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Chapter 30
Further consolidation issues III: Accounting for indirect ownership interests
Review questions
30.1A direct ownership or equity interest arises when the parent entity itself has equity ownership in another entity. An indirect interest, on the other hand, may be held by a parent entity over a particular entity when an interest in that particular entity is held by another subsidiary of the parent entity, rather than the parent entity itself. For example, in the diagram below, the parent entity has a direct ownership interest in A Ltd. The parent entity also has an interest in (and control of) B Ltd through its control of A Ltd. The interest in B Ltd is indirect. By controlling A (which controls B Ltd), the parent entity consequently also controls B Ltd—even in the absence of any direct equity interests. The parent entity’s indirect interest in B Ltd would be 80% of 90% or 72%.
30.2We need to know which part of the non-controlling interest is direct and which part is indirect as some calculations of non-controlling interests only take into account the direct interests, whereas other calculations for non-controlling interest require knowledge of both direct and indirect non-controlling interests. The general rules are that:
- Current period profits are allocated to non-controlling interests using the sum of direct and indirect ownership interests.
- Pre-acquisition balances of reserves (for example, retained earnings and revaluation surplus) are allocated to non-controlling interests on the basis of direct ownership interests only.
- Post-acquisition movements in reserves are allocated on the basis of the sum of direct and indirect ownership interests.
- Dividends are allocated on the basis of direct ownership interests only.
30.3Non-controlling interests must be disclosed separately within the financial statements. As Paragraph 22 of AASB 10 states:
A parent shall present non-controlling interests in the consolidated statement of financial position within equity, separately from the equity of the owners of the parent.
30.4A sequential acquisition is deemed to occur when the parent entity acquires its interest in the intermediate subsidiary before the intermediate subsidiary acquires its interest in the other subsidiary. By contrast, a non-sequential acquisition occurs when the parent entity acquires its interest in the intermediate subsidiary after the intermediate subsidiary acquires its interest in the other subsidiary.
In a sequential acquisition, the consolidated financial statements will be accounted for in the same manner as when acquisitions occur simultaneously. For example the parent entity’s interest in the intermediate subsidiary will be eliminated first (against pre-acquisition capital and reserves with resultant goodwill or discount being recognised), and then the intermediate subsidiary’s interest in the other subsidiary will be eliminated.
In a non-sequential acquisition, the situation where the parent entity acquires its control of the intermediate subsidiary (which we will refer to as Organisation B) after the intermediate subsidiary acquired its interest in another subsidiary (which we will refer to as Organisation C), we need to consider the value of both Organisation B and Organisation C. The value of Organisation B’s investment in Organisation C will be affected by post-acquisition profits and reserve movements in Organisation C. Therefore, Organisation A’s investment in Organisation B must also be eliminated against Organisation A’s share of the owners’ equity of the B Group (Organisation B plus Organisation C) as at the date of Organisation A’s investment. The profits earned by Organisation C, after Organisation B acquired its interest in Organisation C but prior to Organisation A’s acquisition of the B Group, are treated as part of the pre-acquisition reserves of Organisation B, and therefore eliminated on consolidation.
30.5The decision as to how to account for non-controlling interests at acquisition will have direct implications for the amount of goodwill recognised on consolidation and how any subsequent goodwill impairment expenses will be allocated among the separate legal entities. Where non-controlling interests are valued at fair value at acquisition date this means that total goodwill on consolidation will include an amount that has been allocated to the non-controlling interests (that is, the goodwill will be increased beyond the amount purchased by the acquirer). Further, for the purposes of determining non-controlling interests in profits or losses, any subsequent goodwill impairment expense will be apportioned to the non-controlling interest.
Conversely, where non-controlling interests are valued at the proportionate share of the acquiree’s identifiable net assets at acquisition date, this means that total goodwill on consolidation will include only the amount purchased by the acquirer. Also, for the purposes of determining non-controlling interests in profits or losses, any subsequent goodwill impairment expense will not be apportioned to the non-controlling interests.
The appropriate treatment of goodwill impairment losses relating to an investment in a subsidiary depends upon how the non-controlling interest is measured. As noted above, there are two options in terms of how the non-controlling interest can be measured. If it has been decided to adopt the option that allows the acquirer to measure any non-controlling interest in the acquiree (the subsidiary) at the acquisition-date fair values then:
- As we know, the goodwill acquired by the acquirer (the immediate parent), as well as the direct non-controlling interests’ share of goodwill at acquisition will be recognised (referred to as the ‘full goodwill method’).
