Definition IFRS 10
In accordance with IFRS 10, non-controlling interest is the equity (net assets) in a subsidiary not attributable, directly or indirectly, to a parent. The non-controlling interest is (1) reported as part of equity of the consolidated group, (2) recorded separately from the parent’s interests, and (3) clearly identified and labelled (e.g., non-controlling interest in subsidiaries) to distinguish it from other components of the parent’s equity. A company with a non-controlling interest in more than one subsidiary may aggregate its various non-controlling interests in the consolidated financial statements under IFRS 10 22. Non-controlling interests
Financial instruments, which may be either free-standing or embedded, can be treated as a non-controlling interest in the consolidated financial statements if issued by a subsidiary and classified as equity for financial reporting purposes in both the parent’s consolidated financial statements and subsidiary’s financial statements. The parent may, in some circumstances, issue financial instruments on behalf of a subsidiary.
If such financial instruments qualify for equity classification in both the parent’s consolidated financial statements and subsidiary’s financial statements they should, similar to an equity-classified financial instrument issued by a subsidiary, be treated as non-controlling interest in the consolidated financial statements. Guidance under US GAAP (ASC 815-40-15-5C) also clarifies that a financial instrument issued by a parent or a subsidiary for which the payoff to the counterparty is based, in whole or in part, on the shares of a consolidated subsidiary that is considered indexed to the entity’s own shares in the consolidated financial statements of the parent, is also treated as a non-controlling interest.
A financial instrument that a subsidiary classifies as a liability is not a non-controlling interest in the consolidated financial statements. For example, a subsidiary’s mandatorily redeemable financial instruments that are classified as liabilities under IAS 32 are not considered a non-controlling interest because they are not ownership interests. Also, financial instruments classified as liabilities in the parent’s consolidated financial statements under IAS 32 are not considered a non-controlling interest, even if classified as equity in the subsidiary’s financial statements. The guidance in IAS 32 is used to determine the classification of a financial instrument as a liability or equity. Non-controlling interests
Measurement of the non-controlling interest—fair value method
The acquirer in a business combination can elect, on a transaction-by-transaction basis, to measure NCI that are present ownership interests and entitle their holders to a proportionate share of the acquiree’s net assets in liquidation (‘ordinary’ NCI) at fair value or at the holders’ proportionate interest in the recognised amount of the identifiable net assets of the acquiree at the date of acquisition. Other components of NCI are initially measured at fair value, unless a different measurement basis is required by other IFRSs. [IFRS 3 19]. NCI is not remeasured in subsequent periods. Non-controlling interests
IFRS companies have the option of measuring NCI at fair value or at its proportionate share of the recognized amount of the acquiree’s identifiable net assets at the acquisition date, as measured in accordance with IFRS 3 19. This accounting can be elected on a transaction-by-transaction basis and does not require an IFRS company to make an accounting policy election.
The NCI is not remeasured in subsequent periods. In accordance with IFRS 10 B94, NCI will be allocated its share of profit or loss and its share of each component of other comprehensive income in subsequent periods. Non-controlling interests
The option of measuring non-controlling interest under the proportionate share method applies only to components of non-controlling interests that are present ownership instruments and entitle their holders to a proportionate share of the entity’s net assets in the event of liquidation. Other non-controlling interests should be measured at fair value unless another measurement basis is required by IFRS. Preference shares, employee share options, and the equity element of convertible debt are examples of instruments measured at other than fair value under IFRS.
Fair value considerations
The fair value of a non-controlling interest can be measured on the basis of market prices for the equity shares not held by the acquirer if the non-controlling interest consists of publicly traded securities. The acquirer must measure the fair value of the non-controlling interest using other valuation techniques if the securities are not publicly traded. The fair value of the previously held equity interest may also need to be similarly measured. Non-controlling interests
On a per-share basis, the fair value of the acquirer’s interest in the acquiree and the non-controlling interest may differ. This difference may be due to the inclusion of a control premium in the per-share fair value of the acquirer’s interest in the acquiree or, conversely, the inclusion of a discount for lack of control in the per-share fair value of the non-controlling interest.
