AU: Consolidation: other issues

Consolidation: other issues

1. Discuss the two types of NCI that may exist in a multiple subsidiary group structure.

One feature of multiple subsidiary structures where a parent has an interest in a subsidiary that is itself a parent of another subsidiary is the need to classify the NCI ownership in the subsidiaries into direct non-controlling interest (DNCI) and indirect non-controlling interest (INCI).

A DNCI exists where the NCI owns shares in a subsidiary. An INCI exists in a subsidiary where that subsidiary is owned by a partially owned subsidiary in the group. The NCI in the partially owned subsidiary is the INCI in the other subsidiary.

Example: 80% 60% P Ltd A Ltd B Ltd P Ltd 80% P Ltd 48% DNCI 20% DNCI 40% INCI 12%

2. Explain the difference in the calculation of the direct and indirect N

Direct NCI receives a proportionate share of all equity of the subsidiary over which it has direct ownership interest.

Indirect NCI receives a proportionate share of only the post-acquisition equity of the subsidiary over which it has indirect ownership interest. The post-acquisition equity refers to the equity generated after the INCI is considered to be entitled to the indirect ownership; that is, after the multiple subsidiary structure was created.

Remember that in calculating the NCI share of equity, it is the consolidated equity rather than recorded equity on which the NCI is calculated. Hence, in calculating both the DNCI and INCI share of equity, adjustments must be made to eliminate any unrealised profits/losses arising from transactions within the group. In adjusting the NCI for the effects of intragroup transactions, generally there is no difference between INCI and DNCI. However, where dividends are paid/payable by a subsidiary containing an INCI, adjustments are necessary to ensure no double counting occurs.

The calculation of the DNCI share of equity is therefore the same as the calculation of NCI illustrated in chapter 29. The extra adjustments have to be made for the INCI as it receives a share of post-acquisition equity only.

3. Why does the indirect NCI receive a share of only post-acquisition?

Assume: 80% 60% P Ltd A Ltd B Ltd P Ltd 80% P Ltd 48% DNCI 20% DNCI 40% INCI 12%

The DNCI in A Ltd receives a share of the whole of the equity of A Ltd which includes equity relating to the asset “Shares in B Ltd”. This asset reflects the assets of B Ltd that were on hand in B Ltd at the date A Ltd acquired its shares in B Ltd. The pre-acquisition equity of B Ltd also relates to these assets. As the DNCI receives a share of the equity of A Ltd relating to these assets, and as the DNCI in A Ltd is the same party as the INCI in B Ltd, to give the DNCI a share of all the equity of A Ltd as well as the INCI in B Ltd getting a share of the pre-acquisition equity of B Ltd would double-count the share of equity to the NCI. As the investment account “Shares in B Ltd” only relates to the pre-acquisition equity of B Ltd, the INCI is then entitled to a share of the post-acquisition equity of B Ltd.

4. What effect does the existence of a direct and an indirect NCI have on the adjustments for intragroup transactions?

Assume: 80% 60% P Ltd A Ltd B Ltd P Ltd 80% P Ltd 48% DNCI 20% DNCI 40% INCI 12%

The adjustments for the effects of transactions within the group in structures such as in above are the same as those for the two-company structure illustrated in chapter 29. The effects of the transactions must be adjusted in full regardless of the amount of NCI existing in any entity.

What must be considered is the effect on the NCI of such adjustments. The key to this is determining which entity recorded the profit on the transaction. Using the structure in the figure above:
(4) if A Ltd earned the profit/loss — whether by selling to P Ltd or B Ltd — the NCI adjustment is based on the 20% DNCI in A Ltd.
(5) if B Ltd made the profit/loss — whether by selling to P Ltd or A Ltd — the NCI adjustment is based on the total NCI in B Ltd of 52% — that is, the sum of the 40% DNCI and 12% INCI.

The effect on the adjustments for intragroup transactions of the existence of indirect NCI is the same as that for DNCI except in the case of dividends – see 5. below.

5. What effect does the existence of a direct and an indirect NCI have on the adjustments for dividends paid within a group?

