Chapter 4

Chapter 4
Group Reporting III:
Accounting for
Business
Combinations and
Non-controlling
Interests under IFRS 3
in Post-acquisition
Periods

Copyright © 2016 by McGraw-Hill Education (Asia). All rights reserved. 1

Learning Objectives

1. Understand the rationale for elimination of investment;

2. Understand the concept of non-controlling interests;
tương thích
3. Appreciate the alternative measurement basis for non-controlling
interests under IFRS 3;
4. bút toán
Know how to prepare consolidation journal entries relating to
goodwill, depreciation, and amortization of differences between
book values and fair values of identifiable assets, contingent
liabilities of acquired subsidiaries, and non-controlling interests;
5. Know how to prepare consolidation journal entries to allocate
current and past income to non-controlling interests; and
6. Understand the components of non-controlling interests and know
how to analytically determine their balances.

Content

1. Introduction
Introduction
2. Elimination of Investment in a Subsidiary
3. Effects of Amortization, Depreciation and Disposal of Undervalued
or Overvalued Assets and Liabilities Subsequent to Acquisition
4. Accounting for Non-controlling Interests under IFRS 3
5. Goodwill Impairment Tests
6. Conclusion

1
Chapter 4

Introduction

tóm tắt of chapter 3

Recap
• Acquisition method: recognize and measure identifiable net assets
at fair value + recognize goodwill
– Recognition and measurement principles

bản chất
• Different forms of business combination but in substance they share
common features
– Acquirer who gains control of one or more businesses
– Acquisition of a subsidiary = Acquisition of its net assets

Introduction
Focus of chapter 4:
• Subsequent effects when identifiable net assets are sold, consumed, extinguished or
amortized.
– Sale, consumption, use or settlement of the assets and liabilities of acquiree
should be recorded at acquisition date fair value
– Test for impairment of goodwill
• Subsequent effects of acquisition
– Demonstrate how consolidation journal entries are passed to record the
subsequent effects of acquisition
• Accounting for non-controlling interests
– Show how the balance of the non-controlling interests can be analyzed with
respect to three components
– Illustrate the consolidation journal entries to recognize non-controlling interest’s
share of equity
nhiềuperiods
• Accounting for business combinations in multiple kỳ
lặp lại
– Explain the re-enactment process: involving re-enacting certain past
consolidation adjusting entries.
5

Content

1. Introduction
2. Overview ofofthe
Elimination consolidation
Investment process
in a Subsidiary
3. Effects of Amortization, Depreciation and Disposal of Undervalued
or Overvalued Assets and Liabilities Subsequent to Acquisition
4. Accounting for Non-controlling Interests under IFRS 3
5. Goodwill Impairment Tests
6. Conclusion
7. Appendix 4A: Illustrations of Non-controlling Interests Measured
as a Proportion of Acquisition-date Identifiable Net Assets

2
Chapter 4

Elimination of Investment Account

What the parent is paying for mẹ trả giá phí hợp nhất để mua cái j:
Consideration Share of book Share of
transferred by value of excess of fair
Goodwill
parent = subsidiary’s + value over +
net assets at book value of
acquisition identifiable net
Eliminated against date assets
subsidiary’s share
capital, pre-acquisition CL
retained earnings and
pre-acquisition other
equity items
• Investment account is eliminated
– To ensure that the investment account must be zero vì vd mẹ đầu tư vào con, con sẽ ghi nhận ts=> trùng=> 0
– Substituted with subsidiary’s identifiable net assets and goodwill (residual)
– Rationale: Avoid recognizing assets in two forms (investment in parent’s
statement of financial position and individual assets and liabilities of subsidiary)
7

Elimination of Investment Account

• Investment account is eliminated (Continued)

– Pre-acquisition retained earnings or pre-acquisition reserves of subsidiary
are not included in consolidated equity
• Rationale: Pre-acquisition retained earnings arose prior to the
acquisition of control by parent
– The elimination process will result in residuals comprising of
• Goodwill; and
• Excess or deficit of fair value over book value of identifiable net assets

• Re-enactment of elimination of investment entry in subsequent year

– Re-enacted as long as the investment exists
• Rationale: parent’s legal entity financial statements would include
investment in subsidiary balance

Illustration 1: Elimination of Investment

Illustration
On 8 August 2010, Parent Co. bought 100% interest in subsidiary for
$200,000. At the date of acquisition, Subsidiary Co. had the following:

Share capital: $50,000

Retained earnings: $30,000
Equity: $80,000 net assets

At acquisition date, Subsidiary Co. had an unrecognized intangible

asset had a fair value of $50,000. Tax rate was 20%
excess

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Chapter 4

Illustration 1: Elimination of Investment

consolidated worksheet
Consolidation Consolidated Statement of financial
Parent Subsidiary
adjustments position
Dr Cr
Assets
Investment in
Subsidiary
200,000 200,000 đã thể hiện 0
Goodwill (Note 2) 80,000 trong ts bên 80,000
Other net assets con
300,000 80,000 50,000 10,000 420,000
(Note 1)
500,000 80,000 130,000 210,000 500,000

Equity
Share capital 100,000 50,000 50,000 100,000
Retained earnings 400,000 30,000 30,000 400,000
500,000 80,000 80,000 0 500,000
210,000 210,000

