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Seminar 09 Calculating NCInt Simple Example Colour

The document discusses the calculation of non-controlling (minority) interests as part of the consolidation process when a parent company owns less than 100% of a subsidiary. It provides an example calculation where the parent owns 80% of the subsidiary. The non-controlling interest share of the subsidiary's net profit and equity is adjusted for consolidation entries, such as the elimination of an intercompany profit on an asset sale from subsidiary to parent. The non-controlling interests' share is 20% of the subsidiary's contribution to consolidated net profit and equity amounts after accounting for consolidation adjustments.

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43 views

Seminar 09 Calculating NCInt Simple Example Colour

The document discusses the calculation of non-controlling (minority) interests as part of the consolidation process when a parent company owns less than 100% of a subsidiary. It provides an example calculation where the parent owns 80% of the subsidiary. The non-controlling interest share of the subsidiary's net profit and equity is adjusted for consolidation entries, such as the elimination of an intercompany profit on an asset sale from subsidiary to parent. The non-controlling interests' share is 20% of the subsidiary's contribution to consolidated net profit and equity amounts after accounting for consolidation adjustments.

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金鑫
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Calculating Non-controlling (Minority) Interests – simple illustration of concept

The calculation of non-controlling interests is required as part of the consolidation


process where there exist non-controlling interests in the subsidiary.

Conceptually, we are determining the non-controlling interest in the consolidated


Shareholders' Equity items (share capital, reserves and retained profits) and in the
consolidated Net Profit. The non-controlling shareholders have an interest in the group
assets and group profit through their shareholding in the subsidiary.

Calculation of the non-controlling interests’ amounts in the group share capital and
reserves is normally quite straight forward and will likely be the same as the non-
controlling share in these items as reported in the subsidiary reports. The calculation of
the subsidiary contribution to consolidated Net Profit and consolidated Retained
Earnings will be more complex if adjustments and eliminations have been made for
inter-entity unrealised profit and depreciation in upstream transactions.

We then proceed as follows:


1. Calculate the subsidiary contribution to consolidated Net Profit for the period and
consolidated Retained Earnings (this will require adjustment to the figures reported by
Sub based on the upstream adjustments made for Consolidation purposes). Remember
the Investor share of the Sub Retained Earnings at acquisition date is eliminated in the
purchase elimination entry
2. Calculate the non-controlling interest share (%) in these subsidiary contributions.
Example
Assume
 Parent owns 80% of Sub shares (acquired 1 July 2006)
 Sub net profit for the period was $50,000
 No income tax – ignore for the purpose of the illustration
 Sub sold an item of depreciable P&E (vehicle) to the Parent at the end of the
current period for a gain of $10,000 (This is the only intragroup sale for the period)
 Can ignore the consequences of any excess depreciation – sale took place on last
day of financial year

The consolidation process would lead to the elimination of the $10,000 from the net
profit of the Sub, reducing the Sub contribution to consolidated profit by $10,000 to
$40,000. (The carrying amount of the asset is also adjusted so that the amount appears
in the group balance sheet as though sale had not taken place.)
Thus, when we calculate the NCI in the group profit we are calculating the NCI share
using the $40,000 that has actually been recognised in group profit in the consolidated
Income Statement. Only $40,000 was included, so the non-controlling interest (20%)
in the profit recognised by the group for the period will be:
= 20% of $40,000
= $8,000 (and not 20% of the $50,000 as reported in Sub's income statement)

In reality, we would also need to consider the tax consequences (as with the
consolidation adjustments), and it is likely that there will also be adjustments required
for depreciation, unrealised profit in the inventory sold to the Parent, etc.

1
Parent Sub Consol. Adjust. Consolid. NCI Adjust. Economic
Dr Cr Dr Cr Entity
$ '000 $ '000 $ '000 $ '000 $ '000 $ '000 $ '000 $ '000
Revenues 5,000 1,000 6,000 6,000
Expenses (4,800) (960) (5,760) (5,760)
Gain on sale M/V 10 10 2 0 0
Net Profit 200 50 240 240 total for group

NCI in Net Profit 8 3 (8) Less NC Interest


Parent S/H interests in Net Profit 232 =parent S/H interests
Retained Profits (1/7/2006) 500 200 160 1 80% 540 40 3 20% 500
Available for distribution 700 250 780 732
Dividends 0 0 0 0
Retained Profits (30/6/2007) 700 250 780 732 parent S/H interests
Share Capital 3,000 1,000 800 1 80% 3,200 200 3 20% 3,000 parent S/H interests
Reserves 1,000 300 240 1 80% 1,060 60 3 20% 1,000 parent S/H interests
4,700 1,550 5,040 4,732 = total parent interests
NCI - Share capital 3 200 200 NC Interests
NCI - Reserves 3 60 60 NC Interests
NCI - Retained Profits (30/6/2007) 3 48 48 NC Interests
Total NC S/H Interests 308 = total NC Interests

Liabilities 1,300 450 1,750 1,750


Total S/H Equity & Liabs 6,000 2,000 6,790 6,790
Assets
Current assets 1,000 500 1,500 1,500
Motor vehicle 50 2 10 40 40
Other PP&E 3,750 1,500 5,250 5,250
Investment in Sub 1,200 1 1,200 0 0

Total Assets 6,000 2,000 6,790 6,790

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