Description
The primary aim of this paper is to illustrate how goodwill impairment loss should be
accounted for when measuring non-controlling interest in subsidiaries.
Accounting Research Journal
Calculating non-controlling interest in the presence of goodwill impairment
Grant Samkin Craig Deegan
Article information:
To cite this document:
Grant Samkin Craig Deegan, (2010),"Calculating non-controlling interest in the presence of goodwill
impairment", Accounting Research J ournal, Vol. 23 Iss 2 pp. 213 - 233
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Calculating non-controlling
interest in the presence
of goodwill impairment
Grant Samkin
Department of Accounting, University of Waikato, Hamilton, New Zealand, and
Craig Deegan
School of Accounting and Law, RMIT University, Melbourne, Australia
Abstract
Purpose – The primary aim of this paper is to illustrate how goodwill impairment loss should be
accounted for when measuring non-controlling interest in subsidiaries.
Design/methodology/approach – The paper uses two scenarios to illustrate how non-controlling
interest in subsidiaries should be measured in the presence of goodwill impairment loss.
Findings – The way the management of a reporting entity values the non-controlling interest in a
subsidiary will result in different amounts being disclosed in ?nancial statements for non-controlling
interest in earnings, non-controlling interest, retained earnings and total equity.
Research limitations/implications – The paper uses two scenarios to illustrate a simple
consolidation with a parent entity, a subsidiary and a sub-subsidiary.
Practical implications – Practical guidance on how goodwill impairment losses under
International Accounting Standard 36 Impairment of Assets when measuring non-controlling
interest under International Financial Reporting Standard 3 Business Combination, is provided.
Originality/value – The paper corrects any misunderstanding that may exist on the impact
goodwill impairment losses have on closing equity when non-controlling interest is calculated under
the different methods of valuing non-controlling interest.
Keywords Interest, Share values, Financial management
Paper type Technical paper
Introduction
In 2008, the International Accounting Standards Board (IASB) revised International
Accounting Standard (IAS 27) (2008) Consolidated and Separate Financial Statements
and International Financial Reporting Standard 3 (IFRS 3) (2008) Business
Combinations. The revisions to IAS 27 (2008) and IFRS 3 (2008) were part of the
second phase of the business combinations project undertaken between the United
States Financial Accounting Standards Board(FASB) and the IASBto improve ?nancial
reporting while promoting convergence of accounting standards. The IAS 27 (2008)
revisions dealt primarily with accounting for non-controlling interest and for the loss of
control of a subsidiary, while the IFRS 3 (2008) revisions were aimed at providing
guidance when applying the acquisition method to business combinations. In particular,
IFRS 3 (2008) sought to establish principles and requirements for how an acquirer:
.
recognises and measures in its ?nancial statements the identi?able assets
acquired, the liabilities assumed and any non-controlling interest in the acquiree;
.
recognises and measures the goodwill acquired in the business combination or a
gain from a bargain purchase; and
The current issue and full text archive of this journal is available at
www.emeraldinsight.com/1030-9616.htm
Calculating
non-controlling
interest
213
Accounting Research Journal
Vol. 23 No. 2, 2010
pp. 213-233
qEmerald Group Publishing Limited
1030-9616
DOI 10.1108/10309611011073278
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determines what information to disclose to enable users of the ?nancial
statements to evaluate the nature and ?nancial effects of the business
combination (IFRS 3, 2008, paragraph IN4).
Prior to the revision of IFRS 3 (2008), reporting entities were required to value
non-controlling interest at the proportionate share of the acquiree’s identi?able net
assets. The revision of IFRS 3 (2008) introduced an option and permitted any
non-controlling interest in an acquiree to be measured at fair value or at the
non-controlling interest’s proportionate share of the acquiree’s identi?able net assets
(IFRS 3, 2008, paragraph 19)[1,2].
The recent introduction of IFRS 3 (2008) means that this issue has not been fully
addressed in recently published undergraduate accounting texts. In part, this omission
might be due to some of the complexities involved. Although two recently published
texts, Alfredson et al. (2009) and Picker et al. (2009), have updated their material to take
into account revisions to IAS 27 (2008) and IFRS 3 (2008), they fail to address how the
impairment of goodwill will impact the measurement of non-controlling interest in the
presence of indirect non-controlling interest under the different valuation methods.
While recognising the choice IFRS 3 (2008) provides when valuing non-controlling
interest, Alfredson et al. (2009, p. 1010) and Picker et al. (2009, p. 1040), use the
following identical rationale to justify their failure to address this issue:
This choice has no effect on post-acquisition equity. Hence, the calculation of the INCI share
of equity is unaffected by which goodwill method is used. In this chapter, the partial
goodwill method is used in all examples (Emphasis in original).
What this article shows is that the choice made about how to measure non-controlling
interest will impact measurements of non-controlling interest and, therefore, the total
equity of a consolidated group of entities. In line with previous contributions (Goodwin
and Alfredson, 2000; Bradbury and Prangnell, 2005), this paper uses simple
illustrations to detail the correct accounting treatment of a contentious issue. This
paper contributes to the accounting literature by using two simple illustrations that
show the correct treatment of goodwill impairment loss when the non-controlling
interest in subsidiaries is measured at fair value, at the proportionate share of the
acquiree’s identi?able net assets, or a combination of fair value and proportionate
share of the acquiree’s identi?able net assets.
This paper is structured as follows. First, goodwill in the context of business
combinations and the requirements relating to goodwill impairment are considered.
Non-controlling interest and how it should be calculated is then described. Finally, two
simple cases are used to illustrate how goodwill impairment loss impacts on the
measurement of non-controlling interest to be disclosed in ?nancial statements.
Goodwill and goodwill impairment
Goodwill is de?ned as “an asset representing the future economic bene?ts arising from
other assets acquired in a business combination that are not individually identi?ed and
separately recognised” (IFRS 3, 2008; IAS 36, 2008, paragraph 81). In the context of
business combinations, the rules for recognising goodwill are provided in IFRS 3 (2008,
paragraph 32) as follows.
The acquirer shall recognise goodwill as of the acquisition date measured as the
excess of (1) over (2) below:
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(1) the aggregate of:
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the consideration transferred measured in accordance with this IFRS, which
generally requires acquisition-date fair value (see paragraph 37);
.
the amount of any non-controlling interest in the acquiree measured in
accordance with this IFRS; and
.
in a business combination achieved in stages (see paragraphs 41 and 42), the
acquisition-date fair value of the acquirer’s previously held equity interest in
the acquiree.
(2) the net of the acquisition-date amounts of the identi?able assets acquired and
the liabilities assumed measured in accordance with this IFRS.
The above paragraph is simpli?ed in Table I.
From Table I it is clear that goodwill as a resource controlled by the reporting entity
from which future economic bene?ts are expected to arise is a residual. The residual
results from a direct measurement of goodwill not being possible (Basis for
Conclusions, 2008, paragraph BC238).
Prior to the adoption of International Financial Reporting Standards (IFRS),
reporting entities in countries including New Zealand and Australia systematically
amortised purchased goodwill over the period in which the bene?ts were expected to be
realised. This period usually had an upper limit of 20 years. Although the usual method
of amortisation was the straight line basis, reporting entities were permitted to use other
methods if they were considered more appropriate[3]. Adopting IFRSs ensured that this
practice ceased, with reporting entities being prohibited from amortising goodwill.
