ch21 sm leo 10e PDF

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to accompany

Solutions Solutions Manual Manual prepared by

Company Accounting 10e

Ken Leo John Hoggett John Sweeting Jeffrey Knapp Sue McGowan

John © Wiley John& Wiley Sons&Australia, Sons Australia, Ltd 2015 Ltd 2015

Chapter 21: Consolidation: non-controlling interest

REVIEW REVIEW QUESTIONS QUESTIONS NCI is the term used for the ownership interest in a subsidiary other than the parent. It is defined in AASB 127 as: The equity in a subsidiary not attributable, directly or indirectly, to a parent.

The main argument for the NCI being classified as equity is that it better fits the definition of equity. The subsidiary has no present obligation in relation the NCI so the NCI does not meet the definition of a liability.

Chapter Chapter 21Consolidation: 21 – Consolidation: noncontrolling non -controlling interest interest

Some writers argue that NCI should be disclosed separately from equity an liabilities – the “mezzanine” treatment. argumentrelates to the utility of form financial statements provides in relationmore to the user group, the parentThis shareholders. It is argued that this of presentation relevant information to the parent shareholders.

If the NCI is classified as equity, it is entitled to a share of consolidated equity. Note that consolidated equity is basically subsidiary equity adjusted for the effects of intragroup transactions – that is, realised subsidiary equity. If it were classified as a liability of the subsidiary then the calculation of the NCI would be based on the obligation held by the subsidiary. 1. What What is meant is meant by the by term term the“noncontrolling “non -controlling interest” interest” (NCI)? I)? (NC

There is no effect. How ifa the fullNCI goodwill method used, theorpartial recognition of themethod subsidiary’s goodwill is is madeever via BCVR entry. In contrast, where the goodwill is used, goodwill Explain 2. whether Explain the whether NCI is the better classified is better as classified debt is or equity. as equity. debt recognised in the pre-acquisition entry.

Why? The BCVR entries, apart from that for goodwill, are prepared because of the requirement of AASB 3 to show the identifiable assets and liabilities of the acquiree at fair value. The determination of fair value is not affected by the parent’s ownership in the subsidiary.

Explain 3. Explain whetherwhether the NCIthe is entitled NCI share is entitled toofasubsidiary share to aof subsidiary equity or some equityother or some amount. other amount.

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4.How does How the does existence the existence ofaffect an NCI ofthe an affect business NCI the combination business combination valuation valuation entries? entries?

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Solutions manual to accompany Company Accounting 10e

The pre-acquisition entry eliminates the investment account recorded by the parent and the preacquisition equity of the subsidiary, as well as recognising any gain on bargain purchase. The consideration transferred reflects the amount paid by the parent for its share of the equity of the subsidiary. The effect then on the pre-acquisition entry is that the equity eliminated is first effect is that the gain on bargain purchase recognised is only the parent’s share. Thesecond only that relating to the parent’s share of the equity of the subsidiary.

group? group?

The AASB require the disclosure of the equity of the group, as well as the relative proportions of the parent and the subsidiary. For a wholly owned subsidiary situation, the final column in

the worksheet the having group position which also the parent’sthe position, as there is no NCI. Where anrepresents NCI exists, determined theis group position, equity must be divided into parent share and the NCI share. Hence, the worksheet must have additional columns to divide the group equity into the relative shares of the parent and the NCI. This is done by calculating the NCI share and subtracting it from the group equity so that the final column is then the parent entity’s share.

share share of equity. of equity.

