Chapter 28

Further consolidation issues II:

Accounting for indirect interests and changes in
degree of ownership of a subsidiary

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PPTs t/a Australian Financial Accounting 4e by Craig Deegan 28–1
Learning objectives
• Understand that the determination of the total
ownership interest in a subsidiary must take
account of both direct and indirect ownership
interests
• Understand what an indirect equity ownership
represents and how it is calculated
• Understand that the parent entity’s interest in the
post-acquisition movements of a subsidiary’s
retained profits and other reserves will be based
upon the sum of the direct and indirect ownership
interests
Continues/ …

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PPTs t/a Australian Financial Accounting 4e by Craig Deegan 28–2
Learning objectives (cont.)
• Understand that even in the presence of indirect
ownership interests, the pre-acquisition capital
and reserves of a subsidiary will be eliminated on
consolidation on the basis of only the direct
ownership interests
• Understand how to account for incremental
investments in a subsidiary
• Understand how to account for the disposal of a
subsidiary from the perspective of both the
parent entity and the economic entity

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PPTs t/a Australian Financial Accounting 4e by Craig Deegan 28–3
Status of newly converged accounting
standards
• From 2005, the new standard is AASB 127
‘Consolidated and Separate Financial
Statements’
– This replaced AASB 1024 ‘Consolidated Accounts’

• There are two other standards of particular

relevance:
1. AASB 3 ‘Business Combinations’
2. AASB 138 ‘Intangible Assets’

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PPTs t/a Australian Financial Accounting 4e by Craig Deegan 28–4
Indirect ownership interests
• AASB 127 requires that:
– the consolidated financial report include all subsidiaries
of the parent
• Subsidiary defined as (AASB 127):
– an entity (including a partnership) that is controlled by
another entity (the parent)
• Control:
– is the power to govern the financial and operating
policies of an entity so as to obtain benefits from its
activities
– can arise through indirect interests, i.e. without any
direct ownership interest
Continues/ …

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PPTs t/a Australian Financial Accounting 4e by Craig Deegan 28–5
Indirect ownership interests (cont.)
• Example of an indirect interest:
– Insert Figure 28.1
Continues/ …

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PPTs t/a Australian Financial Accounting 4e by Craig Deegan 28–6
Indirect ownership interests (cont.)
• Minority interests:
– are that portion of the profit or loss and net assets of a
subsidiary attributable to equity interests that are not
owned by the parent
• Also possible to hold both direct and indirect
interests in a particular entity:
– Insert Figure 28.2
Continues/ …

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PPTs t/a Australian Financial Accounting 4e by Craig Deegan 28–7
Indirect ownership interests (cont.)
• Consolidation in the presence of indirect interests:
– Refer to Worked Example 28.1
• Choice of two methods in performing consolidation:
1. Sequential-consolidation approach
– Consolidation of each separate legal entity with its controlled
entities is performed sequentially (time-consuming and messy)
2. Multiple-consolidation approach
– In eliminating investments held by the immediate parent
entities only direct interests are taken into account
– Post-acquisition movements in subsidiaries’ shareholders’
funds allocated to ultimate parent entity on basis of sum of
direct and indirect interests
Continues/ …

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PPTs t/a Australian Financial Accounting 4e by Craig Deegan 28–8
Indirect ownership interests (cont.)
Journal entries
• To eliminate parent’s investment in subsidiary:
Debit Share capital
Debit Retained earnings
Debit Goodwill
Credit Investment in subsidiary
• To recognise impairment of goodwill associated with
acquisition:
Debit Impairment expense—goodwill
Credit Accumulated impairment
losses—goodwill
Continues/ …

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PPTs t/a Australian Financial Accounting 4e by Craig Deegan 28–9
Indirect ownership interests (cont.)
Journal entries (cont.)
• To eliminate dividends proposed by subsidiary:
Debit Dividend payable (balance
sheet)
Credit Dividend proposed
(income statement)

Debit Dividend revenue (income

statement)
Credit Dividend receivable
(balance sheet)
Continues/ …

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PPTs t/a Australian Financial Accounting 4e by Craig Deegan 28–10
Indirect ownership interests (cont.)
• Minority interests (AASB 127):
– to be presented separately from the parent
shareholders’ equity in the consolidated balance sheet
within equity
– to be separately disclosed in the profit or loss of the
group

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PPTs t/a Australian Financial Accounting 4e by Craig Deegan 28–11
Increase in the ownership interest held in
a subsidiary
• Parent entity might acquire additional shares in a
subsidiary over time
• AASB 3 requires:
– each exchange transaction to be treated separately by
the acquirer
– that the cost of the transaction and fair value
information at the date of the transaction be used to
determine the amount of any goodwill
– results in a step-by-step comparison of the cost of the
individual investments
• Refer to Worked Example 28.2
Continues/ …

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PPTs t/a Australian Financial Accounting 4e by Craig Deegan 28–12
Increase in the ownership interest held in
a subsidiary (cont.)
Journal entires
• To eliminate investment in subsidiary and
recognise goodwill (each acquisition to be
accounted for separately):
Debit Share capital
Debit Retained earnings
Debit Goodwill
Credit Investment in subsidiary

Continues/ …

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PPTs t/a Australian Financial Accounting 4e by Craig Deegan 28–13
Increase in the ownership interest held in
a subsidiary (cont.)
Journal entires (cont.)

