Introduction

IFRS 10 mandates the application of the economic entity model for accounting purposes when dealing with transactions involving non-controlling interests. Any future changes in ownership stakes of the subsidiary that do not lead to a change in control will be treated as equity transactions.

Definition and classification

‘Non-controlling interest’ is defined as “the equity in a subsidiary not attributable, directly or indirectly, to a parent” . So, for example, where a parent owns 70% of a subsidiary, it has to consolidate 100% of the subsidiary’s results and net assets and show non-controlling interests of 30%.

The non-controlling interest is reported as part of equity of the consolidated group, recorded separately from the parent’s interests, and clearly identified and labelled (for example, non-controlling interest in subsidiaries) to distinguish it from other components of equity. Since the noncontrolling interest is classified as equity in the consolidated group, net income/comprehensive income will include profit or loss that is attributable to the parent and the non-controlling interest. An entity with a non-controlling interest in more than one subsidiary can aggregate its various non-controlling interests in the consolidated financial statements.

When classifying a financial instrument in consolidated financial statements, an entity should consider all terms and conditions agreed between members of the group and holders of the instruments in determining whether the group as a whole has an obligation to deliver cash or another financial asset or otherwise settle in a manner that results in liability classification. To the extent that there is such an obligation, the instrument is classified as a financial liability in the consolidated financial statements, and not as a non-controlling interest.

Non-controlling interest holding the majority of equity

A subsidiary is an entity that is under the control of its parent. Therefore, it is feasible for a parent to possess a lesser share of the ownership in an organization and yet retain control over the significant operations through legislation or a contractual arrangement..

Accounting for a majority non-controlling interest Although uncommon, it is feasible for a parent to possess only 20% of the equity in a corporation and nevertheless exert authority over its actions by legal provisions or contractual agreements, so maintaining control over the entity. In cases where this is true, the minority shareholders will possess 80% of the company’s ownership. Hence, the non-controlling interests depicted in the consolidated financial statements will be computed utilizing this proportion. This would lead to the group acquiring 100% ownership of the entity’s assets and liabilities, while also reflecting non-controlling interests of 80% in those assets and liabilities. A comparable scenario may occur when the parent entity possesses control over a significant portion of the voting rights, although owning a far smaller percentage of the overall equity.

The relationship with the subsidiary must be fully explained in the consolidated financial statements. IFRS 12 requires disclosure of the nature of the relationship between a parent and a subsidiary where less than 50% of the voting power is owned.

Measurement of the non-controlling interest

Entities can choose to measure the non-controlling interest either at its fair value or at its proportional share of the recognized amount of the acquiree’s identified net assets on the date of acquisition. This accounting method can be chosen for each individual transaction and does not necessitate a business to make a decision regarding accounting policies.

The non-controlling stake remains unchanged and is not adjusted to reflect its fair value in future periods. Nevertheless, the non-controlling interest will receive its portion of profit or loss and its portion of each element of other comprehensive income in future periods.

Attribution of profit or loss and comprehensive income to controlling and non-controlling interests

The proportion of income, losses and items of other comprehensive income allocated to the parent and non-controlling interests in preparing consolidated financial statements is determined solely on the basis of present ownership interests.

Proportion allocated to parent shareholder and non-controlling interest based on economic interest Entity A has an 80% interest in its subsidiary, entity B. Entity A holds a direct interest of 25% in entity C. Entity B also holds a 30% interest in entity C. Entity C is a subsidiary of entity A. Entity A controls entity B and, therefore, it also controls the 30% voting power of entity B over entity C. In addition, entity A has a 25% direct interest and related voting power in entity C. Entity A’s total voting power in entity C is (30% + 25%) = 55%. Entity A controls entity C and should consolidate this subsidiary. Although Entity A controls entity C, it is entitled to the subsidiary’s economic benefits based on its actual ownership interest. For the purposes of the consolidated financial statements, the group’s share of entity C is determined as 49% (25% + (80% × 30%)). As a result, entity A consolidates its entity C and attributes 51% to the non-controlling interests.

When evaluating control, potential voting rights are taken into consideration. However, when defining the economic interest, only the current ownership interest is considered, and potential voting rights are not taken into account. When potential voting rights provide access to the economic benefits of real ownership, the allocation of proportion to the non-controlling interest should consider the ultimate exercise of potential voting rights and other consequences.

IFRS 10 does not specify any particular method for attributing earnings between the controlling interest and the non-controlling interest.

How should earnings be attributed between controlling and non-controlling interests? If there are contractual agreements that specify how earnings are allocated, like profit-sharing plans, the allocation provided by the agreement should be taken into account if it is found to be significant. If the parent’s ownership and the non-controlling interest’s ownership of the assets and liabilities are proportionate, the relative ownership interests in the entity should be used in the absence of such contractual provisions. 60% of the earnings should go to the controlling interest and 40% to the noncontrolling interest, for instance, if the controlling interest owns 60% of entity A and the noncontrolling interest owns 40%. However, if the parties have a written agreement that calls for a 50/50 distribution of profits, then, as long as the agreement is valid, 50% of the profits should go to the controlling interest and 50% to the non-controlling interest.

