Lecture 8 : Accounting for non-controlling interestsHI5020 Corporate AccountingHolmes InstituteApplied Business Statistics for ManagersTopics covered in this session:▪ Understand the nature of non-controlling interests▪ Understand why we calculate non-controlling interests▪ Understand how to calculate non-controlling interests’ share inshare capital and reserves, and current period profit▪ Understand how to calculate goodwill (or bargain gain onpurchase) in the presence of non-controlling interests▪ Understand how non-controlling interests should be disclosedwithin consolidated financial statementsHolmes InstituteApplied Business Statistics for ManagersNon-controlling interestsExample▪ Company A (parent entity) owns 75 per cent of Company B▪ Remaining 25 per cent held by investors who are not part ofthe economic entity▪ The outside investors are referred to as ‘non-controllinginterests’Non-controlling interest is defined in AASB 10 as:the equity in a subsidiary not attributable, directly or indirectly,to a parentHolmes InstituteApplied Business Statistics for ManagersNature of Controlling & Minority InterestHolmes InstituteApplied Business Statistics for ManagersCalculating non-controlling interests▪ Non-controlling interests are ‘identified’ but not eliminated aspart of the consolidation process▪ They are identified for disclosure purposes▪ The parent’s investment in the subsidiary is eliminated onlyagainst the parent’s share of the subsidiary’s owners’ equityat acquisition dateHolmes InstituteApplied Business Statistics for ManagersCalculating non-controlling interests-continued▪ The non-controlling interest’s share of equity is noteliminated, but is separately identified so that the noncontrolling interest’s share can be specifically shown in theconsolidated financial statements▪ The dividends paid and payable by the subsidiary to the noncontrolling interest will be included within the consolidatedfinancial statementsHolmes InstituteApplied Business Statistics for ManagersCalculating non-controlling interests-continued▪ The inclusion of non-controlling interests in the consolidatedstatement of financial position is consistent with the entityconcept-NCIs are part of owners▪ Where there are intragroup transactions, any related profit orloss should be eliminated in full as part of the consolidationprocessHolmes InstituteApplied Business Statistics for ManagersCalculating non-controlling interests-How about goodwill?▪ According to paragraph 19 of AASB 3, for eachbusiness combination the acquirer shall measure anynon-controlling interest in the acquiree either:➢at fair value (including goodwill), or➢at the non-controlling interest’s proportionate shareof the acquiree’s identifiable net assets (excludinggoodwill)▪ While the IASB allows for both full goodwillmethod and partial goodwill method, the FASBallows for only full goodwill methodHolmes InstituteApplied Business Statistics for ManagersEffects of NCI on Consolidation ProcessBusiness Combination Valuation EntriesThe revaluation entry is unaffected by the existence of the MIfor differences between carrying amounts & fair values atacquisition dateHolmes InstituteApplied Business Statistics for ManagersNCI is calculated in three steps1. Determine the MI share of equity of the subsidiary atacquisition date2. Determine the MI share of the change in subsidiary equitybetween the acquisition date & the beginning of the currentperiod for which the consolidated financial statements arebeing prepared3. Determine the MI share of the changes in subsidiary equityin the current periodHolmes InstituteApplied Business Statistics for ManagersNCI is calculated in three steps-continuedHolmes InstituteApplied Business Statistics for ManagersNCI & Elimination of pre-acquisition capital and reserves▪ As with 100 per cent owned subsidiaries, the carryingamounts of subsidiaries’ assets must be adjusted to fair valueprior to the elimination of the parent entity’s investment▪ This is necessary to correctly calculate the amount ofgoodwill or gain on acquisition▪ The carrying amounts of subsidiaries’ assets and liabilitiesmust also be adjusted to fair value in the presence of NCIsHolmes InstituteApplied Business Statistics for ManagersWorked Example 27.1—Non-controlling interest in pre-acquisition capital and reserves• On 1 July 2023, Parent Entity acquired 70 per cent of the share capital of Subsidiary Ltd for $800000, which represented the fair value of the consideration paid, when the share capital andreserves of Subsidiary Ltd were: Share capitalRevaluation surplusRetained earnings$700 000$200 000$100 000$1 000 000 • All assets of Subsidiary Ltd were recorded at fair value at acquisition date, except for some plantthat had a fair value $50 000 greater than its carrying amount• The cost of the plant was $250 000 and it had accumulated depreciation of $180 000• The tax rate is 30 per centREQUIREDPrepare the consolidation eliminations and adjustments to recognise the pre-acquisition capital andreserves of Subsidiary Ltd, assuming that the non-controlling interest was measured at theproportionate share of the acquiree’s identifiable net assets.Holmes InstituteApplied Business Statistics for ManagersWorked Example 27.1-Solutions30% Non SubsidiaryParent Ltd’scontrollingLtd($)70% interest($)800 000interest($)Fair value of consideration transferredless Fair value of identifiable assets