Download NCI share of equity

Chapter 5
Consolidation:
Non-controlling
Interest
© 2013 Advanced Accounting, Canadian Edition by G. Fayerman
The Nature of Non-controlling Interest (NCI)
• IFRS 10 defines non-controlling interest as “that
portion of equity of a subsidiary attributable to equity
interests that are not owned, directly or indirectly
through subsidiaries, by the parent.
• Non-controlling interests are classified as a
contributor of equity to the group.
LO 1
The Nature of Non-controlling Interest (NCI)
• On the statement of financial position, NCI is
presented and identified within equity separately
from the parent’s equity (IFRS 10, para. 22).  This is
required even if the NCI will be in a deficit position.
• The NCI is entitled to a share of the consolidated
equity.
• The total comprehensive income for the period
must be disclosed in the statement of changes in
equity, showing separately the total amounts
attributable to owners of the parent and to noncontrolling interests (IAS 1, 106(a))
LO 1
Effect of NCI on Consolidation
Process: Full Goodwill Method
• NCI measured at fair value on the basis of market
price for shares not acquired by the parent.
• NCI receives a share of goodwill.
• Note that in the full goodwill method that
goodwill is calculated as the excess of the sum or
aggregate of the consideration transferred and
the fair value of the NCI over the net fair value of
the subsidiary’s identifiable assets and liabilities at
acquisition date. This goodwill is the goodwill of
the subsidiary as a whole.
LO 2
Effect of NCI on Consolidation
Process: Full Goodwill Method
Example
Example
• Assume that P paid $169,600 for 80% of the shares of S on
January 1, 2013.
• All identifiable assets and liabilities of the subsidiary were
recorded at fair value, except for land for which the fair value
was $10,000 greater than cost.
• The tax rate is 30%.
• The NCI in S was considered to have a fair value of $42,000
based on the current market price of the S shares.
• At acquisition date, the equity of S consisted of:
o Share capital
$100,000
o Retained earnings
$100,000
LO 2
Effect of NCI on Consolidation
Process: Full Goodwill Method
Example
The acquisition analysis is as follows:
$ 169,600
(a) Consideration transferred:
$ 42,000
(b) Non-contorlling interest in S:
$ 211,600
Aggregate of (a) and (b) =
Net fair value of identifiable
assets and liabilities of S:
Goodwill
Goodwill attributable to parent:
Net fair value acquired:
Consideration transferred:
Goodwill—parent:
Goodwill attributable to NCI:
= $100,000 + $100,000
+ ($10,000)(1–30%)
$ 207,000
(recorded equity)
(FVA—land)
$ 4,600 ( = $211,600 – $207,000 )
$ 165,600 ( = $207,000 × 80% )
$ 169,600
$ 4,000
$ 600 ( = $4,600 – $4,000 )
( = $42,000 – (20% × $207,000) )
OR
LO 2
Effect of NCI on Consolidation
Process: Full Goodwill Method
• NCI measured at their proportionate share
of acquiree’s identifiable net assets.
• NCI does not receive a share of goodwill.
• Note that in the partial goodwill method
that only the parent’s share of the
goodwill is recognized.
LO 2
Effect of NCI on Consolidation
Process: Partial Goodwill Method
Example
Example
(exact same facts as full goodwill example)
• Assume that P paid $169,600 for 80% of the shares
of S on January 1, 2013.
• All identifiable assets and liabilities of the subsidiary
were recorded at fair value, except for land for
which the fair value was $10,000 greater than cost.
• The tax rate is 30%.
• At acquisition date, the equity of S consisted of:
o Share capital
$100,000
o Retained earnings
$100,000
LO 2
Effect of NCI on Consolidation
Process: Partial Goodwill Method
Example
The acquisition analysis is as follows:
Consideration transferred:
$ 169,600
Net fair value of identifiable
assets and liabilities of S:
= $100,000 + $100,000
(recorded equity)
+ ($10,000)(1–30%)
(FVA—land)
$ 207,000
x 80%
$ 165,600 ( = $207,000 × 80% )
Net fair value acquired by the parent:
Goodwill acquired
Previously acquired investment
by the parent:
Goodwill—parent:
$ 4,000 ( = $169,600 – $165,600 )
$0
$ 4,000
LO 2
Effect of NCI on Consolidation Process:
Full vs. Partial Goodwill Method
• IFRS 3 provides two alternative methods for calculating the NCI
at acquisition date: the full goodwill and the partial goodwill
methods.
• Under the full goodwill method, the NCI is measured at fair
value at acquisition date, and goodwill is recognized at 100%.
