Multi-year consolidation: non-controlling interests recognised at fair value

Illustration 3.7AMulti-year consolidation: non-controlling interests recognised at fair value

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Relevant data

Acquisition date: 31 Dec 20x1Acquirer: P Co.Acquiree: S Co.Ownership interest acquired: 90%P's ordinary shares issued: 1,000,000Market value of P'shares issued: 5,000,000Cash paid by P: 8,260,000Fair value of non-controlling interests: 1,400,000Tax rate: 20%

All fair value adjustments have tax effects and give rise to deferred tax, except for goodwill impairment loss.


Balance sheets and fair values at 31 December 20x1

S Co. P Co.Book value Fair value Book value

AssetsLand 780,000 1,170,000 1,560,000Leased buildings - net 5,200,000 6,500,000 10,400,000Equipment - net 2,600,000 2,210,000 9,100,000Investment in S Co. 13,260,000Inventories 650,000 780,000 1,170,000Receivables - net 390,000 390,000 910,000Other current assets 520,000 520,000 780,000Cash 260,000 260,000 1,690,000

10,400,000 11,830,000 38,870,000Equity and liabilitiesOrdinary shares 6,500,000 25,870,000Retained earnings 1,170,000 5,590,000Other liabilities 910,000 910,000 2,600,000Loan payable 1,820,000 1,820,000 4,810,000Contingent liabilities 130,000

10,400,000 2,860,000 38,870,000Fair value of net identifiable assets 8,970,000


Balance sheets and fair values at 31 December 20x1

S Co. P Co.Book value Fair value Book value

AssetsLand 780,000 1,170,000 1,560,000Leased buildings - net 5,200,000 6,500,000 10,400,000Equipment - net 2,600,000 2,210,000 9,100,000Investment in S Co. 13,260,000Inventories 650,000 780,000 1,170,000Receivables - net 390,000 390,000 910,000Other current assets 520,000 520,000 780,000Cash 260,000 260,000 1,690,000

10,400,000 11,830,000 38,870,000Equity and liabilitiesOrdinary shares 6,500,000 25,870,000Retained earnings 1,170,000 5,590,000Other liabilities 910,000 910,000 2,600,000Loan payable 1,820,000 1,820,000 4,810,000Contingent liabilities 130,000

10,400,000 2,860,000 38,870,000Fair value of net identifiable assets 8,970,000

Note, this item was NOT recognized in the individual FS of S Co. IFRS 3 requires

previously unrecorded intangibles and contingencies to be recognized due to the

application of acquisition method


In 20x2

Undervalued inventories of $130,000 – sold in 20x2

Contingent liabilities of $130,000 – materialized (paid off) in 20x2

Undervalued land of $390,000 – still held by S Co, no depreciation

Undervalued buildings of $1,300,000 – useful life 50 years from 1 January 20x2

Overvalued equipment of $390,000 – useful life 5 years from 1 January 20x2

Goodwill – impairment loss of $520,000 in 20x2 recognized.

P Co. dividend income from S 409,500S Co. profit after tax 728,000S Co. dividends declared 455,000


Undervalued land of $390,000 – sold in 20x3

Undervalued buildings of $1,300,000 – useful life 50 years from 1 January 20x2

Overvalued equipment of $390,000 – useful life 5 years from 1 January 20x2

Net profit after tax of S Co. - $400,000

No dividends were declared by S Co. For 20x3

In 20x3


Required...

1. Prepare consolidation adjustment at 31 December 20x2

2. Prepare consolidation adjustment at 31 December 20x3

Recognize the tax effects of fair value adjustments.


Computation of goodwill

Consideration transferredCash 8,260,000Fair value of new P's shares issued 5,000,000

13,260,000Fair value of NCI 1,400,000

14,660,000Less: identifiable net assetsFair value of identifiable net assets 8,970,000Deferred tax liabilities -260,000

8,710,0005,950,000




13,260,000Fair value of NCI 1,400,000


8,710,0005,950,000

Deferred taxFair value of identifiable net assets 8,970,000Book value of identifiable net assets 7,670,000

1,300,000Deferred tax liabilities (20%) 260,000




13,260,000Fair value of NCI 1,400,000


8,710,0005,950,000

Goodwill allocationParent ($13,260,000 - (90%*$8,710,000) 5,421,000(91%)NCI ($1,400,000 - (10%*$8,710,000) 529,000(9%)

