Survey
* Your assessment is very important for improving the workof artificial intelligence, which forms the content of this project
* Your assessment is very important for improving the workof artificial intelligence, which forms the content of this project
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 Copyright Notice Copyright © 2013 John Wiley & Sons Canada, Ltd. All rights reserved. Reproduction or translation of this work beyond that permitted by Access Copyright (The Canadian Copyright Licensing Agency) is unlawful. Requests for further information should be addressed to the Permissions Department, John Wiley & Sons Canada, Ltd. The purchaser may make back-up copies for his or her own use only and not for distribution or resale. The author and the publisher assume no responsibility for errors, omissions, or damages caused by the use of these programs or from the use of the information contained herein.