Non-controlling interests

What is it?

Non-controlling interest (NCI) is any equity interest in a subsidiary that is not held by the parent entity. Such equity interests issued by the subsidiary which are not attributable to the parent could be in the form of:

• ordinary shares
• convertible debt and other compound financial instruments
• preference shares which are classified as equity
• warrants
• options over own shares
• awards classified as equity–settled share–based payment transactions

In the consolidated statement of financial position, NCI is presented within equity, separately from the equity of the owners of the parent, but in aggregate for all the NCIs, if there are more than one subsidiary where the parent holds less than 100% ownership interest.

For an instrument to be classified as equity in the consolidated financial statements, it needs to be classified as such also by the subsidiary in its separate financial statements. If the instrument is classified as a liability by the subsidiary, it cannot be presented as a non-controlling interest in the consolidated financial statements, as the instrument does not represent an ownership interest in the subsidiary.

Furthermore, entity’s profit or loss and each component of other comprehensive income are attributed to the owners of the parent and to the NCI, even if this results in the NCI having deficit balance. This is consistent with the fact that both the parent and the NCI participate proportionately in the risks and rewards of their investment in the investee.

An entity is treated as a subsidiary if there is control over the entity. However, parent could also control a subsidiary if it holds for example 30% of the shares of the subsidiary but has power over the relevant activities and thus control from contractual arrangements. In such a case, parent would still consolidate 100% of the subsidiary’s results and net assets and would show non-controlling interest of 70%.

Initial measurement in a business combination

Upon acquisition of a non-wholly owned subsidiary, components of NCI which are present ownership interest and entitle the holders to a proportionate share of the entity’s net assets at liquidation (such as ordinary shares or preference shares classified as equity that are entitled to a pro rata share of net assets on liquidation) can be elected to be measured at either:

• acquisition-date fair value, or
• its proportionate share of the recognised amounts of the acquiree’s identifiable net assets.

Entity is not required to make an accounting policy choice, but selection can be made on a transaction-by-transaction basis.

The above choice is not though available for other components of NCI. For example the equity component of convertible debt or other compound financial instruments, preference shares classified as equity without an entitlement to a pro rata share of net assets upon liquidation, warrants and options over own shares, must be measured at acquisition–date fair value.

Illustrative example – Initial measurement of NCI in a business combination

Note that under the US GAAP, the NCI shall initially be measured at acquisition-date fair value.

Initial measurement in a Subsidiary which is not a business

There are several options on how to measure the NCI when acquiring a subsidiary which is not a business, if the NCI has a present ownership interest and is entitled to a proportionate share of net assets upon liquidation. Selection could be made from the below alternatives:

• proportionate share of the fair values of the entity’s identifiable net assets,
• fair value,
• proportionate share of the consolidated book values of the net assets, including transaction costs, or
• proportionate share of the consolidated book values of the net assets, excluding transaction costs.

All other components of NCI, including such which are not present ownership interests (e.g. warrants) are recognised at fair value, unless another measurement basis is required (e.g. equity-settled share-based payment transactions measured in accordance with IFRS 2 Share-based Payment).

Illustrative example – Acquisition of a subsidiary that is not a business

Non-Controlling Interests classified as financial liabilities

NCI is classified as a financial liability and payments to the NCI as interest expense if in relation to the instrument held, the group has an obligation to deliver cash or other financial asset, or the settlement of the instrument results in the classification as a financial liability. This effectively could mean that no NCI will be recognised in the consolidated financial statements.

Subsequent measurement of non-controlling interests

Subsequent measurement of non-controlling interests depends on the instrument giving rise to the NCI.

For the instruments giving rise to an existing ownership interest and entitle the holders to a proportionate share of the entity’s net assets at liquidation, the non-controlling interest is not remeasured to fair value in the subsequent periods. Instead, its share of profit or loss and each component of other comprehensive income in subsequent periods is allocated to the NCI. Furthermore, when determining the proportion to be allocated to the parent and NCI, eventual exercise of potential voting rights and other derivatives, which in substance, result in an existing ownership interest that currently gives an entity access to the returns associated with that ownership interest, should be taken into account.

Illustrative example – Profit attributable to the NCI subsequent to acquisition

Where the subsidiary has outstanding cumulative preference shares classified as equity that are held by the NCI, the parent is required to calculate its share of profits or losses after making adjustments for the dividends on these shares, irrespective of whether such dividends have been declared. This effectively means that the NCI represented by the cumulative preference shares are being allocated a portion of the profit or loss equivalent to the dividends.

Illustrative example – Profit/(loss) attributable to the NCI where subsidiary has outstanding cumulative preference shares classified as equity

If the subsidiary has granted options over its own shares under an equity–settled share–based payment scheme, the related expense recognised in profit or loss will be attributable to the parent and any other NCI that has a present ownership in the subsidiary. None of the expense is attributed to the NCI that was granted options under the share–based payment transaction. The corresponding entry taken to equity in relation to the options under the share–based payment transaction will be recognised as NCI in the consolidated financial statements.