According to IFRS, a third party that owns redeemable preference shares in a subsidiary is not considered to have a non-controlling interest. In the consolidated statement of financial position, it will merely be shown as a group liability, and the coupon associated with that liability will be shown as a financing expense in the consolidated income statement. However, the parent determines its portion of profits or losses after deducting the dividends on outstanding cumulative preference shares held by the non-controlling interest, which are considered equity, regardless of whether those dividends have been declared..

Calculation of profit attributable to noncontrolling interest subsequent to acquisition A parent entity acquires a 60% subsidiary for C300 million at the beginning of the year. The fair value of the subsidiary’s identifiable net assets at the date of acquisition is C370 million. In its first year after purchase, the subsidiary’s income statement, as it is included in the group’s consolidated financial statements (that is, after all consolidation adjustments, such as the amortization of intangible assets), is as follows: C’m Profit before taxation 26 Tax (1) Profit for the financial year 25 Profit attributable to the non-controlling interests (40% × C25m) 10 Profit attributable to the parent’s equity holders 15 25 The non-controlling interest at the date of acquisition is stated at either: ·        the initial amount of C200 million, if the parent entity recognizes the non-controlling interest at fair value which, assuming there is no control premium, is calculated as follows (40% × (C300m/60%)); or ·        the initial amount of C148 million, if the parent entity recognizes the non-controlling interest at its proportionate share of the acquiree’s net assets at acquisition (calculated as 40% × C370m). The non-controlling interest’s share of changes in equity at the year-end (which are all due to the profit for the year) is C10 million. Depending on the basis used for the initial recognition, the non-controlling interest will be carried at C210 million or C158 million at the end of the first year after the subsidiary’s purchase.

Loss-making subsidiaries

Both the parent and the non-controlling interest should be held accountable for all of the subsidiary’s profits and losses, even if doing so causes the shareholders’ equity to be negatively impacted.

Indirect holdings

The treatment of non-controlling interests gets more intricate when a parent has an indirect stake in a subsidiary. It is first required to determine whether the firm is a subsidiary of the parent and, therefore, should be consolidated, before the non-controlling interests can be computed.

Treatment of non-controlling interests where a parent holds an indirect interest in a subsidiary Consider the following group structure: Entity P owns 70% of the equity and 60% of the voting rights in entity A. Entity A is, therefore, a subsidiary of entity P, because entity P controls more than 50% of the voting rights in entity A. Entity P owns 25% of the equity and 25% of the voting rights in entity B, while entity A owns 30% of the equity and 30% of the voting rights in entity B. Entity B is not a direct subsidiary of entity A, because entity A only controls 30% of its votes (assuming that entity B is not a subsidiary of entity A for other reasons, such as power to direct the relevant activities). However, entity P controls 25% of the votes in entity B directly and, by virtue of its control of entity A, 30% of the votes in entity B indirectly. Entity B is, therefore, a subsidiary of entity P, because entity P controls a total of 55% of the voting rights in entity B. On the other hand, if entity A had not been a subsidiary of entity P, entity P would not have controlled entity B and, as a consequence, entity B would not have been a subsidiary of entity P. The summarized statement of financial position (balance sheet) of each of the group companies is as follows: Summarized statement of financial position Entity P  Entity A  Entity B  C’000    C’000    C’000 Investment in subsidiaries 60* 30 – Net assets 190 120 200 250 150 200 Share capital 100 50 100 Retained profits 150 100 100 Shareholders’ funds 250 150 200  * The investment in subsidiaries represents the investments in entities A and B, which were acquired for their nominal value at incorporation. In theory, the non-controlling interests as presented in the statement of financial position (balance sheet) can be ascertained in two ways: either by considering the non-controlling interest arising when entity B is consolidated with entity A, and when entity A is consolidated by entity P; or by considering entity P’s indirect holding in its subsidiaries. However, the methods will arrive at different results where there is capitalized goodwill. The illustration below assumes that the non-controlling interest has been recognized at its proportionate share of the recognized amount of the acquiree’s net assets at the acquisition date.  Indirect method The indirect method involves calculating the total non-controlling interests by considering the indirect non-controlling interests from the parent’s perspective. In this case, there is an indirect non-controlling interest in entity B of 54% (100% − (30% × 70% + 25%)) and a direct non-controlling interest of 30% in entity A. The non-controlling interests calculated under the indirect method are as follows: C’000 Non-controlling interest’s share of entity A’s net assets × direct non-controlling interest (C120,000 × 30%) 36 Non-controlling interest’s share of entity B’s net assets × indirect non-controlling interest (C200,000 × 54%) 108 144 Direct method C’000 Entity B consolidated into entity A Equity share capital of entity B (C100,000 × 70%) 70 Reserves of entity B (C100,000 × 70%) 70 Non-controlling interest in group A 140 Group A consolidated into entity P Equity share capital of entity A (C50,000 × 30%) 15 Reserves of entity A (C100,000 × 30%) 30 Reserves of entity B ((C100,000 × 30%) × 30%) * 9 Adjustment to eliminate 25% of entity B owned directly by entity P † Ordinary share capital of entity B (C100,000 × 25%) (25) Reserves of entity B (C100,000 × 25%) (25) 144 * The non-controlling interest in group A will take its proportion of entity B’s reserves that have been consolidated with entity A’s reserves. † The adjustment is necessary because the 70% non-controlling interest in entity B consolidated into entity A includes the 25% held by entity P. The same outcome is obtained using both approaches: a non-controlling interest of C144,000. However, where goodwill arises via entity A’s acquisition of entity B and is capitalized in entity A’s consolidated financial statements, the results of the indirect and direct approaches would differ.