- Therefore, if events have occurred which have created an impairment in goodwill then both the immediate parent’s share of goodwill and the direct non-controlling interests’ share of goodwill will be impacted.
- As such, when working out the non-controlling interests’ share of the profit or loss of the subsidiary, the amount of the impairment should be subtracted from the subsidiary’s profit or loss before the non-controlling interests’ share of profit is determined. This impairment will then be proportionally allocated to both the direct parent entity and the non-controlling interest on the basis of the respective ownership interests. This will have the effect of reducing the non-controlling interest in the subsidiary’s profits.
If it has been decided to adopt the other option that allows the acquirer (the immediate parent entity) to measure the non-controlling interest in the subsidiary at the non-controlling interest’s proportionate share of the subsidiary’s identifiable net assets then:
- As we know, only the goodwill acquired by the acquirer (the immediate parent)will be recognised (referred to as the‘partial goodwill method’, which was the method that had been required within Australia until changes to AASB 3were introduced, as explained in Chapter 29). No goodwill will be recognised in relation to the non-controlling interest.
- Therefore, if events have occurred which have created an impairment in the value of goodwill then it is only the immediate parent’s share of goodwill that will be impacted.
- As such, when working out the non-controlling interests’ share of the profit or loss of the subsidiary no adjustment is necessary in relation to goodwill impairment. Any impairment in goodwill will only relate to goodwill that has been attributed to the immediate parent entity’s interest in the subsidiary. As such, any goodwill impairment will be recognised as a consolidation adjustment, but will not be considered when determining the non-controlling interest in the subsidiary’s profit or loss.
30.6The ownership structure can be summarised as follows (the broken arrow represents the
indirect ownership interest of the parent entity):
The consolidated financial statements—specifically, the consolidated statement of changes in equity—would show the dividends that are flowing away from the economic entity. In this case this would represent the dividends paid by the parent entity ($300 000), plus the dividends paid to the direct non-controlling interests of B Ltd ($80 000), and the dividends paid to the direct non-controlling interests of C Ltd ($20 000), giving total dividends to be shown in the consolidated financial statements of $400 000.
30.7(i)A Ltd, as the ultimate parent entity, would be part of the economic entity.
(ii)B Ltd is controlled by A Ltd through A Ltd’s direct ownership interest. B Ltd would be part of the economic entity.
(iii)C Ltd is controlled by A Ltd through A Ltd’s direct ownership interest. C Ltd would be part of the economic entity.
(iv)D Ltd is controlled by A Ltd as a result of A Ltd controlling B Ltd, which in turn controls D Ltd. A Ltd’s ownership interest in D Ltd is indirect. D Ltd would be part of the economic entity.
(v)E Ltd is controlled by A Ltd as a result of A Ltd controlling C Ltd, which in turn controls E Ltd. (It is assumed that an ownership of 50 per cent would guarantee control.) A Ltd’s ownership interest in E Ltd is indirect. E Ltd would be part of the economic entity.
(vi)Although E Ltd would arguably have significant influence over F Ltd (F Ltd would be considered to be an associate), it is not clear that E Ltd would be able to control F Ltd. Hence, F Ltd would not be considered to be part of the economic entity.
30.8The ownership structure can be diagrammatically represented as follows:
The amount of dividends to be shown in the consolidated financial statements would be $156000, which is the dividends paid by the parent entity ($120 000), plus the direct non-controlling interest in the dividends paid by Coogee Ltd (0.30 × $80 000 = $24 000), plus the direct non-controlling interests in the dividends paid by Clovelly Ltd (0.20 × $60 000 = $12 000).
30.9The investments in the subsidiaries are eliminated against the subsidiaries’ pre-acquisition capital and reserves using only the direct ownership interests held in the subsidiaries. Direct and indirect ownership interests are used to allocate interests in post-acquisition movements in the shareholders’ funds of the subsidiaries.
