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    • Because we are treating it as one big company owning all the assets of both, and owing all the liabilities of both. It is the share capital and the retained earnings (which as you will know from the earlier lectures, are equal to the net assets) that are shared between the parent company (the share capital being dealt with in the calculation of the goodwill) and the non-controlling interest.

      This is all explained in the lectures (and of course we are following the rules in the accounting standards).

    • The consolidated statement show it as though it was just one big company – so it shows the total assets and the total liabilities of the two together.

      Who it all belongs to is partly in the share capital and retained earnings belonging to the shareholders of the parent company and partly in the non-controlling interest.

  4. Hello Sir,

    For example 2, to calculate NCI, we only took the retained earnings (16,000 – 6,000 * 0.40 = 4000) and we did not do the same for share capital (0.4 * 20,000 = 8000)

    Am I correct if I say we did not do the same for share capital because this figure has already been included in the fair value of the non-controlling interest at the date of acquisition which was $30,000?

    Thank you.

  6. Hi, sir
    I couldn’t understand why in the first example we find the share of non controlled capital and add it to our equity? I mean you said that we always write our capital and don’t touch the subsidiary’s capital?

  7. HI sir,
    i want ask ques. that…

    HILTON CO SHREW CO
    $ $
    sundry assets 660,000 290,000
    investment in SHREW 280,000 –
    ———– ———–
    940,000 290,000
    ———— ———–
    Issued share capital 400,000 140,000
    share premium account 320,000 50,000
    retained earnings
    As at 1 Jan 20*3 140,000 60,000
    Profit for 20*3 80,000 40,000
    ———– ———–
    940,000 290,000
    ———— ————
    There have been no changes in the share capital or share premium account of either company since 1 Jan 20*3. The fair value of the non-controlling interest on acquisition was $65000.

    I’ve problem here that it is shown that pre-acquisition is {(100000-60000)*80%} in this solution but here i wrote pre-acquisition 40,000 ,,,,,I’ve problem this how it became 100,000 pls help me with solution……

  8. Hey Sir,

    A bit of confusion here, in example 1 you showed us that when the P co. owns 80% of the S co. we find 80% of the share capital when we’re doing our consolidation at the beginning but why in example 2 we didn’t do it? Nor any of the other examples?

    • It was only introductory, and is only because the shares were acquired on the date of incorporation which is unusual for the exam.
      Strictly we should take the consideration plus the value of the NCI (8,000 + 2,000) and subtract the share capital plus pre-acquisition earnings (10,000 + 0). This haves the same result, but only because the shares were acquired on the date of incorporation.

      • Hi, would you help with this question Please?

        A, bought 90% of equity share Capital of B, two years ago, on 1 july 2012 when retained earning of B stood at $12000.

        During the year A, transferred goods to B, for $45000- this figure includes a mark up of 50% two thirds of this goods remained at inventory at the year end.

        The Balance on the current Accounts between A & B were $53000.

        The Fair Value at the date of acquisition of Non-controlling interest $10000.

        A B
        N C Assets:
        property plant & equipment——240 – 72
        investment in B ———- 85
        325 72

        Current Assets:
        inventory——————– 22 48
        receivable 254 60
        cash at bank 24 12

        Equity:
        share capital 36 12
        retained earnings 189 72

        Non- C Liabilities—————-290 70
        Current Liabilities — 120 30

        what figure would appeared for retain earnings?

  10. Sir in example 7 how do you get 5000 as a fair value in NCI? If i am not wrong, when the fair value is not given in the question you take NCI % times the share capital.

    • Which is what I have done! The NCI own 25%. The share capital of the NCI is 20,000. 25% x 20,000 = 5,000.

      (The fair value of the NCI will always be given in the question, unless as in this question the investment in the subsidiary occurred on the date of incorporation in which case obviously the fair value was simply the NCI’s share of the share capital.)

  11. Ooops sorry but i found a doubt a bit later. This whole scenario is about fair value of NCI. What if in question its talked about the fair value of parent company. Then how we should calculate goodwill and NCI? How do we make adjustments with the percentage? Do we have to bring whole share capital invested in subsidiary while calculating goodwill and do we have to take some percent of share capital in NCI?

    Thanks

    • There is no fair value of the parent company – it is not relevant because it is only the subsidiaries shares that were purchased, not the parent company’s.

      It is only for the subsidiary that we need to calculate goodwill and non-controlling interest.

  12. Hi John,

    In example 1 you worked out the Non controlling interest as:

    NCI Share capital (20% x 10000) + NCI Retained profit post acquisition (20% x 8000) = 3600

    In example 2, why didn’t you add the NCI Share capital (40% x 20000)

    So NCI would be 42000 ie Fair value 30000 + Share Capital 8000 + Retained earnings 4000

    Thanks

  13. hi. Thank you for the classes. They help a lot!

