31-1 Copyright 2007 McGraw-Hill Australia Pty Ltd PPTs t/a Australian Financial Accounting 5e by Craig Deegan Slides prepared by Craig Deegan Chapter 31 Further consolidation issues III: Accounting for indirect ownership interests
31-2 Copyright 2007 McGraw-Hill Australia Pty Ltd PPTs t/a Australian Financial Accounting 5e by Craig Deegan Slides prepared by Craig Deegan Learning objectives Understand that the determination of the total ownership interest in a subsidiary must take account of both direct and indirect ownership interests Understand what an indirect equity ownership interest represents and how it is calculated 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
31-3 Copyright 2007 McGraw-Hill Australia Pty Ltd PPTs t/a Australian Financial Accounting 5e by Craig Deegan Slides prepared by Craig Deegan Indirect ownership interests AASB 127 requires that –the consolidated financial report include all subsidiaries of the parent Subsidiary defined as (AASB 127) –an entity (including a partnership) that is controlled by another entity (the parent) Control –is the power to govern the financial and operating policies of an entity so as to obtain benefits from its activities –can arise through indirect interests, i.e. without any direct ownership interest – hence, a parent entity does not need to have any direct ownership in another entity for that other entity to be considered a subsidiary
31-4 Copyright 2007 McGraw-Hill Australia Pty Ltd PPTs t/a Australian Financial Accounting 5e by Craig Deegan Slides prepared by Craig Deegan Indirect ownership interests (cont.) Example of an indirect controlling interest –consider Figure 31.1 (reproduced on following slide)
31-5 Copyright 2007 McGraw-Hill Australia Pty Ltd PPTs t/a Australian Financial Accounting 5e by Craig Deegan Slides prepared by Craig Deegan
31-6 Copyright 2007 McGraw-Hill Australia Pty Ltd PPTs t/a Australian Financial Accounting 5e by Craig Deegan Slides prepared by Craig Deegan Calculating direct and indirect interests We can calculate the percentage interest by constructing a table – consider the following slide
31-7 Copyright 2007 McGraw-Hill Australia Pty Ltd PPTs t/a Australian Financial Accounting 5e by Craig Deegan Slides prepared by Craig Deegan A LtdB Ltd (% interest) (% interest) Parent Entity interest: Direct 70 – Indirect – 42 Minority interest Direct Indirect –
31-8 Copyright 2007 McGraw-Hill Australia Pty Ltd PPTs t/a Australian Financial Accounting 5e by Craig Deegan Slides prepared by Craig Deegan Indirect ownership interests (cont.) Minority interests –are that portion of the profit or loss and net assets of a subsidiary attributable to equity interests that are not owned by the parent Also possible to hold both direct and indirect interests in a particular entity –consider Figure 31.2 (p. 1069)
31-9 Copyright 2007 McGraw-Hill Australia Pty Ltd PPTs t/a Australian Financial Accounting 5e by Craig Deegan Slides prepared by Craig Deegan Indirect ownership interests (cont.) Consolidation in the presence of indirect interests –refer to Worked Example 31.1 (p. 1070) 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 –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
31-10 Copyright 2007 McGraw-Hill Australia Pty Ltd PPTs t/a Australian Financial Accounting 5e by Craig Deegan Slides prepared by Craig Deegan 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 only 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
31-11 Copyright 2007 McGraw-Hill Australia Pty Ltd PPTs t/a Australian Financial Accounting 5e by Craig Deegan Slides prepared by Craig Deegan Indirect ownership interests (cont.) Journal entries To eliminate parent’s investment in subsidiary DrShare capital DrRetained earnings Dr Goodwill Cr Investment in subsidiary The investment elimination is undertaken on the basis of direct ownership interests To recognise impairment of goodwill associated with acquisition DrImpairment expense—goodwill Cr Accumulated impairment losses—goodwill
31-12 Copyright 2007 McGraw-Hill Australia Pty Ltd PPTs t/a Australian Financial Accounting 5e by Craig Deegan Slides prepared by Craig Deegan Indirect ownership interests (cont.) Journal entries (cont.) To eliminate dividends proposed by subsidiary DrDividend payable (balance sheet) Cr Dividend proposed (statement of changes in equity) Dr Dividend revenue (income statement) Cr Dividend receivable (balance sheet) After eliminations, the consolidated financial statements should show the dividends paid and proposed by the parent entity as well as the direct minority interests in the dividends paid and proposed by the subsidiaries – that is, total dividends paid and proposed are those dividends that flow away from the economic entity.
31-13 Copyright 2007 McGraw-Hill Australia Pty Ltd PPTs t/a Australian Financial Accounting 5e by Craig Deegan Slides prepared by Craig Deegan Indirect ownership interests (cont.) Minority interests (AASB 127) –to be presented separately from the parent shareholders’ equity in the consolidated balance sheet within equity –to be separately disclosed in the profit or loss of the group
31-14 Copyright 2007 McGraw-Hill Australia Pty Ltd PPTs t/a Australian Financial Accounting 5e by Craig Deegan Slides prepared by Craig Deegan Minority interests Minority interests in profit are calculated on the basis of the sum of both direct and indirect ownership interests Apportionment of minority 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
31-15 Copyright 2007 McGraw-Hill Australia Pty Ltd PPTs t/a Australian Financial Accounting 5e by Craig Deegan Slides prepared by Craig Deegan Minority 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 minority interests in profits Intragroup dividends paid to an ‘intermediate parent’ from a subsidiary are subtracted from the profits of that intermediate parent before the minority interest in profits of that organisation is calculated where there is an intermediate parent entity, any goodwill impairment expense that is recognised in relation to a subsidiary under the control of the intermediate subsidiary is to be added back to the intermediate parent entity’s reported profit before minority interests are calculated See Worked Example 31.1 for a detailed explanation of the above adjustments
31-16 Copyright 2007 McGraw-Hill Australia Pty Ltd PPTs t/a Australian Financial Accounting 5e by Craig Deegan Slides prepared by Craig Deegan 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); and 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).
31-17 Copyright 2007 McGraw-Hill Australia Pty Ltd PPTs t/a Australian Financial Accounting 5e by Craig Deegan Slides prepared by Craig Deegan Sequential acquisition
31-18 Copyright 2007 McGraw-Hill Australia Pty Ltd PPTs t/a Australian Financial Accounting 5e by Craig Deegan Slides prepared by Craig Deegan Non-sequential acquisition
31-19 Copyright 2007 McGraw-Hill Australia Pty Ltd PPTs t/a Australian Financial Accounting 5e by Craig Deegan Slides prepared by Craig Deegan 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 need to consider the value of both Organisation B and Organisation C.
31-20 Copyright 2007 McGraw-Hill Australia Pty Ltd PPTs t/a Australian Financial Accounting 5e by Craig Deegan Slides prepared by Craig Deegan Non-sequential acquisitions 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. Consider Worked Example 31.3 (p. 1092)
31-21 Copyright 2007 McGraw-Hill Australia Pty Ltd PPTs t/a Australian Financial Accounting 5e by Craig Deegan Slides prepared by Craig Deegan Summary The chapter 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