity of S Ltd comprised:

Share capital 60,000
Retained earnings 33,000
$93,000

On that same day, S acquired 60% interest in T Ltd for
$35,000, when the equity of T Ltd comprised:

Share capital 35,000
Retained earnings 15,000
$50,000

Example: Sequential acquisitions
7
The equity of S and T on 30 June 2011 and 30 June 2012
are summarised below
S Ltd
30/6/11 30/6/12
Share capital $60,000 60,000
Retained earnings 45,000 55,000
105,000 115,000

T Ltd
30/6/11 30/6/12
Share capital $35,000 35,000
General reserve 5,000 5,000
Retained earnings 18,000 23,000
58,000 63,000

Example: Sequential acquisitions
8
At acquisition S Ltd held inventory which was recorded at
$10,000 below fair value. All of this inventory was sold by 30
June 2011
At acquisition T held plant which was recorded at $5,000 below
fair value. The plant has a remaining useful life of 5 years
During the year ended 30 June 2012, S Ltd made a profit of
$18,000 and paid a dividend of $8,000
During the year ended 30 June 2012, T Ltd made a profit of
$30,000 and paid a dividend of $25,000. The profit of $30,000
in T Ltds books includes an unrealised profit of $10,000 on the
sale of inventory to P Ltd. Total inter-entity sales during the
year were $25,000

Required:
Prepare the consolidation journals as at 30 June 2012 for the P
Ltd group

Example: Sequential acquisitions
9
Acquisition Analysis
Consideration transferred
Book value of net assets
- Share capital
- Retained earnings
Total BV of net assets
FV (BCVR) adjustments
- Inventory
- Plant
Total fair value adjustments
FVINA
X %age acquired
Goodwill on acquisition
Ps inv. in S
70,000
60,000
33,000
93,000
7,000
-
7,000
100,000
70% 70,000
-
Ss inv. in T
35,000
35,000
15,000
50,000
-
3,500
3,500
53,500
60% 32,100
2,900
Note that a separate acquisition analysis is required for each subsidiary. The analysis
is based on the ownership by the immediate parent
10

DR Plant 5,000
CR DTL 1,500
CR BCVR 3,500

DR Depn expense 1,000
DR Retained earnings 1,000
CR Accum depreciation 2,000

DR DTL 600
CR ITE 300
CR Retained earnings 300

(i) Revaluation of T Ltds plant to fair value


Consolidation at 30 June 2012
Based on 5 year useful life
($5,000)/5 years
No entry required in relation to the inventory held by S as it was sold in the prior year
11


DR Share capital 42,000
DR Retained earnings 28,000
CR Inv in S Ltd. 70,000
(a) To eliminate Ps investment in S
DR Share capital 21,000
DR Retained earnings 9,000
DR BCVR 2,100
DR Goodwill 2,900
CR Inv in T Ltd 35,000
(b) To eliminate Ss investment in T
(ii) Pre-acquisition elimination entries


Consolidation at 30 June 2012
1
Based on Ps 70%
interest in S
Based on Ss 60%
interest in T
1. (33,000 + 7,000 (FV adj re inventory)) x 70% = $28,000
12

DR Dividend revenue 5,600
CR Dividend paid 5,600

(a) To eliminate dividend paid by S to P

DR Dividend revenue 15,000
CR Dividend paid 15,000

(b) To eliminate dividend paid by T to S

(iii) Elimination of dividends paid


Consolidation at 30 June 2012
($8,000 x 70%)
($25,000 x 60%)- Based
on Ss direct interest in T
13

DR Sales 25,000
CR Cost of Sales 25,000

DR Cost of Sales 10,000
CR Inventory 10,000

DR DTA 3,000
CR ITE 3,000

(iv) Elimination of unrealised profit on inventory
Consolidation at 30 June 2012
14
(kind of like prepaying tax)

DR Share capital 18,000
DR Retained earnings 9,900
DR BCVR 2,100
CR non-controlling interest 30,000

(a)To allocate NCI in S DNCI of 30%


DR Share capital 14,000
DR Retained earnings 6,000
DR BCVR 1,400
CR non-controlling interest 21,400

(b) To allocate NCI in T DNCI of 40%

(v) NCI share of pre-acquisition equity (Step 1)




