Non-controlling interest

ownership is less than 100%

–   Parent has a partial interest in the subsidiary

NCI receives a share of the consolidated equity and therefore participates in the residual equity of the group

Calculating NCI

   Full goodwill method------NCI measured at fair value based on market price for shares

not acquired by the parent (including goodwill)

   Partial goodwill method------NCI is measured at their proportionate share of acquiree’s

identifiable net assets (excluding goodwill)

only use the partial goodwill method!

NCI and the consolidation process

   Acquisition analysis

–   Consider FV acquired by the parent

   Business combination valuation entries

–   Revalue assets not recorded at FV

–   No BCVR entry for goodwill

   Pre-acquisition entries

–   Need to eliminate parent’s share

–   Account for goodwill/gain on bargain purchase

   Intragroup Transactions

–   Need to eliminate intragroup transactions, and also consider the effect on

NCI

Calculation of NCI involving inter-company transactions

Only the unrealized profits/losses from upstream sales should be adjusted!

   Unrealized profits and losses in calculation of NCI

   Closing inventory ( current year)

When the subsidiary has sold inventory to the parent company at a profit/loss

   Opening inventory (prior year)

When the subsidiary has sold inventory to the parent company at a profit/loss,

reflected in R.E.

   Non-current assets

When the subsidiary has sold non-current assets to the parent company at a profit/loss, reflected in R.E. if transferred in previous years

Accounting for NCI: Method

    Step 1: Acquisition Analysis

FVINA=Recorded equity + (1-30%)*BCVR entries-recorded goodwill

FV acquired= FVINA * parent’s proportional ownership interest

Consideration= $XX-cum. Dividend receivable

Goodwill/Gain on bargain= FV acquired – Consideration

    Step 2: BCVR Entries

No effect.

You have to consider the effect on profit and RE when we calculate NCI in step 5.

    Step 3: Pre-acquisition Analysis

Sample pre-acquisition entry:

(assuming 70% parent ownership in subsidiary):

Dr Share capital                      x 70%

Dr Retained earnings  x 70%

Dr General reserve     x 70%

Dr BCVR       x 70%

Dr Goodwill/Cr. Gain on Bargain

Cr Shares in Subsidiary (Consideration transferred)

In the pre-acquisition entry, eliminate the % ownership of share capital, reserves, retained profits, the relevant % of revaluation surplus and the goodwill that was identified in the     acquisition analysis.

    Step 4: Intra-group transactions

All effects of transactions within the group are still adjusted on consolidation (it does not matter what the % of parent ownership is).

One exception ---- dividends

Only eliminate the proportion of dividends applicable to the parent entity.

Eg:

P Ltd owns 80% of the share capital of S Ltd.

S Ltd pays a $2,000 dividend in the current period.

Journal entry:

Dr Dividend Revenue/Income            1,600

Cr Dividend Paid (Retained Earnings)             1,600

(elimination of parent share of dividend $2,000 x 80%)

    Step 5: NCI calculation (7 steps method)

This approach results in ONE journal entry for NCI.

1.   Calculate NCI share of subsidiary’s share capital at date of consolidation.

2.   Calculate NCI share of subsidiary’s reserves at date of consolidation.

3.   Calculate NCI share of Business Combination Valuation Reserve. (sum of Step 2)

4.   Calculate NCI share of subsidiary’s adjusted opening retained earnings.

5.   Calculate NCI share of subsidiary’s adjusted operating profit after tax (PAT) for

current year.

6.   Calculate NCI share of dividends paid and provided by subsidiary during the current year.

7.   Calculate NCI share of any other transfers in or out of subsidiary’s retained earnings during the current year.

Steps 1, 2, 3, 6 and 7 are simple calculations based on the % shareholding of the NCI x by the relevant item.

Steps 4 and 5 each require a detailed formula to take into account adjustments for intra- group transactions (S to P) and BCVR entries affecting opening Retained Earnings and Operating Profit after Tax.

1.   Only include intra-group transaction FROM the Subsidiary TO the Parent.

These transactions affect the Subsidiary’s profits, which is what the NCI is concerned with.

Sales from the Parent to the Subsidiary are irrelevant for the determination of NCI, BUT

STILL NEED TO BE ELIMINATED IN JOURNAL ENTRIES AS NORMAL.

2.   All of the adjustments have a tax effect to reflect the consequences of increasing or decreasing group profit or retained earnings.

Dr Share capital                 (step 1)                      xx

Dr General Reserve        (step 2)                         x

Dr BCVR             (step 3)                         x

Dr Retained Earnings    (step 4)                         x

Dr OPAT                             (step 5)                     x

Dr Transfer from BCVR/GR (step 7)   x

Cr Dividends paid/declared (step 6)                   x

Cr NCI                                                                                   xxx

Step 5: Adjusted Operating PAT of Subsidiary (  Current year) (Step 2+4)

Operating PAT of subsidiary

Less   Unrealised PAT in closing inventory

Less               Unrealised PAT on sale of NCA in current year                     (XXX3)

Four Items

1)  Unrealized profit in opening inventory

•    DEDUCT from Opening RE formula (the inventory is still on hand so the profit is not realised yet from the Group’s point of view).

•    ADD to OPAT formula (inventory is sold during the current year therefore profit is realised in the current year from the Group’s point of view).

2)  Unrealized profit in closing inventory

•    DEDUCT from OPAT formula (inventory is still on hand therefore profit is not realised yet from the Group’s point of view).

3)  Sale of NCA

•    Always DEDUCT unrealised profit on the sale. This is never realised in one amount from the Group’s point of view.

•    Always ADD back realised profit via depreciation. It is through the asset’s use over its remaining useful life that the unrealised profit becomes realised.

4)  Step 2: BCVR adjustments (depreciation adjustments on revalued NCA)

•    For a NCA ‘revalued’ via the revaluation surplus, the fair value is usually higher than the carrying amount, from the Group’s point of view.

•    Depreciation expense will be higher for the Group as well.

•    Each year after acquisition, the excess depreciation will reduce the Group’s profit. The Subsidiary has only recorded ‘normal’ depreciation, therefore the excess        depreciation is DEDUCTED in steps 4 and 5.