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
- each component of other comprehensive income [IFRS 10 B94].
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:
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.
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: