Changes In Ownership Interests

Learning objectives:
objectives:-
1. Understand business combinations achieved
in stages and changes in ownership interests in
y
a subsidiary.
2. Prepare consolidation adjustments for changes
in ownership interests in a subsidiary
subsidiary, with and
without change in control.
3. Understand the differences in profit recognition
arising from the cost, consolidation, and equity
methods.

Lee Kin Wai 1

Business combination achieved in stages

• Business combination achieved in stagesg is an acquisition
q where a
parent acquires control of a subsidiary in a series of share in
transactions (also called as step acquisition or piecemeal acquisition).

• In a business combination achieved in stages, the acquirer shall

1 remeasure its
1. it previously
i l h
held
ld equity
it iinterest
t t iin th
the acquiree
i att its
it
acquisition-date fair value; and
2 recognise the resulting gain or loss
2. loss, in profit or loss.
loss
[ FRS 103 paragraph 42]

• Thus: At the date when control is achieved, revalue previously-held

investments
– difference in fair value of the previously-held
previously held investments is
recognized to profit and loss (as if hypothetically sold and then
hypothetically repurchased at acquisition date)
– onlyl one Goodwill
G d ill figure
fi att date
d t off control.
t l
Lee Kin Wai 2
G d ill iin a Business
Goodwill B i C
Combination
bi ti A Achieved
hi d iin St
Stages

If business combination is achieved in stages, the goodwill calculation will

include a new element, the fair value of previously held interest as follows:

Fair value of consideration Fair value of net

transferred identifiable
+ assets of the
Goodwill = ‐
Fair value of non-controlling acquiree
i att the
th
interests acquisition date
+
Acquisition date fair value of
the acquirer’s previously held
equity interest in the acquiree

Lee Kin Wai 3

TLK Illustration 7.6

Business Combination Achieved in Stages

P acquired S in two successive purchases:

Acquisition cost  Percentage 
Cumulative 
paid for  Fair value of S as  acquired in 
Date percentage
incremental  an entityy incremental 
held by P
held by P
investment investment
1 Jan 20×0 $3,000,000 $15,000,000 20% 20%
31 Dec 20×0 $12,000,000 $20,000,000 60% 80%

1 Jan 20×0 31 Dec 20×0

P Co. acquired 20% of S Co. P Co. acquired another 60% of S Co.

Lee Kin Wai 4
 TLK Illustration 7.6
B i
Business C
Combination
bi ti AAchieved
hi d iin St
Stages

NCI are measured at fair value and are deemed to have a proportionate interest in the 
NCI are measured at fair value and are deemed to have a proportionate interest in the
fair value of S as an entity.

1 Jan 20×0
20 0 1 Jan 20×0
20 0 31 Dec 20
20×0
0 31 Dec 20
20×00
Book Value Fair Value Book Value Fair Value
Intangible assets $0 $1,800,000 $0 $1,600,000
Inventory 1,000,000 1,200,000 2,000,000 2,400,000
Other net assets 9,000,000 9,000,000 12,000,000 12,000,000
Net identifiable assets $10 000 000
$10,000,000 $12 000 000
$12,000,000 $14 000 000
$14,000,000 $16 000 000
$16,000,000

Share capital $4,000,000

$ , , $4,000,000
$ , ,
Retained earnings 6,000,000 10,000,000
$10,000,000 $14,000,000

Intangible assets had a remaining useful life of 6 years from 1 January 20×0. 
Inventories were sold within 3 months from the acquisition date
Inventories were sold within 3 months from the acquisition date.
Lee Kin Wai 5

TLK Illustration 7.6

Business Combination Achieved in Stages

Income statement of S Co. for the year 20×0

2x0
Net profit before tax $6,250,000
Tax expense (1 250 000)
(1,250,000)
Net profit after tax 5,000,000
Dividends declared (1 000 000)
(1,000,000)
Profit retained 4,000,000

Lee Kin Wai 6
TLK Illustration 7.6
B i
Business C
Combination
bi ti AAchieved
hi d iin St
Stages
Separate
p financial statements of P:-
1 Jan 20x0
Dr. Investment 3,000,000
Cr. Cash 3,000,000
Acquisition of 20% of S at fair value
value.

