Corp Acc Lecture 6

7/27/2019 Corp Acc Lecture 6

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Lecture 6

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Accounting fornon-controlling interests

CORPORATE ACCOUNTING


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Objectives of this lecture2

Understand the nature of non-controllinginterests

Understand why and what we calculate for non-

controlling interests Understand how to calculate goodwill (or gain on

bargain purchase) in the presence of non-controlling interests

Prepare consolidated statements that includedisclosures of non-controlling interest and theparent entity interest


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References3

Text Chapter 5

AASB 10/AASB 127 Consolidated FinancialStatements

AASB 3 Business Combinations

AASB 12 Disclosure of Interests in OtherEntities

AASB 101 Presentation of Financial Statements AASB 136 Impairment of Assets

AASB 132 Financial Instruments : Presentation


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Contents4

1. What are Non-Controlling Interests (NCI)

2. Disclosure Requirements

3. Calculation of NCI4. NCI and Goodwill

5. Effect on Goodwill Impairment Losses

6. NCI and adjustments for inter-entitytransactions


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1. Non-controlling interests (NCI)5

A parent entity may have a subsidiary in which theownership interest is less than 100% (a partlyowned subsidiary)

Non-controlling interest is defined in AASB 10 as:the equity in a subsidiary not attributable,directly or indirectly, to a parent

Generally, most subsidiaries are wholly owned Wesfarmers owns most of its subsidiaries 100%

But we must know the consolidation techniques forthe situation where there is an NCI


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6


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Non-controlling interests7

Where a subsidiary is partly owned by a parententity (i.e. less than 100% interest), both theparent entity and the non-controlling interests

will have an ownership interest in thesubsidiarys profits, dividend payments, andshare capital and reserves

As part of the consolidation process, we needto work out the amount to be attributed to thenon-controlling interests


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2. Disclosure requirements8

AASB 10 (para. 22) states:

Non-controlling interests shall be presented in the consolidated statement offinancial position within equity, separately from the equity of the owners ofthe parent

Paragraph B94 and B95 requires that the entity attribute the profit or loss

of each component of other comprehensive income be attributed to theowners of the parent and to the non-controlling interests.

Para. 12 of AASB 12 requires disclosure the profit or loss allocated tothe NCI and the accumulated NCI at the end of the reporting period.

Paragraph B10 of AASB 12 requires disclosure of dividends paid to the NCIplus summarised financial information about the assets, liabilities, profit or

loss and cash flows. This is all subject to the NCI being material to the reporting entity

Refer to the accounts of Wesfarmers. There is no disclosure ofNCI yet you can see there are subsidiary entities not 100%owned. Why might this be?


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Disclosure (cont.)9

AASB 101 Presentation of Financial Statementssupports the disclosures required by AASB 10

AASB 101.54(r) requires separate disclosure ofthe Parent Interest (PI) in issued capital andreserves


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Therefore, to sum up.....10

We need to calculate the NCIs share in thesubsidiarys:

issued capital reserves

opening retained earnings

profit (or loss) for the period dividend distribution for the period

transfers to or from reserves for the period


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3. Calculating non-controllinginterests

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Non-controlling interests are identified(calculated) for disclosure purposes but noteliminated as part of the consolidation process

The parents investment in the subsidiary isnow eliminated only against the parents shareof the subsidiarys equity at acquisition date


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4. NCI and goodwill12

AASB 3 gives a choice in the measurement ofthe non-controlling interest

Specifically, paragraphs 18 and 19 of AASB 3

state:[para. 18] The acquirer shall measure the identifiable

assets acquired and the liabilities assumed at theiracquisition-date fair values

[para. 19] For each business combination, theacquirer shall measure any non-controlling interestin the acquiree either at fair value or at the non-controlling interests proportionate share of theacquirees identifiable net assets


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NCI and goodwill (cont.)13

If the non-controlling interests are calculated onthe basis of the fair value of the subsidiary, thenan amount representing the NCIs share of goodwill

will be calculated This will be in addition to the amount of goodwill

allocated to the parent entitys interest

This approach is often referred to as the full

goodwill method


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Examples of both methods15

Example 1: partial goodwill method see textpage 298

Example 2: full goodwill method see text page305


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Proportionate Interest GoodwillMethod (page 298)

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Yarra Park acquired 75% (and control) of Corio Ltdon 1/1/X0

Pre-acquisition Equities:

100% 75% 25%

Share Capital 3,500,000 2,625,000 875,000

Retained Earnings 1/1/x0 1,600,000 1,200,000 400,000

FVAR (land) 700,000 525,000 175,000

5,800,000 4,350,000 1,450,000

Consideration 5,000,000

Goodwill 650,000


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Additional information17

Corio Ltd leases facilities from Yarra Park Ltd for$120,000 p.a.

Corios interest revenue from Yarra Park Ltd is

$65,000 Corios land carried at $1,000,000 below fair value

No impairment of goodwill to date

Dividends $345,000

Tax rate is 30%


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Consolidation journal entries:Date Particulars Debit Credit

31/12/x2 Land 1,000,000

Fair Value Adjustment 700,000Deferred Tax Liability 300,000

Revaluation of land to FV

31/12/x2 Share Capital 2,625,000

Fair Value Adjustment 525,000

Retained Earnings 1,200,000

Goodwill 650,000

Investment in Corio Ltd 5,000,000Elimination of Investment account (75%)

31/12/x2 Dividend Revenue 345,000

Dividend Paid 345,000

Elimination of inter-entity dividend

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Consolidation journal entries (cont.):

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Date Particulars Debit Credit

31/12/x2 Lease Revenue 120,000

Other Expenses 120,000

Elimination of inter-company rental

31/12/x2 Interest Revenue 65,000



31/12/x2 Payable to Corio Ltd 670,000

Receivable from Yarra Park Ltd 670,000

Elimination of inter-companyreceivable/payable


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Consolidation journal entries:


31/12/x2 Share Capital 875,000


Retained Earnings 1/1/X2 400,000

NCI 1,450,000

Recognition of NCI in pre-acquisition equities

31/12/x2 Retained Earnings 1/1/X2 130,000NCI 130,000

Allocation to NCI post-acquisitionshare of increase in RE

20


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31/12/x2 NCI Share of Current Profit 217,500

NCI 217,500

Allocation to NCI of share ofprofit for the year

31/12/x2 NCI 115,000


Allocation to NCI of currentdividend

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NCI memorandum account22 Corio Ltd NCI

$ $

Retained Earnings 1/1/X0 1,600,000

Post-acqn increase 520,000

Retained Earnings 1/1/X2 2,120,000

NCI @ 25% 530,000Profit for the year 870,000

NCI @ 25% 217,500

Dividend Paid (460,000)

NCI @ 25% (115,000)

Issued Capital 3,500,000NCI @ 25% 875,000


NCI @ 25% 175,000

TOTAL NCI 1,682,500


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100% goodwill method23

Same data as for previous example, except thatthe fair value of the NCI at the control date isgiven as $1,500,000

So where does this $1,500,000 comefrom? In this example it is simply a

given, but we should look at AASB 3for guidance


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AASB 3 paragraph B4424

This Standard allows the acquirer to measure a non-controlling interest in the acquiree at its fair value atthe acquisition date.

Sometimes an acquirer will be able to measure theacquisition-date fair value of a non-controllinginterest on the basis of active market prices for theequity shares not held by the acquirer.

In other situations, however, an active market pricefor the equity shares will not be available. In thosesituations, the acquirer would measure the fair valueof the non-controlling interest using other valuationtechniques.


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Consolidation journal entries:Date Particulars Debit Credit

31/12/x2 Land 1,000,000Fair Value Adjustment 700,000

Deferred Tax Liability 300,000

Revaluation of land to FV

31/12/x2 Share Capital 2,625,000


Retained Earnings 1,200,000

Goodwill 700,000

NCI equity 50,000

Investment in Corio Ltd 5,000,000Elimination of Investment account

31/12/x2 Dividend Revenue 345,000


Elimination of inter-entitydividend

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Consolidation journal entries:26


31/12/x2 Lease Revenue 120,000



31/12/x2 Interest Revenue 65,000



31/12/x2 Payable to Corio Ltd 670,000

Receivable from Yarra Park Ltd 670,000

Elimination of inter-companyreceivable/payable


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31/12/x2 Share Capital 875,000


