12-11-2009, 03:34 AM
Dear Ahmed
Revised IFRS-3 follows an economic entity approach rather than the parent company appraoch. The economic entity approach views all providers of the equity as shareholders of the entity, even if they are not shareholders in the parent entity.
This revised version of IFRS 3 and IAS-27 requires the entities to compute goodwill once the control is achieved. Once the control is achieved, any further transaction, which does not result in control being lost, should be treated as the transaction between the holders' of the equity (i.e. a treasury transaction) and hence, no remeasurement of Goodwill should take place.
For Example, Company 'P' holds 60% of the Company 'S', later company 'P' further acquires 20% shares of Company 'S'. This gives the Parent entity 80% holding over 'S'. Now, this further acquisition of 20% should be dealt as the transaction between the equity holders of the company 'S'.
Prior to further 20% acquisition, there are two types of Equity holders in Company 'S'.
=======>1. Parent Company (which already holds 60%)
=======>2. Non-Controlling Interest (which holds 40%)
This further acquisition of 20% shares in Company 'S' will have two impacts on the financial positions of Both parties.
=======>1. Parent's share in 'S' will be increased by 20%.
=======>2. Interest of Non-Controlling Equity Holders will be reduced by 20%.
This effectively means that the equity holders of NCI have transferred their 20% share to Equity Holders of Parent.
The Calculation will be as follows;
Fair value of the consideration paid for further 20%======>XXXX
Decrease in NCI in net assets at the date of transaction==>(XXXX)
<font color="red"><b>*</b></font id="red">Decrease in NCI in goodwill at the date of transaction===>(XXXX)
_________________________________________________________________
Adjustment to the parent's equity=====================>XXXX
_________________________________________________________________
<b><font color="red">*</font id="red">Note that the decrease in NCI in goodwill should only be taken when the company is following Fair Value method rather than the proportionate method of goodwill.</b>
Roughly the double entry will be;
<b>DR </b> Decrease in NCI interest
<b>DR or CR</b> Balancing figure as the positive or negative movement in the equity of Parent.
<b>CR </b> Cash / Bank
<b>Now, comming back to your example, if we assume that the company is following proportionate method of goodwill.</b>
<b>Goodwill-</b>
Goodwill should be calculated once the control is achieved.
Consideration transferred ================> 100,000
Less Share in Fair Value of Net Assets
Share Capital ========> 100,000
Retained Earnings ====> 10,000
_______________________________________
Fair Value Net Assets => 110,000*60%======> (66,000)
_______________________________________________________
Goodwill==================================> 34,000
_______________________________________________________
<b>Non-Controlling Interest-</b>
Non-Controlling Interest at the date of acquisition;
Share Capital ===========> 100,000
Retained Earnings =======> 10,000
_____________________________________________________________
Non-Controlling Interest==> 110,000*40% ====> <b>44,000 (NCI)</b>
_____________________________________________________________
The Net Assets have increased by (115,000 - 110,000) => 5,000
<b>Therefore, NCI interest have increased by (5,000*40%) =>2,000</b>
After Acquisition of 60% Share Capital of S, P further acquired 20%.
Now,
NCI at the time of Acquisition was ====================> 44,000
Further increase in NCI (Immediately before 20% acquired)=> 2,000
___________________________________________________________________
Fair Value of 40% NCI immediately before 20% acquisition==> 46,000
20% Interest Transferred to Parent Entity<font color="red"><b>*</b></font id="red">=(46,000/40*20)=>(23,000)
___________________________________________________________________
Balance of NCI After the 20% transferred to P ============> 23,000
___________________________________________________________________
<font color="red"><b>*</b></font id="red">This is the fair value of the 20% Interest transferred by NCI holders to Parent Entity.
<b>Caulculation For Movement In Parent's Equity -</b>
Fair Value of The Consideration for Further 20% Acquired ==> 30,000
20% FV of Interest transferred to Parent (46,000/40*20)====>(23,000)
____________________________________________________________________
Negative Movement in the Equity of Parent =================> 7,000
____________________________________________________________________
Roughly The Entry Should be;
<b>=====DR Non-Controlling Interest ============23,000
=====DR Negative Movement in Equity========== 7,000
===============CR Cash / Bank / Other Instrument====30,000</b>
_____________________________________________________________________
I hope it will help you.
