In Example 7.15 above, Option 2 resulted in no goodwill being attributable to non-
controlling interests. However, if the Target had been acquired, not by Parent, but by a
60%-owned subsidiary of Parent, we believe that the goodwill recognised remains the
same, but that some of the goodwill is attributable to the non-controlling interests in
the acquiring subsidiary as illustrated in Example 7.17 below.
Example 7.17: Initial measurement of non-controlling interests in a business
combination by a partly owned subsidiary
Assume the same facts as in Example 7.15 above, except that a 60% Subsidiary of Parent acquires 80% of
the ordinary shares of Target for €950,000 in cash.
Under Option 2, the impact of the business combination and the measurement of non-controlling interests in
Parent’s consolidated financial statements are as follows:
€’000 €’000
DR CR
Fair value of identifiable net assets
850
Goodwill (€950,000 – (80% × €850,000) +€25,000))
295
Cash
950
Non-controlling interests in Target (20% × €850,000 + €25,000)
195
Non-controlling interest in 60% Subsidiary
–
Although the overall impact on the non-controlling interest in 60% Subsidiary is nil, this is represented by:
€’000 €’000
DR CR
Share of fair value of identifiable net assets (40% × 80% × €850,000)
272
Share of goodwill (40% × (€295,000 – €25,000)
108
Share of cash consideration (40% × €950,000)
380
506 Chapter
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5.2.2
Initial measurement of non-controlling interests in a subsidiary (that
is not a business combination)
The initial measurement of non-controlling interests in a subsidiary (that is not a
business combination) is discussed at 3.1.1 above.
5.2.3
Measurement of non-controlling interests where an associate holds
an interest in a subsidiary
Neither IFRS 10 nor IAS 28 explains how to account for non-controlling interests when
the group owns an associate which has a holding in a subsidiary. A non-controlling
interest is defined as ‘the equity in a subsidiary not attributable, directly or indirectly to
a parent’. [IFRS 10 Appendix A]. It is unclear whether this should be computed based on the
ownership interests held by the group (i.e. by the parent and any consolidated
subsidiary), or whether it should also take into account the indirect ownership of the
subsidiary held by the associate.
The reciprocal interests can also give rise to a measure of double-counting of profits
and net assets between the investor and its associate. See Chapter 11 at 7.6.2.A.
We believe that there are two possible approaches to determine the amount of non-
controlling interests in the subsidiary:
(a) the non-controlling interests are determined after considering the associate’s
ownership of the subsidiary (‘look through approach’); or
(b) the non-controlling interests are determined based on the holdings of the
group in the subsidiary (‘black box approach’).
An entity should apply the chosen approach consistently.
In applying the ‘look through approach’, the parent must not recognise the share of
the subsidiary’s results recognised by the associate applying the equity method, in
order to avoid double-counting. The ‘black box approach’ will often lead to reporting
higher consolidated net assets and results than when using the ‘look through
approach’ as this adjustment is not made, although the amounts attributed to owners
of the parent should be the same under both approaches. The two approaches are
illustrated in Example 7.18 below.
Example 7.18: Measurement of non-controlling interest where an associate
accounted using the equity method holds an interest in a subsidiary
Parent P owns directly 60% of subsidiary S. P also directly owns 40% of associate A that in turn holds a 30%
interest in S. S has earned profits of US$1,000,000 in the period and has net assets of US$3,000,000 (which
are consolidated in both P’s consolidated financial statements and equity accounted by A) at the reporting
date. A has net assets of US$1,100,000 (excluding its share of the net assets of S). There are no transactions
between A and S (which was not acquired in a business combination).
Approach 1 (‘look through approach’)
This approach involves determining the ownership attributable to the non-controlling interests after
considering A’s ownership of S. This approach views the equity method as primarily a method of
consolidation (albeit on a single line), as further discussed in Chapter 11 at 7.2.
Therefore, under the ‘look through’ approach, P’s total ownership interest in S is 72% (and the NCI’s interest
is 28%). P’s effective ownership interest of 72% in S represents 60% held directly and an additional effective
interest of 12% (40% × 30%) via A.
Consolidation procedures and non-controlling interests 507
Therefore, P consolidates the profits of S of US$1,000,000, with:
Profits of S attributable to owners of P
US$720,000 (US$1,000,000 × 72%)
Profits of S attributable to the non-controlling interests
US$280,000 (US$1,000,000 × 28%)
However, when equity accounting for A, P does not recognise its share of S’s results recognised by the
associate A of US$120,000 (US$1,000,000 × (40% × 30%)). This is to avoid double counting as S’s results
have already been consolidated and P’s effective ownership of 12% of S that is indirectly held via A has been
attributed to owners of the parent.
