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

NCIS

30%

NCIT

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

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• 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

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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

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

Share capital 60,000Retained 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 35,000Retained earnings 15,000

$50,000

Example: Sequential acquisitions

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The equity of S and T on 30 June 2011 and 30 June 2012 are summarised below

S Ltd30/6/11 30/6/12

Share capital $60,000 60,000Retained earnings 45,000 55,000

105,000 115,000

T Ltd30/6/11 30/6/12

Share capital $35,000 35,000General reserve 5,000 5,000Retained earnings 18,000 23,000

58,000 63,000

Example: Sequential acquisitions

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• 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 Ltd’s 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

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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

P’s inv. in S70,000

60,00033,000

93,000

7,000-

7,000100,000

70% 70,000-

S’s inv. in T35,000

35,00015,000

50,000

-3,500

3,500

53,500

60% 32,1002,900

Note that a separate acquisition analysis is required for each subsidiary. The analysis is based on the ownership by the immediate parent

Note that a separate acquisition analysis is required for each subsidiary. The analysis is based on the ownership by the immediate parent

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DR Plant 5,000

CR DTL 1,500

CR BCVR 3,500

DR Dep’n expense 1,000

DR Retained earnings 1,000

CR Accum depreciation 2,000

DRDTL 600

CR ITE 300

CR Retained earnings 300

(i) Revaluation of T Ltd’s plant to fair value

Consolidation at 30 June 2012

Based on 5 year useful life ($5,000)/5 years

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 yearNo entry required in relation to the inventory held by S as it was sold in the prior year11

DR Share capital 42,000DR Retained earnings 28,000

CR Inv in S Ltd. 70,000

(a) To eliminate P’s investment in S

DR Share capital 21,000DR Retained earnings 9,000DRBCVR 2,100DRGoodwill 2,900

CR Inv in T Ltd 35,000

(b) To eliminate S’s investment in T

(ii) Pre-acquisition elimination entries

Consolidation at 30 June 2012

11Based on P’s 70%

interest in S

Based on P’s 70% interest in S

Based on S’s 60% interest in T

Based on S’s 60% interest in T

1. (33,000 + 7,000 (FV adj re inventory)) x 70% = $28,0001. (33,000 + 7,000 (FV adj re inventory)) x 70% = $28,00012

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

(a) To eliminate dividend paid by S to P

DR Dividend revenue 15,000CR 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%)($8,000 x 70%)

($25,000 x 60%)- Based on S’s direct interest in T

($25,000 x 60%)- Based on S’s direct interest in T

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DR Sales 25,000

CR Cost of Sales 25,000

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

DR DTA 3,000CR ITE 3,000

(iv) Elimination of unrealised profit on inventory

Consolidation at 30 June 2012

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(kind of like prepaying tax)

DR Share capital 18,000DR Retained earnings 9,900DR BCVR 2,100

CR non-controlling interest 30,000

(a)To allocate NCI in S – DNCI of 30%

DR Share capital 14,000DR Retained earnings 6,000DR 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

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(for undervalued plant)

Allocated 40% of T to the NCI

DR Retained earnings 3,600CR BCVR 2,100

CR Non-controlling interest 1,500

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

(vi) NCI share of opening post-acq’n 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 2006Arises due to sale of inventory in 2006

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(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 1,334DR 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-acq’n 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 dep’n expense on plant (700)

Adjusted retained earnings 2,300

X NCI share of 58% 1,334

$5,000 x 58%$5,000 x 58%

17Direct and indirect interest of outsiders

Indirect interests don’t have an impact on preaquisition entries, only the post acquisition entries

DR Non-controlling interest 2,400CR Dividend paid 2,400

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

DR Non-controlling interest 10,000CR 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%)($8,000 x 30%)

(25,000 x 40%)(25,000 x 40%) 11

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

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 900CR 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 12,934CR 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 dep’n expense on plant (700)

Unrealised profit adj. on inventory transfer (7,000)

Adjusted current year profit 22,300

X NCI share of 58% 12,93420

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. Earn’s (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. Earn’s (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

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