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ACCT 20002 Intermediate Financial Accounting Lecture 10 Accounting for Groups • AASB 10: Consolidation: Non-Controlling Interest • Loftus Chapter 29

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OBJECTIVES n

By the end of this lecture students should be able to: 1. Describe non-controlling interest (NCI), its measurement and presentation 2. Calculate goodwill (or gain from a bargain purchase) in the presence of non-controlling interests 3. Explain how the consolidation worksheet changes a) Explain how the NCI is calculated b) Impact of intragroup transactions on NCI. 4. Prepare consolidation journal and consolidation worksheet entries for investments that give rise to non-controlling interests 5. Complete appropriate NCI disclosures required

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Step 1: Acquisition Analysis § An acquisition analysis compares the cost of acquisition with the fair value of the identifiable net assets and contingent liabilities (FVINA) that exist at acquisition to determine whether there is: § Goodwill on acquisition (where cost > FVINA) § Bargain purchase (where cost < FVINA)

NOT the book value

§ Recall that goodwill is an unidentifiable intangible asset that is calculated as a residual value § Also recall that net assets = assets – liabilities = shareholders equity 3

Step 2: Consolidation Journals and Worksheet 1. Revalue any identifiable assets to FV & include recognition of any previously unrecognised assets & liabilities at date of acquisition by transferring to the BUSINESS COMBINATION VALUATION RESERVE (BCVR) account (Lecture 8) I. The BCVR is similar to the Asset Revaluation Reserve (ARS). II. However it needs to be kept separate from the ARS as BCVR captures the revaluation entries applicable to the purchase of a business, that is the Business Combination. 2. Elimination entries I. Eliminate 'Investment in Subsidiary’ pre-acquisition equity at acquisition date and record goodwill/gain on bargain purchase (Lecture 8) II. Eliminate inter-entity balances and transactions (last lecture – Lecture 9)

3. Determine any non-controlling interests (this lecture) 4. Prepare consolidated statements 4

Definition q AASB 10 defines non-controlling interest (NCI) as “equity in a subsidiary not attributable, directly or indirectly, to a parent” A Ltd

80%

B Ltd has 2 owners: • A Ltd directly owns 80% of B • Direct NCI 20% 10%

B Ltd

C Ltd 70%

C Ltd: • A direct 10%, indirect 80%*70% = 56%, Total 66% • Indirect NCI 20%*70% = 14%, • Direct NCI 20%

The focus in ACCT20002 is on NCI’s arising from direct control, not indirect control

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RECALL: Consolidation Concept n

The consolidation concept applied by AASB 10 is the entity concept n Consolidate all the assets and liabilities of the subsidiary and show any non-controlling interest (NCI) as part of equity n e.g. parent owns 80% of shares, NCI = 20%

Þ consolidate 100% of sub’s A & L and show 20% NCI as part of consolidated equity

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How is NCI presented in the Balance Sheet q AASB 10 para 22, NCI in equity is shown as a separate line item from the parent’s equity q Measurement q Allocate to NCI the subsidiary equity proportionate to the ownership interest held q NCI = NCI share of the equity of the subsidiary +/profits and losses made on intragroup transactions q Disclosure q AASB 101 para 54(q), 83 & 106(a) Equity attributable to the NCI needs to be disclosed in each of the relevant financial statements, i.e. Income statement, Balance Sheet, SOCE • Line item in BS – Equity attributable to NCI • Line item in IS/OCI – Profit (or loss) attributable to NCI 7

Rio Tinto 2015 Annual Report

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Rio Tinto 2015 Annual Report

9

Rio Tinto 2015 Annual Report

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Impact of NCI’s on consolidation n

Offset (eliminate) the carrying amount of the parent’s investment … and the parent’s portion of equity of [the] subsidiary n So, if only 80% investment, then offset the whole Parent investment against 80% of sub’s equity (& any FV increments) at acquisition date to calculate goodwill (or gain)

n

Consolidation basically as for 100% − Eliminate in full A, L, Eq, Income & Exp (& CF) relating to intragroup transactions (including unrealised gains or losses in inventory or non-current assets) − BUT where 80% investment, then only 80% of the dividend is intragroup (the other 20% dividend to the NCI is not an intragroup transaction)

§

AASB 3 para 19 permits alternative treatments, that is either the full goodwill or partial goodwill method for measuring the NCI in a subsidiary

