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Session 9

Non-controlling interests
HI5020
Corporate Accounting
HI 5020 Corporate Accounting
Holmes Institute 2010
Session progress
Accounting for equity investments Week 12
Changes in degree of ownership Week 11
Indirect interest Week 10
Non-controlling interest Chapter 30
Class test (1 hour) topics 5-8 (20%)
Week 9
Accounting for intra-group transactions Chapter 29 Week 8
Group Structures Chapter 28 Week 7
Segment reporting and related parties Chapters 25 & 26 Week 6
Cash-flow statements Chapter 20
Class test (1 hour) topics 1-4 (20%)
Week 5
Income and changes in Equity Chapter 17 Week 4
Accounting for Owners Equity Chapter 14 Week 3
Accounting for Liabilities Chapter 10 Week 2
Accounting for Assets Chapter 4 Week 1
HI 5020 Corporate Accounting
Holmes Institute 2010
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
HI 5020 Corporate Accounting
Holmes Institute 2010
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.
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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 Ltd
MI = 25% CI = 75%
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Holmes Institute 2010 6
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.
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Holmes Institute 2010 7
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 required
to be disclosed on the face of the balance sheet
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Holmes Institute 2010 8
Consolidated Income Statement
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Holmes Institute 2010 9
Consolidated Statement of Changes in Equity
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Holmes Institute 2010 10
Effects of MI on consolidation process
Business Combination Valuation Entries
The revaluation entry is unaffected by the
existence of the MI for differences between
carrying amounts and fair values at acquisition
date
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Holmes Institute 2010 11
Effects of MI on the Consolidation process
Acquisition analysis:
Cost of acquisition is compared with FV of
INA acquired. Where parent acquires
<100% of shares of subsidiary, need to
calculate FV acquired
Pre-acquisition entry:
Entry is based on a proportionate share of
subsidiary equity
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Holmes Institute 2010 12
Effects of MI on consolidation process
Intragroup transactions
No impact as under the entity concept of consolidation,
effects of all transactions are adjusted for in full
AASB 127
Note dividends: only parent entitys share of dividends
paid/provided is eliminated on consolidation
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Holmes Institute 2010 13
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 1,200
Dividend Declared Cr 1,200
Dividend Revenue Dr 1,200
Dividend Receivable Cr 1,200
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Holmes Institute 2010 14
Effects of MI on consolidation process Worksheet
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Holmes Institute 2010 15
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 stages
1. MI share of recorded equity is determined
2. This share is adjusted for the effects of
intragroup transactions
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Holmes Institute 2010 16
MI share of recorded equity of the subsidiary
MI share is calculated in three steps
1. Determine the MI share of equity of the
subsidiary at acquisition date
2. Determine the MI share of the change in
subsidiary equity between the acquisition date
and the beginning
of 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
HI 5020 Corporate Accounting
Holmes Institute 2010 17
Calculation of Minority Interest
HI 5020 Corporate Accounting
Holmes Institute 2010
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
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Holmes Institute 2010 19
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 $1,050,000
General Reserve $ 300,000
Retained 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%
HI 5020 Corporate Accounting
Holmes Institute 2010
Elimination of the investment step 1
20
460.5 NON-controlling interest
125.5 Goodwill on acquisition
10.5 24.5
1,074.5
35
1,535
Fair value adjust ($50K x (1-tax
rate))
45 105 150 Ret. earnings-acquisition date
90 210 300 Revalue surplus-acquisition date
315 735 1,050 Share capital on acquisition date
less FV of identifiable assets
acquired and liabilities assumed
1,200 Fair Value of consideration
transferred
30% NCI
$,000
Hans Ltd
(P) $,000
Solo Ltd
(S) $,000
Elimination of investment in Solo
Ltd
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Holmes Institute 2010 21
Consolidation journal entries
We 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
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Holmes Institute 2010 22
Consolidation Journal entries
The various journal entries are as follows;
DR Accumulated Depreciation 196,000
CR Equipment 196,000
To close off accumulated depreciation in accordance with the net
method of asset revaluation
DR Equipment 50,000
CR Revaluation surplus 35,000
CR DTL 15,000
To record the Revaluation surplus and Deferred tax Liability
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Holmes Institute 2010 23
Consolidation Journal entries
DR Share Capital (70%) 735,000
DR Revaluation Reserve 234,500
DR Retained Earnings 105,000
DR Goodwill 125,500
CR Investment Solo Ltd 1,200,000
To recognise the Goodwill on acquisition and eliminate Hans Ltd
interest in pre-acquisition capital and reserves
DR Share Capital 315,000
DR Revaluation Surplus 100,500
DR Retained Earnings 45,000
CR NCI 460,500
To record the recognition of the Non-controlling Interest (NCI) in
contributed equity and reserves at date of acquisition
HI 5020 Corporate Accounting
Holmes Institute 2010
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)
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Holmes Institute 2010 25
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)
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Holmes Institute 2010 26
Non-controlling interests at FV (method 2)
53,786 125,500 179,286 Goodwill on acquisition date
460,500 1,074,500 1,535,000
10,500 24,500 35,000 FV adjustment ($50K x (1-0.3)
45,000 105,000 150,000 Retained earnings on acquisition
90,000 210,000 300,000 Revaluation surplus on acquisition
315,000 735,000 1,050,000 Share capital on acquisition date
less FV of assets acquired,
liabilities assumed
1,714,286
514,286 514,286 Plus NCI measured at FV
1,200,000 1,200,000 FV of consideration transferred
30% NCI
$
Hans Ltd
70% interest
Solo Ltd
$
Elimination of investment is
subsidiary (Solo Ltd)
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Holmes Institute 2010 27
Journal entries (method 2)
DR Share Capital 315,000
DR Revaluation Surplus 100,500
DR Retained Earnings 45,000
DR Goodwill 53,786
CR Non-controlling Interest 514,286
To recognise the non-controlling interest in Solo Ltd at date of
acquisition
DR Share Capital (70%) 735,000
DR Revaluation Reserve 234,500
DR Retained Earnings 105,000
DR Goodwill 125,500
CR Investment Solo Ltd 1,200,000
To recognise the Goodwill on acquisition and eliminate Hans Ltd
interest in pre-acquisition capital and reserves.
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Holmes Institute 2010 28
(3) MI Share of equity at acquisition date (step 1)
Adjustments for Intragroup transactions
1) 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
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Holmes Institute 2010 29
Intragroup payment of dividends
If dividends declared by Solo Ltd were $10,000, then;
DR Dividend Income 7,000
CR Dividend receivable 7,000
DR Dividend payable 7,000
CR Dividend declared 7,000
HI 5020 Corporate Accounting
Holmes Institute 2010
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?
HI 5020 Corporate Accounting
Holmes Institute 2010
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.
HI 5020 Corporate Accounting
Holmes Institute 2010
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.
HI 5020 Corporate Accounting
Holmes Institute 2010
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
HI 5020 Corporate Accounting
Holmes Institute 2010
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
HI 5020 Corporate Accounting
Holmes Institute 2010
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..
HI 5020 Corporate Accounting
Holmes Institute 2010
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
HI 5020 Corporate Accounting
Holmes Institute 2010
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
HI 5020 Corporate Accounting
Holmes Institute 2010
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.
HI 5020 Corporate Accounting
Holmes Institute 2010
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)