10

Illustration 1: Elimination of Investment

Note 1:
Increase in other net assets due to recognition of intangible asset 50,000 chỉ khi hn thì ts mới có FV change
Decrease in other net assets due to recognition of deferred tax liability (10,000) 50,000*20%
Net increase in other net assets 40,000

Note 2:
Goodwill is excess of the investment amount over the FV of identifiable net assets
Investment in Subsidiary 200,000
Book value of equity or net assets (80,000)
Fair value of intangible asset 50,000
Book value of intangible asset 0 giá phí - BV of net assets - Excess of FV over BV
Excess of fair value over book value 50,000
Deferred tax effects (10,000)
(40,000)
Goodwill 80,000

11

Illustration 1: Elimination of Investment

CJE1: Elimination of investment in subsidiary
Dr Share capital 50,000
Dr Retained earnings 30,000
Dr Goodwill 80,000
Dr Intangible asset ts tăng thêm 50,000
Cr Investment in Subsidiary 200,000
Cr Deferred tax liability 10,000
210,000 210,000

Re-enacting CJE

• Building blocks of consolidation worksheet are the legal entity financial

statements of parent and subsidiary
• CJE 1 has to be re-enacted at each reporting date as long as Parent has
control over subsidiary ghi nhận vào ngày mua,
• Each consolidation process is a fresh-start approach kết thúc năm nào cũng ghi nhận bút toán này
ko có balance trc
12

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Chapter 4

Content

1. Introduction
2. Elimination of Investment in a Subsidiary

3. Effects of Amortization, Depreciation and Disposal of Undervalued

3. Accounting
or OvervaluedforAssets
non-controlling interests
and Liabilities under IFRS
Subsequent 3
to Acquisition
4. Accounting for Non-controlling Interests under IFRS 3
5. Goodwill Impairment Tests
6. Conclusion

13

In Subsequent Years

• At acquisition date, we recognize:

– Fair value of identifiable net assets of acquiree as at acquisition date,
– Intangibles assets, contingent liabilities,
– Deferred tax assets or liabilities on the above, and
– Goodwill as a residual
• In subsequent years:
– Subsequent extinguishment of assets and liabilities of subsidiary must be
determined based on the fair values at acquisition date.
– Therefore, subsequent amortization, depreciation and cost of sales of acquired
assets are determined based on fair value as at acquisition date
– Elimination of consideration transferred, recognition of fair value adjustments and
amortization entries must be repeated until:
i. Date of disposal of the investment in subsidiary; or
ii. Date when control is lost

14

In Subsequent Years

• In subsequent years (Continued)

– Acquisition method only recognizes fair value at critical event: acquisition
date
• New internally-generated goodwill or subsequent appreciation in fair
values are not recognized subsequent to acquisition date
– Since net assets are carried at book value (carrying amount) in the
separate financial statements, the subsequent
amortization/depreciation/disposal are adjusted in the consolidation
worksheet
BV of expense in (FV – BV) adjustment FV of expense
separate to expense in consolidated
financial + = financial
statements Adjusted in consolidation statements
worksheet
BV=100=> Dep 10 5 FV150=> dep 15

15

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Chapter 4

Illustration 2:
Amortization of Fair Value Differentials
• P Co. paid $6,200,000 and issued 1,000,000 of its own shares to
acquire 80% of S Co. on 1 Jan 20×5 => nci
• Fair value of P Co’s share is $3 per share
consideration transferred: 6200+1000*3=9200
• Fair value of net identifiable assets is as follows:
Book value Fair value Remaining useful life
Leased property 4,000,000 5,000,000 20 years
In-process R&D 2,000,000 10 years
Other assets 1,900,000 1,900,000
Liabilities (1,200,000) (1,200,000)
Contingent liability (100,000)
Net assets 4,700,000 7,600,000

Share capital 1,000,000

Retained earnings 3,700,000
Shareholders’ equity 4,700,000
16

Illustration 2:
Amortization of Fair Value Differentials
Additional information:
• Contingent liability of $100,000 was recognized as a provision loss
by the acquiree in legal entity financial statement on Dec 20×5
• FV of NCI at acquisition date was $2,300,000
• Net profit after tax of S Co. for 31 Dec 20×5 was $1,000,000
• No dividends were declared during 20×5
• Shareholders’ equity as at 31 Dec 20×5 was $5,700,000

Q1 : Prepare the consolidation adjustments for P Co. for 20×5

Q2 : Perform analytical check on balance of NCI as at 31 Dec 20×5

17

Illustration 2:
Amortization of Fair Value Differentials
• Consideration transferred = Cash consideration + Fair value
of share issued
= $6,200,000 + (1,000,000 × $3)
= $9,200,000
DTL FV BV
• Deferred tax liability = 20% × ($7,600,000 − $4,700,000)
= $580,000

• Goodwill = Consideration transferred + NCI – Fair value of net

identifiable assets, after-tax
= $9,200,000 + $2,300,000 – ($7,600,000 − $580,000)
= $4,480,000

