ACCA F7 (INT) Financial Reporting - Study text - 2010 - Emile Woolf Publishing
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Chapter 18: Consolidated accounts
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A step-by-step approach to accounting for NCI
An example will be used to demonstrate a step-by-step approach to accounting for
NCI in the consolidated statement of financial position (where the non-controlling
interest is valued at a proportionate share of the identifiable net assets of the
subsidiary.)
Example
Parent P acquired 400,000 shares in Entity S on 1 January at a cost of $950,000, when
the statements of financial position of P and S were as follows. (The values of all
assets and liabilities represent fair values).
Attheacquisitiondate
P S
$ $
Non‐currentassets:
Property,plantandequipment 1,400,000 900,000
InvestmentinS 950,000 ‐
–
–––––––
–
–––––––
2,350,000 900,000
Currentassets 400,000 300,000
–
–––––––
–
–––––––
2,750,000 1,200,000
–
–––––––
–
–––––––
Equity
Equitysharesof$1each 800,000 500,000
Sharepremium 400,000 100,000
Revaluationreserve 200,000 100,000
Retainedearnings 1,050,000 300,000
–
–––––––
–
–––––––
2,450,000 1,000,000
Liabilities 300,000 200,000
–
–––––––
–
–––––––
2,750,000 1,200,000
–
–––––––
–
–––––––
The parent company’s accounting policy is to value non-controlling interests at their
proportionate share of the net assets of the subsidiary.
To prepare a consolidated statement of financial position as at the acquisition date,
the following steps should be taken.
Step 1. Establish the group share (parent company share) in the subsidiary and
the percentage owned by non-controlling interests.
Here, there are 500,000 shares in the subsidiary, and the parent owns 400,000 of
them. The proportionate shareholdings are:
%
Parentcompany:(400,000/500,000)×100%
80
Non‐controllinginterest:(100,000/500,000)×100% 20
–––
100
–––
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Step 2. Calculate the net assets of the subsidiary S at the acquisition date and at
the end of the reporting period
We need to know the net assets of the subsidiary at the acquisition date in order to
calculate the purchased goodwill attributable to the parent company.
We need to know the net assets at the acquisition date and at the end of the
reporting period in order to calculate the post-acquisition profits of the subsidiary.
In this example, the acquisition date and the reporting date are the same, and there
are no post-acquisition profits from the subsidiary yet. However, in most
examination questions on consolidation, you will be expected to establish the net
assets of the subsidiary at the two different dates (acquisition date and end of the
reporting period).
The net assets of the subsidiary can be calculated as total assets minus total
liabilities. However, for the purpose of consolidation, it is often better to calculate
net assets as share capital plus reserves. If there are any fair value adjustments to the
assets of the subsidiary at the acquisition date, these must be provided for in the
calculation.
Netassetsattheacquisitiondate(fairvalue)
$
Equityshares 500,000
Sharepremium 100,000
Revaluationreserve 100,000
Retainedearnings 300,000
–
–––––––
Netassetsofthesubsidiary 1,000,000
–
–––––––
Step 3. Calculate the goodwill
The calculation of the goodwill must allow for the fact that the parent has acquired
only 80% of the fair value of the net assets in the subsidiary.
Fairvalueofnetassetsacquired:
$
Costoftheacquisition 950,000
Parent’sshareofnetassetsofthesubsidiaryat
acquisition(=$1,000,000×80%)
800,000
–
–––––––
Goodwill 150,000
–
–––––––
Step 4. Calculate the non-controlling interest (minority interest share)
When the non-controlling interest is valued at a proportionate share of the net assets
of the subsidiary, no goodwill is attributed to the NCI.
The non-controlling interest owns 20% of the net assets of the subsidiary. At the
date of acquisition, this is:
Non-controlling interest = $1,000,000 × 80% = $200,000.
Chapter 18: Consolidated accounts
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The consolidated statement of financial position as at the date of acquisition is
prepared as follows. Note that the non-controlling interest should be shown as a
part of equity, but separate from the parent’s share.
