Accounting for the effect of transactions with non-controlling interests recognised through equity by an associate or joint venture
Entity A holds a 20% interest in entity B (an associate) that in turn has a 100% ownership interest in subsidiary C. The net assets of C included in B”s consolidated financial statements are €1,000. For the purposes of the example all other assets and liabilities in B”s financial statements and in A”s consolidated financial statements are ignored.
B sells 20% of its interest in C to a third party for €300. B accounts for this transaction as an equity transaction in accordance with IFRS 10, giving rise to a credit in equity of €100 that is attributable to the owners of B. The credit is the difference between the proceeds of €300 and the share of net assets of C that now attributable to the non-controlling interest (NCI) of €200 (20% of €1,000).
The financial statements of A and B before the transaction are summarised below:
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A”s consolidated financial statements |
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∈ |
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∈ |
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Investment in B |
200 |
Equity |
200 |
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Coral |
200 |
Total |
200 |
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B”s consolidated financial statements |
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∈ |
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∈ |
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Assets (from C) |
1000 |
Equity |
1,000 |
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Total |
1000 |
Total |
1,000 |
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The financial statements of B after the transaction are summarized below:
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B”s consolidated financial statements |
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∈ |
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∈ |
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Assets (from C) |
1,000 |
Equity |
1,000 |
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Cash |
300 |
Equity transaction with |
100 |
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non-controlling interest Equity attributable to owners |
1,100 |
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Non-controlling interest |
200 |
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Total |
1,300 |
Total |
1,300 |
As a result of the sale of B”s 20% interest in C, B”s net assets attributable to the owners of B have increased from €1,000 to €1,100. Although A has not participated in the transaction, the investor”s share of net assets in B has increased from €200 to €220.
A should account for this increase in net assets arising from this equity transaction using either of the following approaches:
Approach 1 ‘share of other changes in equity’ in investor”s statement of changes in equity
The change of interest in the net assets/equity of B as a result of B”s equity transaction should be reflected in A”s financial statements as ‘share of other changes in equity of associates’ in its statement of changes in equity.
Therefore, A reflects its €20 share of the change in equity and maintains the same classification as the associate i.e. a direct credit to equity.
Although paragraph 10 of IAS 28 only refers to the investor accounting for its share of the investee”s profit or loss and other items of comprehensive income, this approach is consistent with the equity method as described in paragraph 10 of IAS 28 since it:
(a) reflects the post-acquisition change in the net assets of the investee [IAS 28.3]; and
(b) faithfully reflects the investor”s share of the associate”s transaction as presented in the associate”s consolidated financial statements .
Since, the transaction does not change the investor”s ownership interest in the associate it is not a ‘deemed disposal’ and, therefore, there is no question of a gain or loss on disposal arising.
Approach 2 gain or loss within share of associate”s profit or loss included in investor”s profit or loss
The change of interest in the net assets/equity of B as a result of B”s equity transaction should be reflected in A”s financial statements as a ‘gain’ in profit or loss.
Therefore, A reflects its €20 share of the change in equity in profit or loss.
This approach reflects the view that:
(a) the investor should reflect the post-acquisition change in the net assets of the investee ;
(b) from A”s perspective the transaction is not ‘a transaction with owners in their capacity as owners’ A does not equity account the NCI . So whilst B must reflect the transaction as an equity transaction, from A”s point of view the increase in the investment of €20 is a ‘gain’. This is consistent with the treatment of unrealised profits between a reporting entity and an associate . For example, if A sells an asset to C when it is 80% owned by B, A will only eliminate 16% (80% × 20%) as an unrealised profit. The NCI”s ownership is treated as an ‘external’ ownership interest to the A group. Therefore, consistent with this approach, any transaction which is, from A”s perspective a transaction with an ‘external’ ownership interest can give rise to a gain or loss;
(c) the increase in B”s equity is also not an item of other comprehensive income as referred to in paragraph 10 of IAS 28;
(d) any increase in the amount of an asset should go to profit or loss if not otherwise stated in IFRS. Paragraph 88 of IAS 1 states that an ‘entity shall recognise all items of income and expense in a period in profit or loss unless an IFRS requires or permits otherwise.’