For the Year Ended...

[Griet van Vliet]

In the meantime, most clients she got were rather straightforward to handle and she could let the more junior accountants handle it. Now, one of the more troublesome clients (a Manpha-based mom-and-pop HoloNet provider called Cogesco buying a retailer of HoloNet equipment, Securenet) landed in her office. Six years ago, Cogesco bought 75% of Securenet; the equity was 200k split equally between share capital and retained earnings. Securenet had no goodwill, and there were three assets requiring fair value adjustments, taxed at 30%:

Account | Book value | Fair value
Inventory | 70000 | 100000
Plant (cost 170000) | 150000 | 190000
Land | 50000 | 100000

But since there was no right whatsoever to assume that the non-controlling interests is just pro-rating the consideration transferred, thanks to the acquisition premium (VPN tended to instead buy troubled accounting firms at bargain prices), she had to try both approaches (IFRS permit both) to recording goodwill. Fair value is therefore, under the partial goodwill method, and assuming that the acquirer incurs all the tax consequences, thanks to Manpha not having an equivalent to Talz's Section 85:

BV: 200000
Inventory: 21000 = 70%*30000
Plant: 28000 = 70%*40000
Land: 35000 = 70%*50000
Total fair value = 284000

Under partial goodwill, 75% of the goodwill would be attributed to the parent, so 250000-(284000*75%) = 37000. If full goodwill is in use instead, the fair value of the NCI at that date was 90000, so the fair value is 340000, and the parent absorbs the full 56000 in goodwill.

 

[Griet van Vliet]

The adjustment table: how to go from the sum of the segmented financial statements to the consolidated one (net of the parent's investment in the subsidiary and the subsidiary's pre-acquisition equity). The goodwill was written off last year, when the Alliance collapsed. Under partial goodwill:

Account | I/S | R/E | B/S
Inventory | Nil | (21000) | Nil
Plant | (4000) | (14000) | 16000
Land | Nil | Nil | 50000
Income tax expense | 1200 | Nil | (19800)
Goodwill | Nil | (37000) | Nil

Cogesco and Securenet​

Income statements (segmented and consolidated)​

Account | Cogesco | Securenet | Consolidation adjustment | Consolidated
Sales | 510600 | 80000 | Nil | 590600
COGS | 225000 | 35000 | Nil | 260000
Other | 65000 | 7000 | 4000 | 76000
Income tax expense | 50000 | 5000 | (1200) | 53800
Net income | 170600 | 33000 | (2800) | 200800

 

[Griet van Vliet]

Cogesco and Securenet​

Statement of changes in equity (segmented and consolidated)​

Account | Cogesco | Securenet
Beginning retained earnings | 180000 | 155000
Consolidation adjustments | (22000) | (135000)
Consolidated beginning retained earnings | 158000

Consolidated net income | 156600 (208800 * 75%)
Ending consolidated retained earnings | 314800

Now, time was running out for the day but 52200 was attributable to the NCIs. Tomorrow she owuld finish the NCI segment of the statement of changes in equity and do the balance sheets, with the segmented ones as the starting point.

 

[Griet van Vliet]

I know I can do this. Income statements are fully consolidated regardless of how much of the subsidiary the parents owns, if the financial statements need to be consolidated. There is a line that says how much of the net income is attributable to the non-controlling interest(s), 25% of the subsidiary's net income but I was so tired last night that I made a mistake of believing it was 25% of the group's net income, and not simply 25% of , she thought, while also realizing that the 22000 being deducted from the parent's retained earnings is actually 75% of the subsidiary's retained earnings, 15000, minus the 37000 in impairment loss. Also the amount that needed to be attributed to the NCIs is 25% of 33000 minus 2800 in fair-value adjustments, or 25% of 30200, so 7550. Plus the old consolidated net income was overstated by 8000 last night. And the NCI is 71000 on the day of acquisition. Now the statement of changes in equity would mean that the NCIs would be entitled to 25% of the consolidated retained earnings; therefore 5000 in retained earnings is attributable to the NCIs.