PGroup
ConsolidatedstatementoffinancialpositionatthedateofacquisitionofS
$000
Tangiblenon‐currentassets(1,400+900) 2,300
Goodwill 150
–
––––
2,450
Currentassets(400+300) 700
–
––––
Totalassets 3,150
–
––––
Equityandliabilities
Equityattributabletoownersofth eparent
Sharecapital 800
Sharepremium 400
Revaluationreserve 200
Retainedearnings 1,050
–
––––
2,450
Non‐controllinginterest
200
–
––––
Totalequity
2,650
Liabilities(300+200) 500
–
––––
Totalequityandliabilities 3,150
–
––––
4.3 Accounting for non-controlling interests after acquisition
The same approach is required after acquisition for calculating the non-controlling
interest and presenting it in the consolidated statement of financial position. The
only difference with consolidation after the acquisition date is that the parent’s
share of the subsidiary’s profits must be separated into pre-acquisition and post-
acquisition.
Only the post-acquisition profits of the subsidiary are used to calculate the
parent’s consolidated retained earnings.
In the year of acquisition, only the post-acquisition profits of the subsidiary in
that year are included in profit in the consolidated statement of comprehensive
income.
The non-controlling interest in the equity of the subsidiary is the minority interest
percentage of the total net assets of the subsidiary. To the non-controlling interest,
the distinction between pre-acquisition and post-acquisition is totally irrelevant.
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Five steps for preparing a consolidated statement of financial position with a
non-controlling interest
When the non-controlling interest is valued at a proportionate share of the net assets
of the subsidiary, a five-step approach is recommended for preparing a consolidated
statement of financial position. Four of the steps have been described earlier. The
additional step is introduced below as Step 5.
Step 1. Calculate the parent’s percentage share and the non-controlling interest
percentage share in the subsidiary.
Step 2. Calculate the net assets of the subsidiary at the date of acquisition and at
the end of the reporting period. The difference between the net assets of the
subsidiary at these two dates is used to calculate the post-acquisition
accumulated profits of the subsidiary.
Atendofthe
reporting
period
At
acquisition
Post
acquisition
$
Equityshares X X‐
Retainedearnings Y Z Y–Z
–
––––
–
––––
X+Y X+Z
–
––––
–
––––
Step 3. Calculate the goodwill on acquisition. Then reduce it by any
accumulated impairments to date, to calculate the figure for goodwill in the
consolidated statement of financial position.
Costofinvestment A
Less:Parent’sshareoffairvalueofsubsidiary’snetassetsacquired (B)
–––––
A–B
Less:Impairmentofgoodwillsinceacquisition (C)
––––––––
A+B–C
––––––––
Step 4. Calculate the non-controlling interest
Controlling interest % × Subsidiary’s net assets at the end of the reporting period
Step 5. Calculate consolidated retained earnings, using the post-acquisition
profits of the subsidiary now identified in Step 2 and any impairment to
goodwill from Step 3.
Parent’sretainedearnings A
Parent’sshareofsubsidiary’spost‐acquisitionprofits B
Minus:Impairmentofgoodwillsinceacquisition (C)
––––––––
A+B–C
––––––––
You can then prepare the consolidated statement of financial position.
Chapter 18: Consolidated accounts
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Example
The statements of financial position of a parent company P and its subsidiary S at 31
December Year 3 are as follows:
ParentP Subsidiary
S
$ $
Non‐currentassets:
Property,plantandequipment 408,000 100,000
InvestmentinS 142,000 ‐
–
––––––
–
––––––
550,000 100,000
Currentassets 120,000 40,000
–
––––––
–
––––––
670,000 140,000
–
––––––
–
––––––
Equity
Equitysharesof$0.50each 100,000 20,000
Sharepremium 100,000 50,000
Retainedearnings 400,000 60,000
–
––––––
–
––––––
600,000 130,000
Bankloan 70,000 10,000
–
––––––
–
––––––
670,000 140,000
–
––––––
–
––––––
P acquired 32,000 shares in S on 1 January Year 3 when the retained earnings of S
were $20,000. The values for assets and liabilities in the statement of financial
position for S represent fair values.
Neither company has paid any dividends during the year. A review of goodwill at
31 December Year 3 found that goodwill had been impaired, and was now valued at
$55,000.