Retained Earnings 1/1/X2 400,000

NCI 1,450,000

Recognition of NCI in pre-acquisition equities

31/12/x2 Retained Earnings 1/1/X2 130,000

NCI 130,000

Allocation to NCI post-acquisitionshare of increase in RE

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31/12/x2 NCI Share of Current Profit 217,500

NCI 217,500

Allocation to NCI of share ofprofit for the year

31/12/x2 NCI 115,000


Allocation to NCI of currentdividend

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NCI memorandum account29

Corio Ltd NCI$ $

Retained Earnings 1/1/X0 1,600,000Post-acqn increase 520,000Retained Earnings 1/1/X2 2,120,000

NCI @ 25% 530,000Profit for the year 870,000

NCI @ 25% 217,500Dividend Paid (460,000)

NCI @ 25% (115,000)Issued Capital 3,500,000

NCI @ 25% 875,000Fair Value Adjustment 700,000

NCI @ 25% 175,000NCI Equity 50,000 50,000

TOTAL NCI 1,732,500


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5. Effect on goodwill and impairmentlosses

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If using the proportionate method, the carryingamount of goodwill is to be grossed up so thatthe NCI in goodwill is included with the PI

interest in goodwill and that 100% of therecoverable assets of the subsidiary can be usedin the recoverable amount test

The impairment losses are then apportioned so

that only the PI in the impairment loss isrecorded in the consolidated accounts

See AASB 136 example 7A


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Effect on goodwill and impairmentlosses (cont.)

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If the 100% goodwill method is used

Any related impairment losses are split betweenthe PI and the NCI on the same proportionalbasis as the profit etc. is split

See AASB 136 example 7B


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6. Adjustments for intra-grouptransactions

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AASB 127 Paragraph 20 stipulates that: Intragroup balances, transactions, income and

expenses shall be eliminated in full

The requirement to eliminate the effects ofintra-group transactions holds whether or notthere are non-controlling interests

Because if control exists, it is complete, it iscontrol over 100% of the assets and liabilities


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Intra-group payment of dividends33

The consolidation journal entries will eliminatethe proportion of the dividends that relates tothe parent entitys entitlement

The non-controlling interests share in thedividends paid or declared by the subsidiary willnot be eliminated on consolidation

This is appropriate because the dividends paidto the non-controlling interests represent flowsaway from the economic entity


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Intra-group sale of inventory34

When we calculate the NCIs share of the profitsof the subsidiary, we need to calculate thesubsidiarys profit after eliminating income and

expenses of the subsidiary that are unrealisedfrom the economic entitys perspective

So, adjustments to the calculation of the NCIsshare of the subsidiarys profits will be neededwhere some or all of the inventory sold by thesubsidiary is still on hand with the parent entity atreporting date (an upstream transaction)


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Intra-group sale of inventory (cont.)35

If there are unrealised profits in closinginventory, this will mean that in the nextfinancial period there will be unrealised profits

in opening inventory. So, in that financial periodwe need to adjust the NCIs share of OpeningRetained Earnings (by reducing it) and provide acorresponding increase in the NCIs share of

that periods profits


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Intra-group sale of non-current assets36

If a subsidiary sells a non-current asset (e.g., anitem of property, plant and equipment) to anotherentity within the group, the gain or loss on sale is

not recognised from the groups perspective and theNCIs share of profits will need to be adjusted

The gain or loss is realised across the life of the

asset as the asset is used up(depreciated/amortised).

I t i d i t t


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Intra-group services and interestpayments

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No adjustments are necessary for these incalculating the NCI in the subsidiarys profit

Text page 314 if consolidation adjusting journal

entries only affect specific accounts in theconsolidated statement of comprehensive incomeand have no effect on consolidated net assets,they should be ignored in the NCI allocation

Consolidation adjustments are of course stillrequired

I t t ti th t t


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Intra-group transactions that creategains or losses for the parent entity

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When calculating NCI, we do not need to adjustfor gains or losses in the parent entitys accountsthat are unrealised

It is only the unrealised intra-group profits orlosses accruing to the subsidiary that we needto take into our calculation of NCI

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Corp Acc Lecture 6