Further Consolidation Issues II: Accounting For Non-Controlling Interests

ACCOUNTANCY
REVIEW
General Trias, Cavite Campus
Further consolidation
issues II: Accounting for
non-controlling interests
ACCOUNTANCY REVIEW
Copyright © 2012 McGraw-Hill Australia Pty Ltd
PPTs to accompany Deegan, Australian Financial Accounting 7e
AFAR
29-1
Objectives of this lecture
• Understand the meaning and nature of non-
controlling interests
• Understand why we calculate non-controlling
interests
• Understand how to calculate non-controlling
interests’ share in share capital and reserves, and
current period profit
• Understand how to calculate goodwill (or bargain
gain on purchase) in the presence of non-controlling
interests
• Understand how non-controlling interests should be
disclosed within consolidated financial statements
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Non-controlling interests
Example
• Company A (parent entity) owns 75% of Company B
• Remaining 25% held by investors who are not part of
the economic entity
• The outside investors are referred to as ‘non-
controlling interests’
Non-controlling interest is defined in AASB 10 as:

the equity in a subsidiary not attributable, directly or
indirectly, to a parent
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Non-controlling interests (cont.)
• Where a subsidiary is partly owned by a parent entity (i.e.
less than 100% interest), both the parent entity and the
non-controlling interests will have an ownership interest in
the subsidiary’s profits, dividend payments, and share
capital and reserves
• As part of the consolidation process, need to work out the
amount to be attributed to non-controlling interests
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Disclosure requirements
Disclosure requirements: non-controlling interests
• IFRS 10 requires separate disclosure of the non-controlling interest’s
share of capital, retained profits or accumulated losses
– A parent shall present non-controlling interests in the consolidated
statement of financial position within equity, separately from the
equity of the owners of the parent
• In relation to the non-controlling interest in profit or loss, IFRS 10
states:
– An entity shall attribute the profit or loss and each component of
other comprehensive income to the owners of the parent and to
the non-controlling interests. The entity shall also attribute total
comprehensive income to the owners of the parent and the non-
controlling interests even if this results in the non-controlling
interests having a deficit balance
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Calculating non-controlling interests
A key step in preparing consolidated financial statements is
calculating non-controlling interests.
In relation to the steps in preparing consolidated financial
statements, IFRS 10 states:
(a) combine like items of assets, liabilities, equity, income,
expenses and cash flows of the parent with those of its
subsidiaries;
(b) offset (eliminate) the carrying amount of the parent’s
investment in each subsidiary and the parent’s portion
of equity of each subsidiary;
(c) eliminate in full intragroup assets and liabilities, equity,
income, expenses and cash flows relating to
transactions between entities of the group (profits or
losses resulting from intragroup transactions that are
recognised in assets, such as inventory and fixed
assets, are eliminated in full).
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Calculating non-controlling interests (cont.)
• Even in the presence of non-controlling interests we combine
all the assets, liabilities, equity, income and expenses of the
entities of the parent and the subsidiaries as part of the
consolidation process.
• The only exception to this is where the assets, liabilities, equity,
income or assets have been impacted by transactions within
the group, in which case the effects need to be eliminated in
full.
• When eliminating the investment in subsidiaries we only
eliminate the parent entity’s interest in each subsidiary’s equity
account.
• The remaining amounts in the subsidiaries’ equity accounts will
relate to the non-controlling interests in the economic entity.
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• Non-controlling interests are ‘identified’ but not eliminated
as part of the consolidation process.
• They are identified for disclosure purposes.
• The parent’s investment in the subsidiary is eliminated
only against the parent’s share of the subsidiary’s owners’
equity at acquisition date.
• The non-controlling interest’s share of equity is not
eliminated, but is separately identified so that the non-
controlling interest’s share can be specifically shown in
the consolidated financial statements.
• The dividends paid and payable by the subsidiary to the
non-controlling interest will be included within the
consolidated financial statements.
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• The inclusion of non-controlling interests in the
consolidated statement of financial position is consistent
with the entity concept, according to which non-controlling
interest is viewed as an owner within the group, in the
same way as the shareholders of the parent entity.
• Where there are intragroup transactions, any related
profit or loss should be eliminated in full as part of the
consolidation process, not merely the percentage of the
profit or loss equal to the parent entity’s interest in the
subsidiary.
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Non-controlling interest is calculated by taking three elements into
account:
1. Non-controlling interests’ share in the net assets (equity) of
subsidiaries at the dates the parent entity acquired the
subsidiaries. This requires the non-controlling interests’ share
of the pre-acquisition balances of contributed equity, retained
earnings and reserves to be determined.
2. Non-controlling interests’ share in the changes in equity since
acquisition date. This is achieved through calculating the non-
controlling interests’ share of the post acquisition movements in
retained earnings and reserves.
3. Non-controlling interests’ share in the profit or loss of the
subsidiaries in the current period. At the end of the reporting
period the non-controlling interests’ share in profit for the year,
distributions and transfers made, and movements in reserves
for the year must be determined.
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• As a result of recent amendments, IFRS 3 provides preparers
of financial statements with a choice in the measurement of
the non-controlling interest
• According to paragraph 19 of IFRS 3, for each business
combination the acquirer shall measure any non-controlling
interest in the acquiree either:
– at fair value (including goodwill), or
– at the non-controlling interests’ proportionate share of the
acquiree’s identifiable net assets (excluding goodwill)
Specifically, paragraphs 18 and 19 of IFRS 3 state:
18 The acquirer shall measure the identifiable assets acquired
and the liabilities assumed at their acquisition-date fair
values
19 For each business combination, the acquirer shall measure
any non-controlling interest in the acquiree either at fair
value or at the non-controlling interest’s proportionate share
of the acquiree’s identifiable net assets
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• If the non-controlling interests are calculated on the basis of the
