8/26/2008

Chapter 17
Consolidation:
non-controlling interest

Prepared by
Emma Holmes

Nature and calculation of NCI

• AASB 127 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.
• Recall from chapter 14, that non-controlling
interests are classified as a contributor of equity to
the group

• NCI is presented and identified within equity

separately from the parent’s equity

• The NCI is entitled to a share of the consolidated

equity. The remainder of this lecture will examine
how the NCI’s share of equity is calculated

Effects of NCI on the consolidation

process
Acquisitions analysis, BCVR entries and pre-acquisition
eliminations
Impact depends on the treatment of goodwill. Two
options:
Full goodwill method
Partial goodwill method
The investment is eliminated against parents shared
subsidiary’s pre acquisition equity.
Intragroup transactions
The full effect of intragroup transactions are adjusted on
consolidation regardless of the ownership interest held
by the parent
Note that dividends are an exception

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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
• A Ltd acquired 60% of B Ltd for a cost of $150,000
• Equity of B Ltd was $220,000 comprising share
capital of $100,000 and retained earnings of
$120,000. All amounts were recorded at fair value
• NCI in B Ltd had a fair value of $95,000

Consideration + NCI = 245,000

FVINA = 220,000
Goodwill = 25,000

Effect of NCI on consolidation

process – full goodwill method
BCVR entry
DR Goodwill 25,000 100% of goodwill
recognised
CR BCVR 25,000

Pre-acquisition elimination entry

60% of equity balances
DR Retained earnings 72,000 Eliminated

DR Share capital 60,000 BCVR attributable

To parent’s goodwill
DR BCVR 18,000 elimnated
CR Shares in B Ltd 150,000

Effect of NCI on consolidation

process – partial goodwill method
• NCI measured at their proportionate share of
acquiree’s identifiable net assets
• NCI does not receive a share of goodwill
• A Ltd acquired 60% of B Ltd for a cost of $150,000
• Equity of B Ltd was $220,000, comprising share
capital of $100,000 and retained earnings of
$120,000. All amounts were recorded at fair value.

Consideration 150,000
FVINA 220,000
A’s share (60%) 132,000
Goodwill 18,000

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Effect of NCI on consolidation

process – partial goodwill method
BCVR entry
None

Pre-acquisition elimination entry

DR Retained earnings 72,000
DR Share capital 60,000
DR Goodwill 18,000
CR Shares in B Ltd
150,000

Impact of NCI on the consolidation

worksheet

P Ltd. S Ltd. Adjustments Group Non-controlling Parent

$’000 $’000 interests
DR CR
DR CR

Other Assets XXX XXX XXX

Invt in S Ltd xxx xxx xxx
XXX XXX

Share capital xxx xxx xxx

Retained earnings xxx xxx xxx

Total equity in parent xxx
Total equity in MI XXX
TOTAL EQUITY XXX XXX XXX

Note the change to the format of the worksheet – 3 extra columns

Calculating the NCI share of equity

Calculation of NCI share of equity is determined in three steps

Share of equity Share of change in equity from Share of change in

at acquisition acquisition date to beginning of equity in current
date current year period

1 2 3
Step 1: pre-acquisition Steps 2&3: post-acquisition

Acquisition Beginning of End of

Date current current
period period

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Calculating the NCI share of equity

Pro-forma entries
Dr Share Capital XXX
Dr BCVR XXX
Dr Retained Earnings XXX
Step
Cr NCI A XXX
1

Dr Retained Earnings XXX Step

Cr NCI A XXX 2

Dr NCI Share of Profit/(Loss) B XXX

Cr NCI A XXX Step
Dr NCI A XXX 3
Cr Dividends Declared XXX
A= Balance Sheet shareholder’s equity account
B= Profit & Loss account

Accounting at acquisition date – full

goodwill method
Example…

• P Ltd acquired a 60% interest in S Ltd on 1 July 2007 for

$50,000.
• On the same date, the balance of shareholders’ equity of S
Ltd comprised:

Share capital $40,000

General reserve 2,000
Retained earnings 20,000
62,000

• All assets are recorded at their fair values except for an item
of plant, which had a fair value of $200,000 and a carrying
amount of $180,000 (original cost $250,000). The remaining
useful life of the plant at the date of acquisition is 5 years.
• The fair value of the NCI in S Ltd on 1 July 2006 was
$38,000.

