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

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. 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

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

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

6. 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)

7. 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

8. 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

9. 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.

10. 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

11. 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

12. 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 for a detailed explanation of the above adjustments

13. 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)

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

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

16. 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

17. 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

18. 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