The assets and liabilities of S are consolidated, with:
Net assets of S attributable to owners of P
US$2,160,000 (72% × US$3,000,000)
Net assets of S attributable to the non-controlling interests US$840,000 (28% × US$3,000,000)
Investment in A
US$440,000 (Note 1)
Note 1 - when equity accounting for A, P does not recognise its share of S’s net assets recognised by A of
US$360,000 (US$3,000,000 x (40% x 30%)) to avoid double-counting as the net assets of S owned by A
have already been included in the amounts attributable to the owners of P. Therefore, the investment in A is
reported at P’s 40% share of A’s net assets (excluding A’s share of S), i.e. 40% x US$1,100,000.
Approach 2 (‘black box approach’)
Under this approach (the ‘black box approach’), when determining NCI, P considers the ownership interests
in S not held by the group (i.e. by P and its subsidiaries). This approach views the equity method as primarily
a method of valuing an investment, as further discussed in Chapter 11 at 7.2.
Accordingly, P’s ownership interest is 60% and the NCI’s ownership interest is 40%.
Therefore, P consolidates the profits of S of US$1,000,000, with:
Profits of S attributable to owners of P
US$600,000 (60% × US$1,000,000)
Profits of S attributable to the non-controlling interests
US$400,000 (40% × US$1,000,000)
The assets and liabilities of S are consolidated, with:
Net assets of S attributable to owners of P
US$1,800,000 (60% × US$3,000,000)
<
br /> Net assets of S attributable to the non-controlling interests US$1,200,000 (40% × US$3,000,000)
Investment in A
US$800,000 (Note 2)
Note 2 – when equity accounting for A, P does not eliminate its share of S’s results of US$120,000 and net
assets of US$360,000. Therefore, the investment in A is reported at P’s 40% share of A’s net assets
(including the associate’s share of S), i.e. 40% × (US$1,100,000 + (30% × US$3,000,000)).
The results and net assets in respect of S that are attributed to owners of P are the same as in Approach 1.
However, the total consolidated results and net assets exceed those reported in Approach 1 by US$120,000
and US$360,000 respectively (being P’s effective ownership interest of 12% in S’s profits and net assets that
are equity accounted in Approach 2). While this approach has the merit that the attribution of S’s profits and
net assets to NCI reflects the 40% ownership interests in S not held by the group, a downside is the double
counting of 12% of S’s profits that are equity accounted by A.
5.3
Presentation of non-controlling interests
IFRS 10 requires non-controlling interests to be presented in the consolidated
statement of financial position within equity, separately from the equity of the owners
of the parent. [IFRS 10.22]. Profit or loss and each component of other comprehensive
income are attributed to the owners of the parent and to the non-controlling interests.
508 Chapter
7
Attribution of total comprehensive income to the non-controlling interests continues
even if it results in a deficit balance. [IFRS 10.24, B94]. Deficit balances are considered
further at 5.5.1 below.
The presentation of non-controlling interests in the primary financial statements is
addressed in Chapter 3 at 3.1.5 (statement of financial position), [IAS 1.54], 3.2.2
(statement of profit or loss), [IAS 1.81B], 3.2.4 (statement of comprehensive income),
[IAS 1.81B], and 3.3 (statement of changes in equity). [IAS 1.106].
5.4
Non-controlling interests classified as financial liabilities
In spite of the general requirement in IFRS 10 to treat non-controlling interests as
equity, a non-controlling interest is classified by IAS 32 as a financial liability and
payments to the non-controlling interest as interest expense if the group as a whole has
an obligation to deliver cash or another financial asset in respect of the instrument, or
to settle it in a manner that results in its classification as a financial liability. [IAS 32.AG29].
See Chapter 43 at 4.8.1.
One particular issue considered by the Interpretations Committee is the classification,
in the consolidated financial statements of a group, of puttable instruments that are
issued by a subsidiary but that are not held, directly or indirectly, by the parent. The
question asked was whether these instruments, which are classified as equity
instruments in the financial statements of the subsidiary in accordance with IAS 32,
[IAS 32.16A, 16B], should be classified as equity or liability in the parent’s consolidated
financial statements.