18

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Chapter 4

Illustration 2:
Amortization of Fair Value Differentials
• P’s share of goodwill = Consideration transferred – 80% × Fair
value of net identifiable assets, after tax
= $9,200,000 – 80% × $7,020,000 7200-580
= $9,200,000 – $5,616,000
vô tình =4480*80% = $3,584,000
=>> ko được làm vầy
• NCI’s share of goodwill = Consideration transferred – 20% × Fair
value of net identifiable assets, after tax
= $2,300,000 – 20% × $7,020,000
= $2,300,000 – $1,404,000
= $896,000

19

Illustration 2:
Amortization of Fair Value Differentials
Consolidation adjustments for 20×5

CJE 1: Elimination of Investment in Subsidiary

Dr Share capital 1,000,000

Dr Opening retained earnings 3,700,000
Dr Leased property 1,000,000
Dr In-process R&D 2,000,000
Dr Goodwill 4,480,000
Cr Contingent liability 100,000
Cr Deferred tax liability (net) 580,000
Cr Investment in S 9,200,000
Cr Non-controlling interests 2,300,000

1/ BT ts tăng thêm: 2/ 3/ Thuế

Dr Leased property 1000 Dr FV adj 100 Dr FV adj 580
Dr R&D 2000 Cr Contingent L100 Cr DTL 580 20
Cr FV adjustment 3000

Illustration 2:
Amortization of Fair Value Differentials
CJE 2: Depreciation and amortization of excess of FV over book value
Dr Depreciation of leased property 50,000
Dr Amortization of in-process R&D 200,000
Cr Accumulated depreciation 50,000
Cr Accumulated amortization 200,000
Under dep. by Under amort. by
$50k $200k
Dep exp:
$50,000
Amort exp:
Dep. of
Amort. of $200,000
$200,000 $250,000 R&D
leased
property $0
Based on
Based on Based on FV
book value
Based on FV
book value
21

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Chapter 4

Illustration 2:
Amortization of Fair Value Differentials
CJE 3: Reversal of entry relating to provision for loss xưa cho expense=> giờ xáo
Dr Provision for loss 100,000
Cr Loss expense 100,000
Note: Contingent liability was already recognized in CJE 1. The
recognition by the acquiree in its legal entity financial statement
results in double counting; hence this reversal entry is necessary

CJE 4: Tax effects on CJE 2 & CJE 3 thuế chưa trừ cp=> thuế nhiều hơn=> Net profit cao hơn=> giảm thuế sau khi trừ cp
=> Net profit giảm xuống.
Dr Deferred tax liability (net) 30,000 20% * (200k
+ 50k − 100k)
Cr Tax expense 30,000

22

Illustration 2:
Amortization of Fair Value Differentials

CJE 5: Allocation of current year profit to non-controlling interests (NCI)

Dr Income to NCI 176,000

Cr NCI 176,000

Net profit after tax seperate 1,000,000

Excess depreciation (50,000)
Excess amortization (200,000)
Reversal of loss from contingent liability 100,000
Tax effects on FV adjustments 30,000
Adjusted net profit consolidation 880,000
NCI’s share (20%) 880*20%= 176,000

23

Illustration 2:
Amortization of Fair Value Differentials
Explanatory note to CJE 5:
• NCI have a share in the extinguishment of the initial FV differences
and in the impairment of goodwill.
• Net profit after tax represents that increase in the book value of
equity of the subsidiary
• Other adjustments relate to the extinguishment of the FV
differentials
• NCI have a share of $176,000 of adjusted profit which represents
– Increase in book value
– Decrease in fair value differentials

24

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Chapter 4

Illustration 2:
Amortization of Fair Value Differentials
Utilizing the Analytical approach to determine NCI balance:
NCI balance:
NCI at acquisition date (CJE1) ĐK $2,300,000
Income allocated to NCI for 20×5 (CJE 5) trong kỳ đc phân bổ 176,000
NCI as at 31 Dec 20×5 CK $2,476,000

Utilizing the Listing approach to determine NCI balance:

Book value of identifiable net assets as at 31 Dec 20×5 $5,700,000
Unamortized balance of fair value adjustments as at 31 Dec 20×5:
Leased property ($1,000,000 × 19/20) 950,000
In-process R&D ($2,000,000 × 9/10) 1,800,000
After-tax unamortized balance at 80% 2,200,000
Adjusted net assets of S Co. $7,900,000
NCI at 20% 1,580,000
Goodwill attributable to NCI 896,000
NCI as at 31 Dec 20×5 $2,476,000
25

Illustration 2:
Amortization of Fair Value Differentials
Q2 : Perform an analytical check on the balance of NCI as at 31 Dec
20×5

