ACCT 6010 Advanced Financial Reporting
Class 6: Non-controlling interest
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Learning objectives.
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After completing this topic, students should be able to:
Text /CP reference
1. Explain nature of non-controlling interest (NCI)
Arthur et al. 5.2.1- 5.3 & Nurnberg
2. Calculate the amount attributed to direct NCI and preparation of consolidated statements of comprehensive income, changes in equity and financial position using the:
a. Proportionate interest in goodwill; and separately
b. 100% interest in goodwill methods
Arthur et al. 5.4.1 to 5.4.5
3. Explain effects of intragroup transactions on the calculation of NCI and earnings per share
Arthur et al. 5.4.6
4. Explain and evaluate the effects of allocating impairment losses to partly owned subsidiaries under the proportionate interest and 100% interest in goodwill methods
Arthur et al. 5.4.7
5. Evaluate the relevance of non-controlling interest disclosures to shareholders, creditors and management
Arthur et al. 5.2.2 & Abad reading
6. Critically evaluate the proportionate interest in goodwill and 100% interest in goodwill methods
Arthur et al. 5.4.2
The University of 2
LS Class 5 1
– Arthur et al. Chapter 5, excluding section 5.4.5, 5.6 – Class 6 supplementary materials
– AASB 10 Consolidated Financial Statements – paras 22-24, B94-B95 and Appendix A Defined terms
– AASB 101 Presentation of Financial Statements paras 54(q), 81B and 106
– AASB 3 Business Combinations paras 19 & 32
The University of 3
– AASB 136 Impairment of Assets Appendix C & Illustrative examples 7A & 7B
– AASB 12 Disclosure of Interests in Other Entities paras 12, B10 & B11
– Minority Interest in the Consolidated Retained Earnings Statement Nurnberg, N. (2001) (Abstract)
– An Evaluation of the Value Relevance of Consolidated Versus Unconsolidated Accounting Information Laffarga, J.(2000) (Abstract)
– “Earnings Management via Not-wholly-owned Subsidiaries”, , and (2019) (Abstract)
– Optional reading: Moonitz, M. The Entity Approach to Consolidations, The Accounting Review, 1942, pp. 236-42.
The University of 4
LS Class 5 2
Class Outline
1. Nature of non-controlling interest (NCI)
2. Goodwill and measurement of NCI
3. Unrealised profits and calculation of NCI
4. Impairment of goodwill
5. Relevance of NCI disclosure
The University of 5
ACCT 6010 Advanced Financial Reporting
Nature of non-controlling interest (NCI)
The University of 6
LS Class 5 3
1. Nature of NCI
1. 1 Alternative concepts of consolidation
Entity concept
Parent concept
AASB 10 uses the entity concept
The University of 7
Proprietary concept
NCI is a part of equity NCI is a liability NCI not accounted for
1. Nature of OCI
1. 2 Entity concept of consolidation and NCI
The P Ltd Group
Under the entity concept of consolidation, NCI is considered to be a part of the group… so we must divide and disclose total group equity into 2 components; the equity attributable to the parent (PI) and the equity attributable to NCI
An alternative to the entity concept is the parent concept. Under the parent
concept, NCI is not considered to be a part of the group and so is classified
as a liability. The parent concept is not permitted by AASB10.
The University of 8
LS Class 5 4
1. 2 Entity concept of consolidation and NCI
Flow of Resources
Consolidation proceeds as if the resources of the subsidiaries will flow to the parent company, and to the NCI (for example, through dividends):
PLtd 80% SLtd 20% NCIinSLtd Resources
The University of 9
1. Nature of NCI
AASB 10: NCI Definition
“Non-controlling interest” is the equity in a subsidiary not attributable, directly or indirectly, to a parent.”
AASB 10 Appendix A Defined Terms
– The term ‘non-controlling interest’ is arguably an improvement on the term ‘minority interest’. Explain why.
The University of 10
LS Class 5 5
AASB 10: NCI Presentation and disclosure
– We disclose 2 main NCI numbers:
– NCI interests in the consolidated profit is disclosed on the face of the statement of comprehensive income (SCI)
[AASB 101.81B, AASB 10.B94]
– NCI interest in equity is disclosed on the Statement of Financial Position (SFP) [AASB 101.54(q)]
– In both statements, the ‘parent interest’ or PI in profit and equity items is also disclosed. In the SCI, PI is the difference between consolidated totals and NCI
The University of 11
v In-class activity:
Review BlueScope Steel Limited Income Statement and Balance Sheet.