acquiredand liabilities assumed:Share capital on acquisition date700 000490 000210 000Revaluation surplus on acquisition date 200 000140 00060 000Retained earnings on acquisition date100 00070 00030 000Fair value adjustment ($50 000 ×(1 – tax rate))35 00024 50010 5001 035 000724 500Goodwill on acquisition dateNon-controlling interest75 500–310 500 Holmes InstituteApplied Business Statistics for ManagersWorked Example 27.1—Solution (cont.)The consolidation journal entries would be: Dr Accumulated depreciation—plantCr Plant180 000180 000 (to close off accumulated depreciation in accordance with the net method of asset revaluation) Dr PlantCr Revaluation surplus recognised on consolidation50 00035 000Cr Deferred tax liability(to recognise the revaluation increment after tax)15 000 Dr Share capital (70% of 700 000)490 000Dr Revaluation surplus (70% of 200 000)140 000Dr Revaluation surplus recognised on consolidation24 500Dr Retained earnings (70% of 100 000)70 000Dr Goodwill75 500CrInvestment in Subsidiary Ltd800 000 (to recognise the goodwill acquired by Parent Entity and to eliminate the parent’s interest in pre-acquisition capital and reserves) Dr Share capital210 000Dr Revaluation surplus60 000Dr Revaluation surplus recognised on consolidation10 500Dr Retained earningsCr Non-controlling interest30 000310 500 (to recognise the non-controlling interest in contributed equity and reserves at date of acquisition)Holmes InstituteApplied Business Statistics for ManagersNon-controlling interest measured at fair value –grossmethod▪ Assume the same information as in Worked Example 27.1above, except this time we will apply the other optionavailable within the accounting standard and value the noncontrolling interest in the acquiree at fair valueHolmes InstituteApplied Business Statistics for ManagersWorked Example 27.2—Solution 70%Parent Ltd’sinterest($)30% NonControllinginterest($)SubsidiaryLtd($) Fair value of consideration transferredplus Non-controlling interest measuredat fair value ($800 000 × 30/70)800 000800 000342 857342 8571 142 857less Fair value of identifiable assetsacquired and liabilities assumedShare capital on acquisition date490 000210 000700 000Revaluation surplus on acquisition date200 000140 00060 000Retained earnings on acquisition dateFair value adjustment ($50 000 ×(1 – tax rate))100 00070 00030 00035 00024 50010 500 1 035 000724 500310 500Goodwill on acquisition date107 85775 50032 357 Holmes InstituteApplied Business Statistics for ManagersWorked Example 27.2—Solution (cont.)The consolidation journal entries: Dr Accumulated depreciation—plantCr Plant180 000180 000 (to close off accumulated depreciation in accordance with the net method of asset revaluation) Dr PlantCr Revaluation surplus recognised on consolidation50 00035 000Cr Deferred tax liability(to recognise the revaluation increment after tax)15 000 Dr Share capital (70% of 700 000)490 000Dr Revaluation reserve (70% of 235 000)140 000Dr Revaluation surplus recognised on consolidation24 500Dr Retained earnings (70% of 100 000)70 000Dr GoodwillCr Investment in Subsidiary Ltd75 500800 000 (to recognise the goodwill acquired by Parent Entity and to eliminate the parent’s interest in pre-acquisition capital and reserves) Dr Share capital210 000Dr Revaluation surplus60 000Dr Revaluation surplus recognised on consolidation10 500Dr Retained earnings30 000Dr GoodwillCr Non-controlling interest32 357342 857 (to recognise the non-controlling interest in contributed equity and reserves at date of acquisition)Holmes InstituteApplied Business Statistics for ManagersAdjustments for intragroup transactions▪ AASB 10 requires the elimination of the effects of all intragrouptransactions before the consolidated financial statements arepresented▪ The requirement to eliminate the effects of intragroup transactionsholds whether or not there are non-controlling interestsHolmes InstituteApplied Business Statistics for ManagersNCI & Intragroup payment of dividends▪In relation to dividends paid by a subsidiary, eliminate theproportion of the dividends that relates to the parent entity’sentitlement▪The non-controlling interest’s share in the dividends paid ordeclared, by the subsidiary will not be eliminated on consolidation▪Will reduce the non-controlling interests’ share in the equity of thesubsidiary▪Will be shown in the consolidated statement of financial positionHolmes InstituteApplied Business Statistics for ManagersNCI & Intragroup sale of inventory▪ When we calculate the non-controlling interest’s share of the profits of thesubsidiary we need to calculate the subsidiary’s profit after adjustments toeliminate income and expenses of the subsidiary that are unrealised fromthe economic entity’s perspective.▪ If the gains or losses have been realised no adjustment is necessary whencalculating non-controlling interest.