Multi-Year Consolidation: Non-Controlling Interests Recognised at Fair Value

Illustration 3.
7A
Multi-year consolidation: non-controlling interests
recognised at fair value
http://www.warsidi.com
Relevant data
Acquisition date: 31 Dec 20x1
Acquirer: P Co.
Acquiree: S Co.
Ownership interest acquired: 90%
P's ordinary shares issued: 1,000,000
Market value of P'shares issued: 5,000,000
Cash paid by P: 8,260,000
Fair value of non-controlling interests: 1,400,000
Tax rate: 20%
All fair value adjustments have tax effects and give rise to deferred
tax, except for goodwill impairment loss.
Balance sheets and fair values at 31 December 20x1
S Co. P Co.
Book value Fair value Book value
Assets
Land 780,000 1,170,000 1,560,000
Leased buildings - net 5,200,000 6,500,000 10,400,000
Equipment - net 2,600,000 2,210,000 9,100,000
Investment in S Co. 13,260,000
Inventories 650,000 780,000 1,170,000
Receivables - net 390,000 390,000 910,000
Other current assets 520,000 520,000 780,000
Cash 260,000 260,000 1,690,000
10,400,000 11,830,000 38,870,000
Equity and liabilities
Ordinary shares 6,500,000 25,870,000
Retained earnings 1,170,000 5,590,000
Other liabilities 910,000 910,000 2,600,000
Loan payable 1,820,000 1,820,000 4,810,000
Contingent liabilities 130,000
10,400,000 2,860,000 38,870,000
Fair value of net identifiable assets 8,970,000
Balance sheets and fair values at 31 December 20x1
S Co. P Co.
Book value Fair value Book value
Assets
Land 780,000 1,170,000 1,560,000
Leased buildings - net 5,200,000 6,500,000 10,400,000
Equipment - net 2,600,000 2,210,000 9,100,000
Investment in S Co. 13,260,000
Inventories 650,000 780,000 1,170,000
Receivables - net 390,000
Note, this item was390,000 910,000
NOT recognized in
Other current assets 520,000FS of 520,000
the individual S Co. IFRS 3 780,000
requires
Cash 260,000
previously 260,000
unrecorded 1,690,000
intangibles and
10,400,000
contingencies 11,830,000
to be recognized38,870,000
due to the
Equity and liabilities application of acquisition method
Ordinary shares 6,500,000 25,870,000
Retained earnings 1,170,000 5,590,000
Other liabilities 910,000 910,000 2,600,000
Loan payable 1,820,000 1,820,000 4,810,000
Contingent liabilities 130,000
10,400,000 2,860,000 38,870,000
Fair value of net identifiable assets 8,970,000
In 20x2
P Co. dividend income from S 409,500
S Co. profit after tax 728,000
S Co. dividends declared 455,000
y Undervalued inventories of $130,000 – sold in 20x2

y Contingent liabilities of $130,000 – materialized (paid off) in 20x2
y Undervalued land of $390,000 – still held by S Co, no depreciation
y Undervalued buildings of $1,300,000 – useful life 50 years from 1 January
20x2
y Overvalued equipment of $390,000 – useful life 5 years from 1 January
20x2
y Goodwill – impairment loss of $520,000 in 20x2 recognized.
In 20x3
y Undervalued land of $390,000 – sold in 20x3

y Undervalued buildings of $1,300,000 – useful life 50 years from 1 January
20x2
y Overvalued equipment of $390,000 – useful life 5 years from 1 January
20x2
y Net profit after tax of S Co. - $400,000
y No dividends were declared by S Co. For 20x3
Required...
1. Prepare consolidation adjustment at 31 December 20x2

