Notes on Noncontrolling Interest and Goodwill Calculation

Noncontrolling Interest (NCI)

  • Definition: NCI represents the equity interest in a subsidiary not attributable, directly or indirectly, to the parent company as per AASB 127.

    • Example: If a parent owns 90% of a subsidiary, the NCI owns the remaining 10%.

  • Equity Contribution: NCI contributes equity to the economic entity similarly to how parent shareholders do.

  • Reporting Standards:

    • AASB 127 mandates NCI to be presented as a separate item within equity in the consolidated Statement of Financial Position (SFP).
    • AASB 101 requires separate disclosure of the NCI share of total comprehensive income (TCI).

Methods of Calculating Goodwill

Goodwill Calculation Methods (AASB 3)
  1. Partial Goodwill Method: Measures NCI based on the proportionate share of the acquiree’s identifiable net assets, excluding goodwill.
  2. Full Goodwill Method: Includes fair value, accounting for any goodwill attributable to NCI.
Partial Goodwill Method

  • Example: Parent (P) paid $340,000 for 80% of the subsidiary (S).

    • Acquired NCI consists of 20% of the subsidiary.
    • Acquisition Analysis:
    • Share Capital: Parent (80%) $160,000, NCI (20%) $40,000
    • General Reserve: Parent (80%) $96,000, NCI (20%) $24,000
    • Retained Earnings: Parent (80%) $72,000, NCI (20%) $18,000

  • Goodwill Calculation:

    • Total identifiable net assets acquired: $328,000
    • Goodwill: $12,000

  • Elimination Entry:

    • Debit (Dr) Share Capital: $160,000
    • Debit (Dr) General Reserve: $96,000
    • Debit (Dr) Retained Earnings: $72,000
    • Debit (Dr) Goodwill: $12,000
    • Credit (Cr) Investment in S: $340,000
Full Goodwill Method

  • Fair Value of NCI Calculation:

    • Example: If P purchased 80% for $500,000:
    • Fair value of NCI = $500,000 x (20% / 80%) = $125,000

  • Acquisition Analysis Estimate:

    • Consideration transferred: $340,000
    • Estimated fair value of NCI: $84,000

  • Total Goodwill Calculation:

    • Total Goodwill = Goodwill specific to Parent ($12,000) + Goodwill attributable to NCI ($2,000) = $14,000

  • Elimination Entries:

    • Debit (Dr) Goodwill: $2000
    • Credit (Cr) NCI Reserve: $2000

Calculation of NCI

  • NCI only participates in profits generated by the subsidiary; thus, inter-entity transactions must be eliminated in consolidation worksheets.
  • NCI can be computed using additional columns in consolidation worksheets or by allocating equity and comprehensive income after eliminating intergroup transactions.
  • To calculate NCI share of profits for disclosure:
    • Start with subsidiary's profit and subtract unrealized profits/losses.
Example of NCI Share Calculation
  • Profits: P Ltd owns 80% of S Ltd; S has operating profit after tax of $4,000 including an unrealized profit of $1,050.
    • Adjusted Profit = $4,000 - $1,050 = $2,950
    • NCI share = 20% of $2,950 = $590

Sale of Depreciable Assets

  • Example: S Ltd sells a depreciable asset to P Ltd at a profit of $2,000.
    • Depreciation by Parent (P) = 25% per annum.
    • Excess Depreciation Calculation:
    • Year 1: Unrealized profit - $2,000, Add depreciation = $500 → Adjusted Profit = -$1,500
    • Year 2: Unrealized profit - $1,500, Add depreciation = $500 → Adjusted = -$1,000
    • Year 3: Unrealized profit - $1,000, Add depreciation = $500 → Adjusted = -$500