31 December 20x0
Dr. Investment 12,000,000
Cr. Cash 12,000,000
Acquisition of an additional 60% of S at fair value.

Since P had 20% equity

q y interest in S duringg 20x0 and assuming
g that P had significant
g influence over S,, P
had to equity account S’s profit for the year ended 31 December 20x0. The equity accounting (EA) entries
and consolidation journal entries (CJE) are as follows:

EA1: Share of profit for the year ended 31 December 20x0

Dr. Investment in S 920,000
Cr. Share of profit 920,000

Profit after tax of S 5,000,000

Less amortization of intangible assets, after tax (240,000) =(1800000/6)*(1-0.2)
Less cost of sales from undervalued inventory, after tax (160,000) =(200000)*(1-0.2)
Adjusted profit of S after tax - 100% 4,600,000
Share of S’s profit after tax at 20% 920,000
Lee Kin Wai 7

TLK Illustration 7.6

Business Combination Achieved in Stages
EA2: Reclassification of dividend income received during 20x0
Dr. Dividend income 200,000 =20% * 1,000,000
Cr Investment in S
Cr. 200 000
200,000

Investment in S - old 20% tranche on 31 Dec 20x0

Initial cost of purchase on 1 Jan 20x0 3,000,000
Share of profit for the year ended 31 December 20x0 920 000 EA1
920,000
Reclassification of dividend income received during 20x0 (200,000) EA2
Investment in S - old 20% tranche on 31 Dec 20x0 3,720,000 A

Fair value of old 20% tranche on 31 Dec 20x0

= 20% x fair value of S as an entity on 31 Dec 20x0
= 20% x 20,000,000 4,000,000 B

Remeasurement gain on old 20% tranche 280 000 C = B - A

280,000

EA3: Recognition of remeasurement gain in the consolidated financial statements

Dr. Investment in S 280,000
Cr. Gain on remeasurement 280,000
Remeasurement gain on previously held equity interests at consolidated level

Investment in S - 80% tranche on 31 Dec 20x0

Initial cost of p
purchase of old 20% tranche on 1 Jan 20x0 3,000,000
, ,
Share of profit for the year ended 31 December 20x0 920,000 EA1
Reclassification of dividend income received during 20x0 (200,000) EA2
Remeasurement gain on previously held equity interests 280,000 EA 3
purchase new 60% tranche on 31 Dec 20x0 12,000,000 given
Investment in S - 80% tranche on 31 Dec 20x0 16,000,000 D

Lee Kin Wai 8
 TLK Illustration 7.6
g
Business Combination Achieved in Stages
CJE1: Elimination of investment and recognition of goodwill
31 Dec 20x0
Dr. Share capital 4,000,000 on 31-12-20x0
Dr. Retained earnings 10,000,000 on 31-12-20x0
31 12 20x0
Dr. Goodwill 4,400,000 Note 3
Dr. Intangible assets 1,600,000 on 31-12-20x0
Dr. Inventory 400,000 on 31-12-20x0
Cr. Deferred tax liability 400,000 Note 1
Cr. Investment in S 16,000,000 per D above
Cr. Non-controlling interests 4,000,000 Note 2
20,400,000 20,400,000
Note 1
Fair value differential of intangible assets 1,600,000
Fair value differential of inventory 400,000
F i value
Fair l diff
differential
i l - totall 2 000 000
2,000,000
Deferred tax liability = 20% x fair value differential 400,000

Note 2
fair value of S as an entity on 31 Dec 20x0 20,000,000 given
NCI share = 20% on 31 Dec 20x0 4 000 000
4,000,000

Note 3
Fair value of identifiable net assets on 31 Dec 20x0 -100% 16,000,000 given
Less Deferred tax liability (400,000)
Fair value of identifiable net assets on 31 Dec 20x0 after tax 15,600,000

Fair value of consideration transferred to buy new 60% on 31 Dec 20x0 12,000,000 given
Fair value of non-controlling interests on 31 Dec 20x0 4,000,000 Note 2

Fair value of the acquirer’s previously held equity interest in the acquiree at
acquisition date on 31 Dec 20x0, which is the fair value of the old 20% tranche 4,000,000
total 20,000,000