Required
Prepare a consolidated statement of financial position as at 31 December Year 3.
Answer
Step 1. Calculate the group share (parent company’s percentage share) and the non-
controlling interest percentage share in the subsidiary.
The total number of shares in the subsidiary is $20,000/$0.50 per share = 40,000
shares. P acquired 32,000 shares.
%
Parent:(32,000/40,000)×100% 80
Non‐controllinginterest:(8,000/40,000)×100% 20
–
––
100
–
––
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Step 2. Calculate the net assets of S at acquisition and at the end of the reporting
period.
Atendofthe
reporting
period
At
acquisition
Postacquisition
$
Equityshares 20,000 20,000 ‐
Sharepremium 50,000 50,000 ‐
Retainedearnings 60,000 20,000 40,000
–
––––––
–
–––––
130,000 90,000
–
––––––
–
–––––
You should assume that the subsidiary has not issued any shares since acquisition,
so the figures for equity shares and share premium will be the same at acquisition as
at the end of the reporting period.
Step 3. Calculate the goodwill.
$
Costoftheacquisition 142,000
Minusparent’sshareofthesubsidary’snetassetsatacquisition
($90,000(Step2)×80%(Step1))
(72,000)
–––––––
Goodwill 70,000
Minusimpairmentofgoodwilltodate (15,000)
––––––
Balancecarriedforward 55,000
––––––
Step 4. Calculate the non-controlling interest (minority interest share)
Share of net assets of the subsidiary at the end of the reporting period
Non-controlling interest = $130,000 (Step 2) × 20% (Step 1) = $26,000
Step 5. Calculate consolidated retained earnings.
$
Parent‘sretainedearnings 400,000
Parent’sshareofsubsidiary’spost‐acquisitionprofits
(80%(Step1)×$40,000(Step2))
32,000
Minusgoodwillimpairmentsinceacquisition(Step3) (15,000)
–––––––
Consolidatedretainedearnings 417,000
–––––––
The consolidated statement of financial position as at the end of the reporting
period is as follows.
Chapter 18: Consolidated accounts
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PGroup
Consolidatedstatementoffinancialpositionasat31DecemberYear3
$000
Tangiblenon‐currentassets(408,000+100,000) 508,000
Goodwill 55,000
–––––––
563,000
Currentassets(120,000+40,000) 160,000
–––––––
Totalassets 723,000
–––––––
Equityandliabilities
Equityattributabletoownersoftheparent
Sharecapital(parentonly) 100,000
Sharepremium(parentonly) 100,000
Retainedearnings 417,000
–––––––
617,000
Non‐controllinginterest 26,000
–––––––
Totalequity 643,000
Bankloans(70,000+10,000) 80,000
–––––––
Totalequityandliabilities 723,000
–––––––
4.4 Valuation of NCI by the fair value method: introduction
This section of the chapter has explained the accounting treatment of NCI in the
consolidated statement of financial position when the NCI is valued at a
proportionate share of the net assets of the subsidiary.
IFRS 3 (revisedError! Bookmark not defined.)Error! Bookmark not defined.
introduced an alternative accounting treatment, in which NCI is measured at fair
value as at the date of acquisition. The fair value of the NCI is assumed to include
some attributable goodwill.
This alternative method of accounting for NCI is explained in the next section, in
which fair values are considered more generally.
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Consolidated statement of financial position: fair value adjustments
Why fair values are used in consolidated financial statements
Adjusting the assets and liabilities acquired
Fair value adjustments in a subsequent period
Fair value method of accounting for NCI
5 Consolidated balance sheet: fair value adjustments
5.1 Why fair values are used in consolidated financial statements
Goodwill is recognised by the acquirer as an asset from the acquisition date.
It is initially measured as the difference between:
the cost of the acquisition and
the parent’s share of the fair values of the subsidiary’s identifiable assets and
liabilities (including contingent liabilities).
An examination question might tell you to assume that the fair value of the assets
and liabilities of the subsidiary at the acquisition date are represented by their
values in the subsidiary’s statement of financial position. However, if the values in
the statement of financial position are not the fair values there must be adjustments
to the assets and liabilities of the subsidiary, for the purpose of consolidation. These
fair value adjustments must all be made before the value of the purchased goodwill
is calculated.