A control premium represents the amount paid by a new controlling shareholder for the benefits resulting from synergies and other potential benefits derived from controlling the acquired company. Non-controlling interests
Control premiums and minority interest discounts should not be applied without considering whether the non-controlling interest will benefit in ways similar to the acquirer. For example, certain operational synergies will often impact the cash flows of the acquiree as a whole, including the non-controlling interest in the acquiree. In such a case, deducting those operational synergies (control premium) to value the non-controlling interest may not be appropriate. Valuation techniques contains further discussion on valuation techniques and methods.
Consideration of goodwill when non-controlling interest exist
Under IAS 36, any impairment charge is allocated between the controlling and non-controlling interests on the basis of their relative profit shares if the fair value method was used to measure the non-controlling interest on the acquisition date. The impairment charge is allocated to the controlling interest if the proportionate share method was used to measure the non-controlling interest on the acquisition date. Non-controlling interests
The following example demonstrates the application of the proportionate share method and measurement of other non-controlling interest. Non-controlling interests
Company B has issued 1,000 common shares and 100 preference shares (nominal value of CU1 per preference share). The preference shares are appropriately classified within equity. The preference shares give their holders a right to a preferential dividend in priority to the payment of any dividend to the holders of common shares.
Upon liquidation of Company B, the holders of the preference shares are entitled to receive CU1 per share in priority to the holders of the common shares. The holders of the preference shares do not have any further rights on liquidation. Company A acquires 800 common shares of Company B, resulting in Company A controlling Company B. The acquisition date fair value of a preference share is CU1.2 per share.
How should Company A measure the non-controlling interest, including preference shares?
Analysis Non-controlling interests
The non-controlling interest, including preference shares, that relates to Company B’s preference shares should be measured at fair value. The preference shares do not entitle their holders to a proportionate share of Company B’s net assets in the event of liquidation. Company A must measure the preference shares at their acquisition date fair value of CU120 (100 preference shares × CU1.2 per share). Non-controlling interests
IFRS companies that choose the proportionate share method typically record the NCI at an initial value that is lower than the value that would be used under the fair value method. Therefore, subsequent purchases of NCI for these companies may result in a larger percentage reduction of the controlling interest’s equity on the subsequent acquisition date. This is demonstrated in the following examples:
- Change in controlling ownership interest of a business—initial acquisition of controlling interest—fair value method used to measure the NCI in a business combination
- Change in controlling ownership interest of a business that does not result in loss of control—acquisition of additional shares
- Change in controlling ownership interest of a business that does not result in loss of control—sale of shares, control is maintained
- Change in controlling ownership interest of a business—initial acquisition of controlling interest—proportionate share method
- Change in controlling ownership interest of a business that does not result in loss of control—acquisition of additional shares—proportionate share method used to measure the NCI in a business combination Non-controlling interests
- Change in controlling ownership interest of a business that does not result in loss of control—sale of shares, control is maintained—proportionate share method used to measure the NCI in a business combination Non-controlling interests
- Change in controlling ownership interest of a business that does not result in loss of control—sale of additional shares by subsidiary, dilution of controlling interest’s ownership percentage, control is maintained Non-controlling interests
- Change in controlling ownership interest of a business that does not result in loss of control—accounting for the indirect decrease in an interest in an investee through the sale of shares of an intermediate subsidiary—proportionate share method used to measure the NCI in a Business Combination
in Accounting for changes in ownership interest that do not result in loss of control.
Even though control of an entity takes into account potential voting rights that are substantive, the calculation of NCI is generally based on current ownership interests. The returns associated with an ownership interest, and hence the NCI proportion, do not refer to the wider returns, such as synergistic benefits due to economies of scale and cost savings, that are part of the test of control. [IFRS 10 B89] Non-controlling interests
Losses that are attributable to NCI are allocated to the NCI even if doing so causes the NCI to have a deficit balance. [IFRS 10 B94] Non-controlling interests
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