Less - Fair value of identifiable net assets on 31 Dec 20x0 (15,600,000)

Goodwill 4,400,000

Lee Kin Wai 9

Decrease in Shareholding Interest in a Subsidiary  with a Loss of 
C t l
Control
If a parent loses control of a subsidiary, it shall:
( ) derecognise:
(a) d i
(i) assets (including goodwill) and liabilities of the subsidiary at their carrying amounts at
the date when control is lost; and
(ii) the carrying amount of any non-controlling interests in the former subsidiary at the
date when control is lost.
(b) recognise:
(i) the fair value of the consideration received
(ii) if the transaction that resulted in the loss of control involves a distribution of shares of
the subsidiary to owners in their capacity as owners, that distribution;
(iii) iinvestment
t t retained
t i d iin th
the fformer subsidiary
b idi att itits fair
f i value
l att the
th ddate
t when
h control
t l
is lost.
(c) reclassify to profit or loss
loss, or transfer directly to retained earnings if required by other
FRSs, the OCI of the subsidiary.
((d)) recognise
g any
y resulting
g difference as a g
gain or loss in p
profit or loss attributable to the
parent.
Lee Kin Wai 10
 Loss of Control
TLK page 472 – scenario
i 1 - loss
l off control
t l – 90% tto 30%
• P Co. decreases ownership on 1 January 20×0 from 90% to 30% by 
P Co decreases ownership on 1 January 20×0 from 90% to 30% by
reducing investment from $18,000,000 to $6,000,000 
• Proceeds = $9,000,000 
• Fair value of retained investment = $4,500,000. 
• P Co’s share of post‐acquisition profit of subsidiary = $2,000,000.

Impact on consolidated financial

statements at 1 Jan 20×0
Investment $4,500,000
Goodwill Nil (derecognized)
Re-measurement loss ($2.2 million) ($4.5 m – ($6 m + (1/3 × $2
(rounded) m)))
Loss on sale (rounded) ($4.3 million) ($9 m – ($12 m + 2/3 × $2 m))
Equity Nil (derecognized)

Lee Kin Wai 11

Loss of Control
TLK page 472 – scenario
i 1 - loss
l off control
t l – 90% tto 30%
Separate financial statements of P:-
1 JJan 20
20x10
10
Dr. Cash 9,000,000
Dr. Loss on sale 3,000,000
Cr. Investment in S 12,000,000
sale of 60% investment

Cost of investment - 90% old tranche 18,000,000 given

P's 90% share of post acquisition profit of S 2,000,000 given
Carrying amount in consolidated accounts - 90% old tranche 20,000,000

Carrying amount in consolidated accounts - 60% old tranche sold

= (60% / 90%) x 20,000,000
20 000 000 13 333 333
13,333,333

Carrying amount in consolidated accounts - 30% old tranche retained

= (30% / 90%) x 20,000,000 6,666,667

Separate FS Consolidated FS Consolidation adjustment

Proceeds on sale of 60% tranche 9,000,000 9,000,000
L
Less :CCarrying
i amountt off 60% ttranche
h (12 000 000)
(12,000,000) (13 333 333)
(13,333,333)
Profit/ (loss) on sale of 60% tranche (3,000,000) (4,333,333) 1,333,333 A

Retained investment - 30% tranche 6,000,000 4,500,000 1,500,000 B

Lee Kin Wai 12
Loss of Control
TLK page 472 – scenario
i 1 - loss
l off control
t l – 90% tto 30%

Retained investment - 30% tranche

original cost = (30 / 90 ) x 18,000,000 6,000,000
Equity account profit from initial acquisition to 1 Jan 20x10 (lost control)
= (30 / 90) x 2,000,000 666,667
Investment - 30% - equity accounted at 1 Jan 20x10 6,666,667

Fair value of retained 30% tranche on 1 Jan 20x10 (lost control) 4,500,000 given
Less : Investment - 30% - equity accounted at 1 Jan 20x10 (6,666,667)
Adjust retained 30% from equity accounting to fair value on 1 Jan 20x10 (2,166,667) C