2. Prepare consolidation adjustment at 31 December 20x3
Recognize the tax effects of fair value adjustments.
Computation of goodwill
Consideration transferred
Cash 8,260,000
Fair value of new P's shares issued 5,000,000
13,260,000
Fair value of NCI 1,400,000
14,660,000
Less: identifiable net assets
Fair value of identifiable net assets 8,970,000
Deferred tax liabilities -260,000
8,710,000
5,950,000
Cash 8,260,000
13,260,000
14,660,000
8,710,000
5,950,000
Deferred tax
Book value of identifiable net assets 7,670,000
1,300,000
Deferred tax liabilities (20%) 260,000
Cash 8,260,000
13,260,000
14,660,000
8,710,000
5,950,000
Goodwill allocation
Parent ($13,260,000 - (90%*$8,710,000) 5,421,000(91%)
NCI ($1,400,000 - (10%*$8,710,000) 529,000(9%)
5,950,000
Consolidation journal entry #1
Dr Ordinary shares (S Co.) 6,500,000
Dr Retained earnings (S Co.) 1,170,000
Dr Goodwill 5,950,000
Dr Inventories 130,000
Dr Land 390,000
Dr Buildings - net 1,300,000
Cr Investment in S Co. 13,260,000
Cr Equipment - net 390,000
Cr Contingent liabilities 130,000
Cr Deferred tax liabilities 260,000
Cr Non-controlling interests 1,400,000
15,440,000 15,440,000
Consolidation worksheet as at 31 December 20x1
Elimination/Adj. Consolidated
P Co. S Co. Dr. Cr. FS
Assets
Goodwill 5,950,000 5,950,000
Land ‐ net 1,560,000 780,000 390,000 2,730,000
Leased buildings ‐ net 10,400,000 5,200,000 1,300,000 16,900,000
Equipment ‐ net 9,100,000 2,600,000 390,000 11,310,000
Investment in S Co. 13,260,000 0 13,260,000 0
Inventories 1,170,000 650,000 130,000 1,950,000
Receivables ‐ net 910,000 390,000 1,300,000
Other current assets 780,000 520,000 1,300,000
Cash 1,690,000 260,000 1,950,000
38,870,000 10,400,000 43,390,000
Equity and liabilities
Ordinary shares 25,870,000 6,500,000 6,500,000 25,870,000
Retained earnings 5,590,000 1,170,000 1,170,000 5,590,000
Non‐controlling interests 1,400,000 1,400,000
Other liabilities 2,600,000 910,000 3,510,000
Loan payable 4,810,000 1,820,000 6,630,000
Contingent liabilities 130,000 130,000
Deferred tax liabilities 260,000 260,000
38,870,000 10,400,000 15,440,000 15,440,000 43,390,000
Consolidation journal entry #1 (20x2)
Dr Land 390,000
This entry is repeated each year for as long as the investment exixts.
Dr Cost of sales 130,000

Cr Inventories 130,000
Dr Depreciation - buildings 26,000

Cr Accumulated depreciation - buildings 26,000
Dr Accumulated depreciation - equipment 78,000

Cr Depreciation equipment 78,000
Dr Contingent liabilities 130,000

Cr Contingent liabilities expense 130,000
Dr Impairment loss - goodwill 520,000

Cr Goodwill 520,000
Dr Tax expense 10,400

Cr Dererred tax liabilities 10,400


To adjust cost of sales based on the
fair value78,000
Dr Accumulated depreciation - equipment of inventories as at the
Cr Depreciation equipment acquisition date
78,000


Cr Goodwill 520,000




To adjust depreciation based on the
Dr Contingent liabilities fair value as at the acquisition date
130,000
Cr Contingent liabilities expense ($6,500,000 - $5,200,000)
130,000 / 20

Cr Goodwill 520,000





Dr Impairment loss - goodwill To adjust520,000

depreciation based on the
Cr Goodwill fair value as at the acquisition date
520,000
($2,210,000 - $2,600,000) / 5





Cr Goodwill To eliminate the recognition of
520,000
expense in the S Co. I/S and
Dr Tax expense contingent liabilities in CJE #1
10,400




