Non-Controlling Interest - "Initial Measurement" Policy Choice Available?

When an Entity is being acquired by another Entity, it has two way to look at it, first being 100% acquired where all controlling rights will be with Parent Entity only, another could be where the control is less than 100% which arises a situation to have another interested party who has rights in the Investee but it is not a controlling interest.

It loosely call it as Minority Interest also where the holder/s of these portion of voting rights do not have controlling interest in the Investee.

Now,

At initial recognition, the Standard provides a policy choice to measure such non-controlling interest portion either at proportion of the fair value of net assets identified for the purpose of Ind-As 103 - Business combination accounting OR at fair value (only that non-controlling portion).

Let's first refer the relevant guidance over such concept and then we will take an example to understand the concept-  

Ind-AS 103 - Business Combinations

Para-19 - 'For each business combination, the acquirer shall measure at the acquisition date components of non-controlling interest in the acquiree that are present ownership interests and entitle their holders to a proportionate share of the entity's net assets in the event of liquidation at either:

(a) fair value; or
(b) The present ownership instruments' proportionate share in the recognized amounts of the acquiree's identifiable net assets,

All other components of non-controlling interests shall be measured at their acquisition date fair values, unless another measurement basis is required by Ind AS.

Ind-AS 110 - Consolidated Financial Statements- Appendix B

Para B89 - 'When potential voting rights, or other derivatives containing potential voting rights, exist, the proportion of profit or loss and changes in equity allocated to the parent and non-controlling interests in preparing consolidated financial statements is determined solely on the basis of existing ownership interests and does not reflect the possible exercise or conversion of potential voting rights and other derivatives..”

Now,

Let's take an example to understand the concept -

Example -

ABC Limited has acquired 70% of voting shares in XYZ limited on January 2017. The net asset fair value of XYZ limited at the date of acquisition calculated as INR 100 million. The fair values as calculated for the non-controlling interest portion i.e.30% was INR 80 million.

ABC limited has paid INR 180 million for purchasing such stake.

Suggested approach:

ABC limited has policy choice to either create full goodwill or upto its own shares, in other words the non-controlling interest can be valued either at Fair value or at proportionate net asset fair value. Below are journal entries in both scenarios -

FULL Goodwill approach (Measurement of NCI at FAIR VALUE)

                                                                              (in INR million)

PARTIAL Goodwill approach (Measurement of NCI at % of Net Assets fair value)

                                                                             (in INR million)

Now,

Let's summarize the example above -

• Goodwill value has changed from INR 160 Million to INR 110 Million which essentially because of, we have recognized NCI at fair value and the difference between INR 160 & INR 110  = INR 50 million is because of fair value of NCI i.e. INR 80 million has changed to INR 30 million in case proportionate percentage of net asset fair value,
• Fair value of NCI would required to be calculated independently and one should not construed a proportionate value of Total Net assets fair value. Both number would be calculated separately,
• Full Goodwill vs. Partial Goodwill represents the recognition of Goodwill only upto the part of controlling entity without considering the fair valuation of a non-controlling interest,
• This is a policy choice available to the entity who has acquired controlling interest and it can be used only at INITIAL RECOGNITION and can not be change later,
• The allocation of proportionate NCI percentage will be based on actual voting shares involved other then any potential voting rights (refer para B89 of Ind-As 110 mentioned above)

It is interesting to note that the policy choice will change the balance sheet numbers and would reflect all together different picture of the consolidated Balance Sheet. Management needs to select the policy carefully as the change will not be permitted in future periods.

Readers will appreciate about the main objective of the standard and an approach which one can follow while keeping in mind the basis of origin of such requirements. There could possibly be some specific situations or circumstances where the interpretation of any standard will be different as we should always keep in mind that IND-AS is principle based standards and lot more areas need management judgment in line with the standards relevant interpretation and best practices.

One has to look into all related facts and patterns before concluding this type of assessment based on this concept. Readers are requested not to take this article as any kind of advice (it is not exhaustive in nature) and should evaluate all relevant factors of each individual cases separately..

The author can also be reached at agrawal.anuj@icai.org