Deegan5e Sm Ch30

Chapter 30

Further consolidation issues II: Minority Interests

30.1 The entire proportion of the inter-entity transactions will need to be eliminated even in the presence of minority interests. Paragraph 24 of AASB 127 states:

Intragroup balances, transactions, income and expenses shall be eliminated in full.

A group is defined in AASB 127 as a parent and all its subsidiaries. Paragraph 25 further states:

Intragroup balances and transactions, including income, expenses and dividends, are eliminated in full. Profits and losses resulting from intragroup transactions that are recognised in assets, such as inventory and fixed assets, are eliminated in full.

30.2 AASB 127 defines a minority interest as that portion of the profit or loss and net assets of a subsidiary attributable to equity interests that are not owned, directly or indirectly through subsidiaries, by the parent. AASB 127 requires separate disclosure of the minority interests’ share of capital, retained profits or accumulated losses. Paragraph 33 of AASB 127 states:

Minority interests shall be presented in the consolidated balance sheet within equity, separately from the parent shareholders’ equity. Minority interests in the profit or loss of the group shall also be separately disclosed.

Pages 1043 to 1045 of the text provide possible disclosure formats.

30.3 AASB 127 requires that the consolidated financial statements be prepared after the effects of intragroup transactions have been eliminated in full. A number of adjustments need to be made when calculating minority interests in the presence of intragroup transactions. As we know, minority interests in the profit or loss of the group must be separately shown, as must the minority interests share of the economic entity’s share capital and reserves. In relation to different types of intragroup transactions, and their impacts on minority interests, we can consider the following:

Dividends: The minority interest’s share of the dividends paid by the subsidiary will be shown in the consolidated financial statements. That is, the minority interest’s share in the dividends paid or proposed by the subsidiary will not be eliminated on consolidation. This is appropriate because the dividends paid to the minority interests represent resource flows away from the group. The dividends distributed to the minority interests will act to reduce the minority interests’ share in the equity of the subsidiary. The consolidated balance sheet will show any dividends payable to the minority interests as a liability.

Solutions Manual t/a Australian Financial Accounting 5/e by Craig Deegan 30–1

Intragroup sale of inventory: When we calculate the minority interest’s share of the profits of the subsidiary we need to calculate the subsidiary’s profit after adjustments to eliminate income and expenses of the subsidiary that are unrealised from the economic entity’s perspective.

If the gains or losses have been recognised then no adjustment is necessary when calculating minority interest. For example, if a subsidiary sold inventory to the parent at a gain, and the parent entity has in turn sold all the inventory to external parties, the minority interest’s share of profit would not need to be reduced as the related gain would be deemed to have been realised from the perspective of the group. An adjustment only needs be made to the extent that the asset sold within the economic entity, such as inventory, is still on hand at reporting date (that is where profits recorded in the individual accounts of a group member have not been recognised from the perspective of the economic entity). Adjustments to the calculation of the minority interest’s share of the subsidiary’s profits will be needed where some or all of the inventory sold by the subsidiary is still on hand with the parent entity at reporting date.

If there are unrealised profits in closing inventory, this will mean that in the next financial period there will be unrealised profits in opening inventory. In the next financial period we would need to adjust the minority interest’s share of opening retained earnings (by reducing it) and provide a corresponding increase in the minority interest’s share of that period’s profits.

Intragroup sale of non-current assets: As with inventory, if a subsidiary sells a non-current asset such as an item of property, plant and equipment to another entity within the group, to the extent that the asset stays within the group, then the gain or loss on sale has not been recognised from the group’s perspective and the minority interests’ share of profits will need to be adjusted. However, the gain or loss is considered to be realised across the life of the asset as the asset is used up, that is as it is depreciated. As the assets, such as plant, are used, perhaps to produce inventory, the intragroup profit is considered to be realised as the service potential of the plant becomes embodied in goods produced by the plant, for example, in inventory.

Intragroup service and interest payments: To the extent that there is no related asset that is retained in the economic entity upon which any profit has accrued, no adjustments are necessary in calculating the minority interest in the subsidiary’s profit (of course, consolidation adjustments will still be required but this discussion is about calculating the minority interest’s share of profits for presentation purposes and not for the purpose of generating consolidation journal adjustments).

From the discussion so far we can summarise some rules to use when calculating minority interests in profits or losses. The general principles are:


We only need to make adjustments to minority interests’ share of profits where an intragroup transaction affects the subsidiary’s profit or loss.

We make adjustments for profits or losses made by the subsidiary to the extent they are unrealised from the economic entity’s perspective, that is the respective asset is still on hand at reporting date.

For profits relating to transactions that do not involve the transfer of assets, such as those relating to interest, management fees and so forth, no adjustments to minority interests are necessary. The related profits are deemed to be recognised at the point of the transaction.

We do not need to make adjustments for unrealised gains or losses made by the parent entity when calculating the minority interest in profits.

30.4 Some of the intragroup transactions we make adjustments for were discussed in the answer provided to Question 30.3. in calculating minority interests in the profits of the economic entity we start with the reported after-tax profit of the subsidiary and calculate a proportionate share in this unadjusted amount. We then make adjustments for profits made in the accounts of the subsidiary that are unrealised at year end from the perspective of the economic entity. In calculating minority interests, we do not make any adjustments for unrealised profits that were recorded in the accounts of the parent entity. Minority interests in the economic entity’s profits and reserves will be impacted by intragroup transactions such as payments of dividends, intragroup sale of inventory and non-current assets, and intragroup service or interest payments to the extent that related assets are still on hand at balance date.