1st Step: reconstruct the balance of non-controlling interest as at 31

Dec 20×5

NCI as at acquisition date (CJE 1) 2,300,000

Income allocated to NCI for 20×5 (CJE5) 176,000

NCI as at 31 December 20×5 2,476,000

26

1/1/X1, cty mẹ mua 100%cp ct con với giá 1000 tỷ. tất cả ts thuần của ct con đều = gthl, ngoại trừ htk có
gt cao hơn là 50 tỷ. thuế 25%
31/10/x1, ct con đã bán lô hàng này ra bên ngoài
Illustration 2: lập bt đều chỉnh tại 31/12/x1, x2
Amortization of Fair Value Differentials
1/1/X1,
2nd step: reconcile the balance to the three components that NCI have - Dr inventory 50 Dr FV adj 50*25%=12.5
Cr FV adj 50 Cr DTL 12.5
Non-controlling
interests 31/10/x1,
Dr COGS 50 Dr DTL 12.5
gt suy giảm Cr Inventory 50 Cr deferred tax expense 12.5
FV of net assset
Share of 31/12/x1, 31/12/x2,
Share of book value Unamortized Share of
Dr COGS 50 set off->
of net assets unimpaired goodwill Dr retained earnings 37.5
FV adjustment Cr Deferred tax expense 12.5 Cr FV Adj 37.5
Cr FV adj 37.5
$5,700,000 × 20%
+ ($1,000,000 × 19/20
× 80% × 20%) +
+ $896,000 = $2,476,000
= $1,140,000
($2,000,000 × 9/10 × gt thể hiện trên 2/ 1/1/x1, mẹ mua 100% cp con giá 1000 tỷ, all ts thuần đều ghi nhận theo FV, ngọai trừ
80% × 20%) = BCTC hợp nhất
$440,000
tscđ hữu hình có FV=250 tỷ, biết ts có nguyên giá300 tỷ, hmlk=200 tỷ, được tiếp tục sử dụng trong 5
(chứ ko có gtss) năm cho bp quản lý dn. thuế 25%
27
80%: ts tăng 100% nhưng trừ bớt 20% thuế YC: lập bt điều chỉnh FV tại 31/12/x1,x2,x6
1,000,000/20: gt ts 1 năm hm
1,000,000/20*19: gtcl sau 1 năm. giải:
1/1/x1, BV=100ty, FV=250ty
-Xóa hmlk: Dr acc dep 200
Dr acc dep 200 Cr FA 50
Cr Fixed assets 200 Cr FV adj 150
-Tăng FA:
Dr FA 250-100=150 tỷ
Cr FV adj 150 tỷ
-Thuế: 9
Dr FV adj 37.5
Cr DTL 150*25%=37.5
 31/12/x1,
Thuế: (giảm) gộp:
CP KH thay đổi: (tăng)
Dr Dep Ex 30
Chapter 4 dr Dep Expense 150/5=30
Cr Acc Dep 30
Dr DTL 30*25%=7.5
Cr DTE Dr Acc Dep 170
Cr FA 50
Cr FV adj 112.5
Cr DTL 30
Cr DTE 7.5
1/1/x2,
Dr Acc Dep 170
Dr retained earnings 30-7.5=22.5
Cr FA 50
Cr FV adj 112.5 GỘP:
Cr DTL 30 Dr Acc Dep 140
Content 31/12/x2,
Dr Retained earnings 22.5
Dr Dep ex 30
-KH:
Cr FA 50
Dr Dep Ex 30
Cr FV adj 112.5
1. Introduction Cr acc Dep 30
Cr DTL 22.5
-Thuế:
2. Elimination of Investment in a Subsidiary Cr DTE 7.5
Dr DTL 7.5
3. Effects of Amortization, Depreciation and Disposal of Undervalued Cr DTE 7.5
or Overvalued Assets and Liabilities Subsequent to Acquisition 31/12/X3,
Dr Acc Dep 140 Acc Dep=140-30(X3)-30(X4)-30(x5)=50
4. Accounting for non-controlling
Non-controlling interests under IFRS
Interest under IFRS 33 DTL=22.5-7.5-7.5-7.5=0
Dr Retained earnings
5. Goodwill Impairment Tests RE=
6. Conclusion 1/1/X6,
Dr Acc Dep 50 gộp
Dr Retained earnings 112.5 Dr Acc Dep 50
Cr FV adj 112.5 Dr RE 112.5
Cr FA 50 Cr FA 50
28 Cr DTL 0 Cr FV adj 112.5
31/12/X6,
-KH:
dr Dep ex 30
Cr acc Dep 30

Non-controlling Interest

• NCI only arises in consolidated financial statements where:

– one or more subsidiaries are not wholly owned by the parent (IFRS 10)
• ddcentitled
NCI are trao quyền
to their share of retained earnings of the subsidiary from
incorporation
– No distinction between pre-acquisition and post-acquisition retained ko phân biệt RE trước ngày mua và sau ngày mua
earnings for NCI
• Same applies to OCI
– NCI collectively have a share of accumulated OCI arising from
incorporate date to the current date
• NCI are normally a credit balance
– Share of residual interests in the net assets of a subsidiary
– Total equity (parent’s and NCI) = Assets – Liabilities

29

Analysis of Non-Controlling Interests

Share of book
Balance of Share of
value of
non- book value of Unimpaired
remaining (FV
controlling = subsidiary’s + + goodwill
– BV) of
interests at equity at attributable
identifiable
reporting reporting to NCI
net assets at
date date
reporting date

• The analysis of non-controlling interests enables us to efficiently assess

the balance of non-controlling interests

• Another method of arriving at the non-controlling interests is to build up

the balance chronologically through the consolidation process

30

10
Chapter 4

Reconstructing NCI on Statement of

Financial Position
1/1/x1 1/1/x6 31/12/x6
Incorporation Date of Beginning of End of current
date acquisition current year year

