Accounting for Indirect Ownership Interests

Lecture 9 : Accounting for Indirect Ownership Interests
HI5020 Corporate Accounting
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Topics covered in this session:
▪ Understand that controlling interest can be direct and indirect
▪ Understand that non-controlling interest can be direct and indirect
▪ Understand that the financial interest of the parent company on
the subsidiary company can be different from the voting
interest/controlling interest.
▪ Understand the concept of sequential acquisition and nonsequential acquisition.
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Indirect ownership interests
▪ AASB 10 requires that:
➢ the consolidated financial report includes all subsidiaries of the parent
▪ Subsidiary defined as (AASB 10):
➢ an entity that is controlled by another entity
▪ As we already know, control is the criterion for determining whether an entity is
to be consolidated
▪ According to paragraphs 6 and 7 of AASB 10:
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Indirect ownership interests (cont.)
6 An investor controls an investee when it is exposed, or has rights, to variable returns
from its involvement with the investee and has the ability to affect those returns
through its power over the investee.
7 Thus, an investor controls an investee if and only if the investor has all the following:
(a) power over the investee (see paragraphs 10–14);
(b) exposure, or rights, to variable returns from its involvement with the investee
(see paragraphs 15 and 16); and
(c) the ability to use its power over the investee to affect the amount of the investor’s
returns (see paragraphs 17 and 18).
‘Control’ can be exercised even in the absence of any direct ownership interest—it can
arise through indirect ownership interests
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Figure 28.1: Example of control being exercised through an indirect interest
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Calculating direct and indirect interests
▪ Using the information in the last slide we can calculate the
percentage interest by constructing a table:
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Indirect ownership interests
Non-controlling interests represent:
the equity in a subsidiary not attributable, directly or indirectly,
to a parent
It is also possible to hold both direct and indirect interests in the
same entity
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Where a parent entity holds both a direct and an indirect interest in a subsidiary
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Indirect ownership interests
▪ Consolidation in the presence of indirect interests
Choice of two methods in performing consolidation:
1. Sequential-consolidation approach
– Consolidation of each separate legal entity with its controlled entities is
performed sequentially (time-consuming and messy)
2. Multiple-consolidation approach
– This is the method advocated in this book
– In eliminating the investments held by the immediate parent entities (the
investments as they would appear in the separate legal entities’ financial
statements), only direct ownership interests are taken into account
– Post-acquisition movements in the subsidiaries’ shareholders’ equity are
allocated to the ultimate parent entity on the basis of the sum of the direct
and indirect ownership interests
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Indirect ownership interests (continued)
▪ Hence, indirect interests are relevant only for apportioning postacquisition movements in shareholders’ equity
▪ Again, any pre-acquisition allocations or distributions are to be
apportioned to the parent and to the non-controlling interest on the
basis of direct ownership interests only
▪ We need to know both the direct and indirect ownership interests before
we are able to prepare the consolidated financial statements
▪ Indirect interests are relevant for apportioning post-acquisition
movements in shareholders’ funds
▪ Any pre-acquisition allocations or distributions are to be apportioned
on the basis of direct ownership interests only
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Indirect ownership interests (cont.)
Journal entries
To eliminate parent’s investment in subsidiary

Dr Share capital
Dr Retained earnings
Dr Goodwill
Cr Investment in subsidiary
x
x
x
x

AssignmentTutorOnline

The investment elimination is undertaken on the basis of direct
ownership interests
To recognise impairment of goodwill associated with acquisition

Dr Impairment expense—goodwillx
Cr Accumulated impairment losses—goodwillx

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Indirect ownership interests (cont.)
Journal entries (cont.)
To eliminate dividends declared by subsidiary

DrDividend payable
(statement of financial position)
Dividend receivable
(statement of financial position)
xx
Cr
DrDividend revenuex
(statement of comprehensive income)
Dividend declared (statement of changes in equity)
Crx