30.10
B Ltd / C Ltd / D Ltd / E LtdA Ltd’s interest
Direct / 60% / 70% / — / —
Indirect / — / — / 48% / 35.8%*
Non-controlling interest / 40% / 30% / 20% / 30%
— / — / 32%** / 34.2%***
100% / 100% / 100% / 100%
* (0.6×0.8×0.6)+(0.7×0.1)
** 0.4×0.8
*** (0.3×0.1)+(0.4×0.8×0.6) + (0.2×0.6)
30.11 Consolidation adjustments
40% Non- A Ltd’s controlling B Ltd 60% interest interest
Elimination of investment in B Ltd($) ($) ($)
Fair value of consideration transferred 2 000 000
less Fair value of identifiable assets acquired and liabilities assumed
Share capital on acquisition date 2 000 000 1 200 000 800 000
Retained earnings on acquisition date 600 000360 000240 000
2 600 000 1 560 000
Goodwill on acquisition date440 000-
Non-controlling interest at date of acquisition 1 040 000
40% Non- B Ltd’s controlling C Ltd 60% interest interest
Elimination of investment in C Ltd ($) ($) ($)
Fair value of consideration transferred 1 600 000 1 600 000
plus Non-controlling interest at fair
value ($800 000 × 40/60) 1 066 6671 066 667
2 666 667
less Fair value of identifiable assets acquired and
liabilities assumed
Share capital on acquisition date 1 600 000 960 000 640 000
Retained earnings on acquisition date 800 000480 000320 000
2 400 0001 440 000960 000
Goodwill on acquisition date 266 667160 000106 667
The approach to determining goodwill on acquisition will depend upon whether:
- the non-controlling interest at acquisition date is measured at the non-controlling interest’s proportionate share of theacquiree’s identifiable net assets (which means no goodwill will be attributed to the non-controlling interest, as in the case of A Ltd’s investment in B Ltd above, as it was decided by management that the non-controlling interest in B Ltd would be measured at the non-controlling interest’s proportionate share of the B Ltd’s identifiable assets), or
- the non-controlling interest at acquisition date is measured at fair value (which means goodwill will be attributed to the non-controlling interest, as in the case of B Ltd’s investment in C Ltd above, as it was decided by management that the non-controlling interest in C Ltd would be measured at fair value at acquisition date).
Consolidation worksheet entries
1. / Dr / Share capital / 1 200 000Dr / Retained earnings / 360 000
Dr / Goodwill / 440 000
Cr / Investment in B Ltd / 2 000 000
Elimination of investment in B Ltd
2. / Dr / Share capital / 960 000Dr / Retained earnings / 480 000
Dr / Goodwill / 160 000
Cr / Investment in C Ltd / 1 600 000
Elimination of investment in C Ltd
As we can see in the tables above, the total goodwill in C Ltd of $266 667 also includes an amount attributed to thenon-controlling interest, this being $106 667. This amount will be recognised subsequently when we recognise the non-controlling interest in the net assets of C Ltd. At this stage we are only recognising the parent entity’s share of goodwillat acquisition date.
3. / Dr / Goodwill impairment loss / 88 000Cr / Accumulated amortisation—goodwill / 88 000
Impairment of goodwill acquired in B Ltd
4. / Dr / Goodwill impairment loss / 53 333Cr / Accumulated amortisation—goodwill / 53 333
Impairment of goodwill acquired in C Ltd
It should be noted that the above impairment losses relate to the total amount of goodwill recognised on acquisition (see the above tables).An issue we will need to address is that when we subsequently calculate the non-controlling interest in profitsor losses, which entities will we attribute any goodwill impairments to? Possible treatments would be to:
1. attribute the goodwill impairment losses to the ultimate parent entity in the group (in this case, A Ltd)
2. attribute the goodwill impairment losses to the immediate parent entity of the subsidiary (in this case, B would be the immediate parent entity of C Ltd)
3. attribute the goodwill impairment losses to the subsidiary itself.
The appropriate treatment of goodwill impairment losses relating to aninvestment in a subsidiary depends upon how the non-controlling interest is measured. From Chapter 29 we know there aretwo options in terms of how the non-controlling interest can be measured.
If it has been decided to adopt the option that allows the acquirer to measure any non-controlling interest in the acquiree(the subsidiary) at the acquisition-date fair values then:
- As we know, the goodwill acquired by the acquirer (the immediate parent), as well as the direct non-controlling interests’share of goodwill at acquisition will be recognised (referred to as the ‘full goodwill method’).
- Therefore, if events have occurred which have created an impairment in goodwill then both the immediate parent’s share of goodwill and the direct non-controlling interests’ share of goodwill will be impacted.