fair value of the subsidiary, then an amount representing the
non-controlling interest’s share of goodwill will be calculated
• This will be in addition to the amount of goodwill allocated to
the parent entity’s interest
• This means, in effect, that the full amount of the goodwill of the
subsidiary is being recognised, which is in basic accordance
with the entity concept of consolidation.
• This approach is referred to by some people as the ‘full
goodwill method’ and does represent a significant change to
pre-existing accounting practice wherein only the goodwill
acquired by the parent entity was included within the
consolidated financial statements
• Pursuant to the entity concept of consolidation, all the assets
and liabilities of the subsidiary are included within the
consolidated financial statements
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• By contrast, if the parent entity elects to account for the non-
controlling interest in accordance with the second option—this
being the non-controlling interest’s proportionate share of the
acquiree’s identifiable net assets—then no additional goodwill
will be calculated as being attributable to the non-controlling
interests (which is perhaps somewhat obvious given that this
second option explicitly refers to the non-controlling interest’s
proportionate share of identifiable net assets, which explicitly
excludes goodwill)
• Hence, if this option is taken then only a portion of the
subsidiary’s goodwill will be reflected in the consolidated
financial statements, which is not consistent with a ‘pure’
application of the entity concept of consolidation
• This is often referred to as the ‘partial goodwill method’
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Calculating non-controlling interests—the
‘choice’
• In relation to the choice between using the ‘full goodwill method’
and the ‘partial goodwill method’, it is interesting to consider
how the joint convergence work being undertaken by the IASB
and the US Financial Accounting Standards Board (FASB)
ultimately led to this option being available within IFRS 3
• The revised version of IFRS 3 was issued at the same time as
the revised version of the US accounting standard, Statement
of Financial Standards No. 141 Business Combinations
• Both Boards had issued exposure drafts on the revised
standards, and within both of the exposure drafts only the ‘full
goodwill method’ was supported
• However, when the accounting standards were ultimately
released, the FASB retained only the ‘full goodwill method’,
whereas the IASB introduced the option to use either the full
goodwill method, or the partial goodwill method
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29-15
Justifying the ‘choice’ in relation to
calculating goodwill on consolidation
In understanding the reasoning behind this change, we can refer
to the Basis for Conclusions that was released with IFRS 3.
Paragraph BC 210 states:
Introducing a choice of measurement basis for non-controlling
interests was not the IASB’s first preference. In general, the
IASB believes that alternative accounting methods reduce the
comparability of financial statements. However, the IASB was not
able to agree on a single measurement basis for non-controlling
interests because neither of the alternatives considered (fair value
and proportionate share of the acquiree’s identifiable net assets)
was supported by enough board members to enable a revised
business combinations standard to be issued. The IASB decided
to permit a choice of measurement basis for non-controlling
interests because it concluded that the benefits of the other
improvements to, and the convergence of, the accounting for
business combinations developed in this project outweigh the
disadvantages of allowing this particular option.
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Justifying the ‘choice’ in relation to
calculating goodwill on consolidation (cont.)
Hence, the choice of two options within the IASB standard
was the outcome of a political exercise to make sure the
standard was approved, rather than on the basis that the
approach was conceptually sound.
We really have to ponder the impacts of such decisions
on the ultimate quality of financial information being
generated in compliance with accounting standards.
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Elimination of pre-acquisition capital and reserves
in the presence of non-controlling interests
• As with 100% owned subsidiaries, the carrying values of
subsidiaries’ assets must be adjusted to fair value prior to the
elimination of the parent entity’s investment
• This is necessary to prevent the amount of goodwill calculated
on consolidation from being wrongly stated, as the equity (net
assets) of the subsidiary would be undervalued (where the fair
value of the net assets exceeds their carrying amount)
• The existence of non-controlling interests does not change the
requirement for the assets and liabilities of a subsidiary to be
measured at fair value as at acquisition date
• If the parent entity does not acquire all of the shares of the
subsidiary it does not acquire an interest in all the share capital
and reserves. There will be a non-controlling interest
• non-controlling interests are measured at either:
– the proportionate share of the acquiree’s identifiable net
assets, or
– fair value
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Worked Example 1—Non-controlling interest measured at the
proportionate share of the acquiree’s identifiable net assets
• On 1 July 2015, Parent Entity acquired 70% of the share capital of
Subsidiary Ltd for $800 000, which represented the fair value of the
consideration paid, when the share capital and reserves of Subsidiary
Ltd were:
Share capital $700 000
Revaluation surplus $200 000
Retained earnings $100 000
$1 000 000
• All assets of Subsidiary Ltd were recorded at fair value at acquisition
date, except for some plant that 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 $180 000
• The tax rate is 30%
REQUIRED
Prepare the consolidation eliminations and adjustments to recognise the
pre-acquisition capital and reserves of Subsidiary Ltd, assuming that
the non-controlling interest was measured at the proportionate share of
the acquiree’s identifiable net assets.
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Worked Example 1—Solution
30% Non-
Subsidiary Parent Ltd’s controlling
Ltd 70% interest interest
($) ($) ($)
Fair value of consideration transferred 800 000
less Fair value of identifiable assets acquired
and liabilities assumed:
Share capital on acquisition date 700 000 490 000 210 000
Revaluation surplus on acquisition date 200 000 140 000 60 000
Retained earnings on acquisition date 100 000 70 000 30 000
Fair value adjustment ($50 000 ×
(1 – tax rate)) 35 000 24 500 10 500
1 035 000 724 500
Goodwill on acquisition date 75 500 –
Non-controlling interest 310 500
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Worked Example 1—Solution (cont.)
The consolidation journal entries would be:
Dr Accumulated depreciation—plant 180 000
Cr Plant 180 000
(to close off accumulated depreciation in accordance with the net method of asset revaluation)
Dr Plant 50 000
Cr Revaluation surplus 35 000
Cr Deferred tax liability 15 000
(to recognise the revaluation increment after tax)
Dr Share capital (70% of 700 000)) 490 000