Cogesco and Securenet
Statement of changes in equity (segmented and consolidated)

Account | Cogesco | Securenet
Beginning retained earnings | 180000 | 155000
Consolidation adjustments | (22000) | (135000)
Consolidated beginning retained earnings | 158000

Consolidated net income | 193250
Ending consolidated retained earnings | 351250

Beginning NCIs 76000
Net income attributable to NCIs 7550
Ending NCIs 83550

 

[Griet van Vliet]

Under the full goodwill method, the only thing that changed prior to the preparation of the statement of changes in equity is the R/E adjustment due to the goodwill impairment, which is the full 56000 rather than 37000. Even then, the NCI column of the statement of changes in equity would show the exact same data if goodwill is impaired. But if the goodwill wasn't impaired, under full goodwill, the total assets and NCIs would increase by the amount of unimpaired goodwill.

 

[Griet van Vliet]

Another client, based on Adarlon (corporate tax rate: 40%), is ILS, that acquired 80% of the share capital of LBEX, also on Adarlon, for 290000, four years ago. ILS has used full goodwill, and the NCI when it was bought, but since it was not bought ex div, they were entitled to 80% of the dividend payable at that date, so the real consideration transferred is 274000 plus the NCI of 67000 for goodwill purposes, so 341000. Book value was 300000, and then one would need to increase the various assets as follows, net of tax: inventory: 3000, PP&E 9000, vehicles 15000, bond payable (12000) and goodwill (20000) for a total of 295000 so the actual goodwill of the group is 46000. However, under partial goodwill, it's 274000 - 80%*295000 = 38000 and 8000 belongs to the NCIs. But since full goodwill is in use, the NCIs are worth 59000.

 

[Griet van Vliet]

And yet, plant was sold for 6000 midway through the year, which originally cost 50000 and had a net book value of 20000. Its fair value was 9000 at that point in time (Adarlon treats terminal losses on individual assets, rather than on classes of assets). She decided to treat the plant remaining first, with a 26000 upward adjustment, and the depreciation is understated by 5200 as a result of it lasting 5 extra years on ILS' books. But that also causes the income tax expense to be overstated by 2080, so retained earnings have to be adjusted for those three years, and 9360 downward. And the final 5200 left on the balance sheet. However, applying the same logic on the equipment being sold meant that half a year's depreciation would be adjusted, or it would then be overstated by 1100, and the income tax expense is therefore understated by 440, without any balance sheet consequences since the stuff was sold. The gain on sale amounted to 3300, of which 1320 would increase the current ITEs.

 

[Griet van Vliet]

The vehicles lasting for an extra 10 years, and 25000 is the FV difference on the day of acquisition, of which 4500 is the net write-off, net of tax, for the first three years. Therefore there's still 15000 left on the balance sheet and 2500 extra depreciation, with 1000 in income tax expense reduction as a result. The bonds were on LBEX's books at a 20000 discount, amortized to the tune of 750, 780, 811 and 844 for the four years following the transaction. Which caused the ITEs to decrease by 338 that year, and increase the retained earnings by 1405. Complex as hell, and she knew few, if any, other Jedi (or Sith, for that matter) would even touch consolidation of financial statements with a ten-foot pole, and the remaining discount to be amortized is 16815. And the dividend stuff was just the beginning of the intragroup part, so dividends revenue would have to be lowered by 13000, and the declared ones as well, but 5000 of the 13000 was already paid so dividends payable and receivable are lowered by the remaining 8000.

 

[Griet van Vliet]

Oops. 20k of goodwill must be removed since the fair value of a subsidiary's goodwill is deemed to be nil for consolidation purposes, she thought. The hardest part, in a context of consolidation of intragroup transactions, is determining whether such a transaction is upstream or downstream. Upstream meaning that a parent bought from the subsidiary, downstream meaning that the subsidiary is buying from the parent. At the beginning of the year, ILS had 10000 in inventory from LBEX, all of it sold in the current year, and the actual cost is 8000 since LBEX sells its merchandise at 25% markup on cost (which somehow includes variable selling costs, or LBEX's selling costs are all fixed, even though internal sales typically only incur fixed selling costs). which caused the COGS to go down by 2000, ITEs to go up by 800, and beginning R/E and NCI adjsted by 80% and 20% of that 1200. Now for the unrealized profit part: only 5000 is left unrealized, but the whole sales revenue must go down by 50000 and yet, COGS must go down by 49000 since there's only 1000 in unrealized profit left, and income tax expense must go down by 400, and ending inventory is lowered by 1000, but the deferred tax asset is increased by 400.