CJE 1 in the year when control is lost:-

Dr. Loss on Sale 1,333,333 A
Dr. Re-measurement loss 2,166,667 C
Cr. Investment 1,500,000 B
C OOpening
Cr. i retained
t i d earnings
i ((reinstate
i t t RE att 1 JJan 20
20x10)
10) 2 000 000 given
2,000,000 i
Lee Kin Wai 13

Loss of Control
TLK page 472 – scenario
i 1 - loss
l off control
t l – 90% tto 30%

IIn subsequent
b year (20
(20x11),
11) iimpact off retained
i d earnings
i = $1$1,500,000.
00 000
Thus,, in subsequent
q yyear 20x11,, we replace
p CJE 1 in the year
y when control is lost as:-
Dr. Opening retained earnings 1,500,000 #
Cr Investment
Cr. 1 500 000
1,500,000

Opening retained earnings at date of loss of control 2,000,000

Less - Loss on Sale (1 333 333)
(1,333,333)
Less - Re-measurement loss (2,166,667)
Net Debit to Opening retained earnings (1,500,000) #

Lee Kin Wai 14
Gain on control
TLK page 475 – scenario
i 2 – 30% tto 80%
TLK - scenario 2 - gain in control - page 475
•P Co. increases ownership from 30% to 80% on 1 Jan 20×10 by increasing investment from $2,000,000 to $17,000,000
Fair value of previously acquired investment = $6,000,000
•Fai $6 000 000
•Investment in associate (equity-accounted) as at 31 Dec 20×9 = $3,500,000.
Fair value of identifiable net assets on 1 Jan 20×10 = $20,000,000.
•Fai $20 000 000
•Share capital = $10,000,000; Pre-acquisition retained earnings = $6,000,000; Unrecognized intangible asset = $5,000,000;
Fair value of NCI on 1 Jan 20×10
•Fai 20 10 = $4,000,000.
$4 000 000
Tax rate = 20%
Impact on consolidated financial statements at 1 Jan 20×10
Investment Nil
Goodwil $5 000 000 (($15
$5,000,000 (($15,000,000+
000 000+ $6
$6,000,000+
000 000+ $4
$4,000,000)
000 000) – $20
$20,000,000)
000 000)
Re-measurement gain $2,500,000 ($6,000,000 – $3,500,000 )
Non controlling interest
Non-control 4 000 000
4,000,000
Lee Kin Wai 15

Gain on control
TLK page 475 – scenario
i 2 – 30% tto 80%
Old 30% tranche
Investment in associate under equity method 3,500,000 given
Investment in associate - initial cost 2,000,000 given
Share of post acquisition retained earnings 1 500 000
1,500,000

CJE 1
Dr. Investment in S 1,500,000
Cr. Opening retained earnings 1,500,000
Re-enactment of equity
q y accountingg of ppost-acquisition
q retained earnings
g as at 1 Jan 20x10

Fair Value of old 30% tranche on 1 Jan 20x10 6,000,000 given

Less - Investment in associate under equity method on 1 Jan 20x10 3,500,000 given
Adjust retained 30% from equity accounting to fair value on 1 Jan 20x10 2,500,000

CJE 2
Dr. Investment in subsidiary 2,500,000
Cr. Remeasurement gain (PL) 2,500,000
R
Remeasure previous
i iinterests off 30%
Lee Kin Wai 16
 Gain on control
TLK page 475 – scenario 2 – 30% to 80%
Investment at cost - 80% shares 17,000,000
17 000 000 A
Investment at cost - 30% shares 2,000,000 B
purchase cost of new 50% tranche 15,000,000 C = A - B

Fair value of identifiable net assets on 1 Jan 20x10

Share capital 10,000,000
Retained earnings 6,000,000
Intangible assets 5,000,000
deferred tax on fair value excess (intangible assets) (1,000,000)
Fair value of identifiable net assets on 1 Jan 20x10 20 000 000 D
20,000,000

Fair value of consideration transferred to buy new 50% on 1 Jan 20x10 15,000,000 C
Fair value of non-controlling interests on 1 Jan 20x10 6,000,000 given
Fair value of the acquirer’s previously
y held equity
y interest in the acquiree 4,000,000 given
g
total 25,000,000 E