There are two reasons for making fair value adjustments:
Consolidated accounts are prepared from the viewpoint of the group. Therefore
the subsidiary’s assets and liabilities must be shown at their cost to the group,
not their original cost to the subsidiary. The cost to the group is the amount that
the parent paid for them: their fair value at the date of acquisition.
As well as identifiable assets and liabilities, the parent acquires goodwill. The
cost of goodwill is the difference between the cost of the acquisition and the
assets and liabilities acquired. If the subsidiary’s assets and liabilities are not
measured at fair value, the cost of goodwill is incorrect.
5.2 Adjusting the assets and liabilities acquired
Fair value is the amount at which an asset could be exchanged or a liability settled,
between knowledgeable, willing parties in an arm’s length transaction.
The identifiable assets, liabilities and contingent liabilities of a subsidiary may only
be recognised if they satisfy the definitions of assets and liabilities. Recognition is
therefore permitted if the following conditions are satisfied:
For an asset other than an intangible asset, it is probable that any associated
future economic benefits will flow to the acquirer, and its fair value can be
measured reliably;
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For a liability other than a contingent liability, it is probable that an outflow of
resources embodying economic benefits will be required to settle the obligation,
and its fair value can be measured reliably;
For an intangible asset or a contingent liability, its fair value can be measured
reliably.
The table below shows how different types of asset and liability should be valued.
Item Fair value
Marketable
investments
Current market value
Non-marketable
investments
Estimated values that take into consideration features such
as:
(a) price earnings ratios
(b) dividend yield
(c) expected growth rates of comparable investments
Trade and other
receivables
Present values of the amounts to be received. This is
normally the same as their carrying value (book value).
Discounting is not usually required because amounts are
expected to be received within a few months.
Inventories:
Finished goods
Selling price less the sum of:
(a) the costs of disposal, and
(b) a reasonable profit allowance for the selling effort of
the acquirer based on profit for similar finished
goods.
Inventories:
work in progress
Selling price of finished goods less the sum of:
(a) costs to complete,
(b) costs of disposal, and
(c) a reasonable profit for the completing and selling
effort based on profit for similar finished goods.
Inventories:
raw materials Current replacement costs
Land and buildings Market value
Plant and equipment
Normally market value. Use depreciated replacement cost
if market value cannot be used (e.g. because of the
specialised nature of the plant and equipment or because
the items are rarely sold, except as part of a continuing
business).
Intangible assets
Use market value if available (should be by reference to an
active market). Otherwise (if no active market exists) value
on a basis that reflects the amount that the acquirer would
have paid for the asset in an arm's length transaction
between knowledgeable, willing parties based on the best
information available.
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Item Fair value
Trade and other
payables; long-term
debt and other
liabilities.
Present values of amounts to be disbursed in meeting the
liability determined at appropriate current interest rates.
For current liabilities this is normally the same as book
value.
Contingent liabilities
The amounts that a third party would charge to assume
those contingent liabilities.
The consolidated statement of financial position might include some assets and
liabilities that would not normally be recognised in the financial statements or
might not have been previously recognised in the subsidiary’s financial statements.
Contingent liabilities of the subsidiary are recognised in the consolidated statement
of financial position. They cannot be recognised in an entity’s individual financial
statements (IAS 37).
Restructuring costs
An acquirer should not recognise a liability for the cost of restructuring a subsidiary
or for any other costs expected to be incurred as a result of the acquisition
(including future losses).
This is because a plan to restructure a subsidiary after an acquisition cannot be a
liability at the acquisition date. For there to be a liability (and for a provision to be
recognised) there must have been an obligation to incur a future cost that was
created or incurred in the past. This can only be the case if the subsidiary was
already committed to the restructuring before the acquisition.
This means that the acquirer cannot recognise a provision and then subsequently
release it to the consolidated profit in order to smooth profits or reduce losses after
the acquisition. This form of creative accounting was common before the issue of
IAS 37, but is no longer permitted.
Example
Entity P acquired 100% of the shares of Entity S on 1 May at a cost of $700,000. The
statements of financial position of the entities at the acquisition date were as
follows.