30.5 (a) Purchase consideration $10 000 000Company A’s share of the net assets of Company B at the date of acquisition ($10m × 0.7): $ 7 000 000Goodwill acquired $ 3 000 000

(b) Purchase consideration $14 285 714Company A’s share of the net Assets of Company B at the date of acquisition ($10m × 1.0): $10 000 000Goodwill acquired $ 4 285 714

(c) As we know, when we consolidate the accounts of the parent entity and its controlled entities we include 100 per cent of the identifiable assets (tangible and intangible) of the parent entity and the controlled entities in the consolidated financial statements. However, for goodwill, we only include the acquired goodwill, which is based upon the parent entity’s ownership interest in the subsidiary. This is in accord with the requirement that only purchased goodwill shall be brought to account. Students should be encouraged to consider the conceptual logic of this requirement.


30.6 Consolidated income statement of Backbeach Limited and its controlled entities

for the year ended 30 June 2009

Consolidated 2009 $000

Revenue 5 000 Cost of goods sold 1 500Gross Profit 3 500Dividend revenue 200Interest expense (100)Depreciation expense (50)Other expenses (10) Profit before income tax 3 540 Income tax expense (X) Profit for the period 3 540 Profit attributable to minority interest 342* Profit attributable to members of parent entity interest 3 198

* $342,000 was determined as being Consolidated profit, less the parent entity profit multiplied by the minority interest. That is, ($3,540 - $2,400) x 0.30 = $342,000. We can do this calculation in this manner as there were apparently no intra-group transactions and therefore no adjustments for unrealised profits.

30.7 Dividend out of pre-acquisition earningsOn 15 August 2008 Slater Ltd paid a dividend of $50 000 out of pre-acquisition earnings. Kelly Ltd would have received $35 000, being 70 percent of these dividends. Kelly Ltd would have made the following entry in its own journal:

Dr Cash 35 000Cr Investment in Slater Ltd 35 000

Consolidation journal entriesDr Investment in Slater 35 000Cr Retained earnings, 1 July 2008 – Slater 35 000The above entry has the effect of reinstating the investment as if the pre-acquisition dividend had not been paid.

Dr Share Capital 126 000Dr Retained earnings 35 000Dr Revaluation reserve 42 000Dr Goodwill 97 000Cr Investment in Slater Ltd 300 000


30.8 Consolidation adjustments and eliminations:

Fair value adjustment:Dr Land 50 000Cr Revaluation reserve 50 000

Dr Revaluation reserve 15 000Cr Deferred tax liability 15 000

Elimination of investmentDr Share capital 315 000Dr Retained earnings 90 000Dr Revaluation reserve 31 500Dr Goodwill 63 500Cr Investment in Beachly Ltd 500 000

Elimination of intra group sales:Dr Sales 60 000Cr Cost of goods sold 60 000

Elimination of unrealised profit in closing inventory Dr Cost of goods sold 7 500

Cr Inventory 7 500

Consideration of the tax paid or payable on the sale of inventory that is still held within the group

Dr Deferred tax asset 2 250Cr Income tax expense 2 250($7 500 x 30 per cent)

Elimination of intragroup management fees:Dr Management fees revenue 10 000Cr Management fees expense 10 000

Reversal of profit recognised on sale of asset and reinstatement of cost and accumulated depreciationDr Profit on sale of plant 10 000Dr Plant 10 000Cr Accumulated depreciation 20 000

Impact of tax on profit on sale of item of plantDr Deferred tax asset 3 000Cr Income tax expense 3 000

Reinstating accumulated depreciation in the balance sheetLayne Ltd would be depreciating the asset on the basis of the cost it incurred to acquire the asset. Its depreciation charge would be $40 000 ÷ 4 = $10 000.


From the economic entity’s perspective, the asset had a carrying value of $30,000, which was to be allocated over the next four years giving a depreciation charge of $30 000 ÷ 4 = $7 500. An adjustment of $2 500 is therefore required.

Dr Accumulated depreciation 2 500Cr Depreciation expense 2 500

Consideration of the tax effect of the reduction in depreciation expenseDr Income tax expense 750Cr Deferred tax asset 750

Minority interests in 2009 profits

10%Minority interest

Reported profit of Beachly Ltd 70 000 7 000AdjustmentsUnrealised profit in closing inventory (5 250) (525)Profit on sale of plant:

Unrealised portion (after tax) (7 000) (700)Realised portion (depreciation adjustment after tax) 1 750 175

Minority interests in 2009 profits 5 950

30.9 Elimination of the investment in Thruster Ltd and recognition of goodwill on consolidation

Thruster Ltd Parent Entity’s70% interest

$ $Share capital at acquisition date - 1 July 2007 3 000 000 2 100 000Retained earnings at acquisition date - 1 July 2007 1 400 000 980 000

3 080 000Investment in Thruster Ltd 4 000 000Goodwill on consolidation 920 000

As shown above, the net assets of Thruster Ltd are $4.4 million at acquisition date. The proportional interest acquired in these net assets (70 per cent) amounts to $3.080 million. As $4 million is paid for the investment, the goodwill amounts to $920 000. The consolidation entry to eliminate the investment is:

(a)Dr Share capital 2 100 000Dr Retained earnings 980 000Dr Goodwill 920 000Cr Investment in Thruster Ltd 4 000 000

What should be noted at this point is that we are recognising only the goodwill that has been purchased by Anderson Ltd. This is in accord with the requirements in our accounting standards that only purchased goodwill be brought to account.


Implications for minority interests: Recognising minority interest in share capital and reserves at acquisition dateIn recognising the minority interest’s share in share capital and reserves at reporting date we will make three initial calculations:

1. We need to determine the minority interests at acquisition date. 2. We need to consider the minority interest in movements in share capital

and reserves between the date of the parent entity’s acquisition and the beginning of the current reporting period.

3. We need to consider the minority interest in the current period’s profit as well as movements in reserves in the current period. In determining the minority interest’s share of current period’s profit or loss we will subsequently need to adjust for gains and losses of the subsidiary that are unrealised from the economic entity’s perspective.

Remember that in calculating minority interests we do not make any consolidation journal entries; we are doing the calculations so that we can disclose the relative proportions of consolidated profits and consolidated share capital and reserves that are attributable to parent entity interests and minority interests.

Thruster Ltd Minority’s30% interest

$ $Share capital at acquisition date 3 000 000 900 000(A)Retained earnings at acquisition date 1 400 000 420 000(B )

1 320 000(Remember, the markers A and B are used to allow us to reference the calculations to the consolidation worksheet.). Including minority interests on the consolidation worksheet is optional.

Recognising minority interest in movements in share capital and reserves from acquisition date to the beginning of current financial period

Balance at 1 July Balance at 30 June Change Minority2007 2008 interest 30%

$ $ $ $Retained earnings1 400 000 1 600 000 200 000 60 000(C)

Recognition of the minority interest in current period (unadjusted) profitThe profit of the subsidiary for the current financial year as reported in the accounts of the subsidiary is $110 000. This is our starting point, which we will subsequently adjust for unrealised gains and losses. The minority interest in this unadjusted balance is 30 per cent, or $33 000. When we calculate the minority interest in profits we start with this unadjusted share of $33 000. Then we make a number of adjustments to take account of any unrealised components - from the perspective of the subsidiary’s profits - that are included within the $33 000.



$ $Profit for year ended 30 June 2009 110 000 33 000 (D)

We move the above calculations (A to D) of the minority interest in capital and reserves and current period profits to the minority interest column in the consolidation journal. It is further emphasised that the above calculations do not lead to consolidation adjustments. They are simply part of the process of determining the minority interest’s share in total equity as at reporting date. Subsequent adjustments to the minority interest will be necessary to take account of intragroup transactions that have created unrealised profits in the accounts of the subsidiary. So while we have moved the $33 000 to the consolidated worksheet to represent the minority interest in current period’s profit, this unadjusted share will be adjusted for unrealised gains or losses, as we will demonstrate shortly.

Elimination of intercompany salesWe need to provide consolidation journal entries to eliminate the intercompany sales because, from the perspective of the economic entity, the sales did not involve external parties. This will ensure that we do not overstate the total sales of the economic entity.

Sale of inventory from Thruster Ltd to Anderson Ltd(b)Dr Sales 45 000

Cr Cost of goods sold 45 000Under the periodic inventory system, the above credit entry would be to purchases, which would ultimately lead to a reduction in cost of goods sold. (Cost of goods sold equals opening inventory plus purchases less closing inventory, so any reduction in purchases leads to a reduction in cost of goods sold.)

Elimination of unrealised profit in closing inventoryAs all the inventory sold by Thruster to Anderson Ltd has since been sold by Anderson Ltd then there is no unrealised profit in closing inventory, and therefore no adjustments need to be made.

Impairment of goodwillIn the absence of information about the impairment of goodwill we will assume that there has been no impairment of goodwill, and hence no adjustment is necessary.

Dividends paidWe eliminate the dividends paid within the group. Only the dividends paid to parties outside the entity (to the minority interests and to the shareholders of the parent entity) are to be shown in the consolidated accounts.


(c)Dr Other revenue 56 000Cr Dividend paid 56 000

Implications for minority interests: Dividends paidWe need to consider the impacts of the dividends on minority interests. The payment and declaration of dividends by a subsidiary acts to reduce the interest of the minority in the subsidiary’s closing retained earnings.

Reduction in minority interest$


$ $Dividend paid 80 000 (24 000) (E)

Next we transfer the above consolidation journal entries and minority interest calculations to the consolidation worksheet.