Less - Fair value of identifiable net assets on 1 Jan 20x10 (20,000,000) D

Goodwill 5,000,000 F = E - D

Fair value of consideration paid to buy 50% tranche and obtain control 15,000,000 C
Fair Value of previously held interest - old 30% tranche on 1 Jan 20x10 6,000,000 CJE1 & CJE2
Investment in S - 80% interests 21,000,000 G

CJE 3: Elimination of investment and recognition of goodwill at acquisition date

Dr. Share capital 10,000,000
Dr. Retained earnings 6,000,000
Dr. Goodwill 5,000,000 F
D IIntangible
Dr. t ibl assets
t 5 000 000
5,000,000
Cr. Deferred tax liability 1,000,000
Cr. Investment in S 21,000,000 G
Cr. Non-controlling interests 4,000,000
The investment in subsidiary y of $21 million comprises fair value of consideration transferred to obtain
control ($15 million) and the fair value of previously-held interests ($6 million).
Goodwill of $5 million is determined with reference to fair values at acquisition date and is not a
layering of the results of different cost measures. Lee Kin Wai 17

Changes in Shareholding Interest in a Subsidiary

Changes in Shareholding Interest in a Subsidiary
• 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 (i.e. transactions with owners in their capacity as
owners) [FRS 110 paragraph 23]
owners).
• This covers:-
1. Parent increases shareholding in subsidiary from 70% to 85%.
2. Parent decreases shareholding in subsidiary from 90% to 60%.

• FRS 110 paragraph B96:B96:-

1. When the proportion of the equity held by non-controlling interests changes,
an entity shall adjust the carrying amounts of the controlling and non-
controlling interests to reflect the changes in their relative interests in the
subsidiary.

2 Th
2. The entity
tit shall
h ll recognise
i di tl in
directly i equity
it any difference
diff b t
between th
the
amount by which the non-controlling interests are adjusted and the fair
value of the consideration paid or received, and attribute it to the owners
of the parent.
Lee Kin Wai 18
 Decrease in ownership without loss in control
TLK - scenario
i 4 - from
f 90% tto 60%
TLK - scenario 4 - No loss or gain in control - from 90% to 60% - page 478
•P Co
Co. acquired 90% of S Co. Co on 1 Jan 20×8 for $18$18,000,000.
000 000
•Fair value of identifiable net assets (after tax) on 1 Jan 20×8 is $10,000,000.
•FV of NCI on 1 Jan 20×8 is $1,000,000.
On 1 Jan 20x8, S has :-
Sh
Share capital
i l 5 000 000
5,000,000
Retained earnings 4,000,000
Unrecognized intangible asset 1,250,000
tax rate 20%
•P Co. decreases ownership from 90% to 60% on 1 January 20×10.
Proceeds on sale of 30% (in P seprate accounts) on 1 Jan 20x10 is $15,000,000
P's share of subsidiary's equity on 31 Dec 20x9 is $27,000,000.

CJE in year 20x10

CJE 1
Dr. Share Capital 5,000,000
D R
Dr. Retained
t i d earnings
i 4 000 000
4,000,000
Dr. intangible asset 1,250,000
Dr. Goodwill 9,000,000
Cr. Investment in S 18,000,000
Cr. NCI 1,000,000
Cr. Deferred Tax liability 250,000
19,250,000 19,250,000
eliminate investment at acquisition date - old 90% tranche on 1-1-20x8
1 1 20x8

Lee Kin Wai 19

Decrease in ownership without loss in control

TLK - scenario 4 - from 90% to 60%
P's 90% share of subsidiary equity on 31 Dec 20x9 = 27,000,000
Thus, 100% share of subsidiary's equity on 31 Dec 20x9 = 30,000,000
NCI 10% share of subsidiary equity on 31 Dec 20x9 3,000,000 A

In P's separate accounts

Dr. Cash 15,000,000
Cr. Investment = 18,000,000 x (30% / 90%) 6,000,000
Cr. Gain on sale ((P/L)) 9,000,000
, ,

Old NCI at 10% on 31-Dec-20x9 (before P sells 30%) 3,000,000 per A above
Old NCI at 40% on 31-Dec-20x9 12,000,000 =40% x 30,000,000
Change in carrying amount of NCI from 10% to 40% (9 000 000) B
(9,000,000)

Proceeds on sale of 30% interest by P 15,000,000 given

less change in NCI from 10% to 40% (9,000,000) per B above
Gain on sale recognized in capital reserve (equity) in group accounts 6 000 000 C
6,000,000
Why gain ? P received $15,000,000 to sell 30% shares to NCI that is worth $9,000,000.

