Session 9 Non-controlling Interests

Session 9Non-controlling interests

HI5020 Corporate Accounting

HI 5020 Corporate Accounting Holmes Institute 2010

Session progress

Accounting for equity investmentsWeek 12Changes in degree of ownershipWeek 11Indirect interestWeek 10

Non-controlling interest Chapter 30Class test (1 hour) topics 5-8 (20%)

Week 9Accounting for intra-group transactions Chapter 29Week 8Group Structures Chapter 28Week 7Segment reporting and related parties Chapters 25 & 26Week 6

Cash-flow statements Chapter 20Class test (1 hour) topics 1-4 (20%)

Week 5Income and changes in Equity Chapter 17Week 4Accounting for Owners Equity Chapter 14Week 3Accounting for Liabilities Chapter 10Week 2Accounting for Assets Chapter 4Week 1


Session objectives Welcome back to Session 9. In this session, Non-controlling interests, often

called Minority Interests will discussed, looking at how they are treated including;

What is a Minority or Non-controlling interest? How a Parent entity recognises that minority

interest Dividends Acquisition date Intragroup transactions


What is a Minority Interest?

It is the recognition of smaller investors or investors who have no controlling interest in an entity.

In the following slide, it can be seen that P Ltd who has the 75% shareholding have the controlling interest.

HI 5020 Corporate Accounting Holmes Institute 2010 5

Nature of Controlling and Minority Interest

A non-controlling interest exists when a subsidiary is partly owned by a parent entity.A non-controlling interest (AASB 127, Par 4) is defined as the equity in a subsidiary not directly attributable , directly or

indirectly, to a parent

P(CI) Ltd S LtdMI = 25%CI = 75%


MI Nature

AASB 127 adopts the entity concept of consolidation

Minority Interest is entitled to a share of the consolidated equity, as a contributor of equity to the consolidated group.


Non controlling interest Disclosure

AASB 101 requires profit and loss to be disclosed on the face of the income statement, showing separately attributable MI, and that attributable to equity holders of the parent Total Minority Interest share of equity is requiredto be disclosed on the face of the balance sheet


Consolidated Income Statement


Consolidated Statement of Changes in Equity


Effects of MI on consolidation process

Business Combination Valuation EntriesThe revaluation entry is unaffected by the existence of the MI for differences between carrying amounts and fair values at acquisition date


Effects of MI on the Consolidation process

Acquisition analysis:Cost of acquisition is compared with FV of INA acquired. Where parent acquires


Effects of MI on consolidation process

Example:Parent Ltd owns 80% of Subsidiary Ltd. Parent Ltd pays a $1,000 dividend and declares a further $1,500 dividend.Dividend Revenue Dr 800

Dividend Paid Cr 800

Dividend Payable Dr 1,200Dividend Declared Cr 1,200

Dividend Revenue Dr 1,200Dividend Receivable Cr 1,200


Effects of MI on consolidation process Worksheet


Calculation of MI share of equity

AASB 127 Para. 22(c) minority interests in the net assets consists of:

i. The amount of those MI at the date of the original combination and

ii. The minoritys share of changes in equity since the date of the combination

Calculation of MI is done in two stages1. MI share of recorded equity is determined2. This share is adjusted for the effects of

intragroup transactions


MI share of recorded equity of the subsidiary

MI share is calculated in three steps1. Determine the MI share of equity of the

subsidiary at acquisition date2. Determine the MI share of the change in

subsidiary equity between the acquisition date and the beginningof the current period for which the consolidated financial statements are being prepared

3. Determine the MI share of the changes in subsidiary equity in the current period


Calculation of Minority Interest


Eliminations

In previous sessions, carrying values of subsidiaries assets were required to be adjusted to fair value prior to elimination of the parent entitys investment. From that point, Goodwill was correctly determined.

We will now look at how elimination of pre-acquisition share capital and reserves where non-controlling interests are involved.

The first example shows the measurement of the non-controlling interests proportionate share of the acquirees (Solo) identifiable net assets


Accounting at Acquisition Date

On July 1 2010, Hans Ltd acquired 70% of share capital of Solo Ltd for $1,200,000. Equity of Solo Ltd was:

Share Capital $1,050,000General Reserve $ 300,000Retained Earnings $ 150,000

All assets of Solo Ltd were recorded at FV on acquisition except for a piece of equipment that had a higher FV ($50K) than its carrying amount. Cost of equipment was $300K, accumulated depreciation of $196K. Tax rate is 30%


Elimination of the investment step 1

20

460.5NON-controlling interest125.5Goodwill on acquisition

10.524.51,074.5

351,535

Fair value adjust ($50K x (1-tax rate))

45105150Ret. earnings-acquisition date90210300Revalue surplus-acquisition date

3157351,050Share capital on acquisition date

less FV of identifiable assets acquired and liabilities assumed

1,200Fair Value of consideration transferred

30% NCI $,000

Hans Ltd (P) $,000

Solo Ltd (S) $,000

Elimination of investment in Solo Ltd


Consolidation journal entriesWe can now see from the worksheet that there

are a number of journal entries for Hans Ltd (parent) and its controlled entity (Solo Ltd) in order to eliminate Hans Ltds share of pre-acquisition capital and reserves of Solo Ltd.

They are; Depreciation Revaluation increment Goodwill Non-controlling interest


Consolidation Journal entriesThe various journal entries are as follows;

DR Accumulated Depreciation 196,000CR Equipment 196,000To close off accumulated depreciation in accordance with the netmethod of asset revaluation

DR Equipment 50,000CR Revaluation surplus 35,000CR DTL 15,000To record the Revaluation surplus and Deferred tax Liability


Consolidation Journal entriesDR Share Capital (70%) 735,000DR Revaluation Reserve 234,500DR Retained Earnings 105,000DR Goodwill 125,500CR Investment Solo Ltd 1,200,000To recognise the Goodwill on acquisition and eliminate Hans Ltd interest in pre-acquisition capital and reserves

DR Share Capital 315,000DR Revaluation Surplus 100,500DR Retained Earnings 45,000CR NCI 460,500To record the recognition of the Non-controlling Interest (NCI) in contributed equity and reserves at date of acquisition


Consolidation Journal entries

From here the consolidated financial statements can be produced. They would include Hans Ltds (parent) share capital and reserves as well as the non-controlling interests share of Solo Ltds pre-acquisition share capital and reserves (not eliminated as part of the consolidation process)


Lets now look at how the previous information would be recorded if the alternative option, being the valuation of the Non-controlling interest in the acquiree (being Solo Ltd) at Fair Value.

In this method, we will still commence with a worksheet but done to recognise the goodwill on acquisition between the parent (Hans Ltd) and the subsidiary (Solo Ltd)

Non-controlling interests at FV (method 2)


Non-controlling interests at FV (method 2)

53,786125,500179,286Goodwill on acquisition date460,5001,074,5001,535,000

10,50024,50035,000FV adjustment ($50K x (1-0.3)45,000105,000150,000Retained earnings on acquisition90,000210,000300,000Revaluation surplus on acquisition

315,000735,0001,050,000Share capital on acquisition date

less FV of assets acquired, liabilities assumed

1,714,286514,286514,286Plus NCI measured at FV

1,200,0001,200,000FV of consideration transferred

30% NCI $

Hans Ltd 70% interest

Solo Ltd$

Elimination of investment is subsidiary (Solo Ltd)


Journal entries (method 2)DR Share Capital 315,000DR Revaluation Surplus 100,500DR Retained Earnings 45,000DR Goodwill 53,786CR Non-controlling Interest 514,286To recognise the non-controlling interest in Solo Ltd at date of acquisition

DR Share Capital (70%) 735,000DR Revaluation Reserve 234,500DR Retained Earnings 105,000DR Goodwill 125,500CR Investment Solo Ltd 1,200,000To recognise the Goodwill on acquisition and eliminate Hans Ltd interest in pre-acquisition capital and reserves.


(3) MI Share of equity at acquisition date (step 1)

Adjustments for Intragroup transactions1) Intragroup payment of dividends;Elimination of the proportion of the dividends to be

applied to the parent entitys entitlements (as per sessions).

The NCI share of dividends paid or proposed are not eliminated on acquisition


Intragroup payment of dividendsIf dividends declared by Solo Ltd were $10,000, then;

DR Dividend Income 7,000CR Dividend receivable 7,000

DR Dividend payable 7,000CR Dividend declared 7,000


Intragroup sale of inventory

When calculating the NCIs share of profits of a subsidiary, it is necessary to calculate the subsidiarys profit after adjustments to eliminate income and expenses unrealised from the economic entitys (parent) perspective.

Example: Solo Ltd (sub) sold inventory to Hans

Ltd (parent) for $5,000, cost was $4,200.

Hans Ltd sold all the inventory to customers for

$8,000.

What is the situation?


Intragroup sale of inventory

Solo Ltd would record a profit of $800 ($5,000 4,200).

Hans Ltd would record a profit of $3,000 ($8,000 5,000)

Total profit would be $3,800, being $8,000 4,200..

Consideration needs to be made where, if using this example, Hans Ltd still had inventory on hand at a reporting date.


Intragroup sale of non-current assets

Where a subsidiary sells non-current assets to another entity within a group such as plant and equipment, property, motor vehicles, etc. no gain or loss is recognised as the asset remains with the group.

And if a gain or loss is to be realised such as where a subsidiary sold equipment to the parent and made a gain of $5,000, then as a gain would be realised via depreciation, it would need to be unrealised as shown S7-8.


Intragroup service and interest payments

As per AASB 127 (par.27) 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. Intragroup

losses may indicate an impairment that requires recognition

in the consolidated financial statements

AASB 112 income tax applies to temporary differences that arise from the elimination of profits and losses resulting

from intragroup transactions


There is no adjustment for things such as management fees when determining non-controlling interests as they are considered to be realised.

To the extent that there is no related asset that is retained in the economic entity upon which any profit is accrued, no adjustments are necessary in calculating the non-controlling interest in the subsidiarys profit.

Intragroup service and interest payments


Intragroup transactions gains and losses

When calculating NCIs, it is not necessary to adjust for gains or losses in the parents entity accounts that are UNREALISED as NCIs only have an interest in the subsidiarys profit contribution.

Unrealised intragroup profits or losses accruing TO THE SUBSIDIARY need to be eliminated before calculating NCIs interests..


General Principles for calculating NCIs

There are a number (4) of general principles when calculating the non-controlling interests in profit or losses.

1. Need only to make adjustments to NCIs share of profits where an intragroup transactions affects the subsidiarys Profit/Loss

2. Need to make adjustments for profits or losses made by the subsidiary to the extent that they are unrealised from the economic entitys perspective, meaning that the asset is still on hand at the end of the reporting period


3. Profits resulting in transactions that do not involve the transfer of assets, e.g. management fees, interest, etc. (previously discussed), no adjustments are necessary. Related profits are deemed to be recognised at the point of the transaction.

4. No need to make adjustments to unrealised gains or losses made by the parent entity when calculating the non-controlling interests in profits.

General Principles for calculating NCIs


Example

It is recommended that students view and understand how Worked Example 30.3 (pp 953-963) is determined. Whilst a significant exercise, it clearly takes students through the various elements discussed in this session.

Alternatively, Part B (end-of-chapter exercise) is another good example.


Session 9

This completes Session 9 where we discussed the various situations affecting non-controlling interests, looking at what constitutes NCIs and how they are treated from an accounting perspective.

Next week we discuss Indirect Interest (Chapter 31)

Documents

Session 9 Non-controlling Interests