The Interpretations Committee noted that paragraphs 16A-16D of IAS 32 state that
puttable instruments and instruments that impose on the entity an obligation to deliver
to another party a pro rata share of the net assets of the entity only on liquidation meet
the definition of a financial liability. These instruments are classified as equity in the
financial statements of the subsidiary as an exception to the definition of a financial
liability if all relevant requirements are met. [IAS 32.16A, 16B, 16C, 16D]. This exception
applies only to the financial statements of the subsidiary and does not extend to the
parent’s consolidated financial statements. [IAS 32.AG29A]. Consequently, these financial
instruments should be classified as financial liabilities in the parent’s consolidated
financial statements.18
In our view, where a non-controlling interest is classified as equity in consolidated
financial statements, it is subject to all the requirements of IAS 32 relating to own equity.
For example, put or call options over non-controlling interests accounted for as equity
should be accounted for in consolidated financial statements as contracts over own
equity instruments under IAS 32 (see Chapter 43 at 11).
In some cases, the effect of options over what are in law non-controlling interests
may be such that no non-controlling interests are recognised in the financial
statements, particularly when such options are issued as part of a business
combination (see 6 below).
Consolidation procedures and non-controlling interests 509
5.5 Subsequent
measurement
of non-controlling interests
A proportion of profit or loss, other comprehensive income and changes in equity is
only attributed to those instruments included within non-controlling interests if they
give rise to an existing ownership interest. Non-controlling interests, that are
potential voting rights and other derivatives that require exercise or conversion (such
as options, warrants, or share-based payment transactions), generally do not receive
an allocation of profit or loss, other comprehensive income and changes in equity.
[IFRS 10.21, 24, B89, B94]. However, as discussed at 2.2 above, allocating the proportions
of profit or loss, other comprehensive income and changes in equity based on present
legal ownership interests is not always appropriate. An entity also considers the
eventual exercise of potential rights and other derivatives if, in substance, they
provide existing ownership interests that currently give it access to the returns
associated with that ownership interest. In that case, the proportion allocated to the
parent and non-controlling interests takes into account the eventual exercise of those
potential voting rights and other derivatives. [IFRS 10.21, B90]. As noted at 2.2 above, this
chapter uses the term ‘present ownership interest’ to include existing legal ownership
interests, together with potential voting rights and other derivatives that, in substance,
already provide existing ownership interests in a subsidiary.
Where a subsidiary has granted options over its own shares under an equity-settled
share-based payment transaction, the share-based payment expense recognised in
profit or loss will be attributable to the parent and any other non-controlling interest
that has a present ownership in the subsidiary. None of the expense is attributed to the
non-controlling interest represented by the options under the share-based payment
transaction. The corresponding entry taken to equity by the subsidiary in respect of the
options under the share-based payment transaction will be recognised as non-
controlling interest in the consolidated financial statements.
If a subsidiary has outstanding cumulative preference shares classified as equity that are
held by non-controlling interests, the parent is required to compute its share of profits
or losses after adjusting for the dividends on these shares, whether or not dividends
have been declared. [IFRS 10.24, B95]. This effectively means that the non-controlling
interests represented by the cumulative preference shares are being allocate
d a portion
of the profit or loss equivalent to the dividends.
In addition, where an entity has a complicated equity structure with several classes of
equity shares that have varying entitlements to net profits, equity or liquidation
preferences, the parent needs to assess carefully the rights attaching to each class of
equity share in determining the appropriate percentage of ownership interest.
When the proportion of equity held by the non-controlling interests changes, e.g.
because a potential voting right is exercised, the carrying amount originally recognised
in non-controlling interests is adjusted to reflect the change in the relative interests in
the subsidiary. [IFRS 10.24, B96]. In our view, this requirement in IFRS 10 also means that
if potential voting rights lapse unexercised, the amount originally recognised in non-
controlling interests is reversed, so that the carrying amounts of the controlling and
non-controlling interests reflect the relative interests in the subsidiary. Otherwise,
amounts previously recognised related to lapsed potential voting rights would remain
510 Chapter
7
recognised as part of the non-controlling interests until the next remeasurement of non-
controlling interests occurs, which may be an unrelated transaction, or which may
never occur.
5.5.1 Loss-making
subsidiaries
Total comprehensive income is attributed ‘to the owners of the parent and to the non-
controlling interests even if this results in the non-controlling interests having a deficit
balance.’ [IFRS 10.24, B94]. This approach is consistent with the fact that the controlling
and the non-controlling interests participate proportionately in the risks and rewards
of an investment in the subsidiary. The IASB observed that although it is true that non-
controlling interests have no further obligation to contribute assets to the entity, neither
does the parent. [IFRS 10.BCZ165].
Guarantees or other support arrangements by the parent often protect the non-
controlling interests from losses of the subsidiary in excess of their equity. The IASB
believes that the parent ought to account for such arrangements separately, and that the
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