CJE 2 Note
D IInvestment
Dr. t t 6,000,000
6 000 000 1
Dr. Gain on sale (P/L) 9,000,000 2
Cr. capital reserve (equity) 6,000,000 C
Cr. Non-controlling interests (B/S) 9,000,000 B
N t
Note
1 - investment balance after sale = 18,000,000 - 6,000,000 = 12,000,000
2 - to reverse gain in P's separate account
3 - note C above
4 - note B above
Thus, total goodwill does NOT change after divestment of 30% by P.
Lee Kin Wai 20
Increase in ownership without any change in control
E
Examplel – from
f 70% tto 85%

• On 1 January 20x1
20x1, Company PLUTO paid $30 $30,800,000
800 000
to acquire 70% of the share capital of Company SOLAR.
As at the date of acquisition
acquisition, SOLAR had :-:
• Share capital = 23,000,000
• Retained
R t i d earningsi =3,600,000
3 600 000
• Intangible asset (Fair value in excess of book value)
=1,000,000
1 000 000
• On 1 January 20x1, the fair value of non-controlling
interest is $11,880,000.
• Subsequently, y on 1 Januaryy 20x4, Company y PLUTO
paid $12,000,000 to increase its ownership interest in
Company SOLAR from 70% to 85%.
Lee Kin Wai 21

Increase in ownership without any change in control

E
Examplel – from
f 70% tto 85%
• Additional information:
1. The intangible asset of Company SOLAR remains unimpaired as at
31 December 20x4.
2. Retained earnings of Company SOLAR as at 31 December 20x3
is $7,200,000.
3. Net income after tax for Company SOLAR for the year ended 31
December 20x4 is $2,600,000. Company SOLAR did not declare
any dividends for the year ended 31 December 20x4 20x4.
4. Tax rate was 20% throughout.
5
5. PLUTO recognizes non-controlling
non controlling interests at their full fair value
as at the date of acquisition.

Prepare the consolidation journal entries to be passed by Company

PLUTO for the year ended 31 December 20x4.

Lee Kin Wai 22
 Increase in ownership without any change in control
E
Examplel – from
f 70% tto 85%
CJE for year ended 31-12-20X4

CJE1: Eliminate investment on 1-1-20x1 and recognize goodwill

Dr Share capital 23,000,000
Dr Retained earnings g 3,600,000
, ,
Dr Intangible asset 1,000,000
Dr Goodwill 15,280,000
Cr Deferred tax liability 200,000
C IInvestment
Cr t t in
i S Co
C 30,800,000
30 800 000
Cr NCI (B/S) 11,880,000
42,880,000 42,880,000

CJE2: Allocation of post-acquisition change in RE to NCI

Dr RE 1,080,000
Cr NCI (B/S) 1,080,000
RE at date of second step acquisition - 31-12-20x3 7,200,000
RE at first acquisition date - 1-1- 20x1 3,600,000
Increase in RE post acquisition 3,600,000
old 30% NCI share of increase in RE 1 080 000
1,080,000

Old NCI 30% on 1-1-20x1 = 11,880,000 given

Increase in NCI p
post acquisition
q 1-1-20x1 to 31-12-20x3 1,080,000
, , CJE 2
old NCI 30% share of on 31 Dec 20x3 12,960,000 A
Lee Kin Wai 23

Increase in ownership without any change in control

E
Examplel – from
f 70% tto 85%
Old NCI 30% on 1-1-20x1 = 11,880,000 given
Increase in NCI post acquisition 1-1-20x1 to 31-12-20x3 1 080 000 CJE 2
1,080,000
old NCI 30% share of on 31 Dec 20x3 12,960,000 A

In P's separate accounts

Dr. Investment in SOLAR 12,000,000 D - given
Cr. Cash 12,000,000
P buys the second tranche of 15% shares on 1-1-20x4