• Under the partial goodwill method, the NCI is measured as a
proportion of the net fair value of the subsidiary’s identifiable
net assets at acquisition date, and only the parent’s share of
goodwill is recognized on consolidation.
• Because it is necessary to distinguish between the parent’s
share and the NCI share of equity in the consolidated financial
statements, additional calculations are required to divide the
group equity into the NCI share and the parent’s share.
LO 2
Non-controlling Interest in Income
and Equity in Subsequent Periods
• Non-controlling interests in the net assets consist
of:
(1) the amount of those non-controlling interests at the
date of the original combination calculated in
accordance with IFRS 3; and
(2) the non-controlling interests’ share of changes in equity
since the date of the combination.
• These changes are not only in the recorded
equity of the subsidiary, but also relate to other
changes in consolidated equity, such as fair
value adjustments.
• The NCI must be allocated its share of the
change in equity.
LO 3
Calculating the NCI Share Of Equity
Calculation of NCI share of equity is determined in three steps
Share of equity
at acquisition
date
Share of change in equity from
acquisition date to beginning of
current year
1
Step 1: pre-acquisition
Acquisition
Date
Share of change in
equity in current
period
2
3
Steps 2 & 3: post-acquisition
Beginning of
current period
End of
current
period
LO 3
Non-controlling Interest in Income
and Equity in Subsequent Periods
• The NCI is entitled to a share of
consolidated equity.
• To calculate the NCI share of equity, it is
necessary to calculate the NCI share of
equity at the beginning of the year and
then add the NCI share of net income,
other comprehensive income, and
dividends.
LO 3
Non-controlling Interest in Income
and Equity in Subsequent Periods
• The NCI share of income is equal to its
percentage of the subsidiary’s net income
adjusted for any write off of fair value
adjustments.
• The NCI share of equity is equal to its
percentage ownership of the subsidiary’s
equity adjusted for any fair value
adjustments that still remain to the group.
LO 3
Non-controlling Interest Affected by
Intragroup Profit
• The calculation of the NCI is based on a
share of consolidated equity and not equity
as recorded by the subsidiary.
• A sale made from the parent to the
subsidiary would be considered to be a
“downstream” sale.
• A sale from the subsidiary to the parent
would be considered an “upstream” sale.
LO 4
Non-controlling Interest Affected by
Intragroup Profit
• In determining the transactions requiring an
adjustment for the NCI, it is important to
work out which transactions involve
unrealized profit.
• Once the profits/losses on an intragroup
transaction become realized, the NCI share
of equity no longer needs to be adjusted for
the effects of an intragroup transaction
because the profits/losses recorded by the
subsidiary are all realized profits.
LO 4
Non-controlling Interest Affected by
Intragroup Profit: Inventory
• Inventory is realized when the acquiring
entity sells the inventory to an entity
outside the group.
• Consolidation adjustments for inventory
are based on the profit/loss remaining in
inventory on hand at the end of a
financial period.
LO 4
Non-controlling Interest Affected by
Intragroup Profit: Inventory
• Following the consolidation adjustment for the unrealized
profit in ending inventory, net of tax, an NCI adjustment is
made:
NCI—equity; ending
NCI—net income
↓ $xxx
↓ $xxx
• If there is inventory on hand at the beginning of the current
period , the NCI share of the previous period’s profit must
be reduced as the subsidiary’s previous year’s recorded
profit contains unrealized profit. Following the adjustment
for the unrealized profit remaining in beginning inventory,
an NCI adjustment is made:
NCI—equity; beginning
NCI—net income
↓ $xxx
↑ $xxx
LO 4
Non-controlling Interest Affected
by Intragroup Profit: Depreciable NonCurrent Assets
• With depreciable non-current assets, profit is
realized as the asset is used up within the
group.
• Realization of the profit occurs as the future
benefits embodied in the asset are
consumed by the group, and occurs in
proportion to the depreciation of the asset.
LO 4
Non-controlling Interest Affected
by Intragroup Profit: Depreciable NonCurrent Assets
• If the subsidiary sells a non-current asset in
the current period to the parent, an
adjustment is made for the profit on sale,
net of tax, because the profit is unrealized
to the group.
• The NCI share of current period profit must
then be reduced.
LO 4
Non-controlling Interest Affected by
Intragroup Profit: Depreciable
Non-current Assets
• Following the adjustment for the profit on sale of
depreciable non-current assets, an NCI adjustment is
made:
NCI—equity; ending
↓ $xxx
NCI—net income
↓ $xxx
• As the asset is depreciated, some of the profit
becomes realized, net of tax, increasing the NCI
share of profit. Following the adjustment for
depreciation, an NCI adjustment is made:
NCI—equity; ending
NCI—net income
↑ $xxx / years
↑ $xxx / years
LO 4
Non-controlling Interest Affected by
Intragroup Profit: Intragroup Transfers
for Services and Interest
• For transactions involving services and interest, the
group’s profit is unaffected because the general
consolidation adjustment reduces both expense
and revenue equally.
