1. . Copyright  2010 McGraw-Hill Australia Pty Ltd PPTs to accompany Deegan, Australian Financial Accounting 6e 31-1 Chapter 31 Further consolidation issues III: Accounting for indirect ownership interests

2. . Copyright  2010 McGraw-Hill Australia Pty Ltd PPTs to accompany Deegan, Australian Financial Accounting 6e 31-2 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

3. . Copyright  2010 McGraw-Hill Australia Pty Ltd PPTs to accompany Deegan, Australian Financial Accounting 6e 31-3 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

4. . Copyright  2010 McGraw-Hill Australia Pty Ltd PPTs to accompany Deegan, Australian Financial Accounting 6e 31-4 Indirect ownership interests (cont.) Example of an indirect controlling interest –Consider Figure 31.1 (reproduced on following slide)

5. . Copyright  2010 McGraw-Hill Australia Pty Ltd PPTs to accompany Deegan, Australian Financial Accounting 6e 31-5

6. . Copyright  2010 McGraw-Hill Australia Pty Ltd PPTs to accompany Deegan, Australian Financial Accounting 6e 31-6 Calculating direct and indirect interests Using the information in the last slide we can calculate the percentage interest by constructing a table — consider the following slide:

7. . Copyright  2010 McGraw-Hill Australia Pty Ltd PPTs to accompany Deegan, Australian Financial Accounting 6e 31-7 A LtdB Ltd (% interest) (% interest) Parent Entity interest Direct 70 – Indirect – 42 Non-controlling interest Direct 30 40 Indirect – 18 100

8. . Copyright  2010 McGraw-Hill Australia Pty Ltd PPTs to accompany Deegan, Australian Financial Accounting 6e 31-8 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 a particular entity –Consider Figure 31.2 (p. 985)

9. . Copyright  2010 McGraw-Hill Australia Pty Ltd PPTs to accompany Deegan, Australian Financial Accounting 6e 31-9 Indirect ownership interests (cont.) Consolidation in the presence of indirect interests –Refer to Worked Example 31.1 (p. 986) 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

10. . Copyright  2010 McGraw-Hill Australia Pty Ltd PPTs to accompany Deegan, Australian Financial Accounting 6e 31-10 Indirect ownership interests (cont.) 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

11. . Copyright  2010 McGraw-Hill Australia Pty Ltd PPTs to accompany Deegan, Australian Financial Accounting 6e 31-11 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

12. . Copyright  2010 McGraw-Hill Australia Pty Ltd PPTs to accompany Deegan, Australian Financial Accounting 6e 31-12 Indirect ownership interests (cont.) Journal entries (cont.) To eliminate dividends declared by subsidiary DrDividend payable (statement of financial position) Cr Dividend receivable (statement of financial position) Dr Dividend revenue (statement of comprehensive income) Cr Dividend declared (statement of changes in equity) 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

13. . Copyright  2010 McGraw-Hill Australia Pty Ltd PPTs to accompany Deegan, Australian Financial Accounting 6e 31-13 Indirect ownership interests (cont.) Non-controlling interests (AASB 127) –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

14. . Copyright  2010 McGraw-Hill Australia Pty Ltd PPTs to accompany Deegan, Australian Financial Accounting 6e 31-14 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

15. . Copyright  2010 McGraw-Hill Australia Pty Ltd PPTs to accompany Deegan, Australian Financial Accounting 6e 31-15 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 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 See Worked Example 31.1 on p. 986 for a detailed explanation of the above adjustments

16. . Copyright  2010 McGraw-Hill Australia Pty Ltd PPTs to accompany Deegan, Australian Financial Accounting 6e 31-16 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)

17. . Copyright  2010 McGraw-Hill Australia Pty Ltd PPTs to accompany Deegan, Australian Financial Accounting 6e 31-17 Sequential acquisition

18. . Copyright  2010 McGraw-Hill Australia Pty Ltd PPTs to accompany Deegan, Australian Financial Accounting 6e 31-18 Non-sequential acquisition

19. . Copyright  2010 McGraw-Hill Australia Pty Ltd PPTs to accompany Deegan, Australian Financial Accounting 6e 31-19 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

20. . Copyright  2010 McGraw-Hill Australia Pty Ltd PPTs to accompany Deegan, Australian Financial Accounting 6e 31-20 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 Consider Worked Example 31.3 (p. 1010) —Example of a non-sequential acquisition

21. . Copyright  2010 McGraw-Hill Australia Pty Ltd PPTs to accompany Deegan, Australian Financial Accounting 6e 31-21 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