Week10Topic10Lecturenotes

Impact of NCI
• A NCI exists when the Parent owns less than 100% of the equity of the Subsidiary.
• The NCI is entitled to a relevant % of Group equity. This means equity of the Subsidiary from the Group’s point of view (adjusted for unrealised profits and revalued asset effects).
• In Step 3, Opening RE would need to have any prior year depreciation adjustments deducted (after tax) to reflect what retained earnings would have been based on ‘fair value’ depreciation.
AFF 2491 Topic 10
Consolidation: An overview
Department of Accounting and Finance
Slide 1
Consolidation
• Consolidation occurs when one entity (Parent) controls another (Subsidiary).
The consolidation process
• The consolidation entries are done in a consolidation journal and worksheet, but do not affect the individual records of the Subsidiary nor the Parent.
• Shareholders are interested in the financial performance and position of the entities as a group.
• The consolidation process involves measuring the Parent’s share of equity in the Subsidiary, then subsequently eliminating the investment in the Subsidiary along with any intra-group transactions.
• Eg. if an asset (eg. land) was sold, there would be no revaluation entry in the year after it was sold.
NCI and revaluation surplus (continued)
Depreciable assets:
• Revaluation entries bring the relevant asset/liability accounts to fair value from their original carrying amounts (in the Group’s records), and show an ‘extra’ share of equity acquired by the Parent (revaluation surplus).
• However, when the entities involved are viewed as one (the Group), these transactions are impossiinations (continued)
• Intra-group eliminations remove the effects of transactions that have been recorded by the individual entities so the Group financial statements appear as if the transactions had never occurred.
• From the group’s point of view, depreciation expense should be higher (based on fair value).
NCI and revaluation surplus (continued)
Depreciable assets (continued):
The acquisition analysis
• Compares the cost of acquisition to the fair value of identifiable net assets (FVINA) of the Subsidiary to determine if there is any goodwill on acquisition.
• A revaluation adjustment is made if the Subsidiary’s NCA carrying amount is different from fair value.
• If the CA is < FV, the Subsidiary’s depreciation is based upon the lower carrying amount.
• The value of NCI is determined through a series of calculations.
Impact of NCI (continued)
• In an acquisition analysis with NCI, either the FULL goodwill or PARTIAL goodwill method can be used.
• Under the partial goodwill method, only the parent’s share of goodwill is determined. You are required to use this method.
NCI and revaluation surplus
• The pre-acquisition entry eliminates the equity the Parent owns in the Subsidiary for the purpose of consolidation.
• The entry involves a Dr to all relevant equity accounts and a Cr to ‘Investment in Subsidiary’ at the relevant Parent shareholding %.
• The NCI is entitled to a share of revaluation surplus just like other items of equity.
• The surplus at the date of consolidation should reflect the balances of any revaluation adjustments (required at acquisition) on assets that are still on hand.
• They would also result in profits of the group being different from the sum of the profits of the two entities added together.
• The tax implications of these eliminations must be recorded as well. As individual entities, they pay tax based on their profits. As a Group, they adjust tax expense, but still pay the sum of the individual tax owed by each entity.
Intra-group eliminations (continued)
Include: •Unrealised profit in opening inventory •Unrealised profit in closing inventory •Unrealised profit on non-current asset transfers (current year or previous year) •Loans (including interest) •Services provided •Dividends paid and provided
• These involve removing A and L from the balance sheets, and R and E from the income statements during the consolidation process.
Intra-group eliminations (continued)
• Can involve fair value adjustments where the carrying amounts of Subsidiary’s assets or liabilities differ from their carrying amounts.
• Is more complex when there is a noncontrolling interest (NCI) present.
Intra-group eliminations
• As individual entities, it is acceptable to record profits on sales of inventory and non-current assets, earn interest from loans to other companies, earn revenue from services provided and dividends from investments.
• Consequently, they must be repeated each balance day.
• The journal entries involve revaluation entries, pre-acquisition entry, intra-group eliminations and NCI entry.
Revaluation entries
• If the assets/liabilities of the Subsidiary are not at fair value at the date of acquisition, the equity (A-L) measured at that date will be incorrect.
• When a revalued asset/liability is no longer on hand, its revaluation surplus balance is transferred to retained earnings.
Pre-acquisition entries
• From a Group perspective, one company cannot acquire equity in itself, nor show an investment in itself.