1. 30-1 Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Australian Financial Accounting 5e by Craig Deegan Slides prepared by Craig Deegan Chapter 30 Further consolidation issues II: Accounting for minority interests

2. 30-2 Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Australian Financial Accounting 5e by Craig Deegan Slides prepared by Craig Deegan Objectives Understand the nature of minority interests Understand why we calculate minority interests Understand how to calculate minority interests’ share in share capital and reserves, and current period profit Understand how minority interests should be disclosed within consolidated financial statements

3. 30-3 Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Australian Financial Accounting 5e by Craig Deegan Slides prepared by Craig Deegan Minority interests Example Company A (parent entity) owns 75% of Company B Remaining 25% held by investors who are not part of the economic entity Outside investors referred to as ‘minority interests’ Minority interests (under AASB 127) That portion of the profit or loss and net assets of a subsidiary attributable to equity interests that are not owned, directly or indirectly through subsidiaries, by the parent

4. 30-4 Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Australian Financial Accounting 5e by Craig Deegan Slides prepared by Craig Deegan

5. 30-5 Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Australian Financial Accounting 5e by Craig Deegan Slides prepared by Craig Deegan Minority interests Where subsidiary partly owned by parent entity (i.e. less than 100% interest), both the parent entity and the minority interests will have an ownership interest in the subsidiary’s profits, dividend payments, and share capital and reserves As part of consolidation process, need to work out the amount to be attributed to minority interests

6. 30-6 Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Australian Financial Accounting 5e by Craig Deegan Slides prepared by Craig Deegan Disclosure requirements Disclosure requirements: minority interests AASB 127 requires separate disclosure of the minority interest’s share of capital, retained profits or accumulated losses AASB 127 (par. 33) –minority interests shall be presented in the consolidated balance sheet within equity, separately from the parent shareholders’ equity. Minority interests in the profit or loss of the group shall also be separately disclosed –par. 34 of AASB 127 explains: ‘The profit or loss is attributed to the parent shareholders and minority interests. Because both are equity, the amount attributed to minority interests is not income or expenses’. –refer to Exhibits 30.1, 2 & 3 on pages 1025 and 1026 for sample disclosures

7. 30-7 Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Australian Financial Accounting 5e by Craig Deegan Slides prepared by Craig Deegan Calculating minority interests A key step in preparing consolidated financial statements is calculating minority interests AASB 127 (par. 22) in relation to the steps in preparing a consolidated financial report In preparing a consolidated financial report, an entity combines the financial reports of the parent and its subsidiaries line by line by adding together like items of assets, liabilities, equity, income and expenses. In order that the consolidated financial report presents financial information about the group as that of a single economic entity, the following steps are then taken: (a)the carrying amount of the parent’s investment in each subsidiary and the parent’s portion of equity of each subsidiary are eliminated (AASB 3, which describes the treatment of any resulting goodwill);

8. 30-8 Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Australian Financial Accounting 5e by Craig Deegan Slides prepared by Craig Deegan Calculating minority interests (cont.) (b)minority interests in the profit or loss of consolidated subsidiaries for the reporting entity are identified; and (c)minority interests in the net assets of consolidated subsidiaries are identified separately from the parent shareholders’ equity in them. Minority interests in the net assets consist of (i)the amount of those minority interests at the date of the original combination calculated in accordance with AASB 3 (ii)the minority’s share of changes in equity since the date of combination

9. 30-9 Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Australian Financial Accounting 5e by Craig Deegan Slides prepared by Craig Deegan Calculating minority interests (cont) Minority interests are ‘identified’ but not eliminated as part of the consolidation process They are calculated for disclosure purposes the parent’s investment in the subsidiary is eliminated only against the parent’s share of the subsidiary’s owners’ equity at acquisition date. The minority interest’s share of equity is not eliminated, but is separately identified so that the minority interest’s share can be specifically shown in the consolidated financial statements The dividends paid and payable by the subsidiary to the minority interest will be included within the consolidated financial statements

10. 30-10 Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Australian Financial Accounting 5e by Craig Deegan Slides prepared by Craig Deegan Calculating minority interests (cont) The minority interest is determined as the minority interest’s proportion of the fair value of the recognised identifiable assets, liabilities and contingent liabilities at the date of the original acquisition. Post-acquisition minority interest in the identifiable assets and liabilities of a subsidiary comprises the minority interest’s share of movements in equity since the date of the original controlling acquisition, after eliminating intragroup transactions. The inclusion of minority interests in the consolidated balance sheet is consistent with the entity concept, according to which minority interest is viewed as an owner within the group, in the same way as the shareholders of the parent entity. where there are intragroup transactions any related profit or loss should be eliminated in full as part of the consolidation process, not merely the percentage of the profit or loss equal to the parent entity’s interest in the subsidiary.

11. 30-11 Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Australian Financial Accounting 5e by Craig Deegan Slides prepared by Craig Deegan Elimination of pre-acquisition capital and reserves in the presence of minority interests The carrying values of subsidiaries’ assets must be adjusted to fair value prior to the elimination of the parent entity’s investment. This is necessary to prevent the amount of goodwill acquired by the parent entity from being wrongly stated, as the equity (net assets) of the subsidiary would be undervalued (where the fair value of the net assets exceeds their carrying amount). The existence of minority interests does not change the requirement for the assets and liabilities of a subsidiary to be measured at fair value as at acquisition date. If the parent entity does not acquire all of the shares of the subsidiary it does not acquire an interest in all the share capital and reserves. There will be a minority interest. Consider Worked Example 30.1 (page 1029)

12. 30-12 Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Australian Financial Accounting 5e by Craig Deegan Slides prepared by Craig Deegan Adjustments for intragroup transactions AASB 127 requires the elimination of the effects of all intragroup transactions before the consolidated financial statements are presented. Specifically, paragraph 24 stipulates that Intragroup balances, transactions, income and expenses shall be eliminated in full The requirement to eliminate the effects of intragroup transactions holds whether or not there are minority interests.