Rather, any goodwill acquired in a business combination was to be measured at cost less
any accumulated impairment losses (IFRS 3, 2004, paragraph 54). Additionally,
goodwill was to be tested annually for impairment “or more frequently if events or
changes in circumstances indicate that it might be impaired, in accordance with IAS 36
Impairment of Assets” (IFRS 3, 2004, paragraph 55).
The revision of IFRS 3 (2008) saw the goodwill accounting requirements being
incorporated into IAS 36 (2008). Speci?cally, IAS 36 (2008, paragraph 90) requires:
A cash-generating unit to which goodwill has been allocated shall be tested for impairment
annually, and whenever there is an indication that the unit may be impaired, by comparing
the carrying amount of the unit, including the goodwill, with the recoverable amount of the
unit. If the recoverable amount of the unit exceeds the carrying amount of the unit, the unit
and the goodwill allocated to that unit shall be regarded as not impaired. If the carrying
amount of the unit exceeds the recoverable amount of the unit, the entity shall recognise the
impairment loss in accordance with paragraph 104.
Table I.
Calculation of goodwill
impairment
Calculating
non-controlling
interest
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Although the IAS 36 (2008) requirements are more detailed than those contained in
IFRS 3 (2004), the underlying principles articulated in IFRS 3 (2004) remain the same.
Finally, goodwill impairment testing can take place at any time during the reporting
period provided the test is performed at the same time each year.
Calculation of non-controlling interest
IAS 27 (2008) saw the previously used term “minority interest” changed to
“non-controlling interest”. The IASB argued that the term “non-controlling interest”
was a more accurate descriptor than “minority interest” as the owner of a minority
interest in an entity might in fact control the entity, while the owners of a majority
interest might not be able to exercise control (IAS 27, 2008).
Non-controlling interest then is de?ned as “the equity in a subsidiary not
attributable, directly or indirectly, to a parent” (IFRS 3, 2008). Treating non-controlling
interest as equity is consistent with the entity perspective favoured by the IASB.
Additionally, this treatment con?rms the view that non-controlling interest is not a
liability as it fails to meet the de?nition of a liability in the Framework for the
Preparation and Presentation of Financial Statements (IAS 27, 2008).
The steps necessary to undertake a consolidation, and in particular the calculation
of non-controlling interest, are detailed in IAS 27 (2008, paragraph 18):
(1) non-controlling interests in the pro?t or loss of consolidated subsidiaries for the
reporting period are identi?ed; and
(2) non-controlling interests in the net assets of consolidated subsidiaries are
identi?ed separately from the parent’s ownership interests in them.
Non-controlling interests in the net assets consist of:
.
the amount of those non-controlling interests at the date of the original
combination calculated in accordance with IFRS 3; and
.
the non-controlling interests’ share of changes in equity since the date of the
combination.
As indicated earlier, IFRS 3 (2008, paragraph 19) provides reporting entities with the
following choices when measuring non-controlling interests:
For each business combination, the acquirer shall measure any non-controlling interest in the
acquiree either at fair value or at the non-controlling interest’s proportionate share of the
acquiree’s identi?able net assets.
Permitting the choice of two valuation methods provides reporting entities with
?exibility when accounting for business combinations. For example, an entity can
measure non-controlling interest at fair value for the ?rst acquisition while measuring
non-controlling interest at the proportionate share of the acquiree’s identi?able net
assets for a subsequent acquisition.
Permitting non-controlling interest to be measured in different ways gives rise to
the issue of how any goodwill impairment loss attributed to non-controlling interest is
allocated. Appendix C to IAS 36 (2008, paragraph C6) provides clarity by stating:
If a subsidiary, or part of a subsidiary, with a non-controlling interest is itself a cash-generating
unit, the impairment loss is allocated between the parent and the non-controlling interest on the
same basis as that on which pro?t or loss is allocated.
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Following the guidance provided by IAS 27 (2008), the non-controlling interest in the
two cases that follow is measured in three steps as follows:
(1) Non-controlling interests’ share in the net assets (equity) of subsidiaries at the
dates the parent entity acquired the subsidiaries. This requires the
non-controlling interest’s share of the pre-acquisition balances of contributed
equity, retained earnings and reserves to be recorded.
(2) Non-controlling interests’ share in the changes in post acquisition equity. This
is achieved through recording of the non-controlling interest’s share of the post
acquisition movements in retained earnings and reserves.
On 1 April 2007, King?sh Limited acquired 70 per cent of the equity of Snapper Limited[4] for
$4,500,000. On the date of acquisition, the equity of Snapper Limited is as follows:
Illustration 1.
Calculating
non-controlling
interest
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(3) Non-controlling interests’ share in the pro?t or loss of the subsidiaries in the
current period. At the end of the reporting period the non-controlling interest’s
share in pro?t for the year, distributions and transfers made and movements in
reserves for the year must be recorded (Deegan and Samkin, 2009, p. 863).
The measurement of non-controlling interest in Snapper Limited assuming the
management of King?sh Limited measures non-controlling interest at the
proportionate share of the acquiree’s identi?able net assets is detailed in Table II.
In the above scenario, no goodwill impairment losses have been taken into account
in the measurement of the non-controlling interest in Snapper Limited. However, if
management of King?sh Limited measures the non-controlling interest in Snapper
Limited at fair value, then consistent with IAS 36 (2008), paragraph C6, goodwill
impairment losses must be allocated between the parent and the non-controlling
interest on the same basis as that on which pro?t and loss is allocated. This allocation
is detailed in Table III.
Note that although the journal entry to account for the impairment of goodwill is the
same in both cases, there is a difference in the amount of the non-controlling interest
recognised in earnings and retained earnings under the two approaches. These
differences are detailed in Table IV.
Including the goodwill impairment in the calculation of the non-controlling interest
ensures that the IAS 36 (2008) requirements regarding the allocation of the impairment
between the parent and the non-controlling interest are met.
Illustration 2 extends the scenario to incorporate a subsidiary of Snapper Limited
which ensures that valuation of non-controlling interest includes indirect
non-controlling interest. IFRS 3 (2008) permits non-controlling interest in an
acquiree to be measured at fair value or at the non-controlling interest’s
proportionate share of the acquiree’s identi?able net assets. Reporting entities,
therefore, have the choice of which measure to use in each business combination.
Table V details the different combinations available when valuing the non-controlling
interest in the subsidiaries Snapper Limited and Piper Limited is considered.
The direct and indirect ownership interests in Snapper Limited and Piper Limited are
detailed in Table VI. The reason for this calculation is that, consistent with IAS 27 (2008),
indirect non-controlling interest equity holders are entitled to a share in the post
acquisition pro?ts or losses of the sub-subsidiary. Calculating indirect non-controlling
interest in equity ensures any post acquisition pro?ts or losses are correctly calculated
and allocated to the non-controlling interest in earnings for the current year and
appropriate adjustments are made to opening retained earnings to account for the share
of earnings fromthe date of acquisition to the beginning of the current reporting period.
Where direct and indirect holdings are held in a subsidiary and non-controlling
interests in pro?ts or losses requires calculation, how goodwill impairment losses are
allocated to the different reporting entities is critical. There are a number of alternative
treatments. First, all goodwill impairment losses could be allocated to the ultimate
parent entity in the group (in this case, King?sh Limited). Second, the goodwill
impairment losses could be allocated to the immediate parent entity of the
sub-subsidiary (Snapper Limited is the immediate parent entity of Piper Limited).