The NCI does not affect the adjustment itself, as the full effects of the intragroup transaction are adjusted for on consolidation. However, where the subsidiary records profit which is unrealised to the group, this affects the calculation of the NCI. The NCI is entitled only to a share of consolidated equity rather than subsidiary equity. Hence, where the subsidiary has recorded 5.How does How the does existence the existence ofthe anaffect NCI of anshare the affect NCI pre-acquisition thethe pre-acquisition entries? entries? unrealised profit, NCI of recorded profit of the group must be adjusted for any of that profit which is unrealised. In the Step 2 & Step 3 calculations of the NCI share of equity, this is a share of recorded equity. As adjustments are made for intragroup transactions, where these transactions reflect adjustments for unrealised subsidiary profit, an adjustment is also made to the NCI share of profit. The net result is then that the NCI gets a share of realised subsidiary equity. Why is 6. it necessary Why istoitchange necessary the to format change of the format worksheet of the where worksheet a NCI exists where in a NCI the exists in the

An NCI adjustment does NOT need to be made for all intragroup transactions. An NCI adjustment only needs to be made where the adjustment is for unrealised profit recorded byintheorder subsidiary. Hence the transaction an upstream – subsidiary to parent – transaction for an NCI adjustment to be must made.beFurther the upstream transaction must relate to unrealised subsidiary profit.

Explain how 7. the adjustment Explain how forthe intragroup adjustment transactions for intragroup affects transactions the calculation affects of the the calculation NCI of the NCI

Profit is realised when the group transacts with an entity external to the group. The point of realisation depends then on identifying when the external entity is involved. With inventory (and other sale) transactions the point of realisation is easily identified as it is the point of sale when the external entity is involved. It is at this point that the group recognises

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Explain 8. whether Explain an NCI whether adjustment an NCI needs adjustment to be made needs for tointragroup be allmade intragroup for transactions. alltransactions.

What 9. isWhat meantisby meant ‘realisation by ‘realisation of profit’? of? profit’

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Chapter 21: Consolidation: non-controlling interest

profit on sale, being the excess of the sale proceeds over the cost to the group of the item being sold. With assets not sold but used by the group – see 10. below. With intragroup services, see the answer to 11. below.

See the answer to 9. above. With assets used by the group such as depreciable assets, the group does not interact with an external entity. It is then impossible to determine a point of realisation based on direct involvement of the group with an external entity. The point of realisation is then based on indirect involvement. The depreciable asset is used by the group to assist in its interaction with external entities eg by making inventories for sale to external entities. The depreciation charge measures the extent of that involvement in any one year as the depreciation charge is based on para 60 of AASB 116 which notes that the depreciation charge reflects the pattern of benefits consumed by the entity. Realisation of profit then occurs as the asset is used up or consumed by the entity. Realisation is then in proportion to the depreciation charge made on the asset.

warehouse warehouse from the from subsidiary? the subsidiary?

With such a transaction, the subsidiary records revenue, which increases subsidiary profit. This profit is not recognised by the group. However, no adjustment is made to the NCI share of equity as a result of this transaction. This is because of the difficulty of determining a point of realisation as no external entity is ever involved in this transaction.

When is profit 10. 10. realised When isonprofit an intragroup realised on transaction an intragroup involving transaction a depreciable involving asset? a depreciable asset? involved? involved?

There are 3 steps: period.

the current period the current that could periodaffect that could the calculation affect the of calculation the I share NCI of share ofretained theofNC retained earnings? earnings?

1. Share of equity at acquisition date. inventory on hand in thebetween subsidiary the acquisition 2. Share of change in equity theatacquisition date date. and the beginning of the current When is profit 11. 11. realised When isonprofit an intragroup realised ontransaction an intragroup involving transaction the parent involving renting thea parent renting a

3. Share of change in equity in the current period.

If a step approach 12. 12. Ifisa used step approach in the calculation is in ofthe thecalculation NCI share of of the equity, NCIwhat shareare of the equity, stepswhat are the steps Changes inused the assets & liabilities recognised © John Wiley and Sons Australia, Ltd via 2015the BCVR entries eg sale of the21.3 ฀

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Movements in equity eg transfers to/from general reserve, prior period dividends

parent entity parent share entity share NCIand share? NCI share? What are two 13. 13. events What that are could twoand events occur that between could the occur acquisition between date the acquisition and the beginning date andofthe beginning of

14. 14.For For whatwhat line n the line items financial items in the i statements financial statements is it necessary is it necessary to provide a break-down toaprovide break-down intointo

Solutions manual to accompany Company Accounting 10e

Statement of Profit or Loss and Other Comprehensive Income: AASB 101 para 83: Disclose both NCI and parent share of profit/loss for the period AND share of total comprehensive income for the period Statement of Financial Position: AASB 101 para 54 (q) and (r): NCI share of equity, and share capital and reserves attributable to parent Statement of Changes in Equity: AASB 101 para 106 (a): total comprehensive income for the period, showing that attributable to the parent and that attributable to the NCI.

