Accounting for non-controlling interests

Question 1

Non controlling interests

Answer 1

assumed that the parent company still has control over the subsidiary (i.e. it holds more than 50% of the voting rights or contractual agreements allow control) however holds less than 100%
− This means that there are third parties that also own a share in the subsidiary («minorities» or «non-controlling interests»)

Question 2

Basic assumption

Answer 2

If the parent company holds more than 50% of the voting rights, it can control the subsidiary, even if third parties hold an interest in the subsidiary’s equity

Question 3

Consequence

Answer 3

The respective subsidiary is fully consolidated, i.e. all items in the balance sheet and income statement are included in the consolidated financial statements at 100%

Question 4

Shares held by third parties

Answer 4

(«minorities» or «non-controlling interests») are taken into account by allocating them shares in the subsidiary’s equity and profit or loss for the period in proportion to their shareholding

Question 5

What are the methods for treatment of the value of the subsidiary and the allocation of the stake owned by the non-controlling interest?

Answer 5

Purcahse method (revaluation method)
Full goodwill method

Question 6

Purchase method

Answer 6

Revaluation of all identifiable assets and liabilities

Goodwill:
− Solely the portion belonging to the controlling interest is disclosed in the balance sheet
− Goodwill amounts to the excess of the acquisition costs paid by the parent over the
proportional value of the identifiable net assets of the acquired subsidiary

Non-controlling interest is valued and disclosed as the proportional share of the adjusted equity (share capital, capital reserve and revaluation reserve per acquisition date, without goodwill)
− Purchase method is accepted by IFRS and required under Swiss GAAP FER

Question 7

Purchase method example

Answer 7

Illustrative Example – Assumptions / Initial situation
− Baseline:
− Example as previously discussed in lecture
− Acquisition of subsidiary A as at 1.1.20.1
− Subsequent treatment of goodwill according to impairment-only approach
− New assumptions:
− Parent holds an 80% interest in the voting rights and equity of subsidiary A
− Acquisition cost for 80% stake amounts to 1’760
− Residual 20% (calculated value = 20% of 2’200 = 440) is held by third parties («non-controlling interest», «NCI»)

Question 8

Example in Purchase method

Answer 8

Assumptions:
− Investment = 80%
− Purchase price 1’760
Parent company:
− Assets (excl. Investment in A) 6’640
− Investment in A 1’760
− Liabilities 3’400
− Equity 5’000
Subsidiary:
− Assets (adjusted) = 1’500
− Liabilities (adjusted) = 700
− Equity (adjusted) = 800
Goodwill:
Purchase price 1’760 less proportional adjusted equity of 640 (80% of 800) results in goodwill of 1’120

Question 9

Purchase method in CFS

Answer 9

Question 10

Full goodwill method Characteristics

Answer 10

− Revaluation of all identifiable assets and liabilities.
− Goodwill is calculated as if there were a 100% interest in the subsidiary
− As a result, the balance sheet presents a theoretical total value of the goodwill, including the portion relating to the non-controlling interest
− A share of the acquired net identifiable assets at fair value and a share of the calculated full goodwill are allocated to the non-controlling interest.
− Full goodwill method is accepted by IFRS and required under US GAAP

Question 11

Full goodwill method calculation

Answer 11

Assumptions:
− Investment = 80%
− Purchase price = 1’760
Parent company:
− Assets (excl. Investment in A) = 6’640
− Investment in A = 1’760
− Liabilities = 3’400
− Equity = 5’000
Subsidiary:
− Assets (adjusted) = 1’500
− Liabilities (adjusted) = 700
− Equity (adjusted) = 800
Goodwill:
− Purchase price for 80% = 1’760
− Theoretical purchase price for 100% = 2’200
− Theoretical purchase price of 2’200 less full
adjusted equity of 800 results in goodwill of 1’400

Question 12

Full goodwill method in CFS

Answer 12