Accounting at acquisition date – full

goodwill method
Acquisition analysis

Consideration paid 50,000

FV of NCI 38,000 88,000
Bookvalue of net assets
Share capital 40,000
General reserve 2,000
Retained earnings 20,000
Total bookvalue of assets 62,000
Fair value adjustments
Aftertax increase in plant 14,000
FVINA 76,000
Goodwill 12,000
Attributable to:
Parent 4,400
NCI 7,600
12,000

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Accounting at acquisition date – full

goodwill method
BCVR entries
(note that these entries are not affected by the existance of an NCI)

DR Accum. Depn. 70,000

CR Plant-cost 50,000
CR DTL 6,000
CR BCVR 14,000
DR Goodwill 12,000
CR BCVR 12,000

Pre-acquisition elimination entry

DR Share capital 24,000
DR General reserve 1,200
DR Retained earnings 12,000
DR BCVR 12,800 [(14,000X60%) + 4,400]
CR Investment in S Ltd 50,000

Accounting at acquisition date – full

goodwill method

NCI entry
DR Share capital 16,000
40% of totals
DR General reserve 800
DR Retained earnings 8,000
DR BCVR 13,200 [(4,000X40%) + 7,600]
CR NCI 38,000

(The CR to the NCI account is a balancing item)

Accounting at acquisition date –

partial goodwill method
Acquisition analysis
$
Cost of acquisition 50,000
Book value of net assets
- Share capital 40,000
- General reserve 2,000
- Retained earnings 20,000
Total book value of net assets 62,000
Fair value adjustments
- After tax increase in plant 14,000
Total fair value adjustments 14,000
FVINA 76,000
X %age acquired 60% 45,600
Goodwill on acquisition 4,400

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Accounting at acquisition date –

partial goodwill method
BCVR entries
DR Accum. Depn 70,000
CR Plant – cost 50,000
CR DTL 6,000
CR BCVR 14,000

Pre acquisition elimination entry

DR Share capital 24,000
DR General reserve 1,200
DR Retained earnings 12,000
DR BCVR 8,400
DR Goodwill 4,400
CR Investment in S Ltd 50,000

Accounting at acquisition date –

partial goodwill method

NCI entry
DR Share capital 16,000
DR Share reserve 800
DR Retained earnings 8,000
DR BCVR 5,600
CR NCI 30,400

Accounting at acquisition date –

partial goodwill method
Example continued…

At 30 June 2008 & 2009 the equity balances of S Ltd

are:

30/6/08 30/6/09
Share capital 40,000 40,000
General reserve 3,000 3,000
Retained earnings 45,000 75,000
88,000 118,000

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Accounting at acquisition date –

partial goodwill method
Example continued…
During the year ended 30 June 2008, S Ltd sold
inventory to P Ltd for $100,000, at a profit before
tax of $20,000. All inventory is unsold at 30 June
2008. The inventory is sold to external parties by P
Ltd during the year ended 30 June 2009

S Ltd recorded a profit of $40,000 for the year

ended 30 June 2009 and paid a dividend of $10,000
on 1 January 2009

Required:
Prepare the consolidation journals required at 30
June 2009

Consolidation at 30 June 2009

DR Accum depreciation 70,000

CR Plant – cost 50,000
CR DTL 6,000
CR BCVR 14,000
(i) Revaluation of plant to fair value

DR Depreciation expense 4,000

DR Retained earnings 8,000
CR Accum depreciation 12,000

DR DTL 3,600
CR ITE 1,200
CR Retained earnings 2,400
(ii) Consequential depreciation adjustment for plant (including
related tax effect)

Consolidation at 30 June 2009

DR Share capital 24,000

DR General reserve 1,200
DR Retained earnings 12,000
DR BCVR 8,400
DR Goodwill 4,400
CR Investment in S Ltd. 50,000
(iii) Pre-acquisition elimination entry

DR Share capital 16,000

DR General reserve 800
DR Retained earnings 8,000
DR BCVR 5,600
CR NCI 30,400
(iv) Allocation of pre-acquisition equity to NCI.