Consolidation at 30 June 2012
15
(for undervalued plant)
Allocated 40% of T to the NCI
DR Retained earnings 3,600
CR BCVR 2,100
CR Non-controlling interest 1,500

(a) To allocate NCI in S DNCI of 30%

(vi) NCI share of opening post-acqn equity in S (Step 2)

The NCI share of R/E is calculated as follows:




Consolidation at 30 June 2012
Opening retained earnings (30/6/11) 45,000
Less: pre-acquisition retained earnings (33,000)
Post acquisition retained earnings (company S) 12,000
X NCI share of 30% 3,600
Arises due to sale of inventory in 2006
16
(Sweeping up the movement of the retained earnings of the subsidiary
until the current year, picking up along the way that the inventory was
sold outside the group, and adjust for it)
DR Retained earnings 1,334
DR General reserve 2,900
CR Non-controlling interest 4,234
(b) To allocate NCI in T DNCI:40% + INCI:18% = 58%

(vi) NCI share of opening post-acqn equity in T (Step 2)

The NCI share of R/E is calculated as follows:


Consolidation at 30 June 2012
Opening retained earnings (30/6/11) 18,000
Less: pre-acquisition retained earnings (15,000)
Post acquisition retained earnings 3,000
Increased depn expense on plant (700)
Adjusted retained earnings 2,300
X NCI share of 58% 1,334
$5,000 x 58%
17
Direct and indirect interest of outsiders
Indirect interests dont have an impact on preaquisition entries, only the post acquisition entries
DR Non-controlling interest 2,400
CR Dividend paid 2,400

(a) To allocate dividend paid by S to NCI DNCI of 30%

DR Non-controlling interest 10,000
CR Dividend paid 10,000

(b) To allocate dividend paid by T to NCI DNCI of 40%

(vii) NCI share of current year dividends (Step 3)


Consolidation at 30 June 2012
($8,000 x 30%)
(25,000 x 40%) 1
1. Note that the DNCI only is allocated a share of the dividend paid by T. The other
60% of the dividend paid by T was eliminated in journal (iii) (b) on slide 14
18
Eliminate these dividends to place them into the NCI accounts

DR NCI share of profit 900
CR Non-controlling interest 900

(a) Current year profit of S

(viii) NCI share of current year profit (Step 3)

The NCI share of profit in S is calculated as follows:



Consolidation at 30 June 2012
Current year profit 18,000
Less: dividend received from T (15,000)
Adjusted current year profit 3,000
X NCI share of 30% 900
19

DR NCI share of profit 12,934
CR Non-controlling interest 12,934

(b) Current year profit of T

(viii) NCI share of current year equity (Step 3)

The NCI share of profit in T is calculated as follows:



Consolidation at 30 June 2012
Current year profit 30,000
Increased depn expense on plant (700)
Unrealised profit adj. on inventory transfer (7,000)
Adjusted current year profit 22,300
X NCI share of 58% 12,934
20

EXTRACT P Ltd.
$000
S Ltd.
$000
T Ltd.
$000
Adjustments

DR CR
Group MI

DR CR
Parent
Curr yr Profit 100 18 30 (i) 1
(iii)5.6/15
(iv) 10
(i) 0.3
(iv) 3
119.7 (viii) 0.9/
12.934
105.866
Ret. Earns (08) 200 45 18 (i) 1
(ii) 28/9
(i) 0.3 225.3 (v) 9.9/ 6
(vi)3.6/1.334
204.466
Dividend paid (50) (8) (25) (iii) 5.6/15 (62.4) (vii) 2.4/10 (50.0)
Ret. Earns (0) 250 55 23 282.6 260.332
Share capital 100 60 35 (ii) 42/21 132.0 (v) 18/14 100.0
General reserve 20 - 5 25.0 (vi) 2.9 22.1
BCVR - - - (ii) 2.1 (i) 3.5 1.4 (v) 2.1/1.4 (vi) 2.1 -
Total equity :PEI 382.432
Total
equity :NCI
(vii) 2.4/10 (v) 30/21.4
(vi) 1.5/4.234
(viii) 0.9/
12.934





58.568
EQUITY 370 115 63 441 441

Worksheet - 30 June 2012
21
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