• To recognise impairment of goodwill (separately

for each acquisition):

Debit Impairment loss—goodwill

Credit Accumulated impairment
losses—goodwill

Continues/ …

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PPTs t/a Australian Financial Accounting 4e by Craig Deegan 28–14
Increase in the ownership interest held in
a subsidiary (cont.)
• To eliminate dividends proposed by subsidiary:
Debit Dividend payable (balance
sheet)
Credit Dividend proposed
(income statement)

Debit Dividend income (income

statement)
Credit Dividend receivable
(balance sheet)

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PPTs t/a Australian Financial Accounting 4e by Craig Deegan 28–15
Sale of shares in a subsidiary

• When a parent entity sells shares in a subsidiary:

– profit or loss in its own individual accounts will be
different from that in consolidated accounts
• AASB 127 requires investments in subsidiaries
etc. to be measured at either:
– cost; or
– in accordance with AASB 139, i.e. at fair value

Continues/ …

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PPTs t/a Australian Financial Accounting 4e by Craig Deegan 28–16
Sale of shares in a subsidiary (cont.)
• From the parent’s perspective, profit or loss on
sale of shares is the difference between:
– carrying value of shares; and
– value of sales proceeds

• Carrying value:
– is the amount shown in the financial statements for a
particular asset or liability
• From group’s perspective
– Consideration to be given to economic entity’s share of
post-acquisition profits and reserve movements before
determining profit or loss on sale of shares
Continues/ …

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PPTs t/a Australian Financial Accounting 4e by Craig Deegan 28–17
Sale of shares in a subsidiary (cont.)
• Refer to Worked Example 28.3
Journal entries
• To record sale of shares in parent’s journal:
Debit Cash
Credit Investment in subsidiary
Credit Profit on sale of
investment

Continues/ …

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PPTs t/a Australian Financial Accounting 4e by Craig Deegan 28–18
Sale of shares in a subsidiary (cont.)
• Consolidation adjusting journal entries:
Debit Profit on sale of investment
Debit Loss on sale of subsidiary
Credit Profit after tax
Credit Retained profits
Credit Revaluation reserve
• Balance in revaluation reserve can be transferred
to retained profits:
Debit Revaluation reserve
Credit Retained profits
Continues/ …

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PPTs t/a Australian Financial Accounting 4e by Craig Deegan 28–19
Sale of shares in a subsidiary (cont.)
• Discount generated on consolidation
– Refer to Worked Example 28.4
Consolidation journal entries
• To eliminate the first acquisition:
Debit Share capital
Credit Investment in subsidiary
• To record assets at fair value in relation to
acquisition:
Debit Property, plant and equipment
Credit Revaluation reserve
Continues/ …

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PPTs t/a Australian Financial Accounting 4e by Craig Deegan 28–20
Sale of shares in a subsidiary (cont.)
Consolidation journal entries (cont.)
• To eliminate the second acquisition:
Debit Share capital
Debit Capital profits reserve
Debit Retained profits
Debit Revaluation reserve
Credit Investment in subsidiary
Credit Discount on acquisition

Continues/ …

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PPTs t/a Australian Financial Accounting 4e by Craig Deegan 28–21
Sale of shares in a subsidiary (cont.)
Consolidation journal entries (cont.)
• To eliminate discount on acquisition and treat it
as part of income:
Debit Discount on acquisition
Credit Gain on acquisition of
investments

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PPTs t/a Australian Financial Accounting 4e by Craig Deegan 28–22
Summary
• The chapter considers how to account for indirect
interests and changes in the degree of ownership
in a subsidiary
• It is possible to control another entity without
direct ownership, i.e. through an indirect
ownership interest
• In accounting for additional acquisitions of
shares, on consolidation, each investment
acquisition must be eliminated separately
• When shares in a subsidiary are sold, profit or
loss in individual investors’ accounts will be
different from that in the consolidated accounts

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PPTs t/a Australian Financial Accounting 4e by Craig Deegan 28–23
Summary of main changes to accounting
standards
• AASB 127 ‘Consolidated and Separate Financial
Statements’ is generally consistent with AASB
1024 ‘Consolidated Accounts’
• Significant changes
– Goodwill amortisation is prohibited and goodwill must
be subject to regular impairment testing
– Discounts on acquisition now to be treated as part of
the profit or loss of the reporting period
– Outside equity interests now referred to as minority
interests

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PPTs t/a Australian Financial Accounting 4e by Craig Deegan 28–24