    Please tell why do we include share of non controlling interest in the consolidated balance sheet.
    Balance sheet shows financial position of the group.
    like in example 1, non controlling interest is 20%. why is it included in Consolidated balance sheet. that should ideally go to the balance sheet of company having that 20% interest.

    • The consolidated Statement shows all the assets and liabilities of the group as though it was one big company. However, it is not all belonging to the shareholders of the parent (even though they control it) and so we have to show the amount that belongs to the non-controlling interest.
      With regard to the Statement of the subsidiary company – it would not be sensible (or legal) to change this at all. It is a separate legal company and it produces its own Statements in the normal way.

  14. Dear Sir, thanks for the reply.

    If the NCI fair value is not given, we will need to use the proportionate method.

    For example, P purchase 90% of S for $300,000.

    On Date of acquisition 01/01/2014 :
    S Ordinary Share Capital $ 100,000
    S Retain earnings were $ 60,000
    S Building was revalued at 10,000 higher than the book value

    On 31/12/2014 :
    S Ordinary Share Capital $ 100,000
    S Retain earnings $80,000
    _______________________________________________________

    During the calculation of NCI share of the S profit, can we calculate like this :

    10% x (S Share capital on date of acquisition $100,000 + Retain earning on acquisition 60,000 + Revaluation of PPE 10,000 ) = $17,000

    Add :
    10% x (S post retain earning 80,000 – acquisition retain 60,000 – PPE depreciation adjustment 1,000 ) = 1,900

    NCI share of S = $ 18,900

    is my above calculation correct? May i know, does the revaluation of non current asset affects the retain earning of the subsidiary?

    • If using proportionate method, then if 90% cost $300,000 then the NCI of 10% is valued at 10/90 x 300,000 = 33,333

      If the building was actually revalued in S’s books then the surplus goes to revaluation reserve (not to retained earnings).

      If it was simply a fair value adjustment for purposes of consolidation, then none of S’s reserves are affected.

      With regard to a depreciation adjustment, (in a consolidation), then this is not relevant for F3.

      • Dear Sir,
        thank you for your reply.

        what if the revaluation of building was not recorded in S’s books? do we need to do adjustment in the NCI calculation ?

      • I have actually answered this twice!

        As I wrote in my last reply, if the adjustment was purely for the purpose of consolidation (as almost certainly will be the case in Paper F3) then it does not affect the NCI calculation at all. All that happens in the consolidated statement is that the goodwill is lower and the value of the non-current assets is higher.

  15. Dear Sir,

    For example, if the fair value of PPE exceed the carrying value by 10,000 , we will need to make adjustment to the goodwill calculation as well as the non controlling interest calculation even though we are using the fair value method for non controlling interest?

    • Yes – the two mentions of ‘fair value’ are for different reasons and you will still make an adjustment to goodwill if there is a fair value adjustment needed for the non-current assets.

      (If you are still worried as to whether or not it is sensible then ask again and I will write more. However, the rule does remain that if relevant then the adjustment still needs to be made.)

      • Dear Sir, Thank you for your reply.

        For example, P purchase 90% of S when S for $300,000.

        On Date of acquisition 01/01/2014 :
        S Ordinary Share Capital $ 100,000
        S Retain earnings were $ 60,000
        S Building was revalued at 10,000 higher than the book value

        ***Fair value of Non controlling interest is $40,000

        On 31/12/2014 :
        S Ordinary Share Capital $ 100,000
        S Retain earnings $80,000
        __________________________________________

        Working 1: Goodwill
        Cost of investment $300,000
        NCI Fair value $ 40,000
        Less :
        S Share Capital at acquisition ($100,000)
        S Retain earning at acquisition ($ 60,000)
        Revaluation of building ($ 10,000)
        Goodwill is therefore $170,000

        The next step i would like to calculate the Non controlling interest share of S :

        Fair value of S $ 40,000
        Share of post-acquisition profit (80,000-60,000) x 10% = $2000
        ** Do i need to include the revaluation of PPE here ? ($10,000 x 10%)
        NCI is $ 42,000 ?

        ** My question is do we need to give the non controlling interest their share of PPE revaluation ?

        thanks for your help, hope u can help me with this

      • No – we don’t give the NCI a share of the fair value adjustment for the non-current assets.
        All the fair value adjustment does is reduce the goodwill and increase the non-current assets in the consolidated statements – it doesn’t change the total value of the group at all. The NCI remains at the fair value at the date of acquisition plus their share of post-acquisition profits.
        (Although you will never be asked to calculate the fair value of the NCI at the date of acquisition, the reason it is usually higher than their share of sh cap and reserves at the date of acquisition is because of the goodwill and the fact that the assets are worth more than the book values – it effectively already takes it into account).

  19. sir , i want ask a question that :
    P Co acquired 80% of the share capital of S Co ( total ordinary share of S Co is 10,000 $1 shares ) at market value of $12 and issues 1 of P Co share for every 4 shares in S co . Calculate the Fair Value of the consideration

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