Assume: 80% 60% P Ltd A Ltd B Ltd P Ltd 80% P Ltd 48% DNCI 20% DNCI 40% INCI 12%

If B Ltd pays/declares a dividend and dividend revenue is recognised by A Ltd, then the share of equity attributed to the DNCI in A Ltd must be adjusted for the dividend revenue recognised by A Ltd using an entry as follows:

NCI Dr x NCI share of profit/loss Cr x

The INCI in B Ltd is given a share of the post-acquisition profits of B Ltd prior to the appropriation of any dividend. The INCI in B Ltd is unaffected by any NCI adjustments for dividends paid/declared by B Ltd – only DNCI in B Ltd is affected. The profits of B Ltd are then used to pay dividends to A Ltd and recognised as revenue by A Ltd. Hence the profits of B Ltd are now also being shown in A Ltd as dividend revenue. To give the INCI in B Ltd a share of the profits of B Ltd as well as give the DNCI in A Ltd a share of the profits of A Ltd including the dividend revenue from B Ltd would double count the NCI share of equity. Hence the above adjustment is required, reducing the NCI share in total as well as the NCI share of current period profit/loss.

In conclusion, in calculating the NCI share of equity where dividends are paid/payable within the group, adjustments may be necessary to ensure double counting for INCI’s share of dividends does not occur.

6. Explain sequential and non-sequential acquisitions.

Assume: 80% 60% P Ltd A Ltd B Ltd P Ltd 80% P Ltd 48% DNCI 20% DNCI 40% INCI 12%

A sequential acquisition occurs when P Ltd acquires its shares in A Ltd prior to or at the same time as A Ltd acquires its shares in B Ltd.

A non-sequential acquisition occurs when A Ltd acquires its shares in B Ltd prior to P Ltd acquiring its shares in A Ltd.

7. Explain the effects on the consolidation process when the acquisition is non-sequential.

Assume: 80% 60% P Ltd A Ltd B Ltd P Ltd 80% P Ltd 48% DNCI 20% DNCI 40% INCI 12%

A non-sequential acquisition occurs when A Ltd acquires its shares in B Ltd prior to P Ltd acquiring its shares in A Ltd. The complicating factor with such an acquisition is that when P Ltd acquires its shares in A Ltd one of the assets of A Ltd is “Shares in B Ltd”, and its carrying amount may be different from its fair value due to an increase in the net assets of B Ltd subsequent to A Ltd’s acquisition of shares in B Ltd. As a result, in preparing the acquisition analysis of P Ltd – A Ltd the post-acquisition equity recognised by B Ltd and any differences between carrying amounts and fair values of B Ltd’s assets and liabilities must be taken into account.

8. Explain how to account for further acquisition of shares by a parent in a subsidiary.

Where the parent acquires additional shares in a subsidiary there is no change in the economic entity. Both the parent and the subsidiary are still within the economic entity. These changes in ownership interests cannot then give rise to gains or losses to the economic entity. They are accounted for as equity transactions, as they are transactions between the owners and not with entities outside the group.

Where the parent acquires additional shares in the subsidiary this transaction is not a business combination as the parent already had control of the subsidiary. Hence, there is no need to adjust the identifiable assets and liabilities of the subsidiary to fair values or to measure goodwill in relation to the transaction involving acquisition of additional shares.

Note paragraphs 23 and B96 of AASB 10/IFRS 10:
• 23 Changes in a parent’s ownership interest in a subsidiary that do not result in the parent losing control of the subsidiary are equity transactions (i.e. transactions with owners in their capacity as owners).
• B96 When the proportion of the equity held by non-controlling interests changes, an entity shall adjust the carrying amounts of the controlling and non-controlling interests to reflect the changes in their relative interests in the subsidiary. The entity shall recognise directly in equity any difference between the amount by which the non-controlling interests are adjusted and the fair value of the consideration paid or received, and attribute it to the owners of the parent.

Hence, when such transactions occur:
• the carrying amounts of the parent’s interest and the NCI are adjusted to reflect the change in the respective ownership interests
• where the consideration paid by the parent on acquisition of shares in the subsidiary exceeds the carrying value of the relevant interest in the subsidiary sold to the parent, the difference is recognised directly in equity and is attributable to the parents interest.

The parent and the NCI will negotiate the consideration paid on these transactions based on an assessment of the fair value of the subsidiary. In contrast, the relative interests of the parent and the NCI in the subsidiary, as reflected in the consolidated financial statements, are based on the carrying amounts of the net assets of the subsidiary. It is this difference that gives rise to the amount being recognised directly in equity.

This method of accounting for the relative interests applies in all circumstances, regardless of whether the measurement of the NCI is based on the full or partial goodwill method.

9. Explain how to account for sales of shares by a parent in a subsidiary that do not result in loss of control.

Where the parent sells shares in a subsidiary without losing control there is no change in the economic entity. Both the parent and the subsidiary are still within the economic entity. These changes in ownership interests cannot then give rise to gains or losses to the economic entity. They are accounted for as equity transactions, as they are transactions between the owners and not with entities outside the group.