Consolidation worksheet for Anderson Ltd and its controlled entity for the year ending 30 June 2010

Eliminations and adjustments

Consolidated MinorityAnderson Ltd Thruster Ltd Dr Cr statements Interest

($000) ($000) ($000) ($000) ($000) ($000)Adjustments Totals

Reconciliation of opening andclosing retained earningsSales revenue 800 200 45(b) 955 less Cost of goods sold (200) (80) 45(b) (235) less Other expenses (120) (60) (180) Other revenue 310 85 56(c) 339

Profit before tax 790 145 879

Tax 170 35 205

Profit after tax 620 110 674 33D 33

Retained earnings- 30 June 2008 2 000 1 600 980(a) 60C 420B 480

2 6202 620 1 710 3 294

Dividends paid 400 80 56(c) 424 (24)E (24)2 220 1 630 2 870 489

Balance sheet Shareholders’ equity Retained earnings 2 220 1 630 2 870 Share capital 8 000 3 000 2 100(a) 8 900 900A 900

Current liabilities Accounts payable 120 80 200

Non-current liabilities Loans 1 200 500 1700

11 540 5 210 13 670

Current assets Cash 300 50 350 Accounts receivable 500 350 850 Inventory 1 000 600 1 600

Non-current assets Land 2 800 2 210 5 010 Plant (net) 2 940 2 000 5(i) 4 940 Investment in Thruster Ltd 4 000 – 4 000(a) -Goodwill – – 920(a) ______ 920

11 540 5 210 2 166.52 2 166.52 13 670 1 389

The above worksheet provides the data for the consolidated income statement and balance sheet. As can be seen, the dividend payments total $424 000. These represent dividends paid to parties external to the economic entity ($400 000 by Anderson Ltd, and 30 per cent of the $80 000 paid by Thruster Ltd). AASB 127 requires that additional disclosures be made to show the share of minority interests in capital, retained earnings, reserves, and profit or loss. Hence we need to allocate these accounts between the parent entity and the minority interests. The allocation is done after making adjustments for unrealised gains or losses associated with intragroup transactions. In this question there were no unrealised gains.


Summary of minority interest30%

Minority interestProfitProfit of Thruster Ltd 110 000 33 000

Opening retained earningsOpening retained earnings of Thruster 1 600 000 480 000

DividendsPaid by Thruster Ltd (80 000) (24 000)

Minority interest in closing retained earnings 489 000Minority interest in share capital 3 000 000 900 000Total minority interest 1 389 000

We are now in a position to present the consolidated financial statements. A suggested format for the consolidated accounts would be as follows (prior-year comparatives for the accounts of the parent entity, both of which would be required in practice, have not been provided):

Consolidated income statement of Anderson Ltd and its subsidiariesfor the year ended 30 June 2010

$

Sales 955 000Cost of good sold 235 000Gross profit 720 000Other revenue 339 000

1 059 000Other expenses 180 000Profit before income tax expense 879 000Income tax expense 205 000Profit after income tax expense 674 000Profit after income tax attributable to minority interest 33 000Profit after income tax attributable to parent entity interest 641 000


Consolidated balance sheet of Anderson Ltd and its subsidiariesas at 30 June 2010

Parententity Minority

interest interest Consolidated$ $ $

Current assetsCash 350 000Accounts receivable 850 000Inventory 1 600 000

2 800 000Non-current assetsLand 5 010 000Plant and equipment (net) 4 940 000Goodwill 920 000

10 870 000Total assets 13 670

Current liabilitiesAccounts payable 200 000Non-current liabilitiesLoan 1 700 000Total liabilities 1 900 000

Shareholder's equityShare capital 8 000 000 900 000 8 900 000Retained earnings - 30 June 2009 (x) 2 381 000 489 000 2 870 000Total shareholder’s equity 10 381 000 1 389 000 11 770 000Total equities 13 670 000

Notes to and forming part of the consolidated accounts



Note x: Retained earningsRetained earnings - 1 July 2008 2 140 000 480 000 2 620 000Profit after income tax 641 000 33 000 674 000Interim dividend (400 000) (24 000) (424 000)Retained earnings - 30 June 2009 2 381 000 489 000 2 870 000


30.10 (a) Consolidation Worksheet Journal Entriesa Revalue Land to Fair Value (consistent with AASB116)

Dr Land 225 000Cr Revaluation Reserve 225 000

b Tax Effect: Revalue Land to Fair ValueDr Revaluation Reserve 67 500Cr Deferred Tax Liability [225,000 x 0.30] 67 500

c Eliminate Investment in Natasha against Borris Ltd’s share of Natasha Ltd’s Owner’s Equity at acquisition

Dr Share Capital [5,500,000 x .8] 4 400 000Dr Revaluation Reserve

[(225,000 – 67,500) x .8] 126 000Dr Retained earnings 1/7/07

[3,500,000 x .8] 2 800 000Dr Goodwill 674 000Cr Investment in Natasha 8 000 000

d Impairment of GoodwillDr Other expenses - Impairment loss –

goodwill [674,000 – 500,000] 174 000Cr Accumulated Impairment Losses - Goodwill 174 000

e Elimination of inter entity SalesDr Sales Revenue 290 000Cr Cost of Goods Sold (Purchases) 290 000

f Elimination of Unrealised Profit in Closing Inventory (earned by Natasha)Dr Cost of Goods Sold (Closing Inventory –

P+L) [(290,000 – 200,000) x 0.50] 45 000Cr Inventory (B/S) 45 000

g Tax Effect: Elimination of Unrealised Profit in Closing InventoryDr Deferred Tax Asset [45,000 x .3] 13 500Cr Income Tax Expense 13 500

h Reversal of profit recognised on sale of non-current asset Dr Profit on sale of plant [250,000 – 200,000] 50 000Dr Plant [400,000 – 250,000] 150 000Cr Accumulated depreciation 200 000

i Impact of tax on profit on sale of item of plantDr Deferred tax asset [50,000 x 0.3] 15 000Cr Income tax expense 15 000

j Reinstating accumulated depreciation in the balance sheetBorris Ltd would be depreciating the asset on the basis of the cost it incurred to acquire the asset. Its depreciation charge would be $250 000 ÷ 5 = $50 000. From


the economic entity’s perspective, the asset had a carrying value of $200 000, which was to be allocated over the next six years giving a depreciation charge of $200,000 ÷ 5 = $40,000. An adjustment of $10,000 is therefore required.