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The Effect of NCI on Goodwill q Fair Value ‘Full’ Goodwill Method: • NCI is measured at Fair Value • Measures goodwill attributable to both NCI and the parent • Not simply a percentage of consideration • Need to consider control premium q Partial Goodwill Method:

• • •

NCI is measured as the NCI’s proportionate share of the acquiree’s net assets Measures only goodwill attributable to parent NCI does not receive any share of goodwill Goodwill = (Consideration transferred + NCI) - FVINA 12

Measurement of NCI - Full Goodwill Method NCI is measured at fair value on the basis of market price for shares NOT acquired by the parent Under this method, NCI receives a share of goodwill Example 1 P Ltd acquired 90% of S Ltd for a cost of $376,000 At acquisition date the equity of S Ltd consisted of: Share capital $150,000 General reserve $110,000 Retained earnings $ 90,000

All the identifiable assets & liabilities of S Ltd were recorded at fair value except land where FV was $20 000 greater than cost NCI in S Ltd had a fair value of $40,000. 13

NCI measured at FV (provided in Q.)

Full goodwill method Parent 90%

Consideration

$376,000

$150,000

NCI 10%

110,000 Consideration

90,000

40,000

Total consideration $416,000

BCVR – land ($20,000*70%) Net FV of INA

14,000 $364,000

Goodwill = $416,000 - $364,000 = $52,000

As parent probably paid a premium to acquire control of S Ltd, FV of S Ltd = $40,000/10% = $400,000 Goodwill = $400,000 - $364,000 = $36,000 As total goodwill is $52,000, then Control premium is = $52,000 - $36,000 = $16,000

Alternative calculation NCI paid $40,000 to acquire 10%. To purchase 90%, P Ltd should expect to pay $40,000 *90% = $360,000 10% But P Ltd paid $376,000, hence a control premium of $376,000 - $360,000 = $16,000

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Full Goodwill Method – Consolidation worksheet journal entries 1. BCVR Dr: Land Cr: DTL Cr: BCVR

$ 20,000

Dr: Goodwill Cr: BCVR

$ 36,000

$ 6,000 $ 14,000 $ 36,000

2. Pre-acquisition entries Dr: SC (90%*$150,000) Dr: GR (90%*$110,000) Dr: RE (90%*$90,000) Dr: BCVR(90%*$50,000) Dr: Goodwill Cr: Shares in S Ltd

$135,000 $ 99,000 $ 81,000 $ 45,000 $ 16,000 $376,000 15

Measurement of NCI - Partial Goodwill Method NCI is measured as the NCI’s proportionate share of the acquiree’s identifiable net assets Net FV of INA Share capital Parent

General reserve

90%

Consideration transferred

10%

NCI in S Ltd Total

$376,000 $36,40 $412,40

$150,000 110,000

Retained earnings

90,000

BCVR – land ($20,000*70%)

14,000

Net FV of INA NCI’s share of net assets 10% * $364,000

$364,000 $ 36,400

Goodwill = $412,400 - $364,000 = $48,400 Alternative Method: Goodwill = $376 000 – ($364,000 x 90%) = $48,400 Partial goodwill method always applied in ACCT20002 16

Partial Goodwill Method 1. BCVR Dr: Land Cr: DTL Cr: BCVR

$20,000

2. Pre-acquisition entries Dr: SC (90%*$150,000) Dr: GR (90%*$110,000) Dr: RE (90%*$90,000) Dr: BCVR(90%*$14,000) Dr: Goodwill Cr: Shares in S Ltd

$135,000 $ 99,000 $ 81,000 $ 12,600 $ 48,400

$ 6,000 $ 14,000

$376,000 17

Why allow a choice of methods? No majority agreement was reached with IASB members Full goodwill method generally not used because: 1. More costly to measure the NCI at FV 2. Insufficient evidence to assess the marginal benefits of reporting the acquisition date FV of the NCI 3. Most users not interested in the measurement of NCI 18

Non-controlling Interest Principles

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Calculating NCI: equity attributable to NCI n Determine

NCI’s share of subsidiary’s contribution to the group profit [and OCI – not in ACCT 20002]

n Determine

NCI’s share of the subsidiary’s equity as it relates to the group at reporting date − Share Capital − Reserves + any FV increments from acquisition − Retained Earnings (C/B) = Retained Earnings (O/B) + profit per above – dividends 20