Treatment of dividends

The group’s consolidated profit or loss should include all of the gains and losses attributable to a subsidiary, even in cases where there is a non-controlling interest. The reporting entity’s profit or loss for the period is then attributed to the non-controlling interest’s portion of these gains and losses. In the event that the subsidiary paid a dividend during the period, the dividend paid to the non-controlling interest reduces cash on consolidation, signifying the portion of the dividend paid by the subsidiary that the parent did not receive, and lowers the non-controlling interest’s carrying amount.

Transactions with non-controlling interests

After control is acquired, adjustments to a parent’s ownership stake that do not cause the subsidiary to lose control are recorded as equity transactions. As a result, in the event that the parent retains control, the income statement of the subsidiary will not show a gain or loss from the sale of its shares. In a similar vein, in the absence of a change in control, the parent company will not book any extra goodwill to reflect its future acquisition of more shares in a subsidiary. Rather, to reflect the shift in ownership of the subsidiary, the carrying amount of the non-controlling interest will be modified. Equity is recognized and allocated to the parent’s equity holders for any discrepancy between the amount by which the non-controlling interest is modified and the fair value of the consideration paid or received.

According to IAS 1, the income and expenses produced by the entity’s operations during that period do not include changes in equity resulting “from transactions with owners in their capacity as owners (such as equity contributions, reacquisitions of the entity’s own equity instruments and dividends) and transaction costs directly related to such transactions.” Therefore, transaction costs related to non-controlling interest transactions that don’t lead to a change in control are subtracted from equity.

A share-based payment may also result in changes to a parent’s ownership stake in a subsidiary. In this scenario, the parent may give some of its subsidiary’s shares to the subsidiary’s staff, lowering its ownership stake. These kinds of transactions are covered by IFRS 2.

Only on the day of the business combination are non-controlling interests reported at fair value, or a proportionate share of net assets, if preferred. When control is preserved, further acquisitions or transactions of ownership interests are reported at the proportionate share of the net assets held by the non-controlling interest.

A subsidiary may give more shares to a third party, reducing the ownership proportion of the controlling interest. This dilution is treated as an equity transaction if it doesn’t lead to a change in control.

Sale of a 20% interest in a wholly owned subsidiary Entity A sells a 20% interest in a wholly owned subsidiary to outside investors for C200 million in cash. It still maintains an 80% controlling interest in the subsidiary. The carrying value of the subsidiary’s net assets is C600 million, including goodwill of C130 million from the subsidiary’s initial acquisition. The accounting entry recorded on the disposal date for the 20% interest sold is as follows: C’m C’m Dr Cash 200 Cr Non-controlling interest (20% × C600m) 120 Cr Equity 80 The carrying value of the 20% non-controlling interest that is recognized is calculated as the proportionate interest in the subsidiary’s carrying value/net assets.

Acquisition of a further 20% interest in a subsidiary Entity A acquired 60% of entity B some years ago for C3,000. At the time, entity B’s fair value was C5,000. It had net assets with a fair value of C3,000 (which, for the purposes of this example, was the same as book value). Goodwill of C1,200 was recorded (being C3,000 − (60% × C3,000)). On 1 July 20X5, entity A acquires a further 20% interest in entity B, taking its holding to 80%. At that time, entity B’s fair value is C10,000, and entity A pays C2,000 for the 20% interest. At the time of the acquisition, the fair value of entity B’s net assets is C6,000 and the carrying amount of the non-controlling interest is C2,000. The accounting entry recorded for the acquisition of the non-controlling interest is as follows: C C Dr Non-controlling interest 1,000 Dr Equity 1,000 Cr Cash 2,000 The carrying value of the 20% non-controlling interest that is eliminated is calculated at the proportionate interest in the non-controlling interest’s carrying value.

Acquisition of a further 40% interest in a subsidiary A parent entity acquires a 60% subsidiary for C300 million at the beginning of the year. The fair value of the subsidiary’s identifiable net assets at the date of acquisition is C370 million. In its first year after purchase, the subsidiary’s income statement, as it is included in the group’s consolidated financial statements (that is, after all consolidation adjustments, such as the amortization of intangible assets), is as follows: C’m Profit before taxation 26 Tax (1) Profit for the financial year 25 Profit attributable to the non-controlling interests (40% × C25m) 10 Profit attributable to the parent’s equity holders 15 25 The non-controlling interest at the date of acquisition is stated at either: ·        the initial amount of C200 million, if the parent entity recognizes the non-controlling interest at fair value which, assuming there is no control premium, is calculated as follows (40% × (C300m/60%)); or ·        the initial amount of C148 million, if the parent entity recognizes the non-controlling interest at its proportionate share of the acquiree’s net assets at acquisition (calculated as 40% × C370m). The non-controlling interest’s share of changes in equity at the year-end (which are all due to the profit for the year) is C10 million. Depending on the basis used for the initial recognition, the non-controlling interest will be carried at C210 million or C158 million at the end of the first year after the subsidiary’s purchase. The parent entity now acquires the remaining 40% interest in the subsidiary for C280 million. The accounting entry recorded for the purchase of the non-controlling interest is as follows (if NCI was initially recorded at fair value): C’m C’m Dr Non-controlling interest 210 Dr Equity 70 Cr Cash 280 The accounting entry recorded for the purchase of the non-controlling interest is as follows (if NCI was initially recorded at the proportionate share of the acquiree’s identifiable net assets): C’m C’m Dr Non-controlling interest 158 Dr Equity 122 Cr Cash 280 The purchase of the 40% non-controlling interest results in a larger reduction of the controlling interest’s equity where the non-controlling interest was initially recorded as the proportionate share of the acquiree’s identifiable net assets.

