Question

a. FRS 110 paragraph 22 requires non-controlling interest in the consolidated statement of financial position to be presented within equity, separately from the owners of the parent. The now-superseded FRS 27 (2003) required minority interest to be presented separately from liabilities and parent shareholders’ equity.

Discuss the implications of the change in the requirement of the accounting standard. (11 marks)

b. Assume that there are only two shareholders in a company; the controlling shareholder holds 90% of the equity shares of the company whilst the other non-controlling shareholder holds the remaining 10%. The non-controlling shareholder is reading the consolidated financial statements of the controlling shareholder but could not understand why:

• • The balance shown as non-controlling interest is different from the amount he paid to purchase the 10% equity shares of the company nor the market value of the shares of the company as at the date of the financial statements.
• • The amount of profit attributable to non-controlling interest is not equal to 10% of the net profit of the company for the financial year.

Suppose you are the Group Accountant of the company. Draft a short memorandum explaining the above to the non-controlling shareholder to help him to understand the amounts and balances related to non-controlling interest in the consolidated financial statements. (14 marks)

Answer 1

a)The IASB changed the term "minority interest" to "Non-Controlling Interest" in IFRS. Earlier the term minority interest reflect that an owner of minority interest in an entity might control that entity. Therefore NCI is more accurate as it represent minority interest that do not have a controlling interest. IFRS 110 Paragraph 22 FRS 110 paragraph 22 requires non-controlling interest in the consolidated statement of financial position to be presented within equity, separately from the owners of the parent. This is because existence of NCI in the net asset of a subsidiary does not give rise to a present obligation. It represents equity i.e. residual interest in the asset of the entity after deducting its liabilities.

Earlier IFRS required that while preparing Consolidated Financial Statement a parent is required to identify and present minority interest separately from its equity and liabilities of the parent's shareholders. In other words, it was not included as part of equity.

This change will impact the calculation of goodwill at the time of consolidation.As there are two method under IFRS to calculate goodwill.One takes into account the valuation NCI at fair value and hence the method is named full value method. On the other hand second method measuredNCI at the non-controlling interest in net assets excluding goodwill. This leads to goodwill being recognised only for the parent’s interest in the entity acquired.

b) To :Non Controlling Interest Shareholder

From : M/s XYZ & Co , Group Accountant of ABC Company

Subject : Clarification regarding calculation of Non Controlling Interest share of profit and their valuation.

For calculating Non- Controlling Interest , first we calculate the net assets of the company as on the balance sheet date and then divide the net asset into Parent's share i.e. 90% and minority's share i.e 10%.Thereafter we do adjustment for current year profit, goodwill impairment,and various other adjustments. The adjustment are taken into account to present the true and fair value to the shareholder.

Further the amount attributable as a profit to the Non controlling interest is calculated as Realised Profit of the subsidiary*NCI Share. The Profit with which to multiply the Non Controlling Interest share shall be realised profit of the subsidiary and not of the whole group.