Lecture Illustration 1 On 15 November 2010 Parent Ltd acquired 80% of the shares in Sub Ltd for $650,000. On that date the equity in Sub Ltd consisted of:

Share capital Reserves Retained profits

400 000 50 000 250 000 700 000

The above equity reflected the fair value of Sub Ltd’s net assets on this date with the exception of Land that was determined to have a fair value $100,000 in excess of its carrying amount. REQUIRED: 1. Prepare the necessary Consolidation Journal entries for 2014 2. Complete the Calculation of Non-controlling Interests schedule provided 3. Complete the Consolidation Worksheet for 2014

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Lecture Illustration 1 Parent Ltd acquires 80% of shares in Sub Ltd for consideration of: $650,000

FVNA at acquisition: Share capital Reserves Retained profits FV increment of Land (net of tax) x 80% = Goodwill

$400,000 $50,000 $250,000 $70,000 $616,000 $34,000 22

Lecture Illustration 1 DATE

DETAILS

June 30 Land (PPE) 2014

DR

CR

100 000

Deferred Tax liability (Liabilities)

30 000

BCVR (Reserves)

70 000

Revalue land to fair value

June 30 Share capital

320 000

2014 Reserves

40 000

BCVR (Reserves) Retained Profits (O/B) Goodwill Investment in Sub Ltd

56 000 200 000 34 000 650 000

Elimination of investment

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Lecture Illustration 1 DATE

DETAILS

June 30 Dividend revenue (Revenue) 2014

Dividends Paid

DR

CR

48 000 48 000

Elimination of intra-group dividends

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Lecture Illustration 1 Sub Ltd

NCI 20%

DR

Opening Retained profits

350

DR

Net profit

175

70 35

525

105

less Dividends Paid Adjusted Closing Retained profits

(60)

(12)

465

93

Share capital Reserves $100 + FV inc. $70

400 170

80

CR

DR DR CR

Total non-controlling interest

34 207 25

Lecture Illustration 1 DATE

DETAILS

June 30 Share capital 2014 BCVR (Reserves)

DR 80 000 14 000

Reserves

20 000

Retained Profits (O/B)

70 000

Profit attributable to NCI

35 000

Dividends Paid Equity attributable to NCI

CR

12 000 207 000

Elimination of NCI

PART 3: COMPLETE WORKSHEET

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Net profit

Parent Ltd

Sub Ltd

280

175

NP attrib to NCIs

DR

35

Ref

CR

407 (35)

4

NP attrib to Parent Ret Profits (O/B)

Group

372 300

350

200 70

Dividends Paid

(200)

(60)

Ret Profits (C/B)

380

465

Share capital

600

400

320 80

2 4

Reserves

200

100

40 56 14 20

2,1 4

70

4

207

207

1

30

2,230

2 4 3 4

380 48 12

552 600

Equity attributable to NCI Liabilities

1,250

950

2,430

1,915

(200)

240

3,829

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Inter-entity transactions q Recall: Consolidation à all intragroup transactions eliminated in full q Upstream transactions

•

goods or services are provided from the subsidiary to the parent

q Downstream transactions

•

goods and services provided by parent to subsidiary

q This distinction is relevant to the NCI calculation q Upstream transactions can result in unrealised gains in the equity (including profit) of the subsidiary and these must be eliminated in the NCI calculation 28

Calculating NCI: Profit attributable to NCI Profit attributable to NCI: q NCI share of reported profit of the subsidiary from current period adjusted for the following upstream effects net of tax:

•

unrealised gains / losses in opening and closing inventory

•

unrealised gains / losses on sales of non-current assets in the current period

•

differences in depreciation in the current period for sales of non-current assets from the current or prior periods

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Calculating NCI: Equity attributable to NCI Equity attributable to NCI: q NCI share of sub’s reporting date share capital and reserves (adjusted for acquisition date FV increments) q NCI share of sub’s reporting date opening retained profits adjusted for the following upstream effects net of tax: q unrealised gains / losses in opening inventory q any unrealised profits or losses on sales of non-current assets from prior periods q any associated excess / short depreciation from prior periods q NCI share of group profit (calculated on the previous slide) less NCI share of subsidiary’s dividends

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Lecture Illustration 2 On 15 November 2010 High Ltd acquired 80% of the shares in Low Ltd for $650,000. On that date the equity in Low Ltd consisted of: Share capital Reserves Retained profits

400 000 50 000 250 000 700 000

The above equity reflected the fair value of Low Ltd’s net assets on this date with the exception of Land that was determined to have a fair value $100,000 in excess of its carrying amount.