NCI have a share of NCI have a share of NCI have a share of

1. Share capital 1. Change in share capital 1. Profit after tax
2. Retained earnings 2. Change in retained 2. Current amortization of
earnings fair value differential
3. Other equity
3. Change in other equity 3. Current impairment of
4. Fair value goodwill
differentials 4. Past amortization of fair
value differential 4. Dividends as a
5. Goodwill repayment of profits
5. Past impairment of
goodwill 5. Change in other equity

31

Reconstructing NCI on Statement of

Financial Position
• At each reporting date, group will re-create NCI account in the
consolidated financial statement by recognizing the sequential build
up:
– As of acquisition date bt điều chỉnh
– From acquisition date to beginning of the current period bt chuyển qua kỳ mới
– During the current period bt điều chỉnh trong kỳ

• Known as the “re-enactment process” of the attribution of equity to

NCI

32

Accounting for NCI under IFRS 3

• Equity on the consolidated statement of financial position must

include both the interests of equity owners of the parent company
and NCI of partially owned subsidiaries

• NCI is an equity item and must be separately shown from the equity tách ra: có dòng thể hiện NCI trên bctc hợp nhất
of the owners of the parent company

• Asset and liabilities of the subsidiary must be reported in full

33

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Chapter 4

Non-Controlling Interests’ Share of Goodwill

• IFRS 3 Para 19 allows NCI to be measured in either of two ways

Non-controlling interests

2 pp

Measured at Fair Measured as a

value at acquisition proportion of the
date (include recognized amounts of
goodwill) the identifiable assets as
“ Fair value basis” at acquisition date

gthl tỷ lệ
34

Non-Controlling Interests’ Share of Goodwill

• Under the fair value basis:

– FV is determined by either the active market prices of subsidiary’s
equity share at acquisition date or other valuation techniques
– FV per share of NCI may differ from parent because of control premium
paid by parent (e.g. 20% premium over market price to gain control)
– NCI comprises of 3 items:

Non-controlling
interests

Share of
Share of book value unamortized Goodwill attributable to
of net assets FV adjustment NCI
(FV – BV)

35

Non-Controlling Interests’ Share of Goodwill

• Under the fair value option: BT loại trừ:

– Journal entry to record NCI at fair value (re-enacted each year):
Dr Share capital of subsidiary
Dr Retained earnings at acquisition date
Dr Other equity at acquisition date
Dr FV differentials (FV – BV)
Dr Goodwill (Parent & NCI)
Dr/Cr Deferred tax asset / (liability) on fair value adjustment
Cr Investment in subsidiary
Cr FV differentials (BV – FV)
Cr Non-controlling interests (At fair value)

36

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Chapter 4

Non-Controlling Interests’ Share of Goodwill

• Under the 2nd option:

– NCI is a proportion of the acquiree’s identifiable net assets (i.e. not full
fair value)
– NCI comprises of 2 items:

Non-controlling
interests

Share of
Share of book value unamortized
of identifiable net assets of FV adjustments
(FV – BV)
37

Non-Controlling Interests’ Share of Goodwill

• Under the 2nd option:

– Journal entry to record NCI (re-enacted each year):

Dr Share capital of subsidiary

Dr Retained earnings at acquisition date
Dr Other equity at acquisition date
Dr FV differentials (FV – BV)
Dr Goodwill (Parent’s goodwill only)
Dr/Cr Deferred tax asset / (liability) on FV adjustment
Cr FV differentials (BV – FV)
Cr Investment in S subsidiary
Non-controlling interests
Cr (NCI % × FV of identifiable net assets)

38

Non-Controlling Interests’ Share of Goodwill

NCI nếu đo lường theo:
NCI measured as a
NCI measured at FV proportion of the
acquiree’s identifiable
có 3 tp net assets chỉ 2 tp
Book value of net assets

Fair value – Book value of

net assets

Goodwill

39

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Chapter 4

Illustration 3:
Non-Controlling Interests’ Share of Goodwill
The FV of NCI that owned 10% of Subsidiary A as at 31 Dec
20×1(Acquisition date) was $25,000. The financial statements of
Subsidiary A as at acquisition date are as shown below. Subsidiary A
had unrecognized intangible assets with fair value of $40,000. Tax rate
is 20%. Determine NCI’s good will as at acquisition date.

Subsidiary A’s Statement of Financial Position as at 31 December 20×1:

Net assets 160,000 BV

Equity 140,000
Share Capital 20,000
Retained Earnings 160,000

40

Illustration 3:
Non-Controlling Interests’ Share of Goodwill
Fair value of NCI 25,000
Fair value of identifiable net assets
Book value of equity 160,000
Fair value of intangible assets 40,000
Deferred tax on intangible assets (8,000) 192,000

NCI's share of FV of identifiable net assets (10%) 19,200

NCI's goodwill (25,000 – 19,200) 5,800 25,000-19,200

Under alternative basis where NCI are measured as a proportion of the

recognized amounts of the identifiable assets as at acquisition date:
 NCI’s goodwill is zero
 Amount to be recognized as NCI is $19,200 only

