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Brigham has owned 70% of Dorset for many years. It also holds a $5 million loan note from Dorset. One of Dorset’s non current assets has suffered an impairment of $50000 during the year. There is a balance in the revaluation surplus of Dorset of $30000 in respect of this asset. The impairment loss has not yet been recorded.
The entity financial statements of Dorset show a profit for the year of $1.3 million.What is the amount attributable to the non controlling interests in the consolidated statement of profit or loss?
The following is BPP calculation.
Profit for the year……………………………………..1300
Intra-group interest (5m x 8%)……………………..(400)
Impairment(50000-30000)……………………………..(20)
…………………………………………………………………..
…………………………………………………………….880Answer …..880 x 30%.=264
I don’t known why BPP subtract intra-group interest from the profit for the year.
Please, help me, Sir!Hi
Sadly, I can’t help you, sorry
I have no idea why they should have deducted the loan interest!
The question may be wrong. Bpp’s errors make me very confused as I don’t know IAS very well. Thank you, sir
From the information that you have given to me, I am unable to explain the answer
If you can find that there is some extra information, post again and I’ll have another look
Sorry not to be of more assistance
Hi, I know this is on ask the tutor and only replying because I think it may help, but the loan note answe has a star next to it on the answer and the star says loan interest deducted as post acquisition- it confused me too- a lot. Sorry if I should not answer here.
That doesn’t make any sense at all.
The question tells us that the parent has owned the subsidiary for many years. If this were a question looking to calculate goodwill and the parent had only bought the subsidiary part way through this year, then, yes, date of issue of the loan note would be relevant.
But it isn’t
And it wasn’t
This is a question about the nci share of this year’s subsidiary profit after tax.
Sorry, but I still cannot reconcile the BPP answer with my own thinking
Just a guess: Mr Mike, if Parent is the holder of loan note from Subsidiary so the profit oof Sub should have been added intragroup interest when calculating NCI instead of deduction?
If I have understood your post then, I’m sorry, that also doesn’t make any sense at all
The subsidiary’s profit is ….. the subsidiary’s profit and the nci want their share of that profit after tax
Sure, if there’s interest that hasn’t yet been accounted for, that needs to be deducted in arriving at the appropriate profit figure
Similarly, if there were any pups outstanding from a sale by the subsidiary to the parent, that too would need to be deducted
But, just because your parent has lent you money and you are having to pay interest on that loan in no way leads to an adjustment to adjust for that loan interest
Dear Mr. Mike,
I am really confused now! As I understand, NCI takes the share of the profit but it is the actual profit made from business with outside parties. As with the PUP, if no inventories, which the sub sold to the parent, were sold to outside the group, the profit showed on its income statement of subsidiary may be huge but NCI takes zero $ due to adjustment of consolidation.
The intragroup interest is not actual expenses the group has to pay outside so why we do not adjust it? It is similar to PUP, no actual profit is made for group, no actual money flows into group! What I mean is, because the subsidiary deducts the interest expenses before arriving the 1.3 million profit in its separate income statement, but as a group, this expenses did not exist, so when consolidating we would deduct the interest (accounted as an income) from parent profit and add back the interest (accounted as an expenses) to sub profit. The group profit of course would not change but profit of each group member is changed.
Binh, I’m sorry to say that your thinking in the first paragraph is way off target (basically, it’s nonsense!)
And I’ve just read your second paragraph …. it’s in the same class as your first paragraph. Sorry!
I feel that you would benefit from reading quickly through the course notes again from chapter 6 through to chapter 9 (the comprehensive example) because your posts indicate an alarming lack of understanding – particularly when we’re facing a real exam in just 8 days time
Tks Mr. Mike for your patience!
I’ve read again. NCI=% Share x Retained Earning (value showed on individual income statement of subsidiary and adjusted for unrealized profit sold to parent, Fair value depre adjustment…). As you imply, the intragroup loan is not relevant to any adjustment when consolidation but if that, what is the difference between an intragroup loan and an intragroup trading?
As I revised, I found this treatment of intragroup loan in this article from CIMA (Step 5):
https://www.cimaglobal.com/Documents/Student%20docs/2010%20syllabus%20docs/F1/F1Nov11fmarticlepart2.pdfHi Binh
Intra-group loan ….. I’m the parent, you’re the subsidiary. You are looking to borrow money (after acquisition – do not concern this with the situation where I issue loan notes to your former shareholders as part of the purchase consideration for them transferring their shares in Binh Plc to me)
Ok, you issue a loan for $50,000 and I buy $40,000 out of that $50,000 paying $40,000 into your bank. The remaining $10,000 was issued to some friends of yours who paid $10,000 into your cash pot / bank
Your double entry is Dr Bank $50,000 Cr Loan Account $50,000
My double entry is Dr Investment Account (Loan notes issued by Binh) $40,000
Cr Cash $40,000When I prepare the consolidated statement of financial position, the asset in my records of $40,000 is represented by $40,000 out of the $50,000 loan note in your records
So cancel $40,000 from my assets against $40,000 out of the $50,000 liability in your records leaving just $10,000 payable to outside lenders
As for loan interest …. assuming that it’s all been paid up to date and correctly entered (If it isn’t, or if it hasn’t, then you’ll need to put through the adjustments to your statement of profit or loss before we can go any further)
You’re showing $5,000 say ( a full year’s interest at 10%) as an expense in your statement of profit or loss and I’m showing $4,000 investment income in my statement of profit or loss.
Now consolidate. How can the group be showing an item of income ($4,000) at the same time that it’s showing a $5,000 expense that includes that $4,000?
Well, it can’t. So we need to ignore $4,000 investment income and miss it off the consolidated statement of profit or loss and, at the same time, we need to reduce the interest cost that you are showing as an expense down to just the $1,000 that is payable to the outside lenders.
Intragroup trade? I sell to you and you buy from me. Let’s consolidate. How can I effectively be shown as selling goods to me and at the same time how can I show me buying goods from me? It’s nonsense. So reduce consolidated revenue and consolidated cost of sales $ for $ by the value of the selling / transfer price of those intragroup traded goods
But what about pups? Yes, we need to adjust for the UNREALISED profits on those intragroup traded goods that are still held in inventory by a group company. Calculate the pup and ADD that amount to consolidated cost of sales.
When working out working W3 Consolidated Retained Earnings, be careful to make that pup adjustment in the correct column, mine or yours, dependent upon which company made the sale. If it was me selling to you, then the pup is against MY retained earnings. If it was you that made the sale, then the pup is adjusted against your retained earnings
Is that all clear now?
OK, I understand all thing above. Even I am always a slow student but it is still surprise that I have struggle with this intragroup loan. The problem with me is I wrongly include the interest into calculating attributable profit to NCI (because I think them similar to unrealized profit and adjustment in depreciation). Now I will remember that it is just treated as a “revenue” (interest income) and “cost of sale” (interest expenses) in intra-group trading, canceling them in both parent & sub sides but not including when calculating NCI.
Again, thank you so much!My very last question on this topic as I am curious only. As we see from above effect of intragroup loan, it seems to be that Parent could use this type of loan as a tool to deduct the benefit of NCI? Maybe there must be regulation or something relating to Code of Corporate Governance to protect NCI? (as referring to paper F8 🙂 ).
These people that are the non-controlling interest are there because they chose to be there. They knew, at the time that they refused to accept the offer from the parent to buy their shares, that they would have little or no say in the activities and policies of the subsidiary.
It’s their “fault” that they are the non-controlling interest – they could have sold their shares as at the date the parent took control
I have NO sympathy
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