© John Wiley and Sons Australia, Ltd 2015

21.4

Chapter 21: Consolidation: non-controlling interest

CASE CASE STUDY STUDY QUESTIONS QUESTIONS Case Case Study Study1

Equity Equity classification classification

Len Inn is the accountant Len Inn is forthe Wallaby accountant Trucks forLtd. Wallaby This Trucks entity has Ltd.anThis 80%entity holding hasin an thethe 80% entity entity holding in Tyres-R-Us Tyres-R-Us concerned Ltd. Ltd. Lenthat Len is concerned the is consolidated that thefinancial consolidated statements financial prepared statements underprepared under AASB AASB 10 may 10 be may misleading. be misleading. believes Hethat believes He the main thatusers the main of theusers consolidated of the consolidated financial financial statements are the shareholders statements areofthe Wallaby shareholders Trucks of Ltd. Wallaby The key Trucks performance Ltd. Theindicators key performance are indicators are then the profit numbers then the relating profittonumbers the interests relating of those to theshareholders. interests of those He therefore shareholders. wantsHe to therefore wants to prepare the consolidated prepare the financial consolidated statements financial showing statements the non-controlling showing the non-controlling interest in in Tyres-RTyres-Rinterest ategory UsUs Ltd other Ltd in in athan category a c equityother in the than statement equity in ofthe financial statement performance, of financial and performance, for the and for the statement of changes statement in equity of changes to show in equity the profit to show numbers the profit relating numbers toparent the relating parent shareholders shareholders to the only. only. Required Required Discuss the differences Discussthat the would differences arise that in the would consolidated arise in the financial consolidated statements financial if the statements nonif the noncontrolling interests controlling were classified interests were as debt classified rather than as debt equity, rather and than theasons equity, reasons theand standard thethe standard re setters have setters chosen have thechosen equitythe classification equity classification in AASB in 10.AASB 10.

1.

2.

Prime users: There is nothing in either AASB 101 or AASB 127 that indicates who the prime users of the consolidated financial statements are. In the income statement there is no preference given to the parent over the NCI, although in the balance sheet, the NCI is limited to a one-line disclosure. also gives no preference to either the parent or the NCI. The Framework NCI as equity or liability: The main argument for the NCI being classified as equity is that it better fits the definition of equity. The subsidiary has no present obligation in relation to the NCI so the NCI does not meet the definition of a liability. Some people argue that the NCI should be disclosed separately from equity and liabilities – the “mezzanine” treatment. argumentrelates to the utility of form financial statements provides in relationmore to the user group, the parentThis shareholders. It is argued that this of presentation relevant information to the parent shareholders.

3.

Disclosure requirements: Statement of Profit or Loss and Other Comprehensive Income: AASB 101 para 83: Disclose both NCI and parent share of profit/loss for the period AND share of total comprehensive income for the period Statement of Financial Position: AASB 101 para 54 (q) and (r): NCI share of equity, and share capital and reserves attributable to parent Statement of Changes in Equity: AASB 101 para 106 (a): total comprehensive income for the period, showing that attributable to the parent and that attributable to the NCI.

© John Wiley and Sons Australia, Ltd 2015

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Solutions manual to accompany Company Accounting 10e

If the NCI were classified as debt, any dividends would be disclosed as an expense, while the NCI would not receive a share of profit. In the statement of financial position the NCI would be shown under liabilities, while in the statement of changes in equity there would be no NCI information.

