Allocation between Controlling and Non-controlling interest is about consolidation, obtain control over but not hold 100% in another entity/subsidiary.
When a parent entity first obtains control over another entity, it recognises any non-controlling interest in the new subsidiary’s net assets as illustrated in the example below. In subsequent periods the parent allocates to the non-controlling interest its proportion of:
- profit or loss Allocation between Controlling and Non-controlling interest
- each component of other comprehensive income [IFRS 10 B94].
i.e. the entity’s profit or loss in consolidated profit or loss of the parent and the entity’s other comprehensive income in consolidated other comprehensive income of the parent. Allocation between Controlling and Non-controlling interest
The proportion allocated to non-controlling interest is based on ‘existing ownership interests’ [IFRS 10 B89]. Ownership interests in this context are the parent’s economic interests in the subsidiary rather than the voting rights. In most cases involving a traditional corporate structure these proportions will be the same and will reflect the ownership of ordinary shares. However, differences can arise as illustrated here: Allocation between Controlling and Non-controlling interest
Different voting rights and economic interests
Parent company P owns all of the 100 ‘A’ shares in an investee and another investor owns all the 100 ‘B’ shares. These two types of shares have equal rights to dividends and to available assets in a winding-up situation. However, each A share carries two votes and each B share only one vote.
Analysis: Allocation between Controlling and Non-controlling interest
Parent P owns two-thirds of the voting power (and therefore has control) but is entitled only to half the dividends and rights to net assets. Accordingly its economic interest is 50%. Equity and comprehensive income will be apportioned to the non-controlling interest based on 50%.
If a subsidiary has outstanding cumulative preference shares that are classified as equity and held by non-controlling interests, the parent deducts the preference dividends in arriving at the controlling interest’s share of profit. The parent allocates the dividends to non-controlling interest, irrespective of whether they have been declared [IFRS 10.B95].
Other practical issues in determining the allocation percentage include: Allocation between Controlling and Non-controlling interest
- indirect holdings
- potential voting rights and other derivatives.
If some of a parent’s interests in a subsidiary are owned indirectly (through another subsidiary) the non-controlling interest is determined based on the parent’s effective economic ownership. This is illustrated as follows: Allocation between Controlling and Non-controlling interest Allocation between Controlling and Non-controlling interest
Parent P controls two subsidiaries, S1 and S2, in the following group structure. Both subsidiaries were established as start-ups. Accordingly there is no goodwill and S1 and S2’s retained earnings were all generated while P had control:
Non-controlling interest arises in business combination in which the parent acquires less than 100% of the subsidiary. Acquisition method requires the parent to present consolidated financial statements i.e. financial statements which combine total assets and liabilities of the parents with total assets and liabilities of the subsidiary. But because not all assets and liabilities belong to the parent, the shareholders equity section is bifurcated into net assets that belong to the parent and net assets that belong to the other minority shareholders as illustrated by the chart below:
Consolidated statement of financial position
Consolidated equity and liabilities
Equity attributable to parent company
When a company acquires another company, it compares sum the fair value of purchase consideration it pays plus the fair value of the non-controlling interest with the fair value of net identifiable asset of the subsidiary to arrive at goodwill or any bargain purchase.
Allocation between Controlling and Non-controlling interest
Non-controlling interest on balance sheet equals the proportionate share of the non-controlling shareholders in the fair value of the net assets of subsidiary at the acquisition date plus the proportionate share of non-controlling shareholders in retained earnings since acquisition less their proportionate share in dividends.
Calculate fair value of the non-controlling interest (fair value of the equity). This is the value at which you can reasonable expect to sell your holding in the market. As an example, if company M has 80% stake in company X, then the remaining 20% is the non-controlling interest in company X. let’s say the fair value of non-controlling interest is $10 million.
Make any fair-value adjustments, such as for goodwill. For example, if the fair value of non-controlling equity is 10 million, you may want to add $1 million for goodwill and any other fair value adjustments, making the total as $11 million.
Add prorate income attributed to the non-controlling equity interest. At the time of sale, if the company had an income of $5 million, then the prorate share of income for non-controlling interest will be 20% of 5million = $1 million. Add this income to the fair value, i.e., $11 million + $1 million = $12 million.
Subtract prorate share of dividends. If prorate share of dividends is $1 million, this will be subtracted from the total fair value, i.e., $10 million – $1 million = $11 million.
This final fair value will be recorded in the equity section of the consolidated balance sheet of the parent company.
The above calculation can be summarized as follows:
NCI equity = Beginning NCI equity Fair Value + NCI’s interest in subsidiary income – NCI’s share of dividends
See also: The IFRS Foundation