HI5020

Corporate Accounting
Session 9c

Accounting for Non-controlling

Interests
 Session Learning Objectives
Know how to calculate goodwill or bargain gain on
purchase in the presence of non-controlling interests
Know how to prepare consolidation elimination and
adjustments to recognise the pre-acquisition capital
and reserves of Subsidairy Ltd, assuming that non-
controlling interest was measured at the
proportionate share of the acquiree’s identifiable net
assets.
Know how to prepare consolidation elimination and
adjustments to recognise the pre-acquisition capital
and reserves of Subsidairy Ltd, assuming that non-
controlling interest was measured at the fair value.
 In-class Worked Example (cont.)
Star Ltd Western 30% NCI
(S) $,000 Ltd $,000
Elimination of investment in Star Ltd (P) $,000
FV of consideration transferred 4,200
Less: FV of identifiable assets acquired &
liabilities assumed
Share capital on acquisition date 3,675 2,572.50 1,102.50
Revalue surplus-acquisition date 1,050 735 315
Retained earnings-acquisition date 525 367.50 157.50
Revaluation Surplus-(Fair value adjustment) 122.50 85.75 36.75
[$175,000 x (1-tax rate)]
Total 5,372.50 3,760.75
Goodwill on acquisition 439.25
Non-controlling interest 1,611.75
 In-class Worked Example (cont.)
Accumulated depreciation 686,000
Equipment 686,000
To close off accumulated depreciation in accordance with
the net method of asset revaluation

Equipment 175,000
Revaluation surplus 122,500
Deferred tax liability 52,500
To record the Revaluation surplus & Deferred tax Liability
 In-class Worked Example (cont.)
Share capital (70%) 2,572,500
Revaluation surplus 820,750
Retained earnings 367,500
Goodwill 439,250
Investment – Star Ltd 4,200,000
To recognise the Goodwill on acquisition & eliminate Western Ltd interest in
pre-acquisition capital & reserves
 In-class Worked Example (cont.)
Share capital 1,102,500
Revaluation surplus 351,750
Retained earnings 157,500
NCI 1,1611,750
To record the recognition of the Non-controlling Interest (NCI) in contributed
equity & reserves at date of acquisition
 In-class Worked Example
On July 1 2014, Western Ltd acquired 70% of share capital of
Star Ltd for $4,200,000. Equity of Star Ltd was:
Share Capital $3,675,000
Revaluation Surplus $1,050,000
Retained Earnings $ 525,000
All assets of Star Ltd were recorded at FV on acquisition except
for a piece of equipment that had a higher FV ($175,000) than its
carrying amount. Cost of equipment was $1,050,000,
accumulated depreciation of $686,000. Tax rate is 30%.
Req. Prepare the consolidation elimination and adjustments to
recognise the pre-acquisition capital and reserves of Solo Ltd,
assuming that the non-controlling interest was measured at the
fair value.
 Applying the Second Option
(In-class worked example)
Elimination of investment is subsidiary Star Ltd Western Ltd 30% NCI
(Star Ltd) $ 70% interest $
FV of consideration transferred 4,200,000 4,200,000
Add: NCI measured at FV 1,800,000 1,800,000
6,000,000
Less: FV of assets acquired & liabilities
assumed
Share capital on acquisition date 3,675,000 2,572,500 1,102,500
Revaluation surplus on acquisition 1,050,000 735,000 315,000
Retained earnings on acquisition 525,000 367,500 157,500
Revaluation surplus (FV adjustment ) 122,500 85,750 36,750
[$175.000 x (1-0.3)]
Total 5,372,500 3,760,750 1,611,750
Goodwill on acquisition date 627,500 439,250 188,250
 Solutions (cont.)
Share capital 1,102,500
Revaluation surplus 315,000
Retained earnings 157,500
Goodwill 188,250
Non-controlling Interest 1,800,000
To recognise the non-controlling interest in Star Ltd at date of acquisition
Share capital (70%) 2,572,500
Revaluation surplus 820,750
Retained earnings 367,500
Goodwill 439,250
Investment – Star Ltd 4,200,000
To recognise the Goodwill on acquisition & eliminate Western Ltd interest in
pre-acquisition capital & reserves.
 Effects of MI on Consolidation Process
Intra-group transactions
• AASB 10 requires the elimination of the effects of all
intragroup transactions before the consolidated financial
statements are presented
• The requirement to eliminate the effects of intragroup
transactions holds whether or not there are non-controlling
interests
 (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 entity’s
entitlements (as per sessions).
The NCI share of dividends paid or proposed
are not eliminated on acquisition
 Intragroup Payment of Dividends
If dividends declared by Solo Ltd were $10,000, then:

Dividend income 7,000

Dividend receivable 7,000

Dividend payable 7,000

Dividend declared 7,000
 Intragroup Sale of Inventory
When calculating the NCI’s share of profits of a
subsidiary, it is necessary to calculate the
subsidiary’s profit after adjustments to eliminate
income & expenses unrealised from the
economic entity’s perspective.
 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.
 Intragroup Sale of Non-current Assets
Where a subsidiary sells non-current assets to
another entity within a group such as plant &
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
& made a gain of $5,000, then as a gain would be
realised via depreciation, it would need to be
“unrealised”.
 Intragroup Service & Interest Payments
As per AASB 127 (par.27) “intragroup balances &
transactions, including income, expenses &
dividends are eliminated in full. Profits & losses
resulting from intragroup transactions that are
recognised in assets, such as inventory & 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
& losses resulting from intragroup transactions”
 Intragroup Service & Interest Payments (cont.)

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 subsidiary’s profit.
 Intragroup Transactions –Gains & Losses
When calculating NCI’s, it is not necessary to
adjust for gains or losses in the parents entity
accounts that are UNREALISED as NCI’s only
have an interest in the subsidiary’s profit
contribution.
Unrealised intragroup profits or losses accruing
TO THE SUBSIDIARY need to be eliminated before
calculating NCI’s interests.
 General Principles for Calculating NCI’s
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 NCI’s share
of profits where an intragroup transactions
affects the subsidiary’s 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
entity’s perspective, meaning that the asset is
still on hand at the end of the reporting period
 General Principles for Calculating NCI’s (cont.)

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.
 Example
It is recommended that students view &
understand how Worked Example 27.3 (pp 978-
990) is determined. This exercise takes students
through the various elements discussed in this
session.
THE END