 

[Griet van Vliet]

If a transaction happens upstream, NCIs must be considered, but that is not the case when downstream transactions occur. As for land, land is understated by 5000 since it was sold at a discount of that amount, but any decreased in income tax expense must be accompanied by an increase in deferred tax asset for the same amount, so 2000. I have the feeling the client's negligence is causing the statement of changes in equity not to balance, Griet thought while preparing the segmented and consolidated statements of changes in equity:

ILS & LBEX​

Segmented and consolidated statement of changes in equity​

Account | ILS | LBEX
Beginning retained earnings | 50000 | 45000
Inventory | Nil | (1200)
Pre-acquisition R/E | Nil | (100000)
Other FV adjustments | Nil | (11495)
Consolidated R/E | Nil | (67695)
Investment in LBEX | (54156) | Nil
Ending R/E | 78000 | 60000

And the net income portion is then

ILS | LBEX
EBIT | 80000 | 28000
Income tax expense | 13000 | 3874
Net income | 67000 | 24126
Attributable to the parent | Nil | 19301
Attributable to the NCIs | Nil | 4825

 

[Griet van Vliet]

The client's negligence was to treat the 13000 in dividends as income tax expense, so the real segmented and consolidated statement of changes in equity is:

ILS & LBEX
Segmented and consolidated statement of changes in equity

Account | ILS | LBEX
Beginning retained earnings | 50000 | 45000
Inventory | Nil | (1200)
Pre-acquisition R/E | Nil | (100000)
Other FV adjustments | Nil | (11495)
Consolidated R/E | Nil | (67695)
Investment in LBEX | (54156) | Nil
Ending R/E | 78000 | 60000

And the net income portion is then

ILS | LBEX
Segmented net income | 80000 | 28000
Dividend revenue | (10400) | Nil
FVA | Nil | (1474)
Realized profit | Nil | 1200
Unrealized profit | Nil | (600)
Unrealized loss on sale of land | Nil | 3000
Net income | 69600 | 30126
Attributable to the parent | Nil | 24101
Attributable to the NCIs | Nil | 6025

So the total consolidated net income is 93701. For it to balance, 54600 was required to be declared as a dividend. And then comes the NCI part. The 20% share of the R/E that belong to the NCIs is therefore 20% of minus 67695, or (13539). Which then puts the NCI at 53461. Or, one could also reconcile the book value of the net assets (a.k.a. equity), 245000, with any fair-value adjustments at the end of the year minus the net income adjustments, respectively (17969) and 274, whose total is therefore 227305. And the difference between 20% of that amount and the NCI calculated otherwise, is the goodwill apportioned to the NCIs, or 8000.

 

[Griet van Vliet]

And finally, the NCI reconciliation schedule:

Beginning NCI 53461
Net income attributable to NCIs 6025
Dividends declared (2600)
Ending NCI 56886

Or one could always start with the NCI at acquisition:

NCI at acquisition 67000
R/E since acquisition 60000
R/E at acquisition (100000)
FVA at year-end (11495+1474)
Inventory (600)
Unrealized loss 3000
Net subsidiary R/E (50569) (of which only 20% go to NCIs, or 10114)
Ending NCIs 56886

Or from the book value:

Equity book value 260000
FVA (17969)
Net income 2400
Equity fair value 244431
NCI share of equity 48886
Goodwill 8000
Ending NCI 56886

 

[Griet van Vliet]

And finally, the NCI reconciliation schedule:

Beginning NCI 53461
Net income attributable to NCIs 6025
Dividends declared (2600)
Ending NCI 56886

Or one could always start with the NCI at acquisition:

NCI at acquisition 67000
R/E since acquisition 60000
R/E at acquisition (100000)
FVA at year-end (11495+1474)
Inventory (600)
Unrealized loss 3000
Net subsidiary R/E (50569) (of which only 20% go to NCIs, or 10114)
Ending NCIs 56886

Or from the book value:

Equity book value 260000
FVA (17969)
Net income 2400
Equity fair value 244431
NCI share of equity 48886
Goodwill 8000
Ending NCI 56886