Non-controlling interests
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- Rephop
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- @RephopHQ
Table of Contents
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.
For example, Parent owns 80% of a Subsidiary and has control. Consequently, Parent must consolidate 100% of the results and net assets of the Subsidiary and show non-controlling interest of 20%.
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
Parent company acquires 80% of the ordinary shares of Subsidiary for 800 KEUR. The total fair value of equity instruments of Subsidiary is 980 KEUR and the fair value of Subsidiary's net identifiable assets amounts to 750 KEUR. The fair value of 20% of the ordinary shares owned by non-controlling shareholders is 160 KEUR. Furthermore, Subsidiary has written gross settled call option over its own shares with a fair value of 20 KEUR (these are considered equity instruments).
The impact of the business combination and the measurement of NCI under both alternatives is as follows:
NCI are measured at fair value
KEUR KEUR DR Fair value of net identifiable assets 750 DR Goodwill (800 + (160+20) - 750) 230 CR NCI (FV of 160 + call option 20) 180 CR Cash 800
The NCI are measured at the fair value of all equity instruments issued by the Subsidiary which are not owned by the parent, i.e., ordinary shares and gross settled call options.
NCI are measured at proportionate share of identifiable net assets of Subsidiary
KEUR KEUR DR Fair value of net identifiable assets 750 DR Goodwill (800 + 20 - (80%*750) 220 CR NCI (20%*750 + 20) 170 CR Cash 800
The NCI which are present ownership interest and entitle the holders to a proportionate share of the Subsidiary’s net assets upon liquidation (ordinary shares) are measured at the NCI’s proportionate share of the identifiable net assets of the Subsidiary. The NCI that are not present ownership interests or do not entitle their holders to a proportionate share of the Subsidiary’s net assets in the event of liquidation (gross settled call options) are measured at their fair value.
| Reconciliation of Goodwill | KEUR |
|---|---|
| Goodwill from NCI at proportionate share (800 + 20 - (80%*750) | 220 |
| Goodwill related to the NCI in ordinary shares (160 - 20%*750) | 10 |
| Goodwill from NCI at fair value (980-750) | 230 |
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
Company X obtained 60% controlling interest in the equity shares of Company Y for 180 000 EUR. Company Y has only one building, measured at cost, and thus does not constitute a business. The fair value of the building is 300 000 EUR. The remaining 40% interest in the equity shares of Company Y are held by an unrelated party. The fair value of the NCI is 120 000 EUR. Effectively, in this example, the fair value of the NCI is the same as the NCI’s proportionate share of the fair values of the identifiable net assets of Company Y. Transaction costs amount to 5 000 EUR. Tax effects are ignored.
Company X would initially record the following accounting entries, as per each alternative approach to determining the NCI as described above:
NCI is measured at the proportionate share of the fair values of the identifiable net assets of Company Y
EUR EUR DR Property, Plant and Equipment (Building) (300 000 + 5 000) 305 000 CR NCI (40% * 300 000 EUR) 120 000 CR Cash 185 000 NCI is measured at fair value
EUR EUR DR Property, Plant and Equipment (Building) (300 000 + 5 000) 305 000 CR NCI (FV of 120 000 EUR) 120 000 CR Cash 185 000 NCI is measured at the proportionate share of the consolidated book values of the net assets of Company Y, including transaction costs
EUR EUR DR Property, Plant and Equipment (Building) (300 000 + 5 000/0,6) 308 333 CR NCI ((180 000 + 5 000) * 40/60) 123 333 CR Cash 185 000 NCI is measured at the proportionate share of the consolidated book values of the net assets of Company Y, excluding transaction costs
EUR EUR DR Property, Plant and Equipment (Building) (300 000 + 5 000) 305 000 CR NCI (180 000 * 40/60 or 300 000 * 40%) 120 000 CR Cash 185 000
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
Assume the same transaction as described in the first illustrative example: Parent company acquires 80% of the ordinary shares of Subsidiary for 800 KEUR. The total fair value of equity instruments of Subsidiary is 980 KEUR and the fair value of Subsidiary's net identifiable assets amounts to 750 KEUR. The fair value of 20% of the ordinary shares owned by non-controlling shareholders is 160 KEUR. Furthermore, Subsidiary has written gross settled call option over its own shares with a fair value of 20 KEUR (these are considered equity instruments).
The Subsidiary’s post-acquisition statement of comprehensive income as it is included in the consolidated financial statements is as follows:
| KEUR | |
|---|---|
| Profit before tax | 90 |
| Income tax expense | (5) |
| Profit for the year | 85 |
| Attributable to: | |
| Equity holders of the parent | 68 |
| Non-controlling interests (20%*85) | 17 |
Depending on the basis used for the initial recognition of the NCI, at the end of the first year after the acquisition, the NCI would be carried either 197 KEUR or 187 KEUR:
| KEUR | |
|---|---|
| NCI (initially measured at fair value) (180+17) | 197 |
| NCI (initially measured at proportionate share of net assets) (170+17) | 187 |
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
Company Y’s ordinary shares are held by its founders Company A (80%) and Company B (20%). Company Y has also issued 200 KEUR preference shares to Company C. These entitle the holder to receive 2% cumulative preferred dividend. These preference shares are classified as equity as the payment of the fixed rate dividend is at the issuer’s discretion and there is no maturity date or holder redemption right. Upon liquidation, the preference shares are entitled to repayment at par and cumulative unpaid dividends (irrespective of whether declared).
The profits / (losses) of Y for the Years 1,2 and 3 are 84 KEUR, (26) KEUR and 44 KEUR, respectively. As Company C is entitled to 2% cumulative dividend on 200 KEUR shares, the profit/ (loss) of Company Y attributable to the NCI and total NCI balance in Company A’s consolidated financial statements would be:
| Year 1 | Year 2 | Year 3 | |
|---|---|---|---|
| KEUR | |||
| Profit / (loss) of Company Y | 84 | -26 | 44 |
| less amounts attributable to the NCI in preference shares held by Company C (a) | 4 | 4 | 4 |
| Profit / (loss) attributable to ordinary shareholders | 80 | -30 | 40 |
| Profit / (loss) attributable to: | |||
| Equity holder of the parent | 64 | -24 | 32 |
| Non-controlling interests (b) | 16 | -6 | 8 |
| Total NCI (a+b) (ordinary and preference shares) | 20 | -2 | 12 |
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.
Rephop offers assistance in preparing consolidated financial statements that encompass non-controlling interests (NCIs). By analyzing the group structure, Rephop is capable of computing NCIs for a given reporting period. Additionally, in cases of multilevel consolidation, Rephop is equipped to determine the appropriate NCI amounts for each level.