Best Regards,
Muhammad Amir
Revised IFRS-3 follows an economic entity approach rather than the parent company appraoch. The economic entity approach views all providers of the equity as shareholders of the entity, even if they are not shareholders in the parent entity.
This revised version of IFRS 3 and IAS-27 requires the entities to compute goodwill once the control is achieved. Once the control is achieved, any further transaction, which does not result in control being lost, should be treated as the transaction between the holders' of the equity (i.e. a treasury transaction) and hence, no remeasurement of Goodwill should take place.
For Example, Company 'P' holds 60% of the Company 'S', later company 'P' further acquires 20% shares of Company 'S'. This gives the Parent entity 80% holding over 'S'. Now, this further acquisition of 20% should be dealt as the transaction between the equity holders of the company 'S'.
Prior to further 20% acquisition, there are two types of Equity holders in Company 'S'.
=======>1. Parent Company (which already holds 60%)
=======>2. Non-Controlling Interest (which holds 40%)
This further acquisition of 20% shares in Company 'S' will have two impacts on the financial positions of Both parties.
=======>1. Parent's share in 'S' will be increased by 20%.
=======>2. Interest of Non-Controlling Equity Holders will be reduced by 20%.
This effectively means that the equity holders of NCI have transferred their 20% share to Equity Holders of Parent.
The Calculation will be as follows;
Fair value of the consideration paid for further 20%======>XXXX
Decrease in NCI in net assets at the date of transaction==>(XXXX)
<font color="red"><b>*</b></font id="red">Decrease in NCI in goodwill at the date of transaction===>(XXXX)
_________________________________________________________________
Adjustment to the parent's equity=====================>XXXX
_________________________________________________________________
<b><font color="red">*</font id="red">Note that the decrease in NCI in goodwill should only be taken when the company is following Fair Value method rather than the proportionate method of goodwill.</b>
Roughly the double entry will be;
<b>DR </b> Decrease in NCI interest
<b>DR or CR</b> Balancing figure as the positive or negative movement in the equity of Parent.
<b>CR </b> Cash / Bank
<b>Now, comming back to your example, if we assume that the company is following proportionate method of goodwill.</b>
<b>Goodwill-</b>
Goodwill should be calculated once the control is achieved.
Consideration transferred ================> 100,000
Less Share in Fair Value of Net Assets
Share Capital ========> 100,000
Retained Earnings ====> 10,000
_______________________________________
Fair Value Net Assets => 110,000*60%======> (66,000)
_______________________________________________________
Goodwill==================================> 34,000
_______________________________________________________
<b>Non-Controlling Interest-</b>
Non-Controlling Interest at the date of acquisition;
Share Capital ===========> 100,000
Retained Earnings =======> 10,000
_____________________________________________________________
Non-Controlling Interest==> 110,000*40% ====> <b>44,000 (NCI)</b>
_____________________________________________________________
The Net Assets have increased by (115,000 - 110,000) => 5,000
<b>Therefore, NCI interest have increased by (5,000*40%) =>2,000</b>
After Acquisition of 60% Share Capital of S, P further acquired 20%.
Now,
NCI at the time of Acquisition was ====================> 44,000
Further increase in NCI (Immediately before 20% acquired)=> 2,000
___________________________________________________________________
Fair Value of 40% NCI immediately before 20% acquisition==> 46,000
20% Interest Transferred to Parent Entity<font color="red"><b>*</b></font id="red">=(46,000/40*20)=>(23,000)
___________________________________________________________________
Balance of NCI After the 20% transferred to P ============> 23,000
___________________________________________________________________
<font color="red"><b>*</b></font id="red">This is the fair value of the 20% Interest transferred by NCI holders to Parent Entity.
<b>Caulculation For Movement In Parent's Equity -</b>
Fair Value of The Consideration for Further 20% Acquired ==> 30,000
20% FV of Interest transferred to Parent (46,000/40*20)====>(23,000)
____________________________________________________________________
Negative Movement in the Equity of Parent =================> 7,000
____________________________________________________________________
Roughly The Entry Should be;
<b>=====DR Non-Controlling Interest ============23,000
=====DR Negative Movement in Equity========== 7,000
===============CR Cash / Bank / Other Instrument====30,000</b>
_____________________________________________________________________
I hope it will help you.
Best Regards,
Muhammad Amir