1. Classification of NCI
– Entity concept of consolidation means that the NCI is reported as a component of equity – NOT as a liability of the group
[AASB 10.22]
– To be disclosed as a part of equity section in statement of financial position [AASB 101.54(q)]
– Total of the statement of changes in equity is also divided between PI & NCI amounts [AASB 101.106]
Ø Entity approach to consolidation results in greater comparability
Refer to the Nurnberg article
The University of 12
LS Class 5 6
1. Disclosure of NCI
– AASB 1024 (old consolidation standard prior to IFRS) required disclosure of:
– NCI share of paid up capital
– NCI share of reserves
– NCI share of retained profits /or accumulated losses
– AASB 10 does not require disclosure of NCI in each component of equity (just the total amount).
Looking at a consolidated statement of financial position, the NCI figure disclosed comprises of NCI share of issued capital, NCI share of retained earnings and NCI share of other components.
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1. Disclosures
For each subsidiary that has NCI that is material to the group:
– Name, place of business, NCI ownership interest, profit and loss allocated to NCI and balance of NCI at reporting date
[AASB 12.12]
– Dividends paid to NCI
– Summarised financial information (before intragroup transactions are eliminated) to enable financial statement users to understand the interest NCI has in the group’s activities
[AASB 12.B10 and 12.B11]
Ø Refer to IS and BS of BlueScope Steel Limited Annual Report. Also look at Note 22,
which contains further NCI information.
The University of 14
LS Class 5 7
1. Consolidation process and NCI
Differing approaches on the consolidation mechanics-
– NCI disclosure is an allocation problem; no separate consolidation journal entries
– Approach adopted in Arthur et al.
– Alternatively, NCI adjusting journal method – entries contained in consolidation journals and worksheets
– Approach adopted in some other texts,
ØCovered in Arthur et al. section 5.4.5 – ØOptional reading only
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1. Consolidation process and NCI
NCI adjusting journal method 3 steps:
1. Calculate the NCI as at the date of acquisition
– Noting each of its components
2. Calculate the NCI share of the change in OE in the subsidiary from
the date of acquisition to the beginning of the current period– – Noting the components of NCI that have changed
3. Calculate the NCI share of the change in OE during the current period –
– Noting the components and the changes therein
The University of 16
LS Class 5 8
2. Goodwill and the measurement of NC1
The University of 17
2. Goodwill and the measurement of NCI
– ForthepurposesofcalculatinggoodwillinabusinesscombinationAASB 3.19 & 3.32 permits the following choice for measuring NCI at acquisition date.
1) Based on fair value of identifiable net assets of the subsidiary.
Ø Referred to in Arthur et al. as “Proportionate interest in goodwill” method.
2) Based on the fair value (FV) of the NCI
May differ from price per share paid by parent – premium for control.
Ø Referred to in Arthur et al. as “100% interest in goodwill” method.
LSQ 5.1: How could the FV of NCI be measured?
The University of 18
LS Class 5 9
2. Measurement of goodwill when we have NCI
Fair value of consideration
+ Fair value prior holding+
+ Non-controlling interest*
– Fair value of identifiable net assets
= Goodwill (or gain on a bargain purchase if negative)
+ if acquisition is achieved in stages; In our examples this term is zero.
* Recall this may be measured in one of 2 ways
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Note: When the parent interest is 100%, NCI is equal to zero in the above equation (compare with calculation of goodwill in previous weeks)
2. Example – Measurement of goodwill
Alpha Ltd buys 60% of the issued capital of Beta Ltd for $2,100,000.
The fair value of identifiable net assets as at the date of acquisition was $3,050,000.
There was no prior shareholding.
The University of 20
LS Class 5 10
2. Example – Measurement of goodwill (cont.)
Fair value of consideration
+ Fair value prior holding
+ Non-controlling interest
– Fair value of identifiable net assets = Goodwill
_____ _____ _____
_____ ====
v Class 5 Illustrative Example 1: Complete the acquisition analysis using (a) the proportionate goodwill method
(b) the 100% goodwill method
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2. NCI Share of Equity as at the Acquisition Date
– The NCI share of subsidiarys equity is calculated as the NCIs proportionate share of the equity recorded by the subsidiary, adjusted for the effect on the subsidiarys equity for any fair value adjustments (after tax).