Where the parent sells shares in the subsidiary this transaction is not a business combination as the parent already had control of the subsidiary. Hence, there is no need to adjust the identifiable assets and liabilities of the subsidiary to fair values or to measure goodwill in relation to the transaction involving acquisition of additional shares.

Note paragraphs 23 and B96 of AASB 10/IFRS 10:
• 23 Changes in a parent’s ownership interest in a subsidiary that do not result in the parent losing control of the subsidiary are equity transactions (ie transactions with owners in their capacity as owners).
• B96 When the proportion of the equity held by non‐controlling interests changes, an entity shall adjust the carrying amounts of the controlling and non‐controlling interests to reflect the changes in their relative interests in the subsidiary. The entity shall recognise directly in equity any difference between the amount by which the non-controlling interests are adjusted and the fair value of the consideration paid or received, and attribute it to the owners of the parent.

Hence, when such transactions occur:
• the carrying amounts of the parent’s interest and the NCI are adjusted to reflect the change in the respective ownership interests
• where the consideration received by the parent on sale of shares in the subsidiary exceeds the carrying value of the relevant interest in the subsidiary sold by the parent, the difference is recognised directly in equity and is attributable to the parent’s interest.

The parent and the NCI will negotiate the consideration paid on these transactions based on an assessment of the fair value of the subsidiary. In contrast, the relative interests of the parent and the NCI in the subsidiary, as reflected in the consolidated financial statements, are based on the carrying amounts of the net assets of the subsidiary. It is this difference that gives rise to the amount being recognised directly in equity.

This method of accounting for the relative interests applies in all circumstances, regardless of whether the measurement of the NCI is based on the full or partial goodwill method.

10. Explain how to account for changes in ownership interests by a parent in a group that result in loss of control.

A parent may lose control of a subsidiary for a number of reasons, such as:
• it may sell shares in the subsidiary such that another entity has the controlling interest
• there may be a change in the dispersion in the holding of shares by entities comprising the NCI such that a parent with less than a 50% holding loses control
• a subsidiary may become subject to the control of a government, court, administrator or regulator
• there may be a change in a contractual arrangement.

Having lost control, but retained an investment in the former subsidiary, in accordance with paragraph 25 of AASB 10/IFRS 10, the investor will record that remaining investment in accordance with AASB 9/IFRS 9 Financial Instruments, namely at fair value. The measurement of the remaining asset at fair value is factored into the calculation of any gain/loss on disposal of the shares in the subsidiary.

In accordance with paragraphs 25 and B98 of AASB 10/IFRS 10, when the parent losses control as a result of changes in ownership interests, the parent will:
• derecognise the assets and liabilities of the former subsidiary based on the carrying amounts at the date when control was lost
• derecognise the carrying amount of any NCI in the former subsidiary at the date when control was lost
• recognise the fair value of the consideration received
• recognise any investment retained in the former subsidiary at its fair value at the date when control was lost
• recognise any gain/loss in profit or loss attributable to the parent.

The gain/loss from the group’s perspective is calculated as:
• Gain/loss = fair value of the proceeds (if any) from the transaction that resulted in loss of control + fair value of any retained investment in the former subsidiary at the date when control is lost – parent’s share of the carrying amount in the group of the net assets at the date when control is lost.

If the group uses the full goodwill method in relation to the NCI then on consolidation the goodwill relating to the control premium is also recognised (via the pre-acquisition entry adjustment in the consolidation worksheet). This goodwill is also included in the parent’s share of the carrying amount in the group of the net assets at the date the control is lost.

11. What are the disclosure requirements relating to changes in ownership interest by a parent in a group?

AASB 12/IFRS 12 Disclosure of Interests in Other Entities requires disclosures to be made where there are changes in ownership interests.

Paragraph 18 of AASB 12/IFRS 12 sets out the disclosure required where there are changes in a parent’s ownership interest in a subsidiary that do not result in a loss of control:
• An entity shall present a schedule that shows the effects on the equity attributable to owners of the parent of any changes in its ownership interest in a subsidiary that do not result in a loss of control.

Paragraph 19 of AASB 12/IFRS 12 sets out the disclosure required where a parent loses control of a subsidiary during the reporting period:
• An entity shall disclose the gain or loss, if any, calculated in accordance with paragraph 25 of AASB 10, and:
(a) the portion of that gain or loss attributable to measuring any investment retained in the former subsidiary at its fair value at the date when control is lost; and
(b) the line item(s) in profit or loss in which the gain or loss is recognised (if not presented separately).