▪ Adjustments to the calculation of the non-controlling interest’s share of thesubsidiary’s profits will be needed where some or all of the inventory sold bythe subsidiary is still on hand with the parent entity at reporting date▪ Unrealized profit in the closing inventory? In the next financial period:➢ Reduce the non-controlling interest’s share of opening retained earnings➢ Increase in the non-controlling interest’s share of that period’s profitsHolmes InstituteApplied Business Statistics for ManagersNCI & Intragroup sale of non-current assets▪ For non-current asset such as an item of property, plant andequipment➢ stays within the group,➢ the gain or loss on sale has not been recognised from the group’sperspective➢ the non-controlling interests’ share of profits will need to be adjusted➢ considered to be realised over the useful life as depreciation ischarged➢ every year adjust non-controlling interests share of current yearsprofit for the unrealised portion of profit and loss.Holmes InstituteApplied Business Statistics for ManagersNCI & Intragroup services and interest▪ There is no adjustment for such things as management fees when paymentswe are determining non-controlling interests as they areconsidered to be realised▪ However, elimination entries will still be needed for intra-grouptransactionsHolmes InstituteApplied Business Statistics for ManagersNCI & Intragroup transactions that create gains or losses for the parent entity▪ In calculating non-controlling interests we do not need to adjustfor gains or losses in the parent entity’s accounts that areunrealised▪ It is only the unrealised intragroup profits or losses accruing tothe subsidiary that need to be eliminated before we calculatenon-controlling interests▪ Hence, if a subsidiary has acquired inventory from the parententity no adjustment is required if the inventory is still on hand(and hence the profit is unrealised from the perspective of theeconomic entity) when calculating non-controlling interestsHolmes InstituteApplied Business Statistics for ManagersExample : NCI calculationsBravile Ltd acquired 80 percent share capital of Watpack Ltd. On 1 July 2018 for a cost of $4000000. As at the date ofacquisition, all assets and liabilities of Watpack Ltd were fairly valued except a land that has a carrying value $400000 less thanthe fair value. The recorded balance of equity of Watpack Ltd as at 1 July 2018 were as: Share capital$2800000Retained earnings$800000TotalAdditional information:$3600000 ➢ The management of Bravile Ltd values non-controlling interest at the proportionate share of Watpack Ltd identifiable netassets➢ Watpack Ltd has a profit after tax of $600000 for the year ended 30 June 2019➢ During the financial year to 30 June 2019, Watpack Ltd sold inventory to Bravile Ltd for a price of $480000. The inventorycosts Watpack Ltd $240000 to produce. 25 percent of the inventory are still on the hand of Bravile Ltd as at 30 June 2019.➢ During the year Watpack Ltd paid $80000 in management fees to Bravile Ltd.➢ On 1 July 2018, Watpack Ltd sold an item of plant to Bravile Ltd $320000. The equipment had a carrying value of $240000(Cost $400000, accumulated depreciation $160000). At the date of sale it was expected that the equipment had a remaininglife of 4 years and no residual value.▪ The tax rate is 30 percent.▪ Required▪ Based on the above information, calculate the non-controlling interest as at 30 June 2019.▪ Pass necessary journal entry to recognise the non-controlling interest as at 30 June 2019.Holmes InstituteApplied Business Statistics for ManagersExample : NCI calculations-continued(a) Calculation of the non-controlling interest as at 30 June 2019Consolidation adjustments /Fair value adjustments at the date of acquisitionFair value adjustment Dr Land400 000CrRevaluation surplus400 000DrRevaluation surplus120 000CrDeferred tax liability120 000 Non-controlling interest at acquisition date Share capital560 000Retained earnings160 000Revaluation reserve56000……………………………………………………………………………………………………..Non-controlling interest at acquisition date776000 Non-controlling interests is measured at the proportionate share of Watpack Ltd’s identifiable netassets. no goodwill is attributed to the non-controlling interest in Watpack Ltd.Holmes InstituteApplied Business Statistics for ManagersExample : NCI calculations-continuedNon-controlling interests in 2019 profits20%Non-controlling interest Reported profit of Watpack Ltd600 000120 000AdjustmentsUnrealised profit in closing inventory*Profit on sale of plantUnrealised portion (after tax)Realised portion (depreciationadjustment after tax)(42000)(8400)(56000)(11200)140002800Non-controlling interests in 2019 profits103200 *Unrealized profit in closing inventory before tax = (480000*25%-240000*25%)=$60000Deferred tax assets adjustment= (60000*30%)=$18000……………………………………………………………………………………………………………Unrealised profit in closing inventory after tax adjustment=$42000 Holmes InstituteApplied Business Statistics for ManagersExample : NCI calculations-continued(b)Journal to recognition of non-controlling interest at acquisition date Dr Share capital$560 000Dr Retained earnings$160 000Dr Revaluation reserve$56000Cr Non-controlling interest in Watpack Ltd$776000 Non-controlling interests’ share in the current year’s profit DrNon-controlling interest in earnings$103200CrNon-controlling interest$103200 Holmes InstituteApplied Business Statistics for ManagersLecture Summary▪ The concept of non-controlling interest (NCI)▪ Non-controlling interest is calculated in 3 phases▪ Calculating non-controlling interest under fair value method(full goodwill)▪ Calculating non-controlling interest under proportionate shareof subsidiaries identifiable net assets method (partial goodwillmethod)▪ Calculation of non-controlling interest share of current yearsprofit in the presence of different intra-group transactions.
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