Dr Accumulated depreciation 10 000Cr Depreciation expense 10 000

k Consideration of the tax effect of the reduction in depreciation expenseDr Income tax expense 3 000Cr Deferred tax asset 3 000

l Intragroup payment of management feesDr Other revenues (management fees) 30 000Cr Other expenses (management fees) 30 000

m Elimination of Interim Dividend paid by Natasha to BorrisDr Other Revenues (Dividend Revenue)

[100,000 x .8] 80 000Cr Interim Dividend (P + L Appropriation) 80 000

n Elimination of Final Dividend declared by Natasha to BorrisDr Other Revenues (Dividend Revenue) [50,000 x .8] 40 000Cr Final Dividend (P + L Appropriation) 40 000

o Elimination of inter-entity Debt: Borris’s Share of Natasha’s declared Final Dividend

Dr Dividends Payable (Liability) [50,000 x .8] 40 000

Cr Dividends Receivable (Asset) 40 000


Eliminations and adjustments

ConsolidatedBorris Ltd Ntasha Ltd Dr Cr statements

($000) ($000) ($000) ($000) ($000)

Detailed reconciliation of opening and closing retained earningsSales revenue 5200 1550 290(e) 6460

Cost of goods sold (3000) (500) 45(f) 290(e) 3255

Gross profit 2200 1050 3205Other revenue 200 150 50(h)30(l) 150

80(m),40(n)Other expenses (400) (200) 174(d) 10(j),30(l) (734)

Profit before tax 2000 1000 2621

Tax expense (500) (350) 3(k) 13.5(g),

15(i) 824.5

Profit for the year 1500 650 1796.5Retained earnings – 1 July 2008 6000 4000 2800(c) 7200

Interim dividend (500) (100) 80(m) (520)Final Dividends paid - (50) 40(n) (10)

Retained earnings - 30 June 2009 7000 4500 8466.5

Balance sheet Shareholders’ equity Retained earnings 7000 4500 8466.5Revaluation reserve 67.5(b) 225(a) 31.5

126(c)Share capital 15000 5500 4400(c) 16100

Current liabilities Accounts payable 250 100 350Dividends payable 50 40(o) 10

Non-current liabilities Deferred tax liability 67.5(b) 67.5Loans 650 150 800

22900 10300 25825.5

Current assets Cash 250 300 550Accounts receivable 650 250 900Dividends receivable 40 40(o) -Inventory 2800 1200 45(f) 3955

Non-current assets Deferred tax asset 250 1100 13.5(g) 3(k) 1375.5

15(i)

Land 4910 3450 225(a) 8585Plant 7500 5000 150(h) 12650Accumulated depreciation (1500) (1000) 10(j) 200(h) (2690)Investment in Natasha Ltd 8000 – 8000(c) -Goodwill 674(c) 674Accumulated amortisation 174(d) (174)

22900 10300 9233 9233 25825.5


b Calculation of Minority Interest 20%

minority interest

Minority Interest in 2009 Profit after Income Tax Natasha’s Reported Profit after Income Tax Expense 650,000Less

Unrealised Profit in Closing Inventory (45,000)Tax Effect of Unrealised Profit in Closing Inventory 13,500 (31,500)

Profit on sale of plant:Unrealised portion (35,000)Realised portion 7,000 (28,000)

Natasha’s Adjusted Profit after Income Tax Expense 590,500 118,100

Minority Interest in (Opening) Retained Earnings 1/7/08 4,000,000 800,000

918,100Minority Interest in Dividends Natasha’s Reported Interim Dividend 100,000Natasha’s Reported Final Dividend 50,000 150,000 (30,000)Minority Interest in Closing Retained Earnings 888,100

Minority Interest in Share Capital Natasha’s Reported Share Capital 5,500,000 1,100,000

Minority Interest in Revaluation Reserve Natasha’s revaluation reserve recognised on acquisition 157,500 31,500

Minority Interest in Natasha’s Equity 30 June 2009 2,019,600

c.Consolidated income statement of Borris Ltd and its subsidiaries

for the year ended 30 June 2009

$Sales 6,460,000Cost of good sold 3,255,000Gross profit 3,205,000Other revenue 150,000Other expenses (734,000)Profit before income tax expense 2,621,000Income tax expense 824,500Profit after income tax expense 1,796,500 Profit after income tax attributable to minority interest 118,100Profit after income tax attributable to parent entity interest 1,678,400


Consolidated balance sheet of Borris Ltd and its subsidiariesas at 30 June 2009



Current assetsCash 550,000Accounts receivable 900,000Inventory 3,955,000

5,405,000Non-current assetsLand 8,585,000Plant and equipment 12,650,000less Accumulated depreciation (2,690,000)Goodwill 674,000less Accumulated impairment loss (174,000)Deferred tax asset 1,375,500