Dr Revaluation reserve (70% of 235 000) 164 500
Dr Retained earnings (70% of 100 000) 70 000
Dr Goodwill 75 500
Cr Investment in Subsidiary Ltd 800 000
(to recognise the goodwill acquired by Parent Entity and to eliminate the parent’s interest in pre-
acquisition capital and reserves)
Dr Share capital 210 000

Dr Revaluation surplus 70 500
Dr Retained earnings 30 000
Cr Non-controlling interest 310 500
(to recognise the non-controlling interest in contributed equity and reserves at date of
acquisition)
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Worked Example 2—Non-controlling interest measured at fair
value
REQUIRED
Assume the same information as in Worked Example 1
above, except this time we will apply the other option
available within the accounting standard and value the non-
controlling interest in the acquiree at fair value.
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Worked Example 2—Solution
30% Non-
Subsidiary Parent Ltd’s Controlling
Ltd 70% interest interest
($) ($) ($)
Fair value of consideration transferred 800 000 800 000
plus Non-controlling interest measured
at fair value ($800 000 × 30/70) 342 857 342 857
1 142 857
less Fair value of identifiable assets
acquired and liabilities assumed
Share capital on acquisition date 700 000 490 000 210 000
Revaluation surplus on acquisition date 200 000 140 000 60 000
Retained earnings on acquisition date 100 000 70 000 30 000
Fair value adjustment ($50 000 ×
(1 – tax rate)) 35 000 24 500 10 500
1 035 000 724 500 310 500
GOODWILL ON ACQUISITION DATE 107 857 75 500 32 357
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Worked Example 2—Solution (cont.)
The consolidation journal entries would be (and the first 3 sets of entries below are the same as
Worked Example 29.1):
Dr Accumulated depreciation—plant 180 000
Cr Plant 180 000
(to close off accumulated depreciation in accordance with the net method of asset revaluation)
Dr Plant 50 000
Cr Revaluation surplus 35 000
Cr Deferred tax liability 15 000
(to recognise the revaluation increment after tax)
Dr Share capital (70% of 700 000)) 490 000