- As such, when working out the non-controlling interests’ share of the profit or loss of the subsidiary, the amount of the impairment should be subtracted from the subsidiary’s profit or loss before the non-controlling interests’ share of profit is determined. This impairment will then be proportionally allocated to both the direct parent entity and the non-controlling interest on the basis of the respective ownership interests. This will have the effect of reducing the non-controlling interest in the subsidiary’s profits.
If it has been decided to adopt the other option that allows the acquirer (the immediate parent entity) to measure the non-controllinginterest in the subsidiary at the non-controlling interest’s proportionate share of the subsidiary’s identifiable netassets then:
• As we know, only the goodwill acquired by the acquirer (the immediate parent), will be recognised (referred to as the‘partial goodwill method’ which was the method that had been required within Australia until recent changes to AASB 3were introduced, as explained in Chapter 29). No goodwill will be recognised in relation to the non-controlling interest.
• Therefore, if events have occurred which have created an impairment in the value of goodwill then it is only the immediate parent’s share of goodwill that will be impacted.
• As such, when working out the non-controlling interests’ share of the profit or loss of the subsidiary no adjustment is necessary in relation to goodwill impairment. Any impairment in goodwill will only relate to goodwill that has beenattributed to the immediate parent entity’s interest in the subsidiary. As such, any goodwill impairment will be recognisedas a consolidation adjustment, but will not be considered when determining the non-controlling interest in the subsidiary’sprofit or loss.
5. / Dr / Dividend income / 60 000Cr / Dividend declared / 60 000
Elimination of A’s share of the dividends paid by B Ltd
6. / Dr / Dividend income / 36 000Cr / Dividend declared / 36 000
Elimination of A’s share of the dividends paid by C Ltd
7. / Dr / Dividend payable / 60 000Cr / Dividend receivable / 60 000
(to eliminate amount receivable by A Ltd from B Ltd)
8. / Dr / Dividend payable / 36 000Cr / Dividend receivable / 36 000
(to eliminate amount receivable by A Ltd from C Ltd)
40% Non-controlling
B Ltd interest
Calculation of non-controlling interests in B Ltd ($) ($)
Non-controlling interests and goodwill on acquisition date
Share capital 2 000 000 800 000
Retained earnings—on acquisition 600 000240 000
2 600 000 1 040 000
Non-controlling interest in the current period’s profit and movements in
reserves in the current period
Profit for the year 110 000
less Dividends received from entity within group* (36 000)
less Impairment of goodwill in C Ltd* –
74 00029 600
less Dividends declared by B Ltd (100 000) (40 000)
1 029 600
* Explanations for these adjustments are provided below
9. / Dr / Share capital (2 000 000 × 40 per cent) / 800 000Dr / Retained earnings—1 July 2014 (600 000 × 40 per cent) / 240 000
Dr / Non-controlling interest in earnings / 29 600
Cr / Dividend declared (100 000 × 40 per cent) / 40 000
Cr / Non-controlling interest / 1 029 600
Recognising non-controlling interest and non-controlling interest in earnings of B Ltd
Explanation for adjustments
If the above calculations of the non-controlling interest in current period profits are reviewed, it is apparent that adjustments for the intragroup dividends have been made, but no adjustments have been made for any goodwill impairment. Why?
First, in relation to dividends, of the dividends declared by C Ltd, which totalled $60 000, $36 000 (60 per cent)went to B Ltd and $24 000 (40 per cent) went to the direct non-controlling interests in C Ltd. The dividendpaid to B Ltd will be included in B Ltd’s profits, in which the direct non-controlling interests (40 per cent) will have a share. The indirect non-controlling interests in C Ltd—who are the same parties as the direct non-controllinginterests in B Ltd—will be allocated a share in the profits of C Ltd (through their 24 per cent indirect interest). The dividends paid by C Ltd to B Ltd represent a distribution of these profits. The non-controlling interests in B Ltd (who are the same investors as the indirect non-controlling interests in C Ltd) should not get a share of these profits yet again (it would be double counting), so before the non-controlling interest in the profits of B Ltd are calculated, the dividends paid to B Ltd by C Ltd are subtracted. The general rule here is that intragroup dividends paid to an ‘intermediate parent’ from a subsidiary are subtracted from the profits of that intermediate parent before the non-controlling interest in profits of that organisation is calculated.
In relation to why neither the impairment of C Ltd’s goodwill nor B Ltd’s goodwill impairment is deductedfrom B Ltd’s profit before the non-controlling interest is determined, we can refer back to the general principlesprovided earlier, these being: