Chapter 30 Further consolidation issues III: Accounting for indirect ownership interests

Objectives of this lecture Understand what an indirect equity ownership interest represents and how it is calculated Understand that the determination of the total ownership interest in a subsidiary must take account of both direct and indirect ownership interests Understand that the parent entity’s interest in the post- acquisition movements of a subsidiary’s retained earnings and other reserves will be based upon the sum of the direct and indirect ownership interests Understand that even in the presence of indirect ownership interests, the pre-acquisition capital and reserves of a subsidiary will be eliminated on consolidation on the basis of only the direct ownership interests

Indirect ownership interests AASB 10 requires that: the consolidated financial report include all subsidiaries of the parent Subsidiary defined as (AASB 10): an entity that is controlled by another entity According to paragraphs 6 and 7 of AASB 10: ‘Control’ can be exercised even in the absence of any direct ownership interest—it can arise through indirect ownership interests

Indirect ownership interests (cont) Parent Entity 70% A Limited 42% Non-controlling interest 30% 60% 18% B Limited Non-controlling interest 40%

Calculating direct and indirect interests Table 30.2 A Ltd B Ltd (% interest) (% interest) Parent Entity interest Direct 70 – Indirect – 42 Non-controlling interest Direct 30 40 Indirect – 18 100 100

Indirect ownership interests (cont.) Non-controlling interests represent: the equity in a subsidiary not attributable, directly or indirectly, to a parent Also possible to hold both direct and indirect interests in the same entity Consider Figure 30.2 (p. 1004)

Indirect ownership interests (cont.) Consolidation in the presence of indirect interests Refer to Worked Example 30.1 (p. 1005) Choice of two methods in performing consolidation Sequential-consolidation approach Consolidation of each separate legal entity with its controlled entities is performed sequentially (time-consuming and messy) Multiple-consolidation approach In eliminating investments held by the immediate parent entities only direct interests are taken into account Post-acquisition movements in subsidiaries’ shareholders’ funds allocated to ultimate parent entity on basis of sum of direct and indirect interests

Indirect ownership interests (cont.) Journal entries To eliminate parent’s investment in subsidiary Dr Share capital x Dr Retained earnings x Dr Goodwill x Cr Investment in subsidiary x The investment elimination is undertaken on the basis of direct ownership interests To recognise impairment of goodwill associated with acquisition Dr Impairment expense—goodwill x Cr Accumulated impairment losses—goodwill x

Indirect ownership interests (cont.) Journal entries (cont.) To eliminate dividends declared by subsidiary Dr Dividend payable x (statement of financial position) Cr Dividend receivable x Dr Dividend revenue x (statement of comprehensive income) Cr Dividend declared (statement of changes in equity) x 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.

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

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

Non-controlling interests in current period profits Where there is an intermediate parent entity there are a number of adjustments that 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 If the non-controlling interest in a subsidiary is valued at fair value at acquisition date 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 See Worked Example 30.1 on p. 1005 for a detailed explanation of the above adjustments

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)

Sequential acquisition Organisation A 1st acquisition Organisation B 2nd acquisition Organisation C

Non-sequential acquisition Organisation A 2nd acquisition B Group Organisation B 1st acquisition Organisation C

Non-sequential acquisitions In a sequential acquisition, the consolidated financial statements will be accounted for in the same manner as when acquisitions occur simultaneously. In a non-sequential acquisition, ultimate parent (Organisation A) is acquiring an interest in the B Group, rather than solely in Organisation B The value of Organisation B’s investment in Organisation C will be affected by post-acquisition profits and reserve movements in Organisation C

Non-sequential acquisitions (cont.) 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 are treated as part of pre-acquisition reserves, and therefore eliminated on consolidation Consider Worked Example 30.3 (p. 1029)—Example of a non-sequential acquisition

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