20,420,500Total assets 25,825,500

Current liabilitiesAccounts payable 350,000Dividends payable 10,000

360,000

Non-current liabilitiesLoan 800,000Deferred tax liability 67,500

867,500Total liabilities 1,227,500

Shareholders’ equityShare capital 15,000,000 1,100,000 16,100,000Retained earnings - 30 June 2009 (x) 7,578,400 888,100 8,466,500Revaluation reserve _________ 31,500 31,500Total shareholder’s equity 22,578,400 2,019,600 24,598,000Total equities 25,825,500




Note x: Retained earningsRetained earnings - 1 July 2008 6,400,000 800,000 7,200,000Profit after income tax 1,678,400 118,100 1,796,500Interim dividend (500,000) (20,000) (520,000)Final dividend ________ (10,000) (10 000)Retained earnings - 30 June 2009 7,578,400 888,100 8,466,500


30.11 Elimination of the investment in Richards Ltd and the recognition of goodwill on consolidation

Richards Ltd Parent entity’s80% interest

$ $Share capital at acquisition date - 1 July 2000500 000 400 000Retained earnings at acquisition date - 1 July 2000425 000 340 000

740 000Investment in Richards Ltd 890 000Goodwill on consolidation 150 000

As shown, the net assets of Richards Ltd are $925 000 at acquisition date. The proportional interest acquired in these net assets (80 per cent) amounts to $740000. As $890 000 is paid for the investment, the goodwill amounts to $150 000. As we know, this represents only the portion of goodwill acquired by Mark Ltd and not the entire goodwill of Richards Ltd at acquisition date. The consolidation entry to eliminate the investment is:

(a)Dr Share capital 400 000Dr Retained earnings 340 000Dr Goodwill 150 000Cr Investment in Richards Ltd 890 000

Implications for minority interests: Recognising minority interest in share capital and reserves at acquisition dateTo recognise the minority interest’s share in share capital and reserves at reporting date, we make three calculations:

(i) We need to determine the minority interests at acquisition date. (ii) We need to consider the minority interest in movements in share capital

and reserves between the date of the parent entity’s acquisition and the beginning of the current reporting period.

(iii) We need to consider the minority interest in the current period’s profit, as well as movements in reserves in the current period. In determining the minority interest’s share of current period profit or loss we will need to adjust for gains and losses of the subsidiary that are unrealised from the economic entity’s perspective.

Richards Ltd Minority’s20% interest

$ $Share capital at acquisition date 500 000 100 000 (A)Retained earnings at acquisition date 425 000 85 000(B)

185 000


Recognising minority interest in movements in share capital and reserves from acquisition date to the beginning of current financial period

Balance at 1 July Balance at 30 June Change Minority2000 2008 interest 20%

Retained earnings425 000 598 000 173 000 34 600 (C)

Recognition of the minority interest in current period (unadjusted) profitThe profit of the subsidiary for the current year is $252 000. The minority interest in this is 20 per cent, or $50 400.


$ $Profit for year ended 30 June 2009 252 000 50 400 (D)

Elimination of intercompany salesWe need to eliminate the intragroup sales because, from the perspective of the economic entity, no sales have in fact occurred. This will ensure that we do not overstate the turnover of the economic entity.

Sale of inventory from Richards Ltd to Mark Ltd(b)Dr Sales 130 000

Cr Cost of goods sold 130 000Under the periodic inventory system, the above credit entry would be to purchases, which would ultimately lead to a reduction in cost of goods sold. (Cost of goods sold equals opening inventory plus purchases less closing inventory, so any reduction in purchases leads to a reduction in cost of goods sold.)

Elimination of unrealised profit in closing inventoryIn this case, the unrealised profit in closing inventory amounts to $14 000. In accordance with AASB 102 ‘Inventories’, we must value the inventory at the lower of cost and net realisable value. Hence on consolidation we must reduce the value of recorded inventory, as the amount shown in the accounts of Mark Ltd exceeds what the inventory cost the economic entity.

(c)Dr Cost of goods sold 14 000Cr Inventory 14 000Under the periodic inventory system, the above debit entry would be to closing inventory - profit and loss. We increase cost of goods sold by the unrealised profit in closing inventory because reducing closing inventory effectively increases cost of goods sold. (Remember, cost of goods sold equals opening inventory plus purchases less closing inventory.) The effect of the above entries is to adjust the value of inventory so that it reflects the cost of the inventory to the group.


Consideration of the tax paid or payable on the sale of inventory that is still held within the groupFrom the group’s perspective, $14 000 has not been earned. However, from Richards Ltd’s individual perspective (as a separate legal entity), the full amount of the sale has been earned. This will attract a tax liability in Richards Ltd’s accounts of $4 200 (30 per cent of $14 000). However, from the group’s perspective, some of this will represent a prepayment of tax, as the full amount has not been earned by the group even if Richards Ltd is obliged to pay the tax.

(d)Dr Deferred tax asset 4 200Cr Income tax expense 4 200($14 000 x 30 per cent)

Implications for minority interest: Adjustment to minority interest for unrealised profit in closing inventoryThis sale was made by the subsidiary and is unrealised - therefore requiring us to adjust minority interest. If we look at the above consolidation adjustments we see that the after-tax impact of the intragroup transaction is $9 800.


$ $After-tax profit on unrealised component of sale(9800) (1 960) (E)


Sale of inventory from Mark Ltd to Richards LtdDuring the current financial period Mark Ltd sold inventory to Richards Ltd at a price of $162 500. At year end Richards Ltd has $30 000 of this inventory on hand, which portion of inventory cost Mark Ltd $24 000 to produce.