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Consolidation at 30 June 2009

DR Dividend revenue 6,000

CR Dividend paid 6,000
(v) Elimination of intragroup dividend
Note that it is only the amount of the dividend received by the parent ($10,000 x 60%)
that is eliminated

DR Retained earnings 14,000

DR ITE 6,000
CR COGS 20,000
(vi) Elimination of unrealised profit in opening inventory

Consolidation at 30 June 2009 –

NCI journals

DR General reserve 400 ($3,000-$2,000)x 40% = $400

DR Retained earnings 2,160
CR NCI 2,560 Balance
(vii) NCI share of opening post-acquisition equities (STEP 2)

The NCI share of retained earnings is calculated as follows:

Opening retained earnings (30/6/08) 45,000
Less: pre-acquisition retained earnings (20,000)
Post acquisition retained earnings 25,000
Reduction in R/E due to dep’n expense on plant (5,600) Jnl (ii)

Reduction in R/E due to profit in op. inventory (14,000) Jnl (vi)

Adjusted retained earnings 5,400

X NCI share @ 40% 2,160

Consolidation at 30 June 2009 –

NCI journals

DR NCI share of profit 20,480

CR NCI 20,480
DR NCI 4,000
CR Dividends paid 4,000 $10,000 x 40%
(viii) NCI share of current year movements in equity (STEP 3)

The NCI share of current year profit is calculated as follows:

Current year profit 40,000

Reduction in profit due to dep’n expense on plant (2,800) Jnl (ii)
Increase in profit due to profit in op. inventory 14,000 Jnl (vi)

Adjusted current year profit 51,200

X NCI share @ 40% 20,480

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Consol. Worksheet - 30 June 2009

100% of parent’s balances + 60% of post-acquisition balances of subsidiary

EXTRACT P Ltd. S Ltd. Adjustments Group NCI Parent

$’000 $’000
DR CR DR CR
Profit for the period 100 40 (ii) 4 (ii) 1.2 145.2 (viii) 20.48 124.72
(v) 6 (vi) 20
(vi) 6
Ret. Earn’s (1/7/07) 200 45 (ii) 8 (ii) 2.4 213.4 (iv) 8 203.24
(iii) 12 (vii) 2.16
(vi) 14
Dividend paid (50) (10) (v) 6 (54) (viii) 4 (50)
Ret. Earn’s (30/6/08) 250 75 304.6 277.96
Share capital 100 40 (iii) 24 116 (iv) 16 100
General reserve 20 3 (iii)1.2 21.8 (iv) 0.8 20.6
(vii) 0.4
BCVR (iii) 8.4 (i) 14 5.6 (iv) 5.6 -
Total equity :parent 398.56
Total equity :NCI (viii) 4 (iv) 30.4
(vii) 2.56
(viii) 20.48 49.44
TOTAL EQUITY 370 118 448 448

100% of
subs. B/S & All adjustments NCI
P/L included relating to P S journals
here
NCI share
of subs
balances

Other issues affecting the calculation

of NCI
Movement in reserves
• Where assets are subject to fair value adjustments
on acquisition and are subsequently sold (or
collected in the case of receivables) the credit
recorded against the BCVR in relation to the
transfer to retained earnings needs to be
considered when determining the NCI share of
post acquisition reserves- refer to pages 832-835
of the text for further discussion
• Where there have been post-acquisition reserve
transfers undertaken by the subsidiary
Gain on bargain purchase
• Where there is a gain on bargain purchase the NCI
does not receive a share of the gain