Topic:Consolidation: (NCI) Week 11 – Lecture 2 Topic:Consolidation: (NCI) Reference: Chapter 17 Compiled By: Mrs. Maheshwari Chand , tr2, 2014

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 Compiled By: Mrs. Maheshwari Chand , tr2, 2014

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 Compiled By: Mrs. Maheshwari Chand , tr2, 2014

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 Compiled By: Mrs. Maheshwari Chand , tr2, 2014

Effect of NCI on consolidation process – full goodwill method BCVR entry DR Goodwill 25,000 CR BCVR 25,000 Pre-acquisition elimination entry DR Retained earnings 72,000 DR Share capital 60,000 DR BCVR 18,000 CR Shares in B Ltd 150,000 100% of goodwill recognised 60% of equity balances Eliminated BCVR attributable To parent’s goodwill elimnated Compiled By: Mrs. Maheshwari Chand , tr2, 2014

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 Compiled By: Mrs. Maheshwari Chand , tr2, 2014

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 Compiled By: Mrs. Maheshwari Chand , tr2, 2014

Impact of NCI on the consolidation worksheet Note the change to the format of the worksheet – 3 extra columns Compiled By: Mrs. Maheshwari Chand , tr2, 2014

1 3 Calculating the NCI share of equity 2 Calculation of NCI share of equity is determined in three steps Share of equity at acquisition date Share of change in equity from acquisition date to beginning of current year Share of change in equity in current period 1 2 3 Step 1: pre-acquisition Steps 2&3: post-acquisition Acquisition Date End of current period Beginning of current period Compiled By: Mrs. Maheshwari Chand , tr2, 2014

Calculating the NCI share of equity Pro-forma entries Dr Share Capital XXX Dr BCVR XXX Dr Retained Earnings XXX Cr NCI XXX Dr Retained Earnings XXX Cr NCI XXX Dr NCI Share of Profit/(Loss) XXX Cr NCI XXX Dr NCI XXX Cr Dividends Declared XXX Step 1 A Step 2 A B A Step 3 A A= Balance Sheet shareholder’s equity account B= Profit & Loss account Compiled By: Mrs. Maheshwari Chand , tr2, 2014

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. Compiled By: Mrs. Maheshwari Chand , tr2, 2014

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 60% 45 600 4,400 NCI 40% 30400 7,600 12,000 Compiled By: Mrs. Maheshwari Chand , tr2, 2014

Accounting at acquisition date – full goodwill method BCVR entries (note that these entries are not affected by the existence 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 (60%) 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 60% of totals Compiled By: Mrs. Maheshwari Chand , tr2, 2014

Accounting at acquisition date – full goodwill method NCI entry (40%) DR Share capital 16,000 DR General reserve 800 DR Retained earnings 8,000 DR BCVR 13,200 [(14,000X40%) + 7,600] CR NCI 38,000 (The CR to the NCI account is a balancing item) 40% of totals Compiled By: Mrs. Maheshwari Chand , tr2, 2014

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 FVINA 76,000 X %age acquired 60% 45,600 Goodwill on acquisition 4,400 Compiled By: Mrs. Maheshwari Chand , tr2, 2014

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 (60%) 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 Compiled By: Mrs. Maheshwari Chand , tr2, 2014

Accounting at acquisition date – partial goodwill method NCI entry (40%) DR Share capital 16,000 DR Share reserve 800 DR Retained earnings 8,000 DR BCVR 5,600 CR NCI 30,400 Compiled By: Mrs. Maheshwari Chand , tr2, 2014

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 Compiled By: Mrs. Maheshwari Chand , tr2, 2014

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 Compiled By: Mrs. Maheshwari Chand , tr2, 2014

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) Compiled By: Mrs. Maheshwari Chand , tr2, 2014

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. Compiled By: Mrs. Maheshwari Chand , tr2, 2014

Consolidation at 30 June 2009 DR Dividend revenue 6,000 CR Dividend paid 6,000 (v) Elimination of intragroup dividend DR Retained earnings 14,000 DR ITE 6,000 CR COGS 20,000 (vi) Elimination of unrealised profit in opening inventory Note that it is only the amount of the dividend received by the parent ($10,000 x 60%) that is eliminated Compiled By: Mrs. Maheshwari Chand , tr2, 2014

Consolidation at 30 June 2009 – NCI journals DR General reserve 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: ($3,000-$2,000)x 40% = $400 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 Reduction in R/E due to profit in op. inventory (5,600) (14,000) Adjusted retained earnings 5,400 X NCI share @ 40% 2,160 Jnl (ii) Jnl (vi) Compiled By: Mrs. Maheshwari Chand , tr2, 2014

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 (viii) NCI share of current year movements in equity (STEP 3) The NCI share of current year profit is calculated as follows: $10,000 x 40% Current year profit 40,000 Reduction in profit due to dep’n expense on plant Increase in profit due to profit in op. inventory (2,800) 14,000 Adjusted current year profit 51,200 X NCI share @ 40% 20,480 Jnl (ii) Jnl (vi) Compiled By: Mrs. Maheshwari Chand , tr2, 2014

Consol. Worksheet - 30 June 2009 100% of parent’s balances + 60% of post-acquisition balances of subsidiary 100% of subs. B/S & P/L included here All adjustments relating to P & S NCI journals NCI share of subs balances Compiled By: Mrs. Maheshwari Chand , tr2, 2014

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 Compiled By: Mrs. Maheshwari Chand , tr2, 2014

End of Consolidation Thank you.. Compiled By: Mrs. Maheshwari Chand , tr2, 2014