Chapter 30

Further consolidation
issues III: Accounting for
indirect ownership interests

Copyright © 2012 McGraw-Hill Australia Pty Ltd

PPTs to accompany Deegan, Australian Financial Accounting 7e
16-1
Objectives of this lecture
• Understand what an indirect equity ownership interest
represents and how it is calculated
• Understand that the determination of the total ownership
interest in a subsidiary must take account of both direct
and indirect ownership interests
• Understand that the parent entity’s interest in the post-
acquisition movements of a subsidiary’s retained earnings
and other reserves will be based upon the sum of the
direct and indirect ownership interests
• Understand that even in the presence of indirect ownership
interests, the pre-acquisition capital and reserves of a
subsidiary will be eliminated on consolidation on the basis
of only the direct ownership interests

Copyright © 2012 McGraw-Hill Australia Pty Ltd

PPTs to accompany Deegan, Australian Financial Accounting 7e
16-2
Indirect ownership interests

• AASB 10 requires that:

– the consolidated financial report include all
subsidiaries of the parent
• Subsidiary defined as (AASB 10):
– an entity that is controlled by another entity
• According to paragraphs 6 and 7 of AASB 10:
– ‘Control’ can be exercised even in the absence of any
direct ownership interest—it can arise through indirect
ownership interests

Copyright © 2012 McGraw-Hill Australia Pty Ltd

PPTs to accompany Deegan, Australian Financial Accounting 7e
16-3
Indirect ownership interests (cont)

Copyright © 2012 McGraw-Hill Australia Pty Ltd

PPTs to accompany Deegan, Australian Financial Accounting 7e
16-4
Calculating direct and indirect
interests
Table 30.2
A Ltd B Ltd
(% interest) (% interest)
Parent Entity interest
Direct 70 –
Indirect – 42
Non-controlling interest
Direct 30 40
Indirect – 18
100 100

Copyright © 2012 McGraw-Hill Australia Pty Ltd

PPTs to accompany Deegan, Australian Financial Accounting 7e
16-5
Indirect ownership interests (cont.)
Non-controlling interests represent:
the equity in a subsidiary not attributable,
directly or indirectly, to a parent

Also possible to hold both direct and indirect

interests in the same entity
– Consider Figure 30.2 (p. 1004)

Copyright © 2012 McGraw-Hill Australia Pty Ltd

PPTs to accompany Deegan, Australian Financial Accounting 7e
16-6
Indirect ownership interests (cont.)
• Consolidation in the presence of indirect interests
– Refer to Worked Example 30.1 (p. 1005)

• Choice of two methods in performing consolidation

1. Sequential-consolidation approach
– Consolidation of each separate legal entity with its controlled
entities is performed sequentially (time-consuming and messy)

2. Multiple-consolidation approach
– In eliminating investments held by the immediate parent
entities only direct interests are taken into account
– Post-acquisition movements in subsidiaries’ shareholders’
funds allocated to ultimate parent entity on basis of sum of
direct and indirect interests

Copyright © 2012 McGraw-Hill Australia Pty Ltd

PPTs to accompany Deegan, Australian Financial Accounting 7e
16-7
Indirect ownership interests (cont.)
Journal entries
• To eliminate parent’s investment in subsidiary
Dr Share capital x
Dr Retained earnings x
Dr Goodwill x
Cr Investment in subsidiary x
The investment elimination is undertaken on the basis of
direct ownership interests

• To recognise impairment of goodwill associated with

acquisition
Dr Impairment expense—goodwill x
Cr Accumulated impairment losses—goodwill x

Copyright © 2012 McGraw-Hill Australia Pty Ltd

PPTs to accompany Deegan, Australian Financial Accounting 7e
16-8
 Indirect ownership interests (cont.)
Journal entries (cont.)
• To eliminate dividends declared by subsidiary
Dr Dividend payable x
(statement of financial position)
Cr Dividend receivable x
(statement of financial position)

Dr Dividend revenue x
(statement of comprehensive income)
Cr Dividend declared (statement of changes in equity) x

After eliminations, the consolidated financial statements should

show the dividends paid and declared by the parent entity as well
as the direct non-controlling interests in the dividends paid and
declared by the subsidiaries.

Copyright © 2012 McGraw-Hill Australia Pty Ltd

PPTs to accompany Deegan, Australian Financial Accounting 7e
16-9
Indirect ownership interests (cont.)