Options and forward contracts over shares relating to noncontrolling interests

A parent company could write a put option on shares in a current business that are owned by people who don’t control the company. The non-controlling partner can use the put option to force the parent company to buy the shares according to the terms and conditions of the put option. The option could be given when the parent company takes over the subsidiary, or it could be given at a later point. The price at which the option can be exercised could be a set price, its fair value, or a formula, like a multiple of EBITDA. Along with the put option, a bought call option might also be available, with the same (or similar) terms as the put. As long as the terms and conditions of the call option are met, the parent company can force the non-controlling shareholder to give its shares to the parent company. Another option is to make a forward purchase agreement that says the parent company will buy the non-controlling shareholding at a certain time in the future at a price that could be fixed, based on a formula, or equal to the fair value of the shares. Neither party can back out of the deal.

There is no advice in IFRS 3 on how to account for these kinds of contracts when two businesses merge. It’s also not clear what to do when a parent company signs one of these contracts after the businesses have merged. When choosing the right accounting approach, you need to look at IFRS 10, IAS 32, and IFRS 9 (IAS 39).

The main accounting principles are as follows:

1. The ownership risks and rewards of the shares relating to the forward or option should be analyzed to determine whether the equity is attributable to the non-controlling interest or the parent. The noncontrolling interest is recognized if the risks and rewards of ownership of those shares remain with them.
2. Irrespective of whether the non-controlling interest is recognized, a financial liability (recognized at the present value of the redemption amount) is recorded to reflect the forward or put option.
3. Where the significant risks and rewards of ownership remain with the non-controlling interest, the financial liability recognized in (b) above reduces the controlling interest equity. The non-controlling interest continues to be recognized and is allocated its share of profits and losses in the normal way.
4. We consider that, where the significant risks and rewards of ownership reside with the controlling interest, the financial liability recognized in (b) above is offset against the non-controlling interest balance as follows:

• If the liability is greater than the non-controlling interest (which will generally be the case) the difference is debited to controlling interest equity. In substance, there is no non-controlling interest and it would therefore not be appropriate to allocate a loss.
• If the liability is less than the non-controlling interest, it is likely that the non-controlling interest has retained some residual rights, which might be, for example, to future dividends. In this situation, the balance is shown as a non-controlling interest.
• Dividends paid to the non-controlling interest that do not reduce the contracted future purchase price are deducted from the noncontrolling interest carrying value. Profits and losses are allocated to the non-controlling interest to the extent it is necessary to cover any dividend payments.
• If the forward or put option states that dividend payments reduce the contracted future purchase price, the dividend amount should be deducted from the redemption liability.

10. IFRIC did not provide guidance on where subsequent changes to the financial liability should be recorded. There is currently diversity in practice due to a conflict in the guidance in IFRS 9 and IFRS 10.