To adjust tax expense relating to
understated profit in S Co.’s I/S
Cr Goodwill 520,000

Understated profit in S Co.'s income statement
Cost of sales - inventory 130,000

Depreciation - buildings 26,000
Depreciation - equipment -78,000
Contingent liabilities expense -130,000
-52,000
Income tax adjustment 10,400
Note, deferred tax liability should

NOT considered goodwill asset and
its impairment.
Dr Income to NCI 24,960

Cr Non-controlling interest 24,960
Adjustment of S Co.'s net profit after tas

Net profit after tax as reported by S Co. 728,000
Increase in cost of sales of undervalued inventory -130,000
Increase in depreciation on undervalued buildings -26,000
Decrease in depreciation on overvalued equipment 78,000
Decrease in expense on recognized contingency 130,000
Increase in tax expense -10,400
Impairment loss on goodwill -520,000
Adjusted net profit after tax of S Co. 249,600
NCI's share (10%) 24,960
Dr Dividend income 409,500

Dr Non-controlling interest 45,500
Cr Dividends (S Co.) 455,000
Reconciliation of non-controlling interest with net assets
of S Co.
From the consolidation jurnal entries
NCI as at the acquisition date 1,400,000
NCI's share of current profit after tas 24,960
NCI's share of dividends -45,500
NCI as at 31 December 20x2 1,379,460
of S Co.
Analytical check on NCI as at 31 December 20x2
Book value of shareholders' equity 7,943,000
Unamortized FV differentials 1,081,600
Adjusted identifiable net assets 9,024,600
NCI's share of identifiable net assets (10%) 902,460
NCI's share of unimpaired goodwill
Goodwill attributable to NCI 529,000
Impairment loss ‐52,000 477,000
of S Co.
1,379,460
Book value of shareholders' equity as at 31 December 20x2
Share capital 6,500,000
Retained earnings
As at 1 January 20x2 1,170,000
Net profit after tax 728,000
Dividends declared ‐455,000
As at 31 December 20x2 1,443,000
of S Co.
1,379,460
Unamortized FV differentials as at 31 December 20x2
Undervalued land ($1,170,000 ‐ $780,000) 390,000
Undervalued buildings [($6,500,000 ‐ $5,200,000)*49/50] 1,274,000
Overvalued equipment [($2,210,000 ‐ $2,600,000)*4/5] ‐312,000
1,352,000
Tax effects 270,400
Net of tax 1,081,600
Dr Land 390,000
This entry is repeated each year for as long as the investment exixts.
Dr Retained earnings 468,000
Dr Non-controlling interests 52,000
Cr Goodwill 520,000
This entry is to re-enact the impairment loss on goodwill.
Dr Retained earnings 27,300
This entry is to allocate post-acquisition R/E of S Co. from the date of

acquisition to the beginning of the current period.
R/E at beginning of current period (1/1/20x3) 1,443,000

R/E at acquisition date (31/12/20x1) 1,170,000
Change in retained earnings 273,000
NCI's share (10%) 27,300
Cr Retained earnings 37,440
Prior-year adjustment
Cost of sales -130,000
Depreciation of buildings -26,000
Depreciation of equipment 78,000
Realization of contingent liabilities 130,000
Increase in tax expense -10,400
Total prior-year adjustment 41,600
Adjusted to consolidated R/E (90%) 37,440
Allocated to NCI (10%) 4,160
Dr Profit on sale of land 390,000
Cr Land 390,000


