1. Accounting for indirect interests and changes in degree of ownership of subsidiaries
Chapter 26
Copyright  2006 McGraw-Hill Australia Pty Ltd PPTs t/a New Zealand Financial Accounting 3e by Grant Samkin
Slides prepared by Grant Samkin and Annika Schneider

2. 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 represents and how it is calculated
Understand that the parent entity’s interest in the post-acquisition movements of a subsidiary’s retained profits and other reserves will be based upon the sum of the direct and indirect ownership interests
(Continues)
Copyright  2006 McGraw-Hill Australia Pty Ltd PPTs t/a New Zealand Financial Accounting 3e by Grant Samkin
Slides prepared by Grant Samkin and Annika Schneider

3. Learning objectives (cont.)
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
Understand how to account for incremental investments in a subsidiary
Understand how to account for the disposal of a subsidiary from the perspective of both the parent entity and the economic entity
Copyright  2006 McGraw-Hill Australia Pty Ltd PPTs t/a New Zealand Financial Accounting 3e by Grant Samkin
Slides prepared by Grant Samkin and Annika Schneider

4. Status of newly converged accounting standards
From 2005, the new standard is NZ IAS 27 ‘Consolidated and Separate Financial Statements’
replaces SSAP-8 ‘Consolidated Financial Statements’
There are two other standards of particular relevance:
NZ IFRS 3 ‘Business Combinations’
NZ IAS 38 ‘Intangible Assets’
Copyright  2006 McGraw-Hill Australia Pty Ltd PPTs t/a New Zealand Financial Accounting 3e by Grant Samkin
Slides prepared by Grant Samkin and Annika Schneider

5. Indirect ownership interests
NZ IAS 27 requires that:
the consolidated financial report include all subsidiaries of the parent
Subsidiary defined as (NZ IAS 27):
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
(Continues)
Copyright  2006 McGraw-Hill Australia Pty Ltd PPTs t/a New Zealand Financial Accounting 3e by Grant Samkin
Slides prepared by Grant Samkin and Annika Schneider

6. Indirect ownership interests (cont.)
Continues
Copyright  2006 McGraw-Hill Australia Pty Ltd PPTs t/a New Zealand Financial Accounting 3e by Grant Samkin
Slides prepared by Grant Samkin and Annika Schneider

7. Indirect ownership interests (cont.)
Minority interests:
the 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:
(Continues)
Copyright  2006 McGraw-Hill Australia Pty Ltd PPTs t/a New Zealand Financial Accounting 3e by Grant Samkin
Slides prepared by Grant Samkin and Annika Schneider

8. Indirect ownership interests (cont.)
Consolidation in the presence of indirect interests:
Refer to Worked Example 26.1
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
(Continues)
Copyright  2006 McGraw-Hill Australia Pty Ltd PPTs t/a New Zealand Financial Accounting 3e by Grant Samkin
Slides prepared by Grant Samkin and Annika Schneider

9. Indirect ownership interests (cont.)
Journal entries
To eliminate parent’s investment in subsidiary:
Debit Share capital
Debit Retained earnings
Debit Goodwill
Credit Investment in subsidiary
To recognise impairment of goodwill associated with acquisition:
Debit Impairment expense — goodwill
Credit Accumulated impairment losses — goodwill
(Continues)
Copyright  2006 McGraw-Hill Australia Pty Ltd PPTs t/a New Zealand Financial Accounting 3e by Grant Samkin
Slides prepared by Grant Samkin and Annika Schneider

10. Indirect ownership interests (cont.)
Journal entries (cont.)
To eliminate dividends proposed by subsidiary:
Debit Dividend payable (balance sheet)
Credit Dividend proposed (income statement)
Debit Dividend revenue (income statement)
Credit Dividend receivable (balance sheet)
(Continues)
Copyright  2006 McGraw-Hill Australia Pty Ltd PPTs t/a New Zealand Financial Accounting 3e by Grant Samkin
Slides prepared by Grant Samkin and Annika Schneider

11. Indirect ownership interests (cont.)
Minority interests (NZ IAS 27):
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
Refer to Worked Example 26.1, 'Consolidation in the presence of indirect interests', pp. 1066–76
Refer to Worked Example 26.2, 'Consolidation of a complex group', pp. 1077–84
Copyright  2006 McGraw-Hill Australia Pty Ltd PPTs t/a New Zealand Financial Accounting 3e by Grant Samkin
Slides prepared by Grant Samkin and Annika Schneider

12. Increase in the ownership interest held in a subsidiary
Parent entity might acquire additional shares in a subsidiary over time
NZ IFRS 3 requires:
each exchange transaction to be treated separately by the acquirer
that the cost of the transaction and fair value information at the date of the transaction be used to determine the amount of any goodwill
results in a step-by-step comparison of the cost of the individual investments
Refer to Worked Example 26.3, 'Increase in ownership interest of subsidiary', pp. 1085–9
(Continues)
Copyright  2006 McGraw-Hill Australia Pty Ltd PPTs t/a New Zealand Financial Accounting 3e by Grant Samkin
Slides prepared by Grant Samkin and Annika Schneider

13. Increase in the ownership interest held in a subsidiary (cont.)
Journal entries
To eliminate investment in subsidiary and recognise goodwill (each acquisition to be accounted for separately):
Debit Share capital
Debit Retained earnings
Debit Goodwill
Credit Investment in subsidiary
(Continues)
Copyright  2006 McGraw-Hill Australia Pty Ltd PPTs t/a New Zealand Financial Accounting 3e by Grant Samkin
Slides prepared by Grant Samkin and Annika Schneider