41

Allocation to Non-controlling Interests

1. Allocation of the change in equity from date of acquisition to the bất kỳ 1 sự thay đổi nào lq đến vcsh từ ngày mua đến ngày bắt đầu kỳ bc, thì phải phân bổ cho NCI
beginning of the current period

Dr Retained earnings (NCI % × in RE from acquisition date to

beginning of current period)
Cr NCI
• No distinction between pre-acquisition or post-acquisition profits
• To transfer the NCI’s share of subsidiary’s retained earnings to NCI

42

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Chapter 4

Allocation to Non-controlling Interests

2. Allocation of current profit after tax to NCI
Dr Income to NCI
Cr NCI

• Attribution of profit to NCI is not expense item and should not be shown ln phân bổ cho NCI không phải là ex
above the profit after tax line

• Without attribution, retained earnings of the group would be over-stated

and NCI’s share of equity would be under-stated

• The same attribution principle applies to Other Comprehensive Income

(OCI) – NCI are attributed their share of OCI arising during a period

 Examples: Revaluation surplus or deficit on property, PPE and

intangible assets etc.

43

Allocation to Non-controlling Interests

3. Allocation of dividends to NCI
• Reverses the profit and loss effects of dividends in consolidated
income statement
• A repayment of profits by a subsidiary
• Reduces the NCI’s residual stake in the net assets of the subsidiary
Dr Dividend income (Parent)
Dr NCI (Equity)
Cr Dividends declared (Subsidiary)

khi ct thông báo chia cổ tức, thì ở trên bc riêng cso thể hiện
còn bc tập đoàn, thì ko có gd nội bộ (chia cổ tức)--> xóa đi
=> những gì ct con ghi nhận các gd nội bộ thì bc tập đoàn phải xóa đi.

44

Other Components of Non-Controlling

Interests
• Acquiree may have other equity components other than equity shares that
are not owned directly or indirectly by the parent
– Falls within the definition of NCI as defined in IFRS 3 as “the equity in a
subsidiary not attributable directly or indirectly to a parent”

• Paragraph 19 of IFRS 3 stipulates the accounting treatment, to enable the

calculation of goodwill on acquisition.

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tự đọc thêm từ đây về sau

Other Components of Non-Controlling

Interests
Acquiree’s equity components Measurement basis under IFRS 3
Ordinary shares (held by NCI) Proportion share of net identifiable assets
or fair value
Preference shares with holders entitled to Proportion share of net identifiable assets
proportionate share of net assets upon liquidation or fair value
Preference shares with holders not entitled to Fair value
proportionate share of net assets upon liquidation
Equity element of compound financial instrument Fair value
Options/warrants Fair value
Employee share options Market based measure in accordance
with IFRS 2 at acquisition date

• The rationale for the difference in measurement basis (Fair value and proportionate
share of acquiree’s net identifiable assets) is because those equity items belong to
third parties and do not entitle the holder to a pro rata share of the entity’s net assets.

46

Can NCI be a debit balance?

• IFRS 10 paragraph B94 (Appendix B) requires NCI to have a debit

balance if:
– NCI share of losses > NCI existing share of the subsidiary’s share capital,
retained earnings and other equity items

• Departure from an earlier version of IAS 27 that requires NCI to be

carried at zero balance
– Losses being borne by majority shareholders unless the NCI have binding
obligation to make further investments to make good the losses

• Opposing views on NCI being a debit balance

– Parent who has control of subsidiary should bear the responsibility of supporting
an insolvent subsidiary
– Limited liability argument: NCI stand to lose only their investment and have no
legal obligation to bear any further losses

47

Can NCI be a debit balance?

• IASB’s support for NCI to be a debit balance

– NCI as equity holders participate proportionally in the risks and rewards of a
subsidiary
– Limited liability argument: Parent stand to lose only their investment and have no
legal obligation to bear any further losses in the absence of guarantees

48

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Analytical check on Non-controlling

Interests’ balance
• If the fair value basis is adopted
– NCI in a subsidiary have a share in the same three components that
the parent has under the acquisition method

• If NCI are recognized as proportion of FV of identifiable net assets

– Only two components apply to non-controlling interests
• Share of book value of net assets or shareholders’ equity of a
subsidiary
• Share of the balance of unamortized fair value adjustments

• If NCI have both present ownership interests (e.g. ordinary shares)

and potential ownership interests (e.g. options)
– Only present ownership interests may be measured as a proportion of
identifiable net assets
49

Analytical Check on Non-controlling

Interests’ balance

NCI’s share of (NCI % multiply by):

a) Book value of net assets of subsidiary at
year-end +/− remaining unrealized
NCI’s balance at
year-end = profit/loss from upstream sale
b) Unamortized balance of FV adjustments at
year-end
c) Unimpaired balance of goodwill at year
end ([Acquisition-date FV of NCI – NCI %
× acquisition-date FV of identifiable net
assets] less any cumulative impairment)

50

Content

1. Introduction
2. Elimination of Investment in a Subsidiary
3. Effects of Amortization, Depreciation and Disposal of Undervalued
or Overvalued Assets and Liabilities Subsequent to Acquisition
4. Accounting for Non-controlling Interest under IFRS 3
5. Goodwill
Goodwill Impairment
impairment Tests
tests
6. Conclusion