Analyzing the risks and rewards of forwards and options It is important to carefully look over the terms of forward and option contracts to see if they give the parent access to the risks and benefits of actually owning the shares during the contract time. The shareholder who doesn’t have control may have kept the risks and benefits of ownership until the contract is settled or the option is taken. When making this decision, you should think about how much the forward contract or options cost and whether changes in the share price during the contract or option period put the parent company or the non-controlling partner at risk or in the black.Usually, when a forward contract or option is settled with the transfer of the non-controlling interest’s shares for a fair value price, the parent company does not take on the risks and benefits of ownership until the contract is settled or the option is taken. Fixed-price forwards, on the other hand, do give the parent company the risks and benefits of owning the shares from the moment the contract is signed. A fixed-price forward is similar to written put options with a set exercise price that come with a call option with the same price that can be exercised at the same future date. It is almost always the case that either the parent company or a shareholder who does not have control will take a symmetrical put or call option. Two of them will do this because it will be good for their business. The non-controlling shareholder will use the put option to sell the shares if the share price falls below the fixed strike price. This means that the parent company still bears the risk of the shares losing value during the option time. The parent will exercise the call option and buy the shares if the share price goes above the fixed strike price. This means that the parent can still benefit from price increases during the option time.In equity, a non-controlling interest is identified if the non-controlling interest continues to share a large part of the risks and benefits of ownership during the term of the contract. When the parent takes on all the risks and benefits of ownership, there is no longer a non-controlling stake. As per IFRS 3, if forward or symmetrical put and call options are signed at the same time as the business combination and an amount is recorded for a non-controlling interest, it is either recorded at its fair value or at its share of the subsidiary’s identifiable net assets’ fair value.If the contracts are signed after the business merger date, the non-controlling interest is no longer recognized because the parent company now bears all the risks and benefits of ownership. It is up to the judge to decide whether the risks and benefits of ownership should go to the parent company or stay with the non-controlling interest. All of the contract’s terms and conditions must also be taken into account. This also means that there are times when the strike price of forward or symmetrical put and call options to get the non-controlling interest is not the same as the fair value price. These are complicated cases, and the facts and circumstances will tell you where the risks and rewards of ownership lie. Because of this, this advice can’t fully cover these kinds of scenarios.The following table summarizes different types of contracts that might be issued in relation to the acquisition of a non-controlling interest and the likely impact on the transfer of risks and rewards: Instrument Risks and rewards Fixed-price forward Transfer to parent. Fixed-price written put with fixed-price purchased call (Symmetrical terms) (synthetic forward) Transfer to parent. Fair value forward (or formula based on performance) Reside with non-controlling interest. Fair value (or formula based on performance) written put with fair value (or formula based on performance) purchased call Reside with non-controlling interest. Fixed-price written put Risks might transfer to the parent. However, a further assessment of the facts and circumstances are required to understand where the rewards reside. Fixed-price purchased call Rewards might reside with controlling interest. However, a further assessment of the facts and circumstances is required to understand where the risks reside.

Accounting for a forward contract or a written put option liability If an entity agrees to give cash or another financial asset in exchange for its own stock shares, the entity will have a financial liability for the present value of the redemption amount. This debt is written down, even if the deal doesn’t fit the definition of an equity instrument. In a forward contract, the entity’s liability shows its unbreakable duty to give cash or a financial asset. But there is a question of whether a similar responsibility should be recognized for a company that buys a written put option on its own shares.The IFRS Interpretations Committee reviewed this matter and, while it did not include it in its agenda, it did provide a comment stating that a parent company must acknowledge a financial obligation when it is obligated to make a future cash payment to acquire the minority’s shares, even if the payment is contingent upon the holder exercising the option. This statement confirms that when a parent or acquirer engages into a written put option for a non-controlling interest shareholding, they should treat it as a financial liability, similar to how they would treat a forward contract. The financial obligation is acknowledged at the current value of the amount to be repaid. The initial redemption liability results in a decrease in the equity of the parent company if the non-controlling interest retains the risks and rewards of ownership. Alternatively, it leads to a decrease in the equity of the non-controlling interest if the risks and rewards of ownership are transferred to the parent company. Nevertheless, we have noticed variations in how subsequent changes in the carrying amount of the put liability are accounted for. This variation is presumably a result of contradictory instructions in IFRS 9 and IFRS 10. The prevailing method commonly adopted in practice is to acknowledge finance charges in the income statement, which aligns with the guidelines of IFRS 9 (IAS 39) and is illustrated in the examples provided in this article.In practice, we have noticed that changes to the redemption liabilities are being recorded in the equity section. Proponents of this method contend that it is in line with the recommendations of IFRS 10, which advocate for the recognition of adjustments pertaining to changes in the parent’s ownership stake that do not lead to the parent relinquishing control over a subsidiary as ownership transactions. This approach can only be applied when, upon first acknowledging the redemption liability, the risks and benefits are not transferred to the parent company. In this case, noncontrolling interests are still acknowledged, and the allocation of profit and loss is done between controlling and noncontrolling interests. The accounting for changes in redemption liabilities is intricate and heavily reliant on a comprehensive comprehension of the contractual terms. It is anticipated that the IASB will offer further elucidation on this subject after it concludes its project on accounting for financial instruments having equity-like features, which was initiated by the issuance of a discussion paper in June 2018.

Accounting for dividends paid and allocation of profits where there is a forward or put option liability A minority stakeholder may be entitled to earn dividends during the duration of the agreement. Dividends are subtracted from the non-controlling interest. Dividends should only decrease the amount owed for redemption if the forward or put and call options specify that these payments lower the price at which the options can be exercised. If the non-controlling interest continues to bear the risks and benefits of ownership, then the profits should be assigned to it.

Accounting for contracts exercised or lapsed The entity engages in a written put option for a non-controlling interest in its own shares. If the contract is executed, any equity held by non-controlling interests is assigned to the equity of the parent company. Goodwill remains unchanged upon contract settlement. The obligation to repay is balanced by the monetary disbursement. If the contract expires without being utilized, and the parent company has assumed the risks and rewards of ownership, a non-controlling interest equity is acknowledged. Essentially, the parent company has sold the shares back to the non-controlling interest, resulting in a transaction involving the non-controlling interest. The non-controlling interest equity is acknowledged as an amount that is equivalent to its proportionate part of the subsidiary’s net assets’ carrying values at the time of expiration, in addition to the goodwill from the subsidiary’s initial acquisition. The discrepancy between the redemption liabilities and the noncontrolling interest equity adjustment is acknowledged as a deduction from the parent company’s equity. Goodwill remains unchanged and no modifications are applied. If the noncontrolling interest bears the risks and rewards of ownership, there is no change in the carrying value of the non-controlling interest, and the redemption liability is removed from the parent’s equity.

