ACCOUNTING FOR

NON-CONTROLLING
INTERESTS
Chapter 27
WHAT IS NON-CONTROLLING
INTEREST?
Non-controlling Interest (NZ IFRS 10)
“the equity in a subsidiary not attributable, directly
or indirectly, to a parent”.
Some examples:
Example (1):
 Company A (parent entity) owns 75% of Company B.

 Remaining 25% held by investors who are not part of the economic entity.
 25% ‘outside’ investors referred to as ‘non-controlling interests’.

Example (2):
 Company A (parent entity) owns 45% of Company B
 Remaining 55% held by a large community of investors who are not part of the
economic entity
 Company A however holds effective control over Company B
 55% ‘outside’ investors are ‘non-controlling interests’
 Non-controlling interest - a parent entity does not have to hold
50 percent or more of the equity to have effective control of the
subsidiary.
 Under the Entity Concept non-controlling interest will
not be shown as a liability to the economic entity as a
whole – non-controlling interest - contributors of equity
capital and therefore part owners of the economic entity
– viewed as owners within the group.
 Parent entity works out amount attributable to non-
controlling interest in preparing consolidated statements for
the economic entity – they are entitled to that portion of the
subsidiary’s net assets and profit corresponding to their
ownership interest in the subsidiary’s contributed equity.
 What happens on consolidation?
 In preparing a consolidated financial report, an entity
combines the financial reports of the parent and its
subsidiaries line by line by adding together like items of
assets, liabilities, equity, income and expenses.
 However, in order that the consolidated financial report
presents true and fair financial information about the group as
that of a single economic entity - the following steps are
taken:
 1. The carrying amount of the parent’s investment in each
subsidiary and the parent’s portion of equity of each subsidiary
are eliminated (NZ IFRS 3 describes the treatment of any
resulting goodwill);
2. Non-controlling interests in the profit or loss of consolidated
subsidiaries for the reporting period are identified; and
3. Non-controlling interests in the net assets of consolidated
subsidiaries are identified separately from the parent
shareholders’ interest in them.
 Consolidated Statement of Financial Position must therefore
comprise.
 Hundred percent of group’s assets plus
 Parent company’s share of the net assets (i.e. share of equity), and
 Non-controlling interest’s share of net assets (i.e. non-controlling
interest’s share of equity).
  What is non-controlling interest in net assets?
 Non-controlling interests in the net assets consist of:
i. The amount of those non-controlling interests at the date of the
original combination.
ii. The non-controlling interest’s share of changes in equity since
the date of combination.
 Non-controlling interest’s share is determined in three
stages:
1. Non-controlling interest in current period profit or loss.
2. Non-controlling interest in contributed equity and reserves
at date of acquisition of subsidiary by parent.
3. Non-controlling interest in post-acquisition changes in
contributed equity and reserves.
 Non-controlling interest in contributed equity and
reserves at the date of acquisition of the subsidiary by
the parent

 Non-controlling interest may be measured (NZ IFRS 3 )

using two different methods:
1. Non-controlling interest’s proportionate share of acquiree’s
identifiable net assets (excludes goodwill) aka Partial Goodwill
Method, OR
2. Fair value (includes goodwill) – aka Full Goodwill Method.

 Choice is available for each business combination –

significant flexibility,
 The main difference is in the amount of goodwill recognised
and the amounts attributed to non-controlling interest.
 Measurement at proportionate share of acquiree’s
identifiable net assets (i.e. excluding goodwill)
 Under this method any share of goodwill attributable to non-
controlling interest is not recognised – in that way the
consolidated financial statements do not represent a true and
fair view when it comes to the value of goodwill being
controlled by the parent entity.
 Represents a departure from the required treatment in
respect of parent’s share.