Dr Revaluation reserve (70% of 235 000) 164 500
Dr Retained earnings (70% of 100 000) 70 000
Dr Goodwill 75 500
Cr Investment in Subsidiary Ltd 800 000
(to recognise the goodwill acquired by Parent Entity and to eliminate the parent’s interest in pre-
acquisition capital and reserves)
Dr Share capital 210 000

Dr Revaluation surplus 70 500
Dr Retained earnings 30 000
Dr Goodwill 32 357
Cr Non-controlling interest 342 857
(to recognise the non-controlling interest in contributed equity and reserves at date of
acquisition)
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Adjustments for intragroup transactions
• IFRS 10 requires the elimination of the effects of all

intragroup transactions before the consolidated financial
statements are presented.
• The requirement to eliminate the effects of intragroup

transactions holds whether or not there are non-controlling
interests.
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Intragroup payment of dividends
• In relation to dividends paid by a subsidiary, the consolidation
worksheet journal entries will eliminate the proportion of the
dividends that relates to the parent entity’s entitlement
• The non-controlling interest’s share of the dividends paid by the
subsidiary will be shown in the consolidated financial statements.
That is, the non-controlling interest’s share in the dividends paid or
declared by the subsidiary will not be eliminated on consolidation
• This is appropriate because the dividends paid to the non-
controlling interests represent flows away from the economic entity
• The dividends distributed to the non-controlling interests will act to
reduce the non-controlling interests’ share in the equity of the
subsidiary
• The consolidated statement of financial position will show any
dividends payable to the non-controlling interests as a liability
together with those payable to the shareholders of the parent entity
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Intragroup sale of inventory
• When we calculate the non-controlling 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 realised no adjustment is
necessary when calculating non-controlling 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 non-controlling 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
• Adjustments to the calculation of the non-controlling 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 the end of the reporting period
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Intragroup sale of inventory (cont.)
• 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 non-
controlling interest’s share of opening retained
earnings (by reducing it) and provide a
corresponding increase in the non-controlling
interest’s share of that period’s profits
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29-28
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 the gain or loss on sale has not been recognised from
the group’s perspective and the non-controlling 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
• Therefore, if a subsidiary sold an item of plant to another entity
at the beginning of the financial year at a profit of $1000 and if
that asset is to be depreciated over 10 years, only $100 of the
gain could be recognised in the first year and $900 would be
deemed to be unrealised. It would be realised over the next
nine years
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29-29
Intragroup services 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 non-controlling
interest in the subsidiary’s profit (of course, consolidation
adjustments will still be required but this discussion is about
calculating the non-controlling interest’s share of profits for
presentation purposes and not for the purpose of generating
consolidation journal adjustments)
• There is no adjustment for such things as management fees
when we are determining non-controlling interests as they are
considered to be realised
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Intragroup transactions that create gains or
losses for the parent entity
• In calculating non-controlling interests we do not need to adjust
for gains or losses in the parent entity’s accounts that are
unrealised, as non-controlling interests have an interest only in
the subsidiary’s profit contribution
• It is only the unrealised intragroup profits or losses accruing to
the subsidiary that need to be eliminated before we calculate
non-controlling interests
• Hence, if a subsidiary has acquired inventory from the parent
entity no adjustment is required if the inventory is still on hand
(and hence the profit is unrealised from the perspective of the
economic entity) when calculating non-controlling interests, as
the purchase of inventory has no implications for the equity of
the subsidiary as they are simply acquiring one asset in
exchange for another (if paid for by cash), or acquiring one
asset by incurring a liability (accounts payable)
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Summary of some general principles for
calculating non-controlling interests in profits
or losses
• We only need to make adjustments to non-controlling 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 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 non-
controlling interest in profits
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29-32

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ACCOUNTANCY

Non-controlling interest is defined in AASB 10 as:

Dr Share capital (70% of 700 000)) 490 000

Dr Share capital 210 000

Dr Share capital (70% of 700 000)) 490 000

Dr Share capital 210 000

• IFRS 10 requires the elimination of the effects of all

• The requirement to eliminate the effects of intragroup

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