Third, the goodwill impairment losses could be allocated to the sub-subsidiary (Piper
Limited) (Deegan, 2010). While this issue is not dealt with speci?cally in the accounting
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standards, the appropriate treatment of goodwill impairment losses relating to an
investment in a subsidiary depends upon how the non-controlling interest is measured.
Table VII details how the non-controlling interest in Snapper Limited and Piper
Limited is measured when the management of King?sh Limited and Snapper Limited
value non-controlling interest in subsidiaries at the proportionate share of the
acquiree’s identi?able net assets.
Table II.
Calculating the
non-controlling interest in
Snapper Limited where
non-controlling interest is
measured at the
proportionate share of the
Snapper Limited’s
identi?able net assets
Calculating
non-controlling
interest
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Illustration 2.
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Table VIII details how the non-controlling interest in Snapper Limited and Piper
Limited is measured when the management of King?sh Limited and Snapper Limited
value non-controlling interest in subsidiaries at fair value.
Table IX details how the non-controlling interest in Snapper Limited and Piper
Limited is measured when the management of King?sh Limited value non-controlling
interest in Snapper Limited at fair value and the management of Snapper Limited value
non-controlling interest in Piper Limited at the proportionate share of the acquiree’s
identi?able net assets.
In Table X the measurement of non-controlling interest in Snapper Limited and
Piper Limited is measured where the management of King?sh Limited measures
non-controlling interest in Snapper Limited at the proportionate share of the acquiree’s
identi?able net assets, while the management of Snapper Limited measures the
non-controlling interest in Piper Limited at fair value.
The differences in the amount of non-controlling interest in earnings for the current
year, the statement of ?nancial position non-controlling interest balance, closing
retained earnings and total equity under the four scenarios considered in Illustration 2
are summarised in Table XI.
Rules for accounting for goodwill impairment loss
Some rules for accounting for goodwill impairment loss when measuring
non-controlling interest under both valuation methods can be summarised as follows.
Non-controlling interest in Snapper Limited and Piper Limited measured at the
proportionate share of the acquiree’s identi?able net assets
If the non-controlling interest in the immediate parent (Snapper Limited) and the
sub-subsidiary (Piper Limited) is measured at the proportionate share of the acquiree’s
Illustration 2.
Calculating
non-controlling
interest
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Table III.
Calculating the
non-controlling interest in
Snapper Limited where
non-controlling interest is
measured at fair value
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identi?able net assets under a sequential consolidation approach goodwill impairment
losses are not deducted from pro?t for the year when measuring non-controlling
interest. This is consistent with the position taken in Illustration 1, as under this method
of valuation, goodwill impairment losses are not allocated to the non-controlling interest.
Table III.
>Non-controlling interest
in earnings ($)
Retained earnings
1 April 2008 ($)
Non-controlling interest measured at proportionate
share of the acquiree’s identi?able net assets
394,500 442,500
Non-controlling interest measured at fair value 379,500 418,500
Difference 15,000 24,000
Table IV.
Differences in
non-controlling interest in
earnings and opening
retained earnings under
two valuation approaches
Snapper limited Piper limited
Non-controlling interest
measured at
Fair value Fair value
Non-controlling interest
measured at
Proportionate share of the
acquiree’s identi?able net assets
Proportionate share of the
acquiree’s identi?able net assets
Non-controlling interest
measured at
Fair value Proportionate share of the
acquiree’s identi?able net assets
Non-controlling interest
measured at
Proportionate share of the
acquiree’s identi?able net assets
Fair value
Table V.
Different combinations of
valuing non-controlling
interest available in
Illustration 2
Calculating
non-controlling
interest
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The logic behind this position is that goodwill has been calculated in accordance with the
parent entity[7] concept of consolidation However, when the multiple consolidation
approach described in this paper is used, the goodwill impairment losses relating to the
purchase of the sub-subsidiary (Piper Limited) should be attributed to (any)
non-controlling interest in the immediate parent (Snapper Limited) entity of the
sub-subsidiary (Piper Limited), and the ultimate parent interest (King?sh Limited) in the
sub-subsidiary (Piper Limited).
Non-controlling interest in Snapper Limited and Piper Limited measured at fair value
If the non-controlling interest in the immediate parent (Snapper Limited) and the
sub-subsidiary (Piper Limited) is measured at fair value, then any goodwill impairment
losses associated with the acquisition of the immediate parent (Snapper Limited) and
the sub-subsidiary (Piper Limited) must be deducted from the respective pro?ts for
the year. Any goodwill impairment losses from the previous period and associated
with the immediate parent or sub-subsidiary must be deducted from the respective
post acquisition retained earnings. This is consistent with the position taken in
Illustration 1, as under this method of valuation goodwill impairment losses are
allocated between the parent and the non-controlling interest on the same basis as that
on which pro?t or loss is allocated. The logic behind this position is that the goodwill
relating to both the immediate parent’s (Snapper Limited’s) interest in the
sub-subsidiary (Piper Limited) and the non-controlling interest in the sub-subsidiary
(Piper Limited) is recognised upon consolidation, because goodwill is calculated in
accordance with the entity perspective[8] of consolidation.
Non-controlling interest in Snapper Limited measured at fair value and Piper Limited
measured at the proportionate share of the acquiree’s identi?able net assets
If the non-controlling interest in the sub-subsidiary (Piper Limited) is measured at the
proportionate share of the acquiree’s identi?able net assets and the non-controlling
interest in the immediate parent (Snapper Limited) is measured at fair value, then any
goodwill impairment losses associated with the acquisition of the sub-subsidiary and
the immediate parent must be deducted from the immediate parent (Snapper Limited)
subsidiary’s pro?t for the year when measuring non-controlling interest. Any goodwill
impairment losses associated with the immediate parent or sub-subsidiary in previous
reporting periods must be deducted from the post acquisition retained earnings of the
immediate parent (Snapper Limited). The logic behind this position is that the goodwill
relating to both the immediate parent’s (Snapper Limited) interest in the sub-subsidiary
Table VI.
Ownership interests in
Snapper Limited and
piper Limited
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Table VII.
Calculating the
non-controlling interest in
Snapper Limited and
Piper Limited where the
non-controlling interest in
both subsidiaries is
measured at the
proportionate share of the
acquiree’s identi?able net
assets
Calculating
non-controlling
interest
225
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(Piper Limited), and the non-controlling interest in the sub-subsidiary (Piper Limited),
is recognised upon consolidation, because goodwill is calculated in accordance with the
entity perspective of consolidation. Therefore, parts of the goodwill impairment losses
relating to the purchase of a sub-subsidiary (Piper Limited) should be attributed to
(any) non-controlling interest in the immediate parent (Snapper Limited) entity of the
sub-subsidiary (Piper Limited), and to the ultimate parent interest (King?sh Limited) in
the sub-subsidiary (Piper Limited). Consequently, goodwill impairment losses relating
to the purchase of a sub-subsidiary (Piper Limited) should be attributed to the
immediate parent entity of the sub-subsidiary (Snapper Limited).
Non-controlling interest in Snapper Limited measured at the proportionate share of the
acquiree’s identi?able net assets and Piper Limited measured at fair value
If the non-controlling interest in the immediate parent (Snapper Limited) is measured at
the proportionate share of the acquiree’s identi?able net assets and the non-controlling
interest in the sub-subsidiary (Piper Limited) is measured at fair value, then any goodwill
impairment losses associated with the acquisition of the sub-subsidiary must be deducted
from the sub-subsidiary’s pro?t for the year when measuring non-controlling interest.
Any goodwill impairment losses associated with the sub-subsidiary in previous reporting
periods must be deducted from the post acquisition retained earnings of the
sub-subsidiary (Piper Limited).
Conclusion
This paper illustrates how the impairment of purchased goodwill should be treated
when calculating and accounting for non-controlling interest. It is an area that, if not
correctly considered, will lead to incorrect measures attributed to non-controlling
interest in earnings. From the above calculations, it is clear that the contention referred
to earlier by Alfredson et al. (2009, p. 1010) and Picker et al. (2009, p. 1040) that the
choice between the methods of measuring non-controlling interest “has no effect on
Table VII.
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Table VIII.
Calculating the
non-controlling interest in
Snapper Limited and
Piper Limited where the
non-controlling interest in
both subsidiaries is
measured at fair value
Calculating
non-controlling
interest
227
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Table VIII.
Table IX.
Calculating the
non-controlling interest
in Snapper Limited and
Piper Limited where
management of King?sh
Limited measured
non-controlling interest
in Snapper Limited at fair
value and the
management of Snapper
Limited measured
non-controlling interest
in Piper Limited at the
proportionate share of the
acquiree’s identi?able net
assets
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post-acquisition equity” is misleading. The method used to measure non-controlling
and the associated goodwill impairment impacts the amount of non-controlling interest
disclosed in the statement of ?nancial position and on the face of the statement of
comprehensive income. Failure to correctly calculate non-controlling interest has
consequences. For example, earnings per share is calculated on the basis of “pro?t or
loss attributable to ordinary equity holders of the parent entity” (IAS 33, 2003,
paragraph 12). Incorrectly calculating non-controlling interest will have a ?ow-on
effect when calculating earnings per share and diluted earnings per share.
Table IX.
Calculating
non-controlling
interest
229
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Table X.
Calculating the
non-controlling interest
in Snapper Limited and
Piper Limited where
management of King?sh
Limited measured
non-controlling interest
in Snapper Limited at the
proportionate share of the
acquiree’s identi?able net
assets, while the
management of Snapper
Limited measured
non-controlling interest
in Piper Limited at fair
value
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Table X.
2009
Non-controlling
interest in
earnings
a
Closing
retained
earnings
Non-
controlling
interest
b
Total
equity
Non-controlling interest in Snapper
Limited and Piper Limited measured at
the non-controlling interest’s
proportionate share of the acquiree’s
identi?able net assets 891,100 9,149,800 3,600,200 27,350,000
Non-controlling interest in Snapper
Limited and Piper Limited measured at
fair value 866,300 9,214,000 4,014,571 27,828,571
Non-controlling interest in Snapper
Limited measured at fair value and non-
controlling interest in Piper Limited
measured at non-controlling interest’s
proportionate share of the acquiree’s
identi?able net assets 876,100 9,188,800 3,779,771 27,568,571
Non-controlling interest in Snapper
Limited measured at the non-controlling
interest’s proportionate share of the
acquiree’s identi?able net assets and non-
controlling interest in Piper Limited
measured at fair value 881,300 9,175,000 3,835,000 27,610,000
Notes:
a
Statement of comprehensive income;
b
statement of ?nancial position
Table XI.
Differences in the amount
of non-controlling interest
in earnings, the statement
of ?nancial position
non-controlling interest
balance, closing retained
earnings and total equity
Calculating
non-controlling
interest
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This paper has a number of limitations. It does not look at the reasons behind the IASB
decision to allow two methods of valuing non-controlling interest. In addition, it does
not examine the allocation of goodwill impairment expenses to individual components
of cash generating units.
Notes
1. Non-controlling interest in an acquiree measured at fair value is sometimes called the “full
goodwill method” while non-controlling interest measured at the proportionate share of the
acquiree’s identi?able net assets is sometimes called the “partial goodwill method”.
2. IFRS 3 (2008) and IAS 27 (2008) are to be applied prospectively to business combinations
where the acquisition date is on or after the beginning of the ?rst annual reporting period
beginning on or after 1 July 2009. The IASB permitted earlier application.
3. In Australia, however, this did not extend to including the inverse sum-of-digits method (see
Deegan, 2010, p. 274 for a more complete discussion).
4. For the purposes of this paper, in Illustration 1 the subsidiary Snapper Limited, and in
Illustration 2, the subsidiaries Snapper Limited and Piper Limited, are assumed to be cash
generating units.
5. Calculation of goodwill on acquisition date where the non-controlling interest in Snapper
Limited is measured at fair value:
6. Calculation of goodwill on acquisition date where the non-controlling interest in Snapper
Limited is measured at fair value:
7. Under the parent entity perspective of consolidation, the economic entity consists of the net
assets of the parent and the net assets of the subsidiary but the non-controlling interest is
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regarded as a liability to the economic entity. Under this concept, the parent shareholders are
equity while the non-controlling interest is a liability.
8. Under the entity perspective (also known as the entity theory) the reporting entity has a
substance of its own, separate fromthat of its owners. Under the entityperspective, the economic
entity consists of the net assets of the parent as well as the net assets of the subsidiary. Also, the
non-controlling interest is regarded as an equity holder in the group. Under the entity
perspective, both the parent shareholders and non-controlling interest are equity.
References
Alfredson, K., Leo, K., Picker, R., Loftus, J., Clarke, K. and Wise, V. (2009), Applying International
Financial Reporting Standards, 2nd ed., Wiley, Milton.
Bradbury, M. and Prangnell, H. (2005), “(Net) Fair value accounting for forward contracts”,
Australian Accounting Review, Vol. 15 No. 3, pp. 84-9.
Deegan, C. (2010), Australian Financial Accounting, 6th ed., McGraw-Hill, North Ryde.
Deegan, C. and Samkin, G. (2009), New Zealand Financial Accounting, 4th ed., McGraw-Hill,
North Ryde, NSW.
Goodwin, J. and Alfredson, K. (2000), “Consolidation accounting: how you should account for
intragroup sales of depreciable noon-current assets when their estimated total useful life
changes on acquisition”, Accounting Research Journal, Vol. 13 No. 2, pp. 95-101.
IAS 33 (2003), Earnings per Share, International Accounting Standards Committee Foundation,
International Accounting Standards, London.
IAS 36 (2008), Impairment of Assets, International Accounting Standards Committee
Foundation, International Accounting Standard, London.
IAS 27 (2008), Consolidated and Separate Financial Statements, International Accounting
Standards Committee Foundation, International Accounting Standard, London.
IFRS 3 (2004), Business Combinations, International Accounting Standards Committee
Foundation, International Financial Reporting Standard, London.
IFRS 3 (2008), Business Combinations, International Accounting Standards Committee
Foundation, International Financial Reporting Standard, London.
Picker, R., Leo, K., Loftus, J., Clarke, K. and Wise, V. (2009), Australian Accounting Standards,
2nd ed., Wiley, Milton.
Corresponding author
Grant Samkin can be contacted at: [email protected]
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Calculating
non-controlling
interest
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doc_139611856.pdf
The primary aim of this paper is to illustrate how goodwill impairment loss should be
accounted for when measuring non-controlling interest in subsidiaries.