Dr Contributed Equity
Dr Revaluation Surplus (if any)
Dr Retained Earnings
Cr Non-controlling Interest
 Refer
 Worked Example 27.1 “Non-controlling Interest in pre-
acquisition capital and reserves (measured at Proportionate
Share of Subsidiary Limited’s Identifiable Net Assets”).
 Non-controlling Interest at fair value (i.e. incl.
goodwill)
 Share of goodwill attributed to non-controlling interest is
recognised
Dr Contributed Equity
Dr Revaluation Surplus (if any)
Dr Retained Earnings
Dr Goodwill
Cr Non-controlling Interest
 Note: consolidation journal entries to eliminate parent’s
interest in subsidiary capital and reserves and to recognise
goodwill on acquisition were covered in Week 3 – please do
not confuse these two different journals.
 Refer
 Worked Example 27.2 “Non-controlling Interest in
Subsidiary Limited measured at fair value”.
 Alternative calculation of NCI when measured at fair
value (full goodwill method) and fair value of NCI when
that NCI is given or known
 Non-controlling interest in current period profit or
loss
 General principles for calculation
 Adjustment to share of profit need to be made only to the extent the
intragroup transaction affects subsidiary’s profit/loss.
 Adjustment to profits or losses of subsidiary need to be made only
to the extent they remain unrealised from economic entity’s
perspective (i.e. the respective asset sold/purchased is still on hand).
 No adjustment necessary for profits relating to transactions that
do not involve the transfer of assets (e.g. interest, management
fees). They are deemed recognised on execution of transaction.
 No adjustment required for unrealised gains or losses by parent
entity when calculating non-controlling interest portion in
current profit or loss – NCI ‘resides’ in the subsidiary.
 Adjusting transactions:
1. Intragroup sale of inventory
 Adjust for non-controlling interest’s share of subsidiary
profit embedded in ending inventory.
 Adjust in following reporting period for non-controlling
interest’s share of unrealised profit in beginning inventory.
2. Intragroup sale of non-current assets:
 Adjust for non-controlling interest’s share of subsidiary
profit embedded in asset held by other group entity.
 If the asset is used by other entity to produce inventory,
intragroup profit gets realised when service potential of
asset is converted into inventory produced.
1. Intragroup service and interest payments
 No adjustment necessary for NCI calculation since no
related asset upon which any profit accrues.
 Related profit deemed realised when transaction is recognised.
 However it is important to note that as shown in Week 4,
intragroup transaction would still need to be eliminated for
the purposes of preparing consolidated financial statements.
2. NCI - Dividend paid by subsidiary:
 Parent company portion eliminated in consolidation
worksheet journal entries
 The remaining portion representing non-controlling interest
serves to reduce non-controlling interest’s share in the
profits of the subsidiary.
 Any amount yet unpaid (e.g. dividend proposed) shown as
liability in consolidated financial statements.
 Impairment of goodwill
 Parent entity’s share of goodwill recognised on
consolidation (as covered in Week 3).
 Goodwill realised in relation to non-controlling interest
(under fair value method).

 See Worked Examples 27.3 and 27.4 “Consolidated

Financial Statement Presentation in the Presence of
Non-Controlling Interests”.
 Disclosure Requirements – extensive:
 Non-controlling interest’s equity to be disclosed within
equity segment of the Consolidated Statement of
Financial Position separate from the equity of the owners
of the parent,
 Profit or loss and each component of other
comprehensive income attributed to the parent
shareholders and the non-controlling interests,
 Profit or loss and total comprehensive income for the
period attributable to non-controlling interests separately
disclosed in the Statement of Comprehensive Income
(NZ IAS 1 ).
 Summary
 Non-controlling interests in the profits of the economic entity
will be the proportionate share of reported after-tax profit of the
subsidiary adjusted for any subsidiary profits unrealised from the
perspective of the economic entity at the end of the reporting
period.
 NZ IFRS 10 and NZ IAS 1 require the amount of profit
attributable to non-controlling interests and parent interests to be
specified.
 Non-controlling interests in the equity of the economic entity will
be the contributed equity and reserves in the subsidiary
attributable to the non-controlling interest.
 NZ IFRS 10 require non-controlling interests’ equity to be
presented within the equity segment of the Statement of Financial
Position separate from the equity of the owner’s of the parent.
 Effects of intragroup transactions are to be eliminated in full even
in the presence of non-controlling interests.
 The parent’s interest in the dividends paid and declared by the
subsidiary is eliminated in the consolidation process and will
not show in the consolidated financial statements.
 The dividends payable to non-controlling interests is included
with the dividends payable liability in the Consolidated
Statement of Financial Position.
 The dividends disclosed in the Consolidated Statement of
Changes in Equity will be the dividends paid and declared by
the parent entity only.
 The parent’s interests in the pre-acquisition contributed equity
and reserves are eliminated in the consolidation process.
 Goodwill is measured at fair value or at the proportionate
share of the subsidiary’s identifiable net assets.
 Goodwill to be disclosed will only be the goodwill attributable
to parent entity, the portion attributable to non-controlling
interests is not separately disclosed.
 Tutorial/workshop preparation
 Please read and practice Worked Examples, Deegan - Chapter
27
 Exercises 27.16 and 27.17