Dr Deferred tax liabilities 67,600

Cr Deferred tax expense 67,600
Dr Profit on sale of land 390,000
Cr Land 390,000


Dr Deferred tax liabilities 67,600

Cr Deferred tax expense 67,600
To adjust overstated profit before

tas of $338,000 in S Co.’s I/S
Dr Income to NCI 12,960

Computation
Net profit after tax of S Co. for 20x3 400,000
Current adjustments
Cost of sales of undervalued land -390,000
Depreciation of undervalued buildings -26,000
Depreciation of overvalued equipment 78,000
-338,000
Tax expense adjustment 67,600 -270,400
Adjusted net profit after tax of S Co. 129,600
NCI's share (10%) 12,960
of S Co.
From the consolidation jurnal entries
NCI as at the acquisition date 1,400,000
NCI's share of past goodwill impairment -52,000
NCI's share of post-acquisition R/E 27,300
NCI's share of prior-year adjustments 4,160
NCI's share of current profit after tas 12,960
of S Co.
Unamortized FV differentials 811,200

Impairment loss -52,000 477,000
of S Co.

Book value of shareholders' equity as at 31 December 20x2

Share capital 6,500,000
Retained earnings
As at 1 January 20x3 1,443,000
Net profit after tax 400,000
Dividends declared 0
As at 31 December 20x3 1,843,000
of S Co.

Unamortized FV differentials as at 31 December 20x2

Undervalued buildings ($6,500,000 - $5,200,000)*48/50 1,248,000
Overvalued equipment ($2,210,000 - $2,600,000)*3/5 -234,000
1,014,000
Tax effects 202,800
Net of tax 811,200

Multi-Year Consolidation: Non-Controlling Interests Recognised at Fair Value

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Multi-Year Consolidation: Non-Controlling Interests Recognised at Fair Value

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Illustration 3.

y Undervalued inventories of $130,000 – sold in 20x2

y Undervalued land of $390,000 – sold in 20x3

1. Prepare consolidation adjustment at 31 December 20x2

Dr Cost of sales 130,000

Dr Depreciation - buildings 26,000

Dr Accumulated depreciation - equipment 78,000

Dr Contingent liabilities 130,000

Dr Impairment loss - goodwill 520,000

Dr Tax expense 10,400

Dr Cost of sales 130,000

Dr Depreciation - buildings 26,000

Dr Contingent liabilities 130,000

Dr Impairment loss - goodwill 520,000

Dr Tax expense 10,400

Dr Cost of sales 130,000

Dr Depreciation - buildings 26,000

Dr Accumulated depreciation - equipment 78,000

Dr Impairment loss - goodwill 520,000

Dr Tax expense 10,400

Dr Cost of sales 130,000

Dr Depreciation - buildings 26,000

Dr Accumulated depreciation - equipment 78,000

Dr Contingent liabilities 130,000

Dr Impairment loss - goodwill To adjust520,000

Dr Cost of sales 130,000

Dr Depreciation - buildings 26,000

Dr Accumulated depreciation - equipment 78,000

Dr Contingent liabilities 130,000

Dr Impairment loss - goodwill 520,000

Dr Cost of sales 130,000

Dr Depreciation - buildings 26,000

Dr Accumulated depreciation - equipment 78,000

Dr Contingent liabilities 130,000

Dr Tax expense 10,400

Cost of sales - inventory 130,000

Note, deferred tax liability should

Dr Income to NCI 24,960

Adjustment of S Co.'s net profit after tas

Dr Dividend income 409,500

This entry is to re-enact the impairment loss on goodwill.

This entry is to allocate post-acquisition R/E of S Co. from the date of

R/E at beginning of current period (1/1/20x3) 1,443,000

Dr Depreciation - buildings 26,000

Dr Accumulated depreciation - equipment 78,000

Dr Deferred tax liabilities 67,600

Dr Depreciation - buildings 26,000

Dr Accumulated depreciation - equipment 78,000

Dr Deferred tax liabilities 67,600

To adjust overstated profit before

Dr Income to NCI 12,960

NCI's share of identifiable net assets (10%) 915,420

NCI's share of identifiable net assets (10%) 915,420

Book value of shareholders' equity as at 31 December 20x2

NCI's share of identifiable net assets (10%) 915,420

Unamortized FV differentials as at 31 December 20x2

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