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Lecture Illustration 2 •

On 1 July 2011 Low Ltd sold an item of equipment to High Ltd for a profit of $200 000. High is depreciating this equipment on a straight-line basis over 5 years. Upstream

•

On 1 July 2013 High held inventory purchased from Low Ltd with an unrealised gain of $10 000. Low held inventory purchased from High with an unrealised gain for $20 000.

•

During the 2014 financial year intragroup sales from High to Low were $200 000. Sales from Low to High were $100 000.

•

On 30 June 2014 High held inventory purchased from Low with an unrealised gain of $30 000 while Low held inventory purchased from High with an unrealised gain of $50 000. Upstream

REQUIRED: 1. Prepare the necessary Consolidation Journal entries for 2014 2. Complete the Calculation of Non-Controlling Interests schedule provided 3. Complete the Consolidation Worksheet for 2014 4. Complete the disclosure extracts provided

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Lecture Illustration 2 Parent Ltd acquires 80% of shares in Sub Ltd for consideration of: $650,000

FVNA at acquisition: Share capital Reserves Retained profits FV increment of Land (net of tax) x 80% = Goodwill

$400,000 $50,000 $250,000 $70,000 $616,000 $34,000 33

Lecture Illustration 2 DATE

DETAILS

June 30 Land (PPE) 2014

DR

CR

100 000

Deferred tax liability (Liabilities)

30 000

BCVR (Reserves)

70 000

Revalue land to fair value

June 30 Share capital

320 000

2014 Reserves

40 000

BCVR (Reserves) Retained Profits (O/B) Goodwill on consolidation Investments

56 000 200 000 34 000 650 000

Elimination of investment

34

Lecture Illustration 2 On 1 July 2011 Low Ltd sold an item of equipment to High Ltd for a profit of $200 000. High is depreciating this equipment on a straight-line basis over 5 years. DATE

DETAILS

June 30 Retained Profits (O/B) 2014

DR

CR

200 000

Equipment (PPE)

200 000

Elimination of unrealised gain from sale of equipment in a prior period

Deferred Tax Asset Retained Profits (O/B)

60 000 60 000

Tax effect

35

Lecture Illustration 2 DATE

DETAILS

June 30 Accumulated Depreciation (PPE) 2014

DR

CR

120 000

Depreciation Expense (other expenses)

40 000

Retained Profits (O/B)

80 000

Depreciation adjustment

Income Tax Expense (deferred)

12 000

Retained Profits (O/B)

24 000

Deferred Tax Asset

36 000

Tax effect

36

Lecture Illustration 2 On 1 July 2013 High held inventory purchased from Low Ltd with an unrealised gain of $10 000. Low held inventory purchased from High with an unrealised gain for $20 000. DATE

DETAILS

June 30 Retained Profits (O/B)

DR

CR

30 000

Cost of goods sold

30 000

Elimination of unrealised profit in opening inventory

Income Tax Expense (deferred) Retained Profits (O/B)

9 000 9 000

Tax effect

37

Lecture Illustration 2 During the 2014 financial year intragroup sales from High to Low were $200 000. Sales from Low to High were $100 000. On 30 June 2014 High held inventory purchased from Low with an unrealised gain of $30 000 while Low held inventory purchased from High with an unrealised gain of $50 000.

DATE

DETAILS

June 30 Sales 2014

DR

CR

300 000

Cost of goods sold

220 000

Inventory (current assets)

80 000

Elimination of unrealised profit in closing inventory

Deferred Tax Asset Income Tax Expense (deferred)

24 000 24 000

Tax effect

38

Lecture Illustration 2 DATE

DETAILS

June 30 Dividend revenue (Other Revenue) 2014

Dividends Paid

DR

CR

48 000 48 000

Elimination of intra-group dividends

39

Lecture

Example - Step 2 & 3: Measurement of NCI share of Illustration 2 in equity (cont.) changes

Low Ltd Opening Retained Profits less Unreali...