5,950,000


Consolidation journal entry #1

Dr Ordinary shares (S Co.) 6,500,000Dr Retained earnings (S Co.) 1,170,000Dr Goodwill 5,950,000Dr Inventories 130,000Dr Land 390,000Dr Buildings - net 1,300,000Cr Investment in S Co. 13,260,000Cr Equipment - net 390,000Cr Contingent liabilities 130,000Cr Deferred tax liabilities 260,000Cr Non-controlling interests 1,400,000

15,440,000 15,440,000


Consolidation worksheet as at 31 December 20x1

Elimination/Adj. ConsolidatedP Co. S Co. Dr. Cr. FS

AssetsGoodwill 5,950,000 5,950,000Land ‐ net 1,560,000 780,000 390,000 2,730,000Leased buildings ‐ net 10,400,000 5,200,000 1,300,000 16,900,000Equipment ‐ net 9,100,000 2,600,000 390,000 11,310,000Investment in S Co. 13,260,000 0 13,260,000 0Inventories 1,170,000 650,000 130,000 1,950,000Receivables ‐ net 910,000 390,000 1,300,000Other current assets 780,000 520,000 1,300,000Cash 1,690,000 260,000 1,950,000

38,870,000 10,400,000 43,390,000Equity and liabilitiesOrdinary shares 25,870,000 6,500,000 6,500,000 25,870,000Retained earnings 5,590,000 1,170,000 1,170,000 5,590,000Non‐controlling interests 1,400,000 1,400,000Other liabilities 2,600,000 910,000 3,510,000Loan payable 4,810,000 1,820,000 6,630,000Contingent liabilities 130,000 130,000Deferred tax liabilities 260,000 260,000

38,870,000 10,400,000 15,440,000 15,440,000 43,390,000


Consolidation journal entry #1 (20x2)


This entry is repeated each year for as long as the investment exixts.



Dr Cost of sales 130,000Cr Inventories 130,000

Dr Depreciation - buildings 26,000Cr Accumulated depreciation - buildings 26,000

Dr Accumulated depreciation - equipment 78,000Cr Depreciation equipment 78,000

Dr Contingent liabilities 130,000Cr Contingent liabilities expense 130,000

Dr Impairment loss - goodwill 520,000Cr Goodwill 520,000

Dr Tax expense 10,400Cr Dererred tax liabilities 10,400









To adjust cost of sales based on the fair value of inventories as at the

acquisition date









To adjust depreciation based on the fair value as at the acquisition date

($6,500,000 - $5,200,000) / 20









To adjust depreciation based on the fair value as at the acquisition date

($2,210,000 - $2,600,000) / 5









To eliminate the recognition of expense in the S Co. I/S and

contingent liabilities in CJE #1









To adjust tax expense relating to understated profit in S Co.’s I/S


Understated profit in S Co.'s income statement

Cost of sales - inventory 130,000Depreciation - buildings 26,000Depreciation - equipment -78,000Contingent liabilities expense -130,000

-52,000Income tax adjustment 10,400

Note, deferred tax liability should NOT considered goodwill asset and

its impairment.



Dr Income to NCI 24,960Cr Non-controlling interest 24,960

Adjustment of S Co.'s net profit after tasNet profit after tax as reported by S Co. 728,000Increase in cost of sales of undervalued inventory -130,000Increase in depreciation on undervalued buildings -26,000Decrease in depreciation on overvalued equipment 78,000Decrease in expense on recognized contingency 130,000Increase in tax expense -10,400Impairment loss on goodwill -520,000Adjusted net profit after tax of S Co. 249,600NCI's share (10%) 24,960



Dr Dividend income 409,500Dr Non-controlling interest 45,500Cr Dividends (S Co.) 455,000


Reconciliation of non-controlling interest with net assets of S Co.

