Chapter 31
Further consolidation issues
III:
Accounting for indirect
ownership interests
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PPTs t/a Australian Financial Accounting 5e by Craig Deegan
Slides prepared by Craig Deegan
31-1
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 interest
represents and how it is calculated
• Understand that the parent entity’s interest in the postacquisition 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
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PPTs t/a Australian Financial Accounting 5e by Craig Deegan
Slides prepared by Craig Deegan
31-2
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
Copyright  2007 McGraw-Hill Australia Pty Ltd
PPTs t/a Australian Financial Accounting 5e by Craig Deegan
Slides prepared by Craig Deegan
31-3
Indirect ownership interests (cont.)
• Example of an indirect controlling interest
– consider Figure 31.1 (reproduced on following slide)
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PPTs t/a Australian Financial Accounting 5e by Craig Deegan
Slides prepared by Craig Deegan
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PPTs t/a Australian Financial Accounting 5e by Craig Deegan
Slides prepared by Craig Deegan
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Calculating direct and indirect interests
• We can calculate the percentage interest by
constructing a table – consider the following slide
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Slides prepared by Craig Deegan
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A Ltd
(% interest)
B Ltd
(% interest)
Parent Entity interest:
Direct
Indirect
70
–
–
42
30
40
–
18
Minority interest
Direct
Indirect
100
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100
31-7
Indirect ownership interests (cont.)
• Minority interests
– are that 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
– consider Figure 31.2 (p. 1069)
Copyright  2007 McGraw-Hill Australia Pty Ltd
PPTs t/a Australian Financial Accounting 5e by Craig Deegan
Slides prepared by Craig Deegan
31-8
Indirect ownership interests (cont.)
•
Consolidation in the presence of indirect interests
– refer to Worked Example 31.1 (p. 1070)
•
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
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PPTs t/a Australian Financial Accounting 5e by Craig Deegan
Slides prepared by Craig Deegan
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• 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
Copyright  2007 McGraw-Hill Australia Pty Ltd
PPTs t/a Australian Financial Accounting 5e by Craig Deegan
Slides prepared by Craig Deegan
31-10
Indirect ownership interests (cont.)
Journal entries
• To eliminate parent’s investment in subsidiary
Dr
Share capital
Dr
Retained 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
Dr
Impairment expense—goodwill
Cr
Accumulated impairment losses—goodwill
Copyright  2007 McGraw-Hill Australia Pty Ltd
PPTs t/a Australian Financial Accounting 5e by Craig Deegan
Slides prepared by Craig Deegan
31-11
Indirect ownership interests (cont.)
Journal entries (cont.)
• To eliminate dividends proposed by subsidiary
Dr
Dividend payable (balance sheet)
Cr
Dividend proposed
(statement of changes in equity)
Dr
Cr
Dividend revenue (income statement)
Dividend receivable (balance sheet)
After eliminations, the consolidated financial statements should
show the dividends paid and proposed by the parent entity as well
as the direct minority interests in the dividends paid and proposed
by the subsidiaries – that is, total dividends paid and proposed are
those dividends that flow away from the economic entity.
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PPTs t/a Australian Financial Accounting 5e by Craig Deegan
Slides prepared by Craig Deegan
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Indirect ownership interests (cont.)
• Minority interests (AASB 127)
– 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
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PPTs t/a Australian Financial Accounting 5e by Craig Deegan
Slides prepared by Craig Deegan
31-13
Minority interests
• Minority interests in profit are calculated on the basis
of the sum of both direct and indirect ownership
interests
• Apportionment of minority 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
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PPTs t/a Australian Financial Accounting 5e by Craig Deegan
Slides prepared by Craig Deegan
31-14
Minority 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 minority interests in profits
• Intragroup dividends paid to an ‘intermediate parent’ from a
subsidiary are subtracted from the profits of that intermediate
parent before the minority interest in profits of that organisation is
calculated
• where there is an intermediate parent entity, any goodwill
impairment expense that is recognised in relation to a subsidiary
under the control of the intermediate subsidiary is to be added
back to the intermediate parent entity’s reported profit before
minority interests are calculated
• See Worked Example 31.1 for a detailed explanation of the above
adjustments
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PPTs t/a Australian Financial Accounting 5e by Craig Deegan
Slides prepared by Craig Deegan
31-15
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); and
• 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).
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Sequential acquisition
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Non-sequential acquisition
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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 preacquisition capital and reserves of Organisation B, we need to
consider the value of both Organisation B and Organisation C.
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PPTs t/a Australian Financial Accounting 5e by Craig Deegan
Slides prepared by Craig Deegan
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Non-sequential acquisitions
• 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. 1092)
Copyright  2007 McGraw-Hill Australia Pty Ltd
PPTs t/a Australian Financial Accounting 5e by Craig Deegan
Slides prepared by Craig Deegan
31-20
Summary
• The chapter 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
Copyright  2007 McGraw-Hill Australia Pty Ltd
PPTs t/a Australian Financial Accounting 5e by Craig Deegan
Slides prepared by Craig Deegan
31-21