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Goodwill Impairment Test

• IAS 36: Goodwill has to be reviewed annually for impairment loss

– Reviewed as part of a cash-generating unit (CGU)

• CGU is the lowest level at which the goodwill is monitored for internal

management purposes and

• Not larger than a segment determined under IFRS 8 Operating Segments

– Goodwill will be allocated to each of the acquirer’s CGU, or group of

CGUs

52

Goodwill Impairment Test

1. Carrying amount:
– Net assets of the cash-generating unit
– It includes entity goodwill attribute to parent and NCI

2. Recoverable amount:
– IAS 36 allows the higher of the below two metrics to determine
recoverable amount:
− Higher of FV less cost to sell (an arms-length measure)
− Uses market based inputs or market participants’ assumptions in the
valuation process

− Value-in-use (VIU)
− Present value of future net cash flows
− Uses internal or entity-specific input to determine the future cash flows
− VIU likely to be more discretionary as assumptions about future cash flows
are required
53

Goodwill Impairment Test

3. If carrying amount > recoverable amount

– Impairment loss is first allocated to goodwill
– Then to other assets in proportion to their individual carrying amounts
– Impairment tests to be carried out on annual basis; regardless of
whether indications of impairment exists
– Impairment once made is not reversible, as it may result in the
recognition of internally-generated goodwill which is prohibited under
IAS 38

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Goodwill Impairment Test

Steps for impairment test

Determine the carrying amount of the CGU

Determine the recoverable amount of the CGU

Recoverable amount: Higher of fair value or value in use

If carrying amount ≤ If carrying amount ≥

recoverable amount recoverable amount

Allocate impairment loss

No impairment loss to goodwill first and
balance to other net assets
55

Goodwill Impairment Test

NCI as a proportion of
NCI at FV at acquisition
identifiable net asset at
date
acquisition date
Goodwill on consolidation Includes NCI’s goodwill Excludes NCI’s goodwill
Goodwill is allocated to Goodwill has to be grossed
cash-generating unit without up to include NCI’s share
Carrying amount of cash- further adjustment
generating unit Notionally adjusted goodwill
= Recognized
goodwill/parent’s interest
Impairment loss is shared
Impairment loss is borne
between parent and NCI on
Impairment loss only by parent as goodwill
the same basis on which
for NCI is not recognized
profit or loss is allocated

56

Illustration 4:
Goodwill Impairment Test
Company × has 80% ownership in a CGU with identifiable net assets of
$6 million as at 31 Dec 20×1. The recoverable amount of the CGU as
an entity was $5 million as at that date. Determine the impairment loss
of goodwill in the CGU under two alternative measurement basis:

(a) NC measured at FV at acquisition date. Goodwill recognized by

CGU was $1.2 million
(b) NCI measured as a proportion of FV of identifiable net assets at
acquisition date. Goodwill recognized by CGU was $1 million

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Illustration 4:
Goodwill Impairment Test
Question (a)

Goodwill Identifiable net assets Total

Carrying amount 1,200,000 6,000,000 7,200,000
Recoverable amount 5,000,000
Impairment loss 1,200,000 1,000,000 2,200,000

Impairment loss borne by

Parent and NCI 1,200,000 1,000,000 2,200,000

Explanatory notes:
• Goodwill allocated to a CGU to enable comparison between carrying
amount of all assets of the unit and recoverable amount
• Goodwill attributable to NCI is included under recognized goodwill (no
further adjustment is required)

58

Illustration 4:
Goodwill Impairment Test
Question (b)
Goodwill Identifiable net assets Total
Carrying amount 1,000,000 6,000,000 7,000,000

NCI's stet share of goodwill 250000 (20% × $1 million/0.8) 250,000

Notionally adjusted carrying
amount 1,250,000 6,000,000 7,250,000
Recoverable amount 5,000,000
Impairment loss 1,250,000 1,000,000 2,250,000

Impairment loss recognized 1000000 (80% × $1.25 million) 1,000,000 1,000,000

Explanatory notes:
• Since comparison is done against the carrying amount of assets of a CGU,
goodwill is regrossed under alternative (b) to show theoretical goodwill as at
date of acquisition
• NCI unrecognized share of goodwill is included
59

Appendix: Accounting for Other Components

of Non-Controlling Interests
• P Co. paid a consideration of $2,500,000 to purchase all 400,000
ordinary shares in S Co. on 1 Jan 20×1
• Net assets of S Co. on acquisition date was $711,000 and fair value
of net identifiable assets was $800,000.
• Tax effects are ignored.
• Other equity components:
– 1,000 Preference shares of $1 each, which do not carry voting rights
and provide their holders a right to a preferred dividend over the
payment of any dividend to ordinary shareholders. Fair value of
preference shares on acquisition date: $2,000

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Appendix: Accounting for Other Components

of Non-Controlling Interests
• During the year (Cont’d):
– 2 tranches of employee share options issued and carrying amount worth
$70,000:
• Tranche 1 had a carrying value of $20,000, not vested as at date of
acquisition
• Tranche 2 had a carrying value of $50,000, vesting period of 2 years
and as of acquisition date, employees have completed 1 out of the 2
years vesting period
• Market based measure of share option calculated amounted to
$56,000
– Convertible loan to third parties issued
• Equity conversion option with carrying amount of $40,000 was
recognized as part of the equity of S Co
• Fair value of equity conversion option as of acquisition date was
$48,000
61

Appendix: Accounting for Other Components

of Non-Controlling Interests
Analysis for components of non-controlling interests:
• Analysis for preference shares:
– Preference shares do not carry equal rights and ranking to the ordinary
shares issued by the Company.
– Preference shares do not carry voting rights.
– Preference shares only give priority to payment of dividends to holders
– Hence, ownership of preference shares do not represent present
ownership interests which entitle holders to a proportionate share of net
assets upon liquidation.