The University of 22
LS Class 5 11
NCI Share of Equity as at the Acquisition Date
Calculate the NCI share of equity as at the date of acquisition by component:
– Issued capital
– General reserve
– Retained earnings
– Fair value adjustment reserve
Illustrative Example 1: Calculate the NCI share of equity at acquisition date.
The University of 23
3. Unrealised profits and the calculation of NCI
The University of 24
LS Class 5 12
3. Unrealised Profits and Calculation of NCI
AASB1024 (consolidation std prior to IFRS), required NCI to be calculated as:
“… The aggregate of the equity of the subsidiaries, other than that held directly or indirectly by the ownership group of the parent entity, after making adjustments for unrealised profits and losses of subsidiaries and such other adjustments as may be necessary …”
AASB 10 is silent on the need to make these adjustments!
LSQ 5.2: Why do we need to make these adjustments?
The University of 25
Unrealised Profits and Calculation of NCI
– Noncontrollinginterestisonlyadjustedfortheimpactofanyunrealised profit eliminated on consolidation and not also for the gross intragroup transaction that was also eliminated.
– Recall (week 4) that we eliminate (i) the intragroup transaction profit and (ii) any unrealised profit within any asset carrying amount
– E.g. If a subsidiary sold inventory to another group entity, then on consolidation we would debit sales and credit COS/COGS. There is no profit effect from that consolidation adjustment – so no adjustment to NCI.
The second consolidation adjustment effects profit (and NCI).
– After identifying any unrealised profit, decide whether it is the profit of a partly owned subsidiary, parent entity or fully owned subsidiary.
Using the entity concept of consolidation, the NCI has to be allocated
a share of unrealised profits (and losses) adjustments.
The University of 26
LS Class 5 13
Unrealised Profits and Calculation of NCI
One drawback of this process is that Partly – owned subsidiaries provides opportunities for management of consolidated earnings.
Intra-group transactions can shift profit from partly -owned subsidiary to parent entity
– This includes sale of goods and services, management fees – ThiscaneffectEPS.How?
EPS is based on earnings after deducting NCI
The University of 27
LSQ 5.3: Assume NCI is 30% and the management fees charged to sub is increased by $1m.
How does this change the numerator in the EPS calculation (ignore tax)
Non-controlling interest
– Dividends paid by wholly owned subsidiaries are intragroup transactions;
– Dividends paid by parent entity are external to both the parent and the group
– Dividends paid by partly-owned subsidiaries are partly paid to the parent and partly paid to the NCI
– Both parent share of equity and NCI share of equity are reduced.
– In the entity concept of consolidation, both the PI and the NCI are part of the group.
The University of 28
v Class 5 Illustrative Example 2: Calculate the NCI share of equity at the end of 20X8.
LS Class 5 14
The University of 29
4 Impairment of Goodwill
4. Impairment of Goodwill
– Annualimpairmenttestappliedforgoodwill
– Must be tested as part of a cash generating unit
– Impairment of CGU is allocated first to goodwill and then to other assets
– Impairment of goodwill may not be reversed
– Impairment of goodwill for a partly owned subsidiary depends upon the accounting policy adopted for the measurement of NCI.
Ø Refer AASB 136 Appendix C and
ØExample 7A for proportionate interest in goodwill method ØExample 7B for 100% interest in goodwill method
The University of 30
LS Class 5 15
5. NCI and the purpose of accounting
– Recall the purpose of accounting. It is intended to provide information that is useful to users in making decisions relating to providing resources to the company: AASB Conceptual Framework’
Ø Refer to Abad et al. (2000) abstract on eReserve
The University of 32
LSQ 5.4: Do you feel that the calculation and disclosure of NCI meet those needs? How? To whom?
Are they more useful to NCI or parent shareholders?
Other NCI issues
Negative NCI:
– Accumulated losses are allocated proportionately between parent entity interest and NCI
[AASB 10.B94]
Preference shares and NCI:
– Preference shares that are reclassified as equity and not owned by parent entity are treat as part of NCI
– Parent entity share of profit is adjusted for cumulative preference share dividends
[AASB 10.B95]
The University of 33
LS Class 5 16
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