Ownership risks and rewards transfer to the parent Background information Parent A acquires a controlling 70% interest in subsidiary B at the end of 20X0 for C6,000. The fair value of 100% of the identifiable net assets is C6,500. At the date of the acquisition, parent A and the non-controlling shareholder enter into a forward contract (or a symmetrical, fixed-price put/call option arrangement) under which parent A is required to purchase the shareholder’s 30% non-controlling interest for a fixed price of C2,500 at the end of 20X2 (assume that the present value of the redemption amount, using a discount rate of 10%, is C2,066). Total profits for 20X1 and 20X2 are C300 and C500 respectively. Dividends paid by the subsidiary on a pro rata basis to the shareholders in 20X1 and 20X2 are C100 and C150 respectively. The forward contract (or symmetrical put and call options) does not allow dividend payments to reduce the exercise price. Risks and reward analysis The forward (put and call options) results in a transfer of the risks and rewards of ownership, of the 30% interest, to parent A during the contract period, because the forward contract (put and call options) has a fixed exercise price. Forward contract (symmetrical put and call options) is entered into at the date of the business combination Parent A should reflect an economic interest of 100%, according to the above risks and rewards analysis. Hence, there is no amount recorded for the non-controlling interest.  Date of acquisition in 20X0 C C Dr Net assets 6,500 Dr Goodwill 1,566 Cr Redemption liability 2,066 Cr Cash 6,000 to recognize the initial acquisition. A symmetrical put and call option is, in substance, a forward contract and is accounted for in the same way as a forward. The call option does not have an accounting impact on the consolidated financial statements. Accounting in 20X1 C C Dr Finance expense 207 Cr Redemption liability 207 to accrete the liability to its redemption amount (C2,066 × 10%). C C Dr Non-controlling interest equity 30 Cr Cash 30 to recognize the payment of dividend to the non-controlling interest (C100 × 30%). C C Dr Parent equity/income statement 30 Cr Non-controlling interest 30 Profits are allocated to the non-controlling interest to cover the dividend payment. Accounting in 20X2 C C Dr Finance expense 227 Cr Redemption liability 227 to accrete the liability to its redemption amount ((C2,066 + C207) × 10%). C C Dr Non-controlling interest equity 45 Cr Cash 45 to recognize the payment of dividend to the non-controlling interest (C150 × 30%). C C Dr Parent equity/income statement 45 Cr Non-controlling interest 45 Profits are allocated to the non-controlling interest to cover the dividend payment. Expiry of contract (in practice, these fixed-price contracts are assumed to be exercised) C C Dr Redemption liability 2,500 Cr Cash 2,500 to pay the redemption obligation (C2,066 + C207 + C227). Lapse of contract C C Dr Redemption liability 2,500 Dr Parent equity 85 Cr Non-controlling interest equity 2,585 If the contracts had lapsed, the non-controlling interest carrying value would be recognized at C2,585. This amount is calculated as 30% of the net assets of the subsidiary at the date of lapse, calculated as net assets plus goodwill from the subsidiary’s initial acquisition adjusted for profits and dividends since acquisition, which is C6,500 + C1,566 (goodwill) + C800 (profits) – C250 (dividends) = C8,616. Goodwill is included in the calculation, because the substance of the transaction is a sale of shares to non-controlling interest. Forward contract (symmetrical put and call options) is entered into after the business combination The following accounting entries arise: C C Dr Net assets 6,500 Dr Goodwill 1,450 Cr Non-controlling interest 1,950 Cr Cash 6,000 For the purposes of this illustration, the parent entity has elected to measure the non-controlling interest at its proportionate share of the fair value of identifiable net assets, which is C1,950 (C6,500 × 30%). However, the parent entity could have chosen to measure it at its full fair value in accordance with IFRS 3 (that is, C2,300). Goodwill attributable to the parent is C1,800 (C1,450 + (C2,300 – C1,950)). Profits should be allocated to the non-controlling interest until the time when the risks and rewards associated with the non-controlling interest are transferred to the parent. Date of entering into the forward contract (symmetrical put and call options) At the time when the forward (put and call options) is entered into, the risks and rewards are transferred to the parent; the following entry should be recognized: C C Dr Non-controlling interest (de-recognize entirely) 1,950 Dr Parent equity (the difference) 115 Cr Redemption liability (PV of the redemption amount) 2,066 Subsequent accounting The ongoing accounting would be consistent with that described in (a) above, that is: ·        The redemption liability should be accreted over the contract period through finance expense. ·        Dividend payments should reduce the carrying value of the noncontrolling interest. ·        Profits should be allocated to the non-controlling interest to the extent that it covers the dividend payments.

