Question

Question 4 Week 10 (7 marks) (a) Where the parent company does not hold 100 percent equity of the subsidiary company, what portion of the intra-group transactions between the parent entity and the subsidiary entity will need to be eliminated on consolidation? (2 marks) (b) What is a non-controlling interest, and how should it be disclosed? (2 marks) (c) How are non-controlling interests affected by intra-group transactions? (2 marks) (d) What are the three steps we use to calculate total non-controlling interest? (1 mark)

Answer 1

a

If parent company does not hold 100% of equity of subsidiary, following transactions shall be eliminated on consolidation

i. Unrealized profits from intragroup transactions and balances

ii. Unrealized losses from intragroup transactions unless cost is recovered.

iii. Effects of upstream and downstream transactions

b.

Non-controlling interest is stake of less than 50% of shareholding. They are also called minority interest and are measured at net asset value. The disclosure of non-controlling interest does not provide any financial information. Investors have to take their own discretion. Non-controlling interest are disclosed in primary statements in equity section of balance sheet.

c.

NCI do not impact the consolidated adjustments for intra-group transactions. These are only entitled to share of consolidated equity rather than subsidiary equity.

d.

Three steps to compute NCI are:

i. Compute book value of subsidiary as it appears on subsidiary’s balance sheet.

ii. Multiply the book value by the percentage of the subsidiary owned by the minority shareholders

iii. Compute net income belonging to NCI and add the above balance plus share in net income for minority shareholders.