© John Wiley and Sons Australia, Ltd 2015

21.6

Chapter 21: Consolidation: non-controlling interest

Case Case Study Study2 Adjustment Adjustment for forthe theNCI NCI share shareof ofequity equity

The consolidated The consolidated financialfinancial statements statements of Whale Submarine ofSubmarine Whale Works Works Ltd areLtd being are prepared prepared being by by the group accountant, the groupRaz accountant, Putin. HeRaz is currently Putin. Heinisdispute currently with inauditors the dispute auditors over withover the theneed the need to to adjust for adjust the NCI for the share NCIof relation share equity ofto in equity intragroup relation in totransactions. intragroup transactions. He understands He understands the the need to need adjust to adjust for the the for effects intragroup the effects of thetransactions, of intragroup transactions, but believes that but believes it is unnecessary that it is unnecessary to to adjust for adjust the NCI for the share NCIofshare argues equity. ofthat He equity. the argues NCI He that group the of NCI shareholders group of shareholders has its interest has its interest in the subsidiary in the subsidiary and as and a result asentitled aisresult entitled to is a share to ahat share ofthewhat of subsidiary wthe subsidiary recordsrecords as equity. as equity. also disputes He with He also thedisputes auditors with aboutthe theauditors notion of about ‘realisation’ the notionofofprofit ‘realisation’ in relation of to profit the in relation to the NCI. If realisation NCI. If requires realisation the involvement requires the involvement of an externalofentity an external a in transaction, a transaction, entitythen in then in in relation to transactions relation such to transactions as intragroupsuch transfers as intragroup of vehicles transfers and services of vehicles such and as interest services such as interest payments, there ispayments, never any there external is never partyany involved. external Those partytransactions involved. Those are totally transactions within the are totally within the group andgroup neverand involve neverexternal involve entities. external esult, As entities. the a result, more As the appropriate a r more appropriate accounting accounting is to give is to give theof the NCI subsidiary NCI a share a share of equity subsidiary and notequity be concerned and not be with concerned the fictitious with involvement the fictitious of involvement of external external entities. entities. Required Required WriteWrite a report a report convincing to Raz to convincing Razhim that him his argument that his argument is fallacious. is fallacious.

1. The need to adjust for the NCI share of equity in relation to intragroup transactions

:

If the NCI is classified as equity, it is entitled to consolidated equity. Note that consolidated equity basically subsidiary equity adjusted for the effects of intragroup transactions – that is, realisedissubsidiary equity. If it were classified as a liability of the subsidiary then the calculation of the NCI would be based on the obligation held by the subsidiary. 2. is realised when the group transacts with an entity external to the group. VehiclesProfit & services: The point of realisation depends then on identifying when the external entity is involved. With (and other sales) transactions the point of realisation is easily identified as it is inventory the point of sale when the external entity is involved. It is at this point that the group recognises profit on sale, being the excess of the sale proceeds over the cost to the group of the item being sold. With assets used by the group such as , the group does not interact with an depreciable assets external entity. It is then impossible to determine a point of realisation based on direct involvement of the group with an external entity. The point of realisation is then based on indirect involvement. The depreciable asset is used by the group to assist in its interaction with external entities eg by making inventories for sale to external entities. The depreciation charge measures the extent of that involvement in any one year as the depreciation charge is based on para 60 of AASB 116 which notes that the depreciation charge reflects the pattern of benefits consumed by the entity. Realisation of profit then occurs as the asset is used up or consumed by the entity. Realisation is then achieved in proportion to the depreciation charge made on the asset. With transactions such , thethesubsidiary records revenue, whichisincreases profit. This profit is notas recognised by group. However, no adjustment made to subsidiary the NCI services share of equity as a result of this transaction. This is because of the difficulty of determining a point of realisation as no external entity is ever involved in this transaction.

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Solutions manual to accompany Company Accounting 10e

Case Case Study Study3

The Thestep step approach approach

In December In December 2016, Frog 2016, Ltd acquired Frog Ltd 60% acquired shares of the 60% ofshares Kovrov of the of Kovrov Ltd. TheLtd. accountan...