14. Increase in the ownership interest held in a subsidiary (cont.)
Journal entries (cont.)
To recognise impairment of goodwill (separately for each acquisition):
Debit Impairment loss — goodwill
Credit Accumulated impairment losses — goodwill
(Continues)
Copyright  2006 McGraw-Hill Australia Pty Ltd PPTs t/a New Zealand Financial Accounting 3e by Grant Samkin
Slides prepared by Grant Samkin and Annika Schneider

15. Increase in the ownership interest held in a subsidiary (cont.)
To eliminate dividends proposed by subsidiary:
Debit Dividend payable (balance sheet)
Credit Dividend proposed (income statement)
Debit Dividend income (income statement)
Credit Dividend receivable (balance sheet)
Copyright  2006 McGraw-Hill Australia Pty Ltd PPTs t/a New Zealand Financial Accounting 3e by Grant Samkin
Slides prepared by Grant Samkin and Annika Schneider

16. Sale of shares in a subsidiary
When a parent entity sells shares in a subsidiary:
profit or loss in its own individual accounts will be different from that in consolidated accounts
NZ IAS 27 requires investments in subsidiaries etc. to be measured at either:
cost; or
in accordance with NZ IAS 39 (i.e. at fair value)
(Continues)
Copyright  2006 McGraw-Hill Australia Pty Ltd PPTs t/a New Zealand Financial Accounting 3e by Grant Samkin
Slides prepared by Grant Samkin and Annika Schneider

17. Sale of shares in a subsidiary (cont.)
From the parent’s perspective, profit or loss on sale of shares is the difference between:
carrying value of shares; and
value of sales proceeds
Carrying value:
is the amount shown in the financial statements for a particular asset or liability
From group’s perspective
consideration to be given to economic entity’s share of post-acquisition profits and reserve movements before determining profit or loss on sale of shares
(Continues)
Copyright  2006 McGraw-Hill Australia Pty Ltd PPTs t/a New Zealand Financial Accounting 3e by Grant Samkin
Slides prepared by Grant Samkin and Annika Schneider

18. Sale of shares in a subsidiary (cont.)
Refer to Worked Example 26.3
Journal entries
To record sale of shares in parent’s journal:
Debit Cash
Credit Investment in subsidiary
Credit Profit on sale of investment
(Continues)
Copyright  2006 McGraw-Hill Australia Pty Ltd PPTs t/a New Zealand Financial Accounting 3e by Grant Samkin
Slides prepared by Grant Samkin and Annika Schneider

19. Sale of shares in a subsidiary (cont.)
Consolidation adjusting journal entries:
Debit Profit on sale of investment
Debit Loss on sale of subsidiary
Credit Profit after tax
Credit Retained profits
Credit Revaluation reserve
Balance in revaluation reserve can be transferred to retained profits:
Debit Revaluation reserve
(Continues)
Copyright  2006 McGraw-Hill Australia Pty Ltd PPTs t/a New Zealand Financial Accounting 3e by Grant Samkin
Slides prepared by Grant Samkin and Annika Schneider

20. Sale of shares in a subsidiary (cont.)
Discount generated on consolidation
Refer to Worked Example 26.4
Consolidation journal entries
To eliminate the first acquisition:
Debit Share capital
Credit Investment in subsidiary
To record assets at fair value in relation to acquisition:
Debit Property, plant and equipment
Credit Revaluation reserve
(Continues)
Copyright  2006 McGraw-Hill Australia Pty Ltd PPTs t/a New Zealand Financial Accounting 3e by Grant Samkin
Slides prepared by Grant Samkin and Annika Schneider

21. Sale of shares in a subsidiary (cont.)
Consolidation journal entries (cont.)
To eliminate the second acquisition:
Debit Share capital
Debit Capital profits reserve
Debit Retained profits
Debit Revaluation reserve
Credit Investment in subsidiary
Credit Discount on acquisition
(Continues)
Copyright  2006 McGraw-Hill Australia Pty Ltd PPTs t/a New Zealand Financial Accounting 3e by Grant Samkin
Slides prepared by Grant Samkin and Annika Schneider

22. Sale of shares in a subsidiary (cont.)
Consolidation journal entries (cont.)
To eliminate discount on acquisition and treat it as part of income:
Debit Discount on acquisition
Credit Gain on acquisition of investments
See Worked Example 26.5, 'Sale of all shares held in the subsidiary', pp. 1095–96
Copyright  2006 McGraw-Hill Australia Pty Ltd PPTs t/a New Zealand Financial Accounting 3e by Grant Samkin
Slides prepared by Grant Samkin and Annika Schneider

23. Summary
The chapter considers how to account for indirect interests and changes in the degree of ownership in a subsidiary
It is possible to control another entity without direct ownership i.e. through an indirect ownership interest
In accounting for additional acquisitions of shares, on consolidation, each investment acquisition must be eliminated separately
When shares in a subsidiary are sold, profit or loss in individual investors’ accounts will be different from that in the consolidated accounts
Copyright  2006 McGraw-Hill Australia Pty Ltd PPTs t/a New Zealand Financial Accounting 3e by Grant Samkin
Slides prepared by Grant Samkin and Annika Schneider

24. Summary of main changes to accounting standards
NZ IAS 27 ‘Consolidated and Separate Financial Statements’ is generally consistent with SSAP-8 ‘Consolidated Financial Statements’
Significant changes
Goodwill amortisation is prohibited and goodwill must be subject to regular impairment testing
Discounts on acquisition now to be treated as part of the profit or loss of the reporting period
Outside equity interests now referred to as minority interests
Copyright  2006 McGraw-Hill Australia Pty Ltd PPTs t/a New Zealand Financial Accounting 3e by Grant Samkin
Slides prepared by Grant Samkin and Annika Schneider