Non-controlling interests (AASB 10)

– To be presented separately from the parent
shareholders’ equity in the consolidated statement
of financial position within equity
– To be separately disclosed in the profit or loss of
the group

Copyright © 2012 McGraw-Hill Australia Pty Ltd

PPTs to accompany Deegan, Australian Financial Accounting 7e
16-10
Non-controlling interests
• Non-controlling interests in profit are calculated on
the basis of the sum of both direct and indirect
ownership interests
• Apportionment of non-controlling interest in pre-
acquisition share capital and reserves is based on
direct ownership interests only
• Apportionment of post-acquisition movements in
retained earnings and other reserves is based on the
sum of both direct and indirect ownership interests

Copyright © 2012 McGraw-Hill Australia Pty Ltd

PPTs to accompany Deegan, Australian Financial Accounting 7e
16-11
Non-controlling interests in current
period profits
Where there is an intermediate parent entity there are a
number of adjustments that must be made to subsidiaries’
profits before we can determine non-controlling interests in
profits
• Intragroup dividends paid to an ‘intermediate parent’ from a
subsidiary
• If the non-controlling interest in a subsidiary is valued at fair
value at acquisition date
• If the non-controlling interest in a subsidiary is valued at the
non-controlling interest’s proportionate share of the
subsidiary’s identifiable net assets at acquisition date
See Worked Example 30.1 on p. 1005 for a detailed
explanation of the above adjustments
Copyright © 2012 McGraw-Hill Australia Pty Ltd
PPTs to accompany Deegan, Australian Financial Accounting 7e
16-12
Sequential and non-sequential
acquisitions
Examples would include:
– The parent acquires its interest in the intermediate
subsidiary before the intermediate subsidiary acquires its
interest in the other subsidiary (this is referred to as
sequential acquisition and is represented in the following
slide)

– The parent acquires its interest in the intermediate

subsidiary after the intermediate subsidiary acquires its
interest in the other subsidiary (this is referred to as non-
sequential acquisition and is represented in the slide
following the next slide)

Copyright © 2012 McGraw-Hill Australia Pty Ltd

PPTs to accompany Deegan, Australian Financial Accounting 7e
16-13
Sequential acquisition

Copyright © 2012 McGraw-Hill Australia Pty Ltd

PPTs to accompany Deegan, Australian Financial Accounting 7e
16-14
Non-sequential acquisition

Copyright © 2012 McGraw-Hill Australia Pty Ltd

PPTs to accompany Deegan, Australian Financial Accounting 7e
16-15
Non-sequential acquisitions

• In a sequential acquisition, the consolidated financial

statements will be accounted for in the same manner
as when acquisitions occur simultaneously.
• In a non-sequential acquisition, ultimate parent
(Organisation A) is acquiring an interest in the B
Group, rather than solely in Organisation B
• The value of Organisation B’s investment in
Organisation C will be affected by post-acquisition
profits and reserve movements in Organisation C

Copyright © 2012 McGraw-Hill Australia Pty Ltd

PPTs to accompany Deegan, Australian Financial Accounting 7e
16-16
Non-sequential acquisitions (cont.)

• Organisation A’s investment in Organisation B must

be eliminated against Organisation A’s share of the
owners’ equity of the B Group (Organisation B plus
Organisation C) as at the date of Organisation A’s
investment
• The profits earned by Organisation C are treated as
part of pre-acquisition reserves, and therefore
eliminated on consolidation
• Consider Worked Example 30.3 (p. 1029)—Example
of a non-sequential acquisition

Copyright © 2012 McGraw-Hill Australia Pty Ltd

PPTs to accompany Deegan, Australian Financial Accounting 7e
16-17
Summary
• The lecture showed that it is possible to control another
entity—and therefore be required to consolidate it—
without necessarily having any direct ownership in that
separate legal entity
• When consolidating in the presence of indirect interests,
the elimination of the investments held by the immediate
parent entities is to be undertaken on the basis of the
direct ownership interest
• The economic entity’s interest in the post-acquisition
profits of subsidiaries and post acquisition movements in
reserves will be based on the sum of both the direct
ownership interests and the indirect ownership interests

Copyright © 2012 McGraw-Hill Australia Pty Ltd

PPTs to accompany Deegan, Australian Financial Accounting 7e
16-18