(e) Dr Sales 162 500 Cr Cost of goods sold 162 500

(f) Dr Cost of goods sold 6 000Cr Inventory 6 000

(g) Dr Deferred tax asset 1 800Cr Income tax expense 1 800($6000 x 30 per cent)

We do not need to make any adjustments to minority interests as profit was not recorded in the accounts of the subsidiary.

Unrealised profit in opening inventoryAt the end of the preceding financial year, Mark Ltd had $105 000 of inventory on hand, which had been purchased from Richards Ltd. The inventory cost Richards Ltd $87 500 to produce.It is assumed that the inventory has been sold to an external party in the current period and hence is realised - so there is no need to adjust closing balance of inventory. Therefore, we need to increase the minority interest’s share of current period’s profits.

(h) Dr Retained earnings - 30 June 2008 12 250Dr Income tax expense 5 250Cr Cost of sales 17 500

Implications for minority interest: Unrealised profit in opening inventoryRegarding the impact on minority interest, in the last period it was considered as unrealised from the perspective of the minority interest and hence their share of opening retained earnings is decreased and their share of current period profit is increased. Specifically, we increase minority interest share in profit by 20 per cent of $12 250, which equals $2 450, and make a corresponding reduction in minority interest’s share of opening retained earnings.



$ $Reduction on opening retained earnings (12 250) (2 450)(F)Increase in current period profit 12 250 2 450(G)

Adjustments for intragroup sale of plantOn 1 July 2008 Mark Ltd sold an item of plant to Richards Ltd for $290 000 when its carrying value in Richards Ltd’s accounts was $202 500 (cost of $337 500 and accumulated depreciation of $135 000). This item of plant was being depreciated over 10 years, with no expected residual value.

Reversal of profit recognised on sale of asset and reinstatement of cost and accumulated depreciationThe result of the sale of the item of plant to Richards Ltd is that the profit of $93 500 - the difference between the sales proceeds of $290 000 and the carrying amount of $202 500 - will be shown in Mark Ltd’s financial statements. However, from the economic entity’s perspective there has been no sale and, therefore, no gain on sale given that there has been no transaction with a party external to the group. The following entry is necessary so that the accounts will reflect the balances that would have been in place had the intragroup sale not occurred.

(i) Dr Profit on sale of plant 87 500Dr Plant 47 500Cr Accumulated depreciation 135 000

The result of this entry is that the intragroup profit is removed and the asset and accumulated depreciation accounts revert to reflecting no sales transaction. The profit of $87 500 will be recognised progressively in the consolidated financial report of the economic entity by adjustments to the amounts of depreciation charged by Richards Ltd in its accounts. As the service potential or economic benefits embodied in the asset are consumed, the $87 5000 profit will be progressively recognised from the economic entity’s perspective. This is shown in journal entry (k).

Impact of tax on profit on sale of item of plantFrom Richards Ltd’s individual perspective it would have made a profit of $87 500 on the sale of the plant and this gain would have been taxable. At a tax rate of 30 per cent, $26 250 would be payable by Mark Ltd. However, from the economic entity’s perspective no gain has been made, which means that the related ‘tax expense’ must be reversed and a related deferred tax benefit recognised. A deferred tax asset is recognised because, from the economic entity’s perspective, the amount paid to the Tax Office represents a prepayment of tax.

(j) Dr Deferred tax asset 26 250Cr Income tax expense 26 250


Reinstating accumulated depreciation in the balance sheetMark Ltd would be depreciating the asset on the basis of the cost it incurred to acquire the asset. Its depreciation charge would be $290 000 ÷ 6 = $48 333. From the economic entity’s perspective, the asset had a carrying value of $202 500, which was to be allocated over the next six years giving a depreciation charge of $202 500 ÷ 6 = $33 750. An adjustment of $5833 is therefore required.

(k)Dr Accumulated depreciation 14 583Cr Depreciation expense 14 583

Consideration of the tax effect of the reduction in depreciation expenseThe increase in the tax expense from the perspective of the economic entity is due to the reduction in the depreciation expense. The additional tax expense is $4 375, which is $14 583 x 30 per cent. This entry represents a partial reversal of the deferred tax asset of $26 250 recognised in the earlier entry. After 10 years the balance of the deferred tax asset relating to the sale of the item of plant will be $nil.

(l) Dr Income tax expense 4 375Cr Deferred tax asset 4 375

Implications for minority interest: Intragroup sale of a non-current assetBecause the profit was in the accounts of Mark Ltd there is no adjustment to the minority interest in profits.

Impairment of goodwill (m)Dr Retained earnings – 1 July 2008 56 250

Dr Impairment loss - goodwill 7 500Cr Accumulated impairment losses - goodwill 63 750There is no implication for the minority interest as this only relates to the parent entity’s share.

Elimination of intragroup transactions - management feesAll of the management fees paid within the group will need to be eliminated on consolidation.

(n)Dr Management fee revenue 66 250Cr Management fee expense 66 250

Implications for minority interests: Intragroup payment of management feesIt is not necessary to make any adjustments to minority interest of profits as the profits associated with the management are deemed to be recognised.

Dividends paidWe eliminate the dividends paid within the group. Only the dividends paid to parties outside the entity (the minority interests) are to be shown in the consolidated accounts.