Ownership risks and rewards remain with the non-controlling interest Background information At the conclusion of 20X0, Parent A purchases a majority stake of 70% in subsidiary B for a total of C6,000, thereby gaining control over it. The valuation of all the identifiable net assets amounts to C6,500. Upon the acquisition, parent A and the non-controlling shareholder establish a forward contract (or fair value, symmetrical put/call option). This contract obligates parent A to buy the non-controlling shareholder’s 30% stake at its fair value, which will be determined at the forward date at the end of 20X2.The fair value of the non-controlling interest is estimated to be C2,500 during 20X0 and 20X1 but is re-estimated to be C2,600 in 20X2. The present value of the estimated redemption amount of C2,500, at a discount rate of 10%, is C2,066. Total profits for 20X1 and 20X2 are C300 and C500 respectively. Dividends paid on a pro rata basis to the shareholders in 20X1 and 20X2 are C100 and C150 respectively. The forward (symmetrical put and call options) does not allow dividend payments to reduce the exercise price. Parent A elects to recognize the non-controlling interest at the proportionate share of identifiable net assets. Risks and reward analysis The forward (put and call options) results in no transfer of the risks and rewards of ownership, of the 30% interest, to parent A during the contract period, because the forward contract (put and call options) has a fair value exercise price. (a) Forward contract (symmetrical put and call options) is entered into at the date of the business combination Date of acquisition in 20X0 C C Dr Net assets 6,500 Dr Goodwill 1,450 Cr Non-controlling interest equity 1,950 Cr Cash 6,000 to recognize the initial acquisition. The non-controlling interest is recognized at 30% × C6,500 because, in this example, it is measured at the proportionate share of identifiable net assets. C C Dr Parent equity 2,066 Cr Redemption liability 2,066 to recognize the liability for the forward (symmetrical put and call options) at the present value of the expected redemption amount. Accounting in 20X1 C C Dr Parent equity/income statement 90 Cr Non-controlling interest equity 90 to allocate profits to the non-controlling interest (C300 × 30%). C C Dr Non-controlling interest equity 30 Cr Cash 30 to recognize the payment of the dividend to the non-controlling interest (C100 × 30%). C C Dr Finance expense 207 Cr Redemption liability 207 to accrete the liability at estimated discount rate (C2,066 × 10%).* Accounting in 20X2 C C Dr Parent equity/profits attributable to non-controlling interest 150 Cr Non-controlling interest equity 150 to allocate profits to the non-controlling interest (C500 × 30%). C C Dr Non-controlling interest equity 45 Cr Cash 45 to recognize payment of the dividend to the non-controlling interest (C150 × 30%). C C Dr Finance expense 227 Cr Redemption liability 227 to accrete the liability at estimated discount rate ((C2,066 + C207) × 10%).* C C Dr Finance expense 100 Cr Redemption liability 100 to adjust the liability for the changes in estimated cash flows for the redemption in accordance with IFRS 9 (IAS 39) (C2,600 – (C2,066 + C207 + C227)).* Exercise of the contract C C Dr Redemption liability 2,600 Cr Cash 2,600 to pay the redemption obligation (C2,066 + C207 + C227 + C100). C C Dr Non-controlling interest equity 2,115 Cr Parent equity 2,115 to eliminate the non-controlling interest (C1,950 + C90 – C30 + C150 – C45). Lapse of contract C C Dr Redemption liability 2,600 Cr Parent equity 2,600 to de-recognize the redemption obligation (C2,066 + C207 + C227 + C100). The non-controlling interest put liability is extinguished and, therefore, reclassified through equity. * Another acceptable approach is to recognize in this scenario any adjustment to the redemption liability in equity. (b) Forward contract (symmetrical put and call options) is entered into after the business combination If the forward contract (or put/call arrangement) was entered into after the date of acquisition, the accounting would be consistent with that noted above.

Issuance of written call option on a subsidiary (issued by parent) Accounting for a free-standing written call option on a subsidiary’s shares issued by a parent If a parent company issues a written call option on a subsidiary’s shares, and the option qualifies for equity classification, the parent company should account for it as a non-controlling interest. The amount of compensation received for the written call option determines the value of this non-controlling interest. However, while the option is still valid, the option holder should not be assigned any gains or losses from the subsidiary. The non-controlling interest persists until the option reaches its expiration date.If the option is exercised and the parent maintains control over the subsidiary, the alteration in the parent’s ownership stake should be treated as an equity transaction as outlined in paragraph 23 of IFRS 10. During the exercise, the recently issued shares should be disclosed as a non-controlling interest, which is equivalent to the non-controlling interest holder’s proportionate share of the parent company’s investment in the subsidiary’s equity. Alternatively, in the event that the option reaches its expiration date, the recorded value of the written option must be moved from the non-controlling interest category to the equity of the controlling interest, provided that there are no additional non-controlling interests remaining. Example Entity A issues a warrant (written call option), to purchase 10% of a wholly owned subsidiary’s shares with an exercise price of C150, to investor B for C60. Before and after investor B’s exercise of the warrant, entity A’s carrying amount in the subsidiary, including goodwill, is C1,000. There are no basis differences between entity A’s investment in the subsidiary and the subsidiary’s equity. There is no other existing non-controlling interest. In consolidation, entity A would record the following journal entries: Dr Cash 60 Cr Non-controlling interest to record the issuance of the warrant 60 Dr Cash 150 Cr Non-controlling interest to record the issuance of the warrant C140 (1) Cr Equity to record the exercise of the warrant C110 (2) (1) Entity A’s basis in the subsidiary’s equity after exercise of warrant C1,000 Investor B’s ownership percentage × 10% Non-controlling interest after exercise 100 Less: Non-controlling interest prior to exercise (60) Increase in non-controlling interest C40 (2) Warrant consideration received by entity A C60 Plus: Exercise price 150 Total consideration received by entity A 210 Less: 10% of entity A’s basis in the subsidiary’s equity (100) Change in entity A’s equity reserves C110 If the warrant was not exercised but expires, entity A would record the following entry to reclassify the premium received for the warrant: Dr Non-controlling interest C60 Cr Equity to record the expiration of the warrant C60