Accounting Research Journal
Calculating non-controlling interest in the presence of goodwill impairment
Grant Samkin Craig Deegan
Article information:
To cite this document:
Grant Samkin Craig Deegan, (2010),"Calculating non-controlling interest in the presence of goodwill
impairment", Accounting Research J ournal, Vol. 23 Iss 2 pp. 213 - 233
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Calculating non-controlling
interest in the presence
of goodwill impairment
Grant Samkin
Department of Accounting, University of Waikato, Hamilton, New Zealand, and
Craig Deegan
School of Accounting and Law, RMIT University, Melbourne, Australia
Abstract
Purpose – The primary aim of this paper is to illustrate how goodwill impairment loss should be
accounted for when measuring non-controlling interest in subsidiaries.
Design/methodology/approach – The paper uses two scenarios to illustrate how non-controlling
interest in subsidiaries should be measured in the presence of goodwill impairment loss.
Findings – The way the management of a reporting entity values the non-controlling interest in a
subsidiary will result in different amounts being disclosed in ?nancial statements for non-controlling
interest in earnings, non-controlling interest, retained earnings and total equity.
Research limitations/implications – The paper uses two scenarios to illustrate a simple
consolidation with a parent entity, a subsidiary and a sub-subsidiary.
Practical implications – Practical guidance on how goodwill impairment losses under
International Accounting Standard 36 Impairment of Assets when measuring non-controlling
interest under International Financial Reporting Standard 3 Business Combination, is provided.
Originality/value – The paper corrects any misunderstanding that may exist on the impact
goodwill impairment losses have on closing equity when non-controlling interest is calculated under
the different methods of valuing non-controlling interest.
Keywords Interest, Share values, Financial management
Paper type Technical paper
Introduction
In 2008, the International Accounting Standards Board (IASB) revised International
Accounting Standard (IAS 27) (2008) Consolidated and Separate Financial Statements
and International Financial Reporting Standard 3 (IFRS 3) (2008) Business
Combinations. The revisions to IAS 27 (2008) and IFRS 3 (2008) were part of the
second phase of the business combinations project undertaken between the United
States Financial Accounting Standards Board(FASB) and the IASBto improve ?nancial
reporting while promoting convergence of accounting standards. The IAS 27 (2008)
revisions dealt primarily with accounting for non-controlling interest and for the loss of
control of a subsidiary, while the IFRS 3 (2008) revisions were aimed at providing
guidance when applying the acquisition method to business combinations. In particular,
IFRS 3 (2008) sought to establish principles and requirements for how an acquirer:
.
recognises and measures in its ?nancial statements the identi?able assets
acquired, the liabilities assumed and any non-controlling interest in the acquiree;
.
recognises and measures the goodwill acquired in the business combination or a
gain from a bargain purchase; and
The current issue and full text archive of this journal is available at
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Calculating
non-controlling
interest
213
Accounting Research Journal
Vol. 23 No. 2, 2010
pp. 213-233
qEmerald Group Publishing Limited
1030-9616
DOI 10.1108/10309611011073278
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determines what information to disclose to enable users of the ?nancial
statements to evaluate the nature and ?nancial effects of the business
combination (IFRS 3, 2008, paragraph IN4).
Prior to the revision of IFRS 3 (2008), reporting entities were required to value
non-controlling interest at the proportionate share of the acquiree’s identi?able net
assets. The revision of IFRS 3 (2008) introduced an option and permitted any
non-controlling interest in an acquiree to be measured at fair value or at the
non-controlling interest’s proportionate share of the acquiree’s identi?able net assets
(IFRS 3, 2008, paragraph 19)[1,2].
The recent introduction of IFRS 3 (2008) means that this issue has not been fully
addressed in recently published undergraduate accounting texts. In part, this omission
might be due to some of the complexities involved. Although two recently published
texts, Alfredson et al. (2009) and Picker et al. (2009), have updated their material to take
into account revisions to IAS 27 (2008) and IFRS 3 (2008), they fail to address how the
impairment of goodwill will impact the measurement of non-controlling interest in the
presence of indirect non-controlling interest under the different valuation methods.
While recognising the choice IFRS 3 (2008) provides when valuing non-controlling
interest, Alfredson et al. (2009, p. 1010) and Picker et al. (2009, p. 1040), use the
following identical rationale to justify their failure to address this issue:
This choice has no effect on post-acquisition equity. Hence, the calculation of the INCI share
of equity is unaffected by which goodwill method is used. In this chapter, the partial
goodwill method is used in all examples (Emphasis in original).
What this article shows is that the choice made about how to measure non-controlling
interest will impact measurements of non-controlling interest and, therefore, the total
equity of a consolidated group of entities. In line with previous contributions (Goodwin
and Alfredson, 2000; Bradbury and Prangnell, 2005), this paper uses simple
illustrations to detail the correct accounting treatment of a contentious issue. This
paper contributes to the accounting literature by using two simple illustrations that
show the correct treatment of goodwill impairment loss when the non-controlling
interest in subsidiaries is measured at fair value, at the proportionate share of the
acquiree’s identi?able net assets, or a combination of fair value and proportionate
share of the acquiree’s identi?able net assets.
This paper is structured as follows. First, goodwill in the context of business
combinations and the requirements relating to goodwill impairment are considered.
Non-controlling interest and how it should be calculated is then described. Finally, two
simple cases are used to illustrate how goodwill impairment loss impacts on the
measurement of non-controlling interest to be disclosed in ?nancial statements.
Goodwill and goodwill impairment
Goodwill is de?ned as “an asset representing the future economic bene?ts arising from
other assets acquired in a business combination that are not individually identi?ed and
separately recognised” (IFRS 3, 2008; IAS 36, 2008, paragraph 81). In the context of
business combinations, the rules for recognising goodwill are provided in IFRS 3 (2008,
paragraph 32) as follows.
The acquirer shall recognise goodwill as of the acquisition date measured as the
excess of (1) over (2) below:
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(1) the aggregate of:
.
the consideration transferred measured in accordance with this IFRS, which
generally requires acquisition-date fair value (see paragraph 37);
.
the amount of any non-controlling interest in the acquiree measured in
accordance with this IFRS; and
.
in a business combination achieved in stages (see paragraphs 41 and 42), the
acquisition-date fair value of the acquirer’s previously held equity interest in
the acquiree.
(2) the net of the acquisition-date amounts of the identi?able assets acquired and
the liabilities assumed measured in accordance with this IFRS.
The above paragraph is simpli?ed in Table I.
From Table I it is clear that goodwill as a resource controlled by the reporting entity
from which future economic bene?ts are expected to arise is a residual. The residual
results from a direct measurement of goodwill not being possible (Basis for
Conclusions, 2008, paragraph BC238).
Prior to the adoption of International Financial Reporting Standards (IFRS),
reporting entities in countries including New Zealand and Australia systematically
amortised purchased goodwill over the period in which the bene?ts were expected to be
realised. This period usually had an upper limit of 20 years. Although the usual method
of amortisation was the straight line basis, reporting entities were permitted to use other
methods if they were considered more appropriate[3]. Adopting IFRSs ensured that this
practice ceased, with reporting entities being prohibited from amortising goodwill.
Rather, any goodwill acquired in a business combination was to be measured at cost less
any accumulated impairment losses (IFRS 3, 2004, paragraph 54). Additionally,
goodwill was to be tested annually for impairment “or more frequently if events or
changes in circumstances indicate that it might be impaired, in accordance with IAS 36
Impairment of Assets” (IFRS 3, 2004, paragraph 55).
The revision of IFRS 3 (2008) saw the goodwill accounting requirements being
incorporated into IAS 36 (2008). Speci?cally, IAS 36 (2008, paragraph 90) requires:
A cash-generating unit to which goodwill has been allocated shall be tested for impairment
annually, and whenever there is an indication that the unit may be impaired, by comparing
the carrying amount of the unit, including the goodwill, with the recoverable amount of the
unit. If the recoverable amount of the unit exceeds the carrying amount of the unit, the unit
and the goodwill allocated to that unit shall be regarded as not impaired. If the carrying
amount of the unit exceeds the recoverable amount of the unit, the entity shall recognise the
impairment loss in accordance with paragraph 104.
Table I.
Calculation of goodwill
impairment
Calculating
non-controlling
interest
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Although the IAS 36 (2008) requirements are more detailed than those contained in
IFRS 3 (2004), the underlying principles articulated in IFRS 3 (2004) remain the same.
Finally, goodwill impairment testing can take place at any time during the reporting
period provided the test is performed at the same time each year.
Calculation of non-controlling interest
IAS 27 (2008) saw the previously used term “minority interest” changed to
“non-controlling interest”. The IASB argued that the term “non-controlling interest”
was a more accurate descriptor than “minority interest” as the owner of a minority
interest in an entity might in fact control the entity, while the owners of a majority
interest might not be able to exercise control (IAS 27, 2008).
Non-controlling interest then is de?ned as “the equity in a subsidiary not
attributable, directly or indirectly, to a parent” (IFRS 3, 2008). Treating non-controlling
interest as equity is consistent with the entity perspective favoured by the IASB.
Additionally, this treatment con?rms the view that non-controlling interest is not a
liability as it fails to meet the de?nition of a liability in the Framework for the
Preparation and Presentation of Financial Statements (IAS 27, 2008).
The steps necessary to undertake a consolidation, and in particular the calculation
of non-controlling interest, are detailed in IAS 27 (2008, paragraph 18):
(1) non-controlling interests in the pro?t or loss of consolidated subsidiaries for the
reporting period are identi?ed; and
(2) non-controlling interests in the net assets of consolidated subsidiaries are
identi?ed separately from the parent’s ownership interests in them.
Non-controlling interests in the net assets consist of:
.
the amount of those non-controlling interests at the date of the original
combination calculated in accordance with IFRS 3; and
.
the non-controlling interests’ share of changes in equity since the date of the
combination.
As indicated earlier, IFRS 3 (2008, paragraph 19) provides reporting entities with the
following choices when measuring non-controlling interests:
For each business combination, the acquirer shall measure any non-controlling interest in the
acquiree either at fair value or at the non-controlling interest’s proportionate share of the
acquiree’s identi?able net assets.
Permitting the choice of two valuation methods provides reporting entities with
?exibility when accounting for business combinations. For example, an entity can
measure non-controlling interest at fair value for the ?rst acquisition while measuring
non-controlling interest at the proportionate share of the acquiree’s identi?able net
assets for a subsequent acquisition.
Permitting non-controlling interest to be measured in different ways gives rise to
the issue of how any goodwill impairment loss attributed to non-controlling interest is
allocated. Appendix C to IAS 36 (2008, paragraph C6) provides clarity by stating:
If a subsidiary, or part of a subsidiary, with a non-controlling interest is itself a cash-generating
unit, the impairment loss is allocated between the parent and the non-controlling interest on the
same basis as that on which pro?t or loss is allocated.
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Following the guidance provided by IAS 27 (2008), the non-controlling interest in the
two cases that follow is measured in three steps as follows:
(1) Non-controlling interests’ share in the net assets (equity) of subsidiaries at the
dates the parent entity acquired the subsidiaries. This requires the
non-controlling interest’s share of the pre-acquisition balances of contributed
equity, retained earnings and reserves to be recorded.
(2) Non-controlling interests’ share in the changes in post acquisition equity. This
is achieved through recording of the non-controlling interest’s share of the post
acquisition movements in retained earnings and reserves.
On 1 April 2007, King?sh Limited acquired 70 per cent of the equity of Snapper Limited[4] for
$4,500,000. On the date of acquisition, the equity of Snapper Limited is as follows:
Illustration 1.
Calculating
non-controlling
interest
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(3) Non-controlling interests’ share in the pro?t or loss of the subsidiaries in the
current period. At the end of the reporting period the non-controlling interest’s
share in pro?t for the year, distributions and transfers made and movements in
reserves for the year must be recorded (Deegan and Samkin, 2009, p. 863).
The measurement of non-controlling interest in Snapper Limited assuming the
management of King?sh Limited measures non-controlling interest at the
proportionate share of the acquiree’s identi?able net assets is detailed in Table II.
In the above scenario, no goodwill impairment losses have been taken into account
in the measurement of the non-controlling interest in Snapper Limited. However, if
management of King?sh Limited measures the non-controlling interest in Snapper
Limited at fair value, then consistent with IAS 36 (2008), paragraph C6, goodwill
impairment losses must be allocated between the parent and the non-controlling
interest on the same basis as that on which pro?t and loss is allocated. This allocation
is detailed in Table III.
Note that although the journal entry to account for the impairment of goodwill is the
same in both cases, there is a difference in the amount of the non-controlling interest
recognised in earnings and retained earnings under the two approaches. These
differences are detailed in Table IV.
Including the goodwill impairment in the calculation of the non-controlling interest
ensures that the IAS 36 (2008) requirements regarding the allocation of the impairment
between the parent and the non-controlling interest are met.
Illustration 2 extends the scenario to incorporate a subsidiary of Snapper Limited
which ensures that valuation of non-controlling interest includes indirect
non-controlling interest. IFRS 3 (2008) permits non-controlling interest in an
acquiree to be measured at fair value or at the non-controlling interest’s
proportionate share of the acquiree’s identi?able net assets. Reporting entities,
therefore, have the choice of which measure to use in each business combination.
Table V details the different combinations available when valuing the non-controlling
interest in the subsidiaries Snapper Limited and Piper Limited is considered.
The direct and indirect ownership interests in Snapper Limited and Piper Limited are
detailed in Table VI. The reason for this calculation is that, consistent with IAS 27 (2008),
indirect non-controlling interest equity holders are entitled to a share in the post
acquisition pro?ts or losses of the sub-subsidiary. Calculating indirect non-controlling
interest in equity ensures any post acquisition pro?ts or losses are correctly calculated
and allocated to the non-controlling interest in earnings for the current year and
appropriate adjustments are made to opening retained earnings to account for the share
of earnings fromthe date of acquisition to the beginning of the current reporting period.
Where direct and indirect holdings are held in a subsidiary and non-controlling
interests in pro?ts or losses requires calculation, how goodwill impairment losses are
allocated to the different reporting entities is critical. There are a number of alternative
treatments. First, all goodwill impairment losses could be allocated to the ultimate
parent entity in the group (in this case, King?sh Limited). Second, the goodwill
impairment losses could be allocated to the immediate parent entity of the
sub-subsidiary (Snapper Limited is the immediate parent entity of Piper Limited).
Third, the goodwill impairment losses could be allocated to the sub-subsidiary (Piper
Limited) (Deegan, 2010). While this issue is not dealt with speci?cally in the accounting
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standards, the appropriate treatment of goodwill impairment losses relating to an
investment in a subsidiary depends upon how the non-controlling interest is measured.
Table VII details how the non-controlling interest in Snapper Limited and Piper
Limited is measured when the management of King?sh Limited and Snapper Limited
value non-controlling interest in subsidiaries at the proportionate share of the
acquiree’s identi?able net assets.
Table II.
Calculating the
non-controlling interest in
Snapper Limited where
non-controlling interest is
measured at the
proportionate share of the
Snapper Limited’s
identi?able net assets
Calculating
non-controlling
interest
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Illustration 2.
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Table VIII details how the non-controlling interest in Snapper Limited and Piper
Limited is measured when the management of King?sh Limited and Snapper Limited
value non-controlling interest in subsidiaries at fair value.
Table IX details how the non-controlling interest in Snapper Limited and Piper
Limited is measured when the management of King?sh Limited value non-controlling
interest in Snapper Limited at fair value and the management of Snapper Limited value
non-controlling interest in Piper Limited at the proportionate share of the acquiree’s
identi?able net assets.
In Table X the measurement of non-controlling interest in Snapper Limited and
Piper Limited is measured where the management of King?sh Limited measures
non-controlling interest in Snapper Limited at the proportionate share of the acquiree’s
identi?able net assets, while the management of Snapper Limited measures the
non-controlling interest in Piper Limited at fair value.
The differences in the amount of non-controlling interest in earnings for the current
year, the statement of ?nancial position non-controlling interest balance, closing
retained earnings and total equity under the four scenarios considered in Illustration 2
are summarised in Table XI.
Rules for accounting for goodwill impairment loss
Some rules for accounting for goodwill impairment loss when measuring
non-controlling interest under both valuation methods can be summarised as follows.
Non-controlling interest in Snapper Limited and Piper Limited measured at the
proportionate share of the acquiree’s identi?able net assets
If the non-controlling interest in the immediate parent (Snapper Limited) and the
sub-subsidiary (Piper Limited) is measured at the proportionate share of the acquiree’s
Illustration 2.
Calculating
non-controlling
interest
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Table III.
Calculating the
non-controlling interest in
Snapper Limited where
non-controlling interest is
measured at fair value
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identi?able net assets under a sequential consolidation approach goodwill impairment
losses are not deducted from pro?t for the year when measuring non-controlling
interest. This is consistent with the position taken in Illustration 1, as under this method
of valuation, goodwill impairment losses are not allocated to the non-controlling interest.
Table III.
>Non-controlling interest
in earnings ($)
Retained earnings
1 April 2008 ($)
Non-controlling interest measured at proportionate
share of the acquiree’s identi?able net assets
394,500 442,500
Non-controlling interest measured at fair value 379,500 418,500
Difference 15,000 24,000
Table IV.
Differences in
non-controlling interest in
earnings and opening
retained earnings under
two valuation approaches
Snapper limited Piper limited
Non-controlling interest
measured at
Fair value Fair value
Non-controlling interest
measured at
Proportionate share of the
acquiree’s identi?able net assets
Proportionate share of the
acquiree’s identi?able net assets
Non-controlling interest
measured at
Fair value Proportionate share of the
acquiree’s identi?able net assets
Non-controlling interest
measured at
Proportionate share of the
acquiree’s identi?able net assets
Fair value
Table V.
Different combinations of
valuing non-controlling
interest available in
Illustration 2
Calculating
non-controlling
interest
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The logic behind this position is that goodwill has been calculated in accordance with the
parent entity[7] concept of consolidation However, when the multiple consolidation
approach described in this paper is used, the goodwill impairment losses relating to the
purchase of the sub-subsidiary (Piper Limited) should be attributed to (any)
non-controlling interest in the immediate parent (Snapper Limited) entity of the
sub-subsidiary (Piper Limited), and the ultimate parent interest (King?sh Limited) in the
sub-subsidiary (Piper Limited).
Non-controlling interest in Snapper Limited and Piper Limited measured at fair value
If the non-controlling interest in the immediate parent (Snapper Limited) and the
sub-subsidiary (Piper Limited) is measured at fair value, then any goodwill impairment
losses associated with the acquisition of the immediate parent (Snapper Limited) and
the sub-subsidiary (Piper Limited) must be deducted from the respective pro?ts for
the year. Any goodwill impairment losses from the previous period and associated
with the immediate parent or sub-subsidiary must be deducted from the respective
post acquisition retained earnings. This is consistent with the position taken in
Illustration 1, as under this method of valuation goodwill impairment losses are
allocated between the parent and the non-controlling interest on the same basis as that
on which pro?t or loss is allocated. The logic behind this position is that the goodwill
relating to both the immediate parent’s (Snapper Limited’s) interest in the
sub-subsidiary (Piper Limited) and the non-controlling interest in the sub-subsidiary
(Piper Limited) is recognised upon consolidation, because goodwill is calculated in
accordance with the entity perspective[8] of consolidation.
Non-controlling interest in Snapper Limited measured at fair value and Piper Limited
measured at the proportionate share of the acquiree’s identi?able net assets
If the non-controlling interest in the sub-subsidiary (Piper Limited) is measured at the
proportionate share of the acquiree’s identi?able net assets and the non-controlling
interest in the immediate parent (Snapper Limited) is measured at fair value, then any
goodwill impairment losses associated with the acquisition of the sub-subsidiary and
the immediate parent must be deducted from the immediate parent (Snapper Limited)
subsidiary’s pro?t for the year when measuring non-controlling interest. Any goodwill
impairment losses associated with the immediate parent or sub-subsidiary in previous
reporting periods must be deducted from the post acquisition retained earnings of the
immediate parent (Snapper Limited). The logic behind this position is that the goodwill
relating to both the immediate parent’s (Snapper Limited) interest in the sub-subsidiary
Table VI.
Ownership interests in
Snapper Limited and
piper Limited
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Table VII.
Calculating the
non-controlling interest in
Snapper Limited and
Piper Limited where the
non-controlling interest in
both subsidiaries is
measured at the
proportionate share of the
acquiree’s identi?able net
assets
Calculating
non-controlling
interest
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(Piper Limited), and the non-controlling interest in the sub-subsidiary (Piper Limited),
is recognised upon consolidation, because goodwill is calculated in accordance with the
entity perspective of consolidation. Therefore, parts of the goodwill impairment losses
relating to the purchase of a sub-subsidiary (Piper Limited) should be attributed to
(any) non-controlling interest in the immediate parent (Snapper Limited) entity of the
sub-subsidiary (Piper Limited), and to the ultimate parent interest (King?sh Limited) in
the sub-subsidiary (Piper Limited). Consequently, goodwill impairment losses relating
to the purchase of a sub-subsidiary (Piper Limited) should be attributed to the
immediate parent entity of the sub-subsidiary (Snapper Limited).