• However, from the NCI’s perspective, there has
been a change in the subsidiary’s equity.
• Example: The subsidiary may have recorded
interest revenue as a result of a payment to the
parent entity relating to an intragroup loan. The
revenue is unrealized in that no external entity has
been involved in the transaction.
LO 4
Non-controlling Interest Affected by
Intragroup Profit: Summary
• Since the NCI is entitled to a share of consolidated
equity, it is necessary to adjust for the effects of
intragroup transactions in calculating the NCI share of
equity.
• Since the NCI is calculated in relation to subsidiary
equity, not all intragroup transactions affect the
calculation of the NCI, only those where the equity of
the subsidiary is affected.
• In adjusting for intragroup transactions it is necessary to
determine the flow of the transaction—parent to
subsidiary or subsidiary to parent—in order to determine
whether an NCI adjustment is required.
LO 4
Non-controlling Interest Affected by
Intragroup Profit: Summary
• The NCI share of equity is affected by the
realization of profit on intragroup transactions.
• With intragroup transfers for services and interest,
the NCI is unaffected because income/loss is
assumed to be immediately realized.
LO 4
Non-controlling Interest Affected by a
Gain On Bargain Purchase
• The NCI receives a share of the fair value
of the subsidiary, and has no involvement
with the gain on bargain purchase.
• Any gain on bargain purchase adjusts for
the parent’s share of pre-acquisition equity
only. The NCI does not receive any share
of the gain on bargain purchase.
• The NCI is unaffected by the existence of
any gain on bargain purchase.
LO 5
Changes in the Proportion Held by
Non-controlling Interest
• A company will often buy shares of another entity in
stages or will divest itself of ownership interest in stages.
Increases in Ownership
• Changes in a parent’s ownership interest in a subsidiary
that do not result in the parent losing control of the
subsidiary are equity transactions (IFRS 10.23).
• Conceptually, what has happened is that the
consolidated group has transferred net assets from the
non-controlling interest to the parent. The total net
assets of the group have not increased.
LO 6
Changes in the Proportion Held by
Non-controlling Interest
Increases in Ownership (cont.)
• The parent must adjust the carrying amount of noncontrolling interest to reflect the changes in its
relative interests in the subsidiary (IFRS 10.B.96).
• The parent recognizes in consolidated equity any
difference between the amount by which the noncontrolling interests are adjusted and the fair value of
the consideration paid.
LO 6
Changes in the Proportion Held by
Non-controlling Interest
Decreases in Ownership
• If the parent retains control over the subsidiary, the parent is
not deemed to have sold any interest. In substance the
group has transferred net assets from the parent to the noncontrolling interest.
• The parent must adjust the carrying amounts of the noncontrolling interests to reflect the changes in its relative
interests in the subsidiary (IFRS 10.B.96).
• The parent recognizes in consolidated equity any difference
between the amount by which the non-controlling interests
are adjusted and the fair value of the consideration paid.
LO 6
Changes in the Proportion Held by
Non-controlling Interest: Summary
• When a parent increases its ownership interest, the
difference between the amount that was paid by the
parent and the amount that was transferred from the
non-controlling interest is allocated to equity.
• When a parent decreases its ownership interest but still
retains control, the difference between the amount that
was received and the amount that was transferred to
the non-controlling interest is allocated to equity.
• When a parent decreases its ownership interest and
loses control, the difference between the amount that
was received and the amount that was transferred to
the non-controlling interest is recorded in net income.
LO 6
Appendix 5A:
Concepts of Consolidation
• There are three main concepts of consolidation:
entity, parent entity, and proprietary concept.
• The choice of concept affects how consolidated
financial statements are prepared, but only where
the subsidiary is less than wholly owned by the
parent.
• The IASB has chosen to adopt the entity concept of
consolidation, mainly because of the conceptual
framework decision that financial statements are
prepared for a wide range of users.
LO 7
Appendix 5A: Concepts of Consolidation
Illustration 5A.2, Group Under the Entity Concept
LO 7
Appendix 5A: Concepts of Consolidation
Illustration 5A.3, Group Under the Parent Entity Concept
LO 7
Appendix 5A: Concepts of Consolidation
Illustration 5A.4, Group Under the Proprietary Concept
LO 7
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