From the consolidation jurnal entriesNCI as at the acquisition date 1,400,000NCI's share of current profit after tas 24,960NCI's share of dividends -45,500NCI as at 31 December 20x2 1,379,460


Reconciliation of non-controlling interest with net assets of S Co.Analytical check on NCI as at 31 December 20x2Book value of shareholders' equity 7,943,000Unamortized FV differentials 1,081,600Adjusted identifiable net assets 9,024,600

NCI's share of identifiable net assets (10%) 902,460NCI's share of unimpaired goodwillGoodwill attributable to NCI 529,000Impairment loss ‐52,000 477,000

NCI as at 31 December 20x2 1,379,460




1,379,460

Book value of shareholders' equity as at 31 December 20x2Share capital 6,500,000Retained earningsAs at 1 January 20x2 1,170,000Net profit after tax 728,000Dividends declared ‐455,000As at 31 December 20x2 1,443,000

Book value of shareholders' equity 7,943,000




1,379,460

Unamortized FV differentials as at 31 December 20x2Undervalued land ($1,170,000 ‐ $780,000) 390,000Undervalued buildings [($6,500,000 ‐ $5,200,000)*49/50] 1,274,000Overvalued equipment [($2,210,000 ‐ $2,600,000)*4/5] ‐312,000

1,352,000Tax effects 270,400Net of tax 1,081,600




This entry is repeated each year for as long as the investment exixts.



Dr Retained earnings 468,000Dr Non-controlling interests 52,000Cr Goodwill 520,000

This entry is to re-enact the impairment loss on goodwill.



Dr Retained earnings 27,300Cr Non-controlling interest 27,300

This entry is to allocate post-acquisition R/E of S Co. from the date of acquisition to the beginning of the current period.

R/E at beginning of current period (1/1/20x3) 1,443,000R/E at acquisition date (31/12/20x1) 1,170,000Change in retained earnings 273,000NCI's share (10%) 27,300



Dr Accumulated depreciation - equipment 78,000Dr Contingent liabilities 130,000Cr Inventories 130,000Cr Accumulated depreciation - buildings 26,000Cr Dererred tax liabilities 10,400Cr Retained earnings 37,440Cr Non-controlling interest 4,160

Cost of sales -130,000Depreciation of buildings -26,000Depreciation of equipment 78,000Realization of contingent liabilities 130,000Increase in tax expense -10,400Total prior-year adjustment 41,600Adjusted to consolidated R/E (90%) 37,440Allocated to NCI (10%) 4,160

Prior-year adjustment


Dr Profit on sale of land 390,000Cr Land 390,000



Dr Deferred tax liabilities 67,600Cr Deferred tax expense 67,600



Dr Profit on sale of land 390,000Cr Land 390,000



Dr Deferred tax liabilities 67,600Cr Deferred tax expense 67,600


To adjust overstated profit before tas of $338,000 in S Co.’s I/S



ComputationNet profit after tax of S Co. for 20x3 400,000Current adjustments

Cost of sales of undervalued land -390,000Depreciation of undervalued buildings -26,000Depreciation of overvalued equipment 78,000

-338,000Tax expense adjustment 67,600 -270,400

Adjusted net profit after tax of S Co. 129,600NCI's share (10%) 12,960

Dr Income to NCI 12,960Cr Non-controlling interest 12,960


Reconciliation of non-controlling interest with net assets of S Co.From the consolidation jurnal entriesNCI as at the acquisition date 1,400,000NCI's share of past goodwill impairment -52,000NCI's share of post-acquisition R/E 27,300NCI's share of prior-year adjustments 4,160NCI's share of current profit after tas 12,960NCI as at 31 December 20x3 1,392,420


Reconciliation of non-controlling interest with net assets of S Co.Analytical check on NCI as at 31 December 20x2Book value of shareholders' equity 8,343,000Unamortized FV differentials 811,200Adjusted identifiable net assets 9,154,200

NCI's share of identifiable net assets (10%) 915,420NCI's share of unimpaired goodwillGoodwill attributable to NCI 529,000Impairment loss -52,000 477,000NCI as at 31 December 20x3 1,392,420




Book value of shareholders' equity as at 31 December 20x2Share capital 6,500,000Retained earningsAs at 1 January 20x3 1,443,000Net profit after tax 400,000Dividends declared 0As at 31 December 20x3 1,843,000Book value of shareholders' equity 8,343,000




Unamortized FV differentials as at 31 December 20x2Undervalued buildings ($6,500,000 - $5,200,000)*48/50 1,248,000Overvalued equipment ($2,210,000 - $2,600,000)*3/5 -234,000

1,014,000Tax effects 202,800Net of tax 811,200


Documents

Multi-year consolidation: non-controlling interests recognised at fair value