Issuance of written call option on a subsidiary (issued by subsidiary) Accounting for a free-standing written call option on a subsidiary’s shares issued by the subsidiary A free-standing written call option, such as an employee stock option, on a subsidiary’s shares issued by the subsidiary that is classified as equity should also be recorded by the parent as a noncontrolling interest for the amount of money paid for the written call option. The person who has the option shouldn’t be responsible for the subsidiary’s profit or loss while the option is still valid. The non-controlling stake will still exist after the option ends. If the parent company exercises its option and stays in charge of the subsidiary, the change in the parent’s ownership stake should be recorded as an equity deal. When the option is exercised, the new shares should be reported as a non-controlling interest equal to the holder’s share of the parent company’s investment in the subsidiary’s stock. If the option ends, on the other hand, IFRS 10 says that the parent should lower their non-controlling interest by the amount of their share of the written option’s carrying amount. Example A subsidiary, which is wholly owned and controlled by entity A, issues a warrant (written call option), to purchase 10% of the subsidiary’s shares with an exercise price of C150, to investor B for C60. After investor B’s exercise of the warrant, the subsidiary’s equity, including goodwill, is C1,210 (C1,000 of net assets plus CU60 of cash received for issuance of the warrant and C150 received for the exercise price). There are no basis differences between entity A’s investment and the subsidiary’s equity. There is no other existing non-controlling interest. In consolidation, entity A would record the following journal entries: Dr Cash 60 Cr Non-controlling interest to record the issuance of the warrant 61 Cr Equity to record the exercise of the warrant C89 (2) Dr Cash 150 Cr Non-controlling interest to record the issuance of the warrant C140 (1) Cr Equity to record the exercise of the warrant C110 (2) (1) Entity A’s basis in the subsidiary’s equity after exercise of warrant C1,210 Investor B’s ownership percentage × 10% Non-controlling interest after exercise 121 Less: Non-controlling interest prior to exercise (60) Increase in non-controlling interest C61 (2) Subsidiary carrying amount of net assets after exercise C1,210 Entity A’s ownership percentage after exercise 90% Entity A’s ownership in the subsidiary’s net assets after exercise 1,089 Entity A’s ownership investment in the subsidiary before exercise (1,000) Change in entity A’s ownership interest C8 If the warrant was not exercised but expires, entity A would record the following entry to reclassify the premium received for the warrant: Dr Non-controlling interest C60 Cr Equity to record the exercise of the warrant C60 Note that the change in interest calculation might be more complex if there is an existing non-controlling interest prior to the issuance of the option, or if there is a basis difference between the parent’s investment in the subsidiary and the equity in the subsidiary’s separate financial statements.

Presentation in financial statements

A stake in a subsidiary that doesn’t give the parent company power is an ownership stake in the consolidated entity that should be shown as equity in the consolidated financial statements. Comprehensive income and consolidated profit or loss show the combined results of the parent company and all of its subsidiaries that it controls, no matter how much of those subsidiaries it owns. The parent and the non-controlling stake are then given these amounts. In the same way, the non-controlling interest is shown as equity on the statement of financial situation (balance sheet).

From the date the subsidiary is bought until the date the parent company no longer controls the subsidiary, the consolidated financial records should show the subsidiary’s income, expenses, profit or loss, and other comprehensive income or loss. The consolidated financial statements show how much money the owners of the parent company and the non-controlling stake have.

On the front of the consolidated financial records, companies must show their profit or loss, their comprehensive income or loss, and the amounts that belong to the parent company and the non-controlling interest.

Either in the notes or on the face of the consolidated income statement (in the statement of comprehensive income or the income statement), the parent company should show its profit or loss from ongoing and discontinued activities.On the face of the consolidated statement of changes in equity, an entity should present a separate reconciliation of the carrying amount at the beginning and end of the period for each of the following categories of equity:

(i) total equity,

(ii) equity attributable to the parent, and

(iii) equity attributable to the non-controlling interest.

In this reconciliation, the following details should be presented separately:

• Profit or loss.
• Other comprehensive income.
• Transactions with owners acting in their capacity as owners (contributions from and distributions to owners should be shown separately).

A further specification of each item of other comprehensive income for each category of equity is required, but can be presented in the notes.

Entities are required to present, in the notes to the consolidated financial statements, a supplemental schedule that shows the effects that transactions with the non-controlling interest have on the equity attributable to the parent for each period that an income statement is presented. The schedule is required if the parent has transactions with the non-controlling shareholders for any of the periods presented in the consolidated financial statements, when there is no loss of control.