After eliminations, the consolidated financial statements should show the dividends paid
and declared by the parent entity as well as the direct non-controlling interests in the
dividends paid and declared by the subsidiaries—that is, total dividends paid and
declared are those dividends that flow away from the economic entity
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Indirect ownership interests (cont.)
Non-controlling interests (AASB 10)
➢ To be presented separately from the parent shareholders’ equity in the
consolidated statement of financial position within equity
➢ To be separately disclosed in the profit or loss of the group
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Non-controlling interests
▪ Non-controlling interests in profit are calculated on the basis of
the sum of both direct and indirect ownership interests
▪ Apportionment of non-controlling interest in pre-acquisition share
capital and reserves is based on direct ownership interests only
▪ Apportionment of post-acquisition movements in retained
earnings and other reserves is based on the sum of both direct
and indirect ownership interests
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Non-controlling interests in current period profits
Where there is an intermediate parent entity a number of adjustments must be made to
subsidiaries’ profits before we can determine non-controlling interests in profits:
➢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
➢If the non-controlling interest in a subsidiary is valued at fair value at acquisition date, the
goodwill impairment loss relating to the purchase of a subsidiary should be attributed to that
subsidiary
➢If the non-controlling interest in a subsidiary is valued at the non-controlling interest’s
proportionate share of the subsidiary’s identifiable net assets at acquisition date, then the
goodwill impairment loss relating to the purchase of a subsidiary should be attributed to the
immediate parent entity of the subsidiary because it is only the immediate parent entity’s share
of goodwill which has been recognised
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Sequential and non-sequential acquisitions
Examples would include:
➢ The parent acquires its interest in the intermediate subsidiary before the
intermediate subsidiary acquires its interest in the other subsidiary (this is
referred to as sequential acquisition and is represented in the following slide)
➢ The parent acquires its interest in the intermediate subsidiary after the
intermediate subsidiary acquires its interest in the other subsidiary (this is
referred to as non-sequential acquisition and is represented in the slide
following the next slide)
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Sequential acquisition
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Non-sequential acquisition
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Non-sequential acquisitions
▪ In a sequential acquisition, the consolidated financial statements will be
accounted for in the same manner as when acquisitions occur simultaneously.
Since we have considered simultaneous acquisitions up to now, we should
have no trouble accounting for sequential transactions
▪ In a non-sequential acquisition—the situation where the parent entity acquires
its control of the intermediate subsidiary after the intermediate subsidiary
acquired its interest in another subsidiary—the ultimate parent (Organisation
A) is acquiring an interest in the B Group, rather than solely in Organisation B
▪ In determining the fair value of the assets acquired in Organisation B, which is
necessary for our consolidation entry that eliminates the investment in
Organisation B against the pre-acquisition capital and reserves of
Organisation B, we must consider the value of both Organisation B and
Organisation C
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Non-sequential acquisitions (cont.)
▪ 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 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 pre-acquisition reserves, and therefore eliminated on
consolidation
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Example 1
▪ A Ltd has a 60 per cent interest in B Ltd and B Ltd has an 80
per cent interest in C Ltd. Both acquisitions were made in
2012. During the financial year ended 30 June 2015, A Ltd
paid a dividend of $300 000, B Ltd paid a dividend of $200
000 and C Ltd paid a dividend of $100 000. What amount of
dividends paid would be shown in the consolidated financial
statements of A Ltd and its controlled entities for the year
ending 30 June 2015?
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Answer: Example 1
▪ The ownership structure can be summarised as follows (the broken arrow represents
the indirect ownership interest of the parent entity):
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Answer: Example 1 continued
▪ 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.
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Example 2
▪ Maroubra Ltd holds 70 per cent of the ownership equity of Coogee Ltd
and Coogee Ltd holds 80 per cent of the ownership equity of Clovelly
Ltd. During the financial year the following dividends are paid by the
respective companies:
▪ Required
▪ What amount of dividend payments would be shown in the consolidated
financial statements?
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Answer: Example 2
▪ The amount of dividends to be shown in the consolidated
financial statements would be $156 000, 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).
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Summary
▪ The lecture showed that it is possible to control another entity—and
therefore be required to consolidate it—without necessarily having any
direct ownership in that separate legal entity
▪ When consolidating in the presence of indirect interests, the elimination
of the investments held by the immediate parent entities is to be
undertaken on the basis of the direct ownership interest
▪ The economic entity’s interest in the post-acquisition profits of
subsidiaries and post-acquisition movements in reserves will be based
on the sum of both the direct ownership interests and the indirect
ownership interests

Reference no: EM132069492

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