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

2. 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

3. 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

4. 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 = ,000
FVINA = ,000
Goodwill = ,000
Compiled By: Mrs. Maheshwari Chand , tr2, 2014

5. 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 ,000
DR BCVR ,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

6. 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 ,000
A’s share (60%) 132,000
Goodwill ,000
Compiled By: Mrs. Maheshwari Chand , tr2, 2014

7. 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 ,000
Compiled By: Mrs. Maheshwari Chand , tr2, 2014

8. 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

9. 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

10. 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

11. 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

12. Accounting at acquisition date – full goodwill method
Acquisition analysis
Consideration paid ,000
FV of NCI , ,000
Bookvalue of net assets
Share capital ,000
General reserve ,000
Retained earnings 20,000
Total bookvalue of assets ,000
Fair value adjustments
Aftertax increase in plant ,000
FVINA ,000
Goodwill ,000
Attributable to:
Parent 60% ,400
NCI 40% ,600
12,000
Compiled By: Mrs. Maheshwari Chand , tr2, 2014

13. 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 ,000
CR DTL ,000
CR BCVR ,000
DR Goodwill 12,000
CR BCVR ,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 ,000
60% of totals
Compiled By: Mrs. Maheshwari Chand , tr2, 2014

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

15. 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

16. Accounting at acquisition date – partial goodwill method
BCVR entries
DR Accum. Depn 70,000
CR Plant – cost ,000
CR DTL ,000
CR BCVR ,000
Pre acquisition elimination entry (60%)
DR Share capital 24,000
DR General reserve ,200
DR Retained earnings 12,000
DR BCVR ,400
DR Goodwill ,400
CR Investment in S Ltd ,000
Compiled By: Mrs. Maheshwari Chand , tr2, 2014

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

18. 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 , ,000
General reserve 3, ,000
Retained earnings 45, ,000
88, ,000
Compiled By: Mrs. Maheshwari Chand , tr2, 2014

19. 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 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

20. Consolidation at 30 June 2009 DR Accum depreciation 70,000
CR Plant – cost 50,000
CR DTL ,000
CR BCVR ,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 ,200
CR Retained earnings 2,400
(ii) Consequential depreciation adjustment for plant (including related tax effect)
Compiled By: Mrs. Maheshwari Chand , tr2, 2014

21. 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
DR Retained earnings 8,000
DR BCVR 5,600
CR NCI ,400
(iv) Allocation of pre-acquisition equity to NCI.
Compiled By: Mrs. Maheshwari Chand , tr2, 2014

22. 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 ,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

23. Consolidation at 30 June 2009 –
NCI journals
DR General reserve
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 40%
2,160
Jnl (ii)
Jnl (vi)
Compiled By: Mrs. Maheshwari Chand , tr2, 2014

24. Consolidation at 30 June 2009 –
NCI journals
DR NCI share of profit ,480
CR NCI ,480
DR NCI ,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 40%
20,480
Jnl (ii)
Jnl (vi)
Compiled By: Mrs. Maheshwari Chand , tr2, 2014

25. 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

26. 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 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

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