Old NCI at 30% on 31-Dec-20x3 (before P buys 15%) 12,960,000 per A above
New NCI at 15% on 1-1-20x4 = ( 15% / 30%) * 12,960,000 = 6,480,000
Change in carrying amount of NCI from 30% to 15% 6,480,000 B

Purchase of additional interest of 15% by P on 1-1-20x4 12,000,000 given

less change in NCI from 30% to 15% 6,480,000 per B above
Gain/ (Loss) on sale recognized in capital reserve (equity) in group accounts (5,520,000) C
Why loss ? P paid $12,000,000
$ to buy 15% shares from NCI that is worth $
$6,480,000.

CJE3: Loss on purchase of additional 15% (no change in control)

Dr. NCI ((B/S)) 6,480,000
, , B
Dr. Equity (Loss on purchase) or Capital Reserve (Equity) 5,520,000 C
Cr. Investment in SOLAR 12,000,000 D
Excess of investment in SOLAR written off to capital reserve (equity)
Note D - to eliminate investment in SOLAR (in PLUTO's
PLUTO s separate account)
Thus, total goodwill does NOT change after additional investment of 15% by PLUTO.
Lee Kin Wai 24
 Increase in ownership without any change in control
E
Examplel – from
f 70% tto 85%

CJE4: AllAllocation
CJE4 ti off currentt iincome tto NCI
Dr Incometo
Income to NCI 390000
390,000
Cr NCI (B/S) 390000
390,000
Current income after taxtaxalallocated
catedtoNCI
to NCI

current year net incomeafter

come after tax 2,600,000 given
2600000
new 15% NCI = 390,000
Lee Kin Wai 25

Increase in ownership - No gain or loss in control

TLK Scenario
S i 3 – from
f 90% tto 95%
TLK - scenario 3 - No loss or gain in control - from 90% to 95% - page 477
•P
PC Co. acquired
i d 90% off S Co.C on 1 JJan 2020×88 ffor $18
$18,000,000.
000 000
•Fair value of identifiable net assets (after tax) on 1 Jan 20×8 is $10,000,000.
•FV of NCI on 1 Jan 20×8 is $1,000,000.
•P Co. increases ownership from 90% to 95% on 1 January 20×10 by increasing investment from $18,000,000 to $20,000,000.
Th P paid
Thus id $2
$2,000,000
000 000 tto bbuy an additional
dditi l 5% shares
h on 1 JJan 20
20x10.
10
•Fair value of identifiable net assets (after tax) on 1 Jan 20×10 is $15,000,000
•Fair value of NCI on 1 Jan 20×10 is $3,000,000.
Balance of NCI on 31 December 20×9 is $3,000,000 (i.e. carrying value of NCI (Consolidated balance sheet) = $3,000,000.)
I is
It i just
j a coincidence
i id that
h fair
f i value
l off NCI on 1-Jan 1 J 20x10
20 10 = carrying
i value
l off NCI (consolidated
( lid d balance
b l sheet).
h )
Assume accounting policy is NCI is recognized at full fair value.

CJE in year 20x10

CJE 1
Dr. Share Capital not given
Dr. Retained earnings not given
Dr. Goodwill 9,000,000 E below
Cr. Investment in S 18,000,000
Cr. NCI 1,000,000
eliminate investment at acquisition date - old 90% tranche on 1-1-20x8

Purchase cost by P to buy 90% of S on 1-1-20x8 18,000,000 given - A

Fair value of NCI on 1-1-20x8 1,000,000 given - B
Total 19,000,000 C=A+B
Less FVINA on 1-1-20x8 ((10,000,000)) given - D
g
Goodwill 9,000,000 E=C-D

Lee Kin Wai 26
 Increase in ownership - No gain or loss in control
TLK Scenario
S i 3 – from
f 90% tto 95%
NCI balance on 31 Dec 20x9 = not given
NCI at acquistion date - 1 Jan 20x8 1 000 000
1,000,000
NCI share of increase in retained earnings post-acquisition cannot be computed - say $xx
CJE2
Dr. Retained earnings xx
Cr NCI
Cr. xx
increase in NCI (assume = NCI share of increase in retained earnings post-acquisition)

Carrying value of Old NCI at 10% at 31-Dec-20x9 3,000,000 given

Carrying value of NCI at 5% at 31-Dec-20x9
31 Dec 20x9 1 500 000 =(5%
1,500,000 (5% / 10%) * 3,000,000
3 000 000
Change in carrying amount of NCI from 10% to 5% 1,500,000 Note A
Note : The fair value of NCI on 1-Jan-20x10 of $3,000,000 is irrelevant here.
Why ? FRS 110 para B.96 focus on change in carrying value of NCI (B/S) when there is no gain or loss in control.

Implementing FRS 110 para B.96:-

Consideration paid by P to buy extra 5% from NCI 2,000,000 given
Less : Change in carrying amount of NCI from 10% to 5% (1,500,000) per note A above
L
Loss on purchase
h recognized
i d iin capital
it l reserve ((equity)
it ) 500 000 Note
500,000 N t B
Why loss? P paid $2,000,000 to buy 5% shares from NCI that is worth $1,500,000.

CJE 3
Dr. Non-controlling interests (B/S) 1,500,000 per Note A above
Dr. capital reserve (equity) 500,000 per Note B above
Cr. Investment in S 2,000,000 Note C
[new purchase by P from NCI reduces NCI from old 10% to new 5% ]
Note - Total goodwill (in CJE 1) does NOT change after investment of 5% by P.
Why? Difference between consideration paid and change in NCI is recognized in capital reserve (equity)
Lee Kin Wai 27

Increase in ownership - No gain or loss in control

TLK Scenario
S i 3 – from
f 90% tto 95%

CJE44
CJE
H NNett income affter tax off SSffor year ended
Here: d d31D
31 Dec 2020x1010iis nott giiven
supposeffor year ended31Dec20x10
suppose ended 31 Dec 20x10, Shasnet S has net incomeaf
come after taxofx of $z
New NCI 5% shareof
share of current year profit = 5% xzx z
Dr Incomet
come to NCI =5% xzx z
Cr NCI (B/S) =5%5% xzx z
Current incomeaf
come after taxalx allocatedtd to NCI
Lee Kin Wai 28
TLK - Illustration 7.8 Comparison of the cost
and
d equity
it methods
th d andd consolidation
lid ti
The differences between consolidation
consolidation, cost and equity methods are only temporary in nature
nature.
Consider the following scenario when a sale is made of an investment prepared under 3 methods.
Total profit earned during the investment-holding period (share of post-acquisition profits
andd profit
fit on sale)
l ) iis th
the same under
d eachh method.
th d

Cost method q y method Consolidation

Equity
1 ] Sales proceeds 10,000,000 10,000,000 10,000,000

2] Original cost 66,000,000

000 000 66,000,000
000 000 66,000,000
000 000
3] Add : share of post-acquisition profit 0 3,500,000 3,500,000
4] Cost of sales = [2] + [3] 6,000,000 9,500,000 9,500,000

5] Profit on sale = [1] - [4] 4,000,000 500,000 500,000

6] total profit = [ 3 ] + [ 5 ] 4,000,000 4,000,000 4,000,000

Th [5] = [6].
Thus, [6]
Lee Kin Wai 29

TLK - Illustration 7.8 Comparison of the cost

and
d equity
it methods
th d andd consolidation
lid ti
Terminal entry (cost method):
Dr. Cash 10,000,000
Cr. Investment 6,000,000
Cr. Profit on sale 4,000,000

The equity accounting adjustment to adjust the terminal entry from the cost to the equity method is:-
Dr. Profit on sale 3,500,000
Cr. Investment 3,500,000
Profit on sale under equity method = 500,000
Profit on sale under cost method = 4,000,000
Adjust from cost to equity method (3,500,000)

A terminal consolidation journal entry is required to reflect that the group had already recognized,
in previous years, the profit now recognized by the parent on disposal of the investment under the cost
method. The following shows the consolidation journal entry:
Dr. Profit on sale 3,500,000
Cr Retained earnings
Cr. 3 500 000
3,500,000
Profit on sale under consolidation method = 500,000
Profit on sale under cost method = 4,000,000
Adjust
j from cost to equity
q y method ((3,500,000)
, , )

Lee Kin Wai 30