(o)Dr Dividend revenue 186 000Cr Dividend paid 186 000


Implications for minority interests: Dividends paid and declaredWe need to consider the impacts of the dividends on minority interests. The payment and declaration of dividends by the subsidiary act to reduce the interest of the minority in the subsidiary.

Reduction in minority interestRichards Ltd Minority’s

20% interest$ $

Dividend paid 232 500 46 500 (J)

Now we can post the consolidation journal entries and the minority interest calculations to the consolidation worksheet.


Eliminations

and adjustments

Consolidated MinorityMark Ltd Richards Ltd Dr Cr statements Interest

($000) ($000) ($000) ($000) ($000) ($000)Adjustments Totals

Detailed reconciliation of opening and closing retained earningsSales revenue 1 725 1 450 130(b) 2 882.5

162.5(e)Cost of goods sold (1 160) (595) 14(c) 130(b) 1465

6(f) 162.5(e)17.5(h)

Gross profit 565 855 1 417.5Other revenue - Dividends received - from Richards 186 - 186(o) -Management fee revenue 66.25 66.25(n) -Profit on sale of plant 87.5 87.5(i) -ExpensesAdministrative expenses (77) (96.75) (173.75)Depreciation (61.25) (142)) 14.583(k) (188.667)Management fee expense - (66.25) 66.25(n) -Other expenses (252.75) (192.5) 7.5(m) (452.75)

Profit before tax 513.75 357.5 602.333

Tax expense 153.75 105.5 5.25(h) 4.2(d) 236.625

4.375(l) 1.8(g)

26.25(j)

Profit for the year 360 252 365.708 50.4(D)

(1.96)(E)

2.45(F)50.89

Retained earnings - 30 June 2008 798.5 598 340(a) 988 85(B) 12.25(h) 34.6(C)56.25(m) (2.45)(G)

117.15

1 158.5 850 1 353.708Dividends paid (343.5) (232.5) 186(o) (390) (46.5)(H)

(46.5)

Retained earnings - 30 June 2009 815 617.5 963.708

Balance sheet Shareholders’ equity Retained earnings 815 617.5 963.708Share capital 875 500 400(a) 975 100(A)

100

Current liabilities Accounts payable 136.75 115.75 252.5Tax payable 103.25 62.5 165.75

Non-current liabilities Loans 433.75 290 723.75

2 363.75 1 585.75 3 080.708

Current assets Accounts receivable 148.5 155.75 304.25Inventory 230 72.5 14(c) 282.5

6(f)

Non-current assets Deferred tax asset 4.2(d) 4.375(l) 27.875

1.8(g)26.25(j)

Land and buildings 560 815 1 375Plant - at cost 749.625 889.5 47.5(i) 1 686.625Accumulated depreciation (214.375) (347) 14.583(k) 135(i) (681.793)


Investment in Richards Ltd 890 – 890(a) -Goodwill 150(a) 150Accumulated amortisation 63.75(m) (63.75)

2 363.75 1 585.75 1 722.208 1 722.208 3 080.708221.54

Summary of minority interest20%

minority interestProfitProfit of Richards Ltd 252 000 50 400AdjustmentsUnrealised profit in opening inventory 12 250 2 450Unrealised profit in closing inventory (9 800) (1 960) 50 890

Opening retained earningsOpening retained earnings of Richards Ltd 598 000 119 600Unrealised profit in opening inventory (12 250) (2 450) 117 150

DividendsPaid by Richards Ltd (232 500) (46 500) (46 500)

Minority interest in closing retained earnings 121 540Minority interest in share capital 500 000 100 000 100 000Total minority interest 221 540

We are now in a position to present the consolidated financial statements. A suggested format for the consolidated accounts would be as follows (prior year comparatives for the accounts of the parent entity, both of which would be required in practice, have not been provided):

Consolidated income statement of Mark Ltd and its subsidiariesfor the year ended 30 June 2009

$Sales 2 882 500Cost of good sold 1 465 000Gross profit 1 417 500Administrative expenses (173 750)Depreciation (188 668)Other expenses (452 750)Profit before income tax expense 602 332Income tax expense 236 625Profit after income tax expense 365 707 Profit after income tax attributable to minority interest 50 890Profit after income tax attributable to parent entity interest 314 817


Consolidated balance sheet of Mark Ltd and its subsidiariesas at 30 June 2009



Current assetsAccounts receivable 304 250Inventory 282 500

586 750Non-current assetsLand and buildings 1 375 000Plant and equipment 1 686 625less Accumulated depreciation (681 192.5)Goodwill 150 000less Accumulated impairment loss (63 750)Deferred tax asset 27 875

2 493 957.5Total assets 3 080 707.5

Current liabilitiesAccounts payable 252 500Tax payable 165 750

418 250

Non-current liabilitiesLoan 723 750Total liabilities 1 142 000

Shareholders’ equityShare capital 875 000 100 000 975 000Retained earnings - 30 June 2009 (x) 842 167.5 121 540 963 707.5Total shareholder’s equity 1 717 167.5 221 540 1 938 707.5Total equities 3 080 707.5




Note x: Retained earningsRetained earnings - 1 July 2008 870 850 117 150 988 000Profit after income tax 314 817.5 50 890 365 707.5Final dividend (343 500) (46 500) (390 000)Retained earnings - 30 June 2009 842 167.5 121 540 963 707.5


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