13. 30-13 Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Australian Financial Accounting 5e by Craig Deegan Slides prepared by Craig Deegan Intragroup payment of dividends In relation to dividends paid by a subsidiary, the consolidation worksheet journal entries will eliminate the proportion of the dividends that relates to the parent entity’s entitlement. The minority interest’s share of the dividends paid by the subsidiary will be shown in the consolidated financial statements. That is, the minority interest’s share in the dividends paid or proposed by the subsidiary will not be eliminated on consolidation This is appropriate because the dividends paid to the minority interests represent flows away from the economic entity The dividends distributed to the minority interests will act to reduce the minority interests’ share in the equity of the subsidiary. The consolidated balance sheet will show any dividends payable to the minority interests as a liability together with those payable to the shareholders of the parent entity

14. 30-14 Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Australian Financial Accounting 5e by Craig Deegan Slides prepared by Craig Deegan Intragroup sale of inventory When we calculate the minority interest’s share of the profits of the subsidiary we need to calculate the subsidiary’s profit after adjustments to eliminate income and expenses of the subsidiary that are unrealised from the economic entity’s perspective. If the gains or losses have been realised no adjustment is necessary when calculating minority interest. For example, if a subsidiary sold inventory to the parent at a gain, and the parent entity has in turn sold all the inventory to external parties, the minority interest’s share of profit would not need to be reduced as the related gain would be deemed to have been realised from the perspective of the group. Adjustments to the calculation of the minority interest’s share of the subsidiary’s profits will be needed where some or all of the inventory sold by the subsidiary is still on hand with the parent entity at reporting date.

15. 30-15 Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Australian Financial Accounting 5e by Craig Deegan Slides prepared by Craig Deegan Intragroup sale of inventory (cont) If there are unrealised profits in closing inventory, this will mean that in the next financial period there will be unrealised profits in opening inventory. In the next financial period we would need to adjust the minority interest’s share of opening retained earnings (by reducing it) and provide a corresponding increase in the minority interest’s share of that period’s profits

16. 30-16 Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Australian Financial Accounting 5e by Craig Deegan Slides prepared by Craig Deegan Intragroup sale of non-current assets As with inventory, if a subsidiary sells a non-current asset such as an item of property, plant and equipment to another entity within the group, to the extent that the asset stays within the group the gain or loss on sale has not been recognised from the group’s perspective and the minority interests’ share of profits will need to be adjusted. However, the gain or loss is considered to be realised across the life of the asset as the asset is used up, that is as it is depreciated. As the assets, such as plant, are used, perhaps to produce inventory, the intragroup profit is considered to be realised as the service potential of the plant becomes embodied in goods produced by the plant, for example, in inventory. Therefore, if a subsidiary sold an item of plant to another entity at the beginning of the financial year at a profit of $1000 and if that asset is to be depreciated over 10 years, only $100 of the gain could be recognised in the first year and $900 would be deemed to be unrealised. It would be realised over the next nine years.

17. 30-17 Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Australian Financial Accounting 5e by Craig Deegan Slides prepared by Craig Deegan Intragroup services and interest payments To the extent that there is no related asset that is retained in the economic entity upon which any profit has accrued, no adjustments are necessary in calculating the minority interest in the subsidiary’s profit (of course, consolidation adjustments will still be required but this discussion is about calculating the minority interest’s share of profits for presentation purposes and not for the purpose of generating consolidation journal adjustments). There is no adjustment for such things as management fees when we are determining minority interests as they are considered to be realised.

18. 30-18 Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Australian Financial Accounting 5e by Craig Deegan Slides prepared by Craig Deegan Intragroup transactions that create gains or losses for the parent entity In calculating minority interests we do not need to adjust for gains or losses in the parent entity’s accounts that are unrealised as minority interests have an interest only in the subsidiary’s profit contribution. It is only the unrealised intragroup profits or losses accruing to the subsidiary that need to be eliminated before we calculate minority interests. Hence, if a subsidiary has acquired inventory from the parent entity no adjustment is required if the inventory is still on hand (and hence the profit is unrealised from the perspective of the economic entity) when calculating minority interests as the purchase of inventory has no implications for the equity of the subsidiary as they are simply acquiring one asset in exchange for another (if paid for by cash), or acquiring one asset by incurring a liability (accounts payable).

19. 30-19 Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Australian Financial Accounting 5e by Craig Deegan Slides prepared by Craig Deegan Summary of some general principles for calculating minority interests in profits or losses We only need to make adjustments to minority interests’ share of profits where an intragroup transaction affects the subsidiary’s profit or loss. We make adjustments for profits or losses made by the subsidiary to the extent they are unrealised from the economic entity’s perspective, that is, the respective asset is still on hand at reporting date. For profits relating to transactions that do not involve the transfer of assets, such as those relating to interest, management fees and so forth, no adjustments are necessary. The related profits are deemed to be recognised at the point of the transaction. We do not need to make adjustments for unrealised gains or losses made by the parent entity when calculating the minority interest in profits. Consider Worked Example 30.2 (pp. 1033 – 45)