Non-controlling interest in Snapper Limited measured at the proportionate share of the
acquiree’s identi?able net assets and Piper Limited measured at fair value
If the non-controlling interest in the immediate parent (Snapper Limited) is measured at
the proportionate share of the acquiree’s identi?able net assets and the non-controlling
interest in the sub-subsidiary (Piper Limited) is measured at fair value, then any goodwill
impairment losses associated with the acquisition of the sub-subsidiary must be deducted
from the sub-subsidiary’s pro?t for the year when measuring non-controlling interest.
Any goodwill impairment losses associated with the sub-subsidiary in previous reporting
periods must be deducted from the post acquisition retained earnings of the
sub-subsidiary (Piper Limited).
Conclusion
This paper illustrates how the impairment of purchased goodwill should be treated
when calculating and accounting for non-controlling interest. It is an area that, if not
correctly considered, will lead to incorrect measures attributed to non-controlling
interest in earnings. From the above calculations, it is clear that the contention referred
to earlier by Alfredson et al. (2009, p. 1010) and Picker et al. (2009, p. 1040) that the
choice between the methods of measuring non-controlling interest “has no effect on
Table VII.
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Table VIII.
Calculating the
non-controlling interest in
Snapper Limited and
Piper Limited where the
non-controlling interest in
both subsidiaries is
measured at fair value
Calculating
non-controlling
interest
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Table VIII.
Table IX.
Calculating the
non-controlling interest
in Snapper Limited and
Piper Limited where
management of King?sh
Limited measured
non-controlling interest
in Snapper Limited at fair
value and the
management of Snapper
Limited measured
non-controlling interest
in Piper Limited at the
proportionate share of the
acquiree’s identi?able net
assets
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post-acquisition equity” is misleading. The method used to measure non-controlling
and the associated goodwill impairment impacts the amount of non-controlling interest
disclosed in the statement of ?nancial position and on the face of the statement of
comprehensive income. Failure to correctly calculate non-controlling interest has
consequences. For example, earnings per share is calculated on the basis of “pro?t or
loss attributable to ordinary equity holders of the parent entity” (IAS 33, 2003,
paragraph 12). Incorrectly calculating non-controlling interest will have a ?ow-on
effect when calculating earnings per share and diluted earnings per share.
Table IX.
Calculating
non-controlling
interest
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Table X.
Calculating the
non-controlling interest
in Snapper Limited and
Piper Limited where
management of King?sh
Limited measured
non-controlling interest
in Snapper Limited at the
proportionate share of the
acquiree’s identi?able net
assets, while the
management of Snapper
Limited measured
non-controlling interest
in Piper Limited at fair
value
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Table X.
2009
Non-controlling
interest in
earnings
a
Closing
retained
earnings
Non-
controlling
interest
b
Total
equity
Non-controlling interest in Snapper
Limited and Piper Limited measured at
the non-controlling interest’s
proportionate share of the acquiree’s
identi?able net assets 891,100 9,149,800 3,600,200 27,350,000
Non-controlling interest in Snapper
Limited and Piper Limited measured at
fair value 866,300 9,214,000 4,014,571 27,828,571
Non-controlling interest in Snapper
Limited measured at fair value and non-
controlling interest in Piper Limited
measured at non-controlling interest’s
proportionate share of the acquiree’s
identi?able net assets 876,100 9,188,800 3,779,771 27,568,571
Non-controlling interest in Snapper
Limited measured at the non-controlling
interest’s proportionate share of the
acquiree’s identi?able net assets and non-
controlling interest in Piper Limited
measured at fair value 881,300 9,175,000 3,835,000 27,610,000
Notes:
a
Statement of comprehensive income;
b
statement of ?nancial position
Table XI.
Differences in the amount
of non-controlling interest
in earnings, the statement
of ?nancial position
non-controlling interest
balance, closing retained
earnings and total equity
Calculating
non-controlling
interest
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This paper has a number of limitations. It does not look at the reasons behind the IASB
decision to allow two methods of valuing non-controlling interest. In addition, it does
not examine the allocation of goodwill impairment expenses to individual components
of cash generating units.
Notes
1. Non-controlling interest in an acquiree measured at fair value is sometimes called the “full
goodwill method” while non-controlling interest measured at the proportionate share of the
acquiree’s identi?able net assets is sometimes called the “partial goodwill method”.
2. IFRS 3 (2008) and IAS 27 (2008) are to be applied prospectively to business combinations
where the acquisition date is on or after the beginning of the ?rst annual reporting period
beginning on or after 1 July 2009. The IASB permitted earlier application.
3. In Australia, however, this did not extend to including the inverse sum-of-digits method (see
Deegan, 2010, p. 274 for a more complete discussion).
4. For the purposes of this paper, in Illustration 1 the subsidiary Snapper Limited, and in
Illustration 2, the subsidiaries Snapper Limited and Piper Limited, are assumed to be cash
generating units.
5. Calculation of goodwill on acquisition date where the non-controlling interest in Snapper
Limited is measured at fair value:
6. Calculation of goodwill on acquisition date where the non-controlling interest in Snapper
Limited is measured at fair value:
7. Under the parent entity perspective of consolidation, the economic entity consists of the net
assets of the parent and the net assets of the subsidiary but the non-controlling interest is
ARJ
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regarded as a liability to the economic entity. Under this concept, the parent shareholders are
equity while the non-controlling interest is a liability.
8. Under the entity perspective (also known as the entity theory) the reporting entity has a
substance of its own, separate fromthat of its owners. Under the entityperspective, the economic
entity consists of the net assets of the parent as well as the net assets of the subsidiary. Also, the
non-controlling interest is regarded as an equity holder in the group. Under the entity
perspective, both the parent shareholders and non-controlling interest are equity.
References
Alfredson, K., Leo, K., Picker, R., Loftus, J., Clarke, K. and Wise, V. (2009), Applying International
Financial Reporting Standards, 2nd ed., Wiley, Milton.
Bradbury, M. and Prangnell, H. (2005), “(Net) Fair value accounting for forward contracts”,
Australian Accounting Review, Vol. 15 No. 3, pp. 84-9.
Deegan, C. (2010), Australian Financial Accounting, 6th ed., McGraw-Hill, North Ryde.
Deegan, C. and Samkin, G. (2009), New Zealand Financial Accounting, 4th ed., McGraw-Hill,
North Ryde, NSW.
Goodwin, J. and Alfredson, K. (2000), “Consolidation accounting: how you should account for
intragroup sales of depreciable noon-current assets when their estimated total useful life
changes on acquisition”, Accounting Research Journal, Vol. 13 No. 2, pp. 95-101.
IAS 33 (2003), Earnings per Share, International Accounting Standards Committee Foundation,
International Accounting Standards, London.
IAS 36 (2008), Impairment of Assets, International Accounting Standards Committee
Foundation, International Accounting Standard, London.
IAS 27 (2008), Consolidated and Separate Financial Statements, International Accounting
Standards Committee Foundation, International Accounting Standard, London.
IFRS 3 (2004), Business Combinations, International Accounting Standards Committee
Foundation, International Financial Reporting Standard, London.
IFRS 3 (2008), Business Combinations, International Accounting Standards Committee
Foundation, International Financial Reporting Standard, London.
Picker, R., Leo, K., Loftus, J., Clarke, K. and Wise, V. (2009), Australian Accounting Standards,
2nd ed., Wiley, Milton.
Corresponding author
Grant Samkin can be contacted at: [email protected]
To purchase reprints of this article please e-mail: [email protected]
Or visit our web site for further details: www.emeraldinsight.com/reprints
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