The objective of IFRS 10 is to establish principles for the presentation and preparation of consolidated financial statements. These are the financial statements of a group where the parent and its subsidiaries are presented as those of a single economic entity.
The economic entity approach treats all providers of equity capital as shareholders of the entity, even when they are not shareholders in the parent company.
For example, disposal of a partial interest in a subsidiary in which the parent company retains control, does not result in a gain or loss but in an increase or decrease in equity under the economic entity approach. Purchase of some or all of the NCI is treated as a treasury transaction and accounted for in equity. A partial disposal of an interest in a subsidiary in which the parent company loses control but retains an interest as an associate, creates the recognition of gain or loss on the entire interest. A gain or loss is recognised on the part that has been disposed of, and a further holding gain is recognised on the interest retained, being the difference between the fair value of the interest and the carrying amount of the interest. The gains are recognised in the statement of comprehensive income. Amendments to IAS 28, Investments in Associates, extend this treatment to associates and joint ventures.
On 1 January 2008, A acquired a 50% interest in B for $60m. A already held a 20% interest which had been acquired for $20m but which was valued at $24m at 1 January 2008. The fair value of the NCI at 1 January 2008 was $40m, and the fair value of the identifiable net assets of B was $110m. The goodwill calculation would be as follows, using the full goodwill method:
A gain of $4m would be recorded on the increase in the value of the previous holding in B.
Acquisition of part of an NCI
On 1 January 2008, Rage acquired 70% of the equity interests of Pin, a public limited company. The purchase consideration comprised cash of $360m. The fair value of the identifiable net assets was $480m. The fair value of the NCI in Pin was $210m on 1 January 2008. Rage wishes to use the full goodwill method for all acquisitions. Rage acquired a further 10% interest from the NCIs in Pin on 31 December 2008 for a cash consideration of $85m. The carrying amount of the net assets of Pin was $535m at 31 December 2008.
Rage has effectively purchased a further share of the NCI, with the premium paid for that share naturally being charged to equity. The situation is comparable when a parent company sells part of its holding but retains control.
Acquisition of further interest
The net assets of Pin have increased by $(535 – 480)m – ie $55m and therefore the NCI has increased by 30% of $55m – ie $16.5m. However, Rage has purchased an additional 10% of the shares and this is treated as a treasury transaction. There is no adjustment to goodwill on the further acquisition.
Disposal of part of holding to NCI
Using Example 4, instead of acquiring a further 10%, Rage disposes of a 10% interest to the NCIs in Pin on 31 December 2008 for a cash consideration of $65m. The carrying amount of the net assets of Pin is $535m at 31 December 2008.
The parent has effectively sold 10% of the carrying amount of the net assets (including goodwill) of the subsidiary ($62.5m) at 31 December 2008 for a consideration of $65m, giving a profit of $2.5m, which is taken to equity.