• Measurement of preference shares at fair value at acquisition date

of $2,000.

62

Appendix: Accounting for Other Components

of Non-Controlling Interests
Analysis for components of non-controlling interests:
• Analysis for Employee share options:
– Tranche 1 vested by the date of acquisition:
• P Co. does not replace the shares held by the employees of S Co.
on acquisition
• Under the terms and conditions, the share options held by
employees do not expire on acquisition of S Co. by P Co.
• Share options do not represent present ownership interests which
entitle their holders to a proportionate share of net assets upon
liquidation as employees have not exercised their options to acquire
the ordinary shares in the S Co. as at the date of acquisition.

• Measurement at market-based measure in accordance with IFRS 2

at $20,000.

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Appendix: Accounting for Other Components

of Non-Controlling Interests
Analysis for components of non-controlling interests:
• Analysis for Employee share options:
– Tranche 2 unvested by the date of acquisition:
• P Co. does not replace the shares held by the employees of S Co. on
acquisition
• Under the terms and conditions, the share options held by employees
do not expire on acquisition of S Co. by P Co.
• Share options do not represent present ownership interests which
entitle their holders to a proportionate share of net assets upon
liquidation as employees have not exercised their options to acquire the
ordinary shares in the S Co. as at the date of acquisition.
• Amount allocated to the NCI is based on the ratio of the portion of the
vesting period completed to the greater of the total vesting period and
the original vesting period of the share based payment transaction −
$28,000 ($56,000 × 1 year/2 years)
• Measurement at market-based measure in accordance with IFRS 2 at $28,000.
64

Appendix: Accounting for Other Components

of Non-Controlling Interests
Analysis for components of non-controlling interests:
• Analysis for Equity conversion option:
– Equity conversion option held by external parties
– No present ownership interests which entitle holders to a proportionate
share of net assets upon liquidation as options have yet to be exercised
by holders as of acquisition date.

• Measurement at fair value at $48,000.

65

Appendix: Accounting for Other Components

of Non-Controlling Interests
Calculation of fair value uplift on acquisition
Fair value uplift on acquisition
= $800,000 − $711,000
= $89,000

Calculation of goodwill
Consideration transferred
= $2,500,000 − $28,000 (being paid for post combination employee service)
= $2,472,000
Goodwill
= Fair value of consideration transferred + Amount of NCI at acquisition date –
Recognized net identifiable assets of acquiree measured
= $2,472,000 + ($2,000 + $20,000 + $28,000 + $48,0000) − $800,000
= $1,770,000
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Appendix: Accounting for Other Components

of Non-Controlling Interests
Preparation of consolidation journal entries:
CJE1: Elimination of share capital and investment account
Dr Share capital and other reserves 711,000
Dr Net identifiable assets (excess of fair value over NBV) 89,000
Dr Goodwill 1,770,000
Dr Staff costs – P/L 28,000
Cr Investment in subsidiary 2,500,000
Cr NCI – Preference shares 2,000
Cr NCI – Share option reserve 48,000
Cr NCI – Equity component of convertible loan 48,000

67

Conclusion

• Two sets of financial statements must be presented:

– Investor’s separate financial statements for the legal entity
– Consolidated financial statements for group of companies
• Although two sets of accounts exist, only one set of “books” has to be kept
by the legal entity
– Consolidation worksheets are used to prepare consolidated financial
statement
• Summation of line items of the financial statements of parents and
subsidiaries
• Incorporation of adjustments to eliminate and adjust intragroup
transactions and balances
• Transactions and balances in consolidated financial statement reflect
group’s perspective

68

Conclusion

• All business combinations are accounted for using the acquisition

method
– Entails an “asset substitution process”
– Acquirer is deemed to have obtained control of all assets and liabilities of
acquiree.
– Acquisition date is a critical economic event (exchange of economic
resources between acquirer and the former-owners)
– Use of fair values to recognize assets and liabilities
– Unrecognized intangible assets and contingent liabilities recognized if they
meet criteria in IFRS 3
– NCI included as a component in equity

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Conclusion

• Under the acquisition method:

– Consideration transferred = Fair value of (assets transferred + liabilities
incurred + equity interests issued by acquirer + contingent
consideration)
– Asset substitution process: Investment account is eliminated and
substituted with:
• Subsidiary’s identifiable net assets; and
• Goodwill
– Goodwill = Fair value of (consideration transferred + non-controlling
interests + acquirer’s previously held interest in the acquiree) –
acquiree’s recognized net identifiable assets

70

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