Goodwill, NCI and a change in ownership interest
On 1 January 20X6 Perch Co acquired 80% of Minnow Co for $46m cash. At acquisition Minnow's net assets had a carrying amount of $38m. A brand not previously recognised was valued at $6m and had a remaining life of 10 years; plant was valued at $3m above its carrying amount and had a remaining life of 5 years. Minnow's profit for the year to 31 December 20X6 was $9m, earned evenly through the year. During 20X6 Minnow sold goods to Perch for $12m at a mark-up on cost of 25%; one quarter of those goods remained in Perch's inventory at the year end. On 1 October 20X6 Perch sold a 10% interest in Minnow for $7m cash, reducing its holding to 70% but retaining control. Perch measures non-controlling interest using the proportionate share of net assets method.
1. Calculate goodwill arising on the acquisition of Minnow and the NCI at the acquisition date.
Read the worked answer
Fair value of identifiable net assets at acquisition
| $m | |
|---|---|
| Carrying amount of net assets | 38.0 |
| Brand (fair value adjustment) | 6.0 |
| Plant (fair value adjustment) | 3.0 |
| Fair value of net assets | 47.0 |
Goodwill (proportionate NCI method)
| $m | |
|---|---|
| Consideration transferred | 46.0 |
| NCI: 20% × $47.0m | 9.4 |
| Less fair value of net assets | (47.0) |
| Goodwill | 8.4 |
Under the proportionate method, goodwill contains no share attributable to NCI, so any subsequent impairment of goodwill is charged wholly to the parent. Watch the trap: the NCI is 20% of fair-valued net assets ($47.0m), not of the $38m carrying amount - using $38m would give goodwill of $15.4m by omitting the $9m of fair value adjustments from both sides of the calculation.
2. Calculate the NCI at 31 December 20X6, taking account of the 1 October 20X6 transaction.
Read the worked answer
Step 1 – adjust Minnow's profit for the year
| $m | |
|---|---|
| Reported profit | 9.00 |
| Brand amortisation (6.0 / 10) | (0.60) |
| Extra plant depreciation (3.0 / 5) | (0.60) |
| Unrealised profit in inventory | (0.60) |
| Adjusted profit | 7.20 |
PURP: $12m / 1.25 = $9.6m cost, so profit is $2.4m; one quarter remains in inventory: $2.4m × 25% = $0.6m. The sale is upstream (subsidiary to parent), so the whole elimination is charged against Minnow's profit and reduces the NCI share.
Step 2 – NCI before and after the transaction
| $m | |
|---|---|
| NCI at acquisition | 9.40 |
| Share of post-acquisition profit to 30 Sept (20% × 7.20 × 9/12 = 20% × 5.40) | 1.08 |
| NCI at 30 Sept 20X6 | 10.48 |
| Transfer out on sale of half the NCI (10/20 × 10.48) | (5.24) |
| NCI after transaction (70% parent / 10% NCI) | 5.24 |
| Share of Q4 profit (10% × 7.20 × 3/12 = 10% × 1.80) | 0.18 |
| NCI at 31 December 20X6 | 5.42 |
Step 3 – effect on parent equity Proceeds $7.0m less the $5.24m carrying amount of the NCI transferred = $1.76m credited to a separate reserve within parent equity.
3. Explain why the 1 October 20X6 disposal produces no gain or loss in profit or loss, and why the PURP is attributed entirely to the subsidiary.
Read the worked answer
No gain or loss on the 10% disposal
- Perch still controls Minnow (70% and control is retained through voting rights and the ability to direct relevant activities).
- A transaction with NCI that does not change control is a transaction between owners. The group's assets and liabilities are unchanged in substance; the only change is how the group's equity is attributed between parent shareholders and NCI.
- Therefore no goodwill is remeasured, no gain or loss is recognised in profit or loss, and the difference between the $7.0m proceeds and the $5.24m NCI carrying amount is taken to equity. Recognising a profit would allow a group to manufacture earnings simply by selling slices of a subsidiary it still controls.
- Contrast: if the disposal had taken the holding to, say, 45% and control had been lost, the retained interest would be remeasured to fair value and a gain or loss on the whole holding recognised in profit or loss.
Why the PURP hits NCI in full The profit on the intra-group sale was recorded in Minnow's own books, so it is Minnow's profit that must be reduced to the group's perspective. The NCI's entitlement is to a share of the group-adjusted profit of its subsidiary; it cannot share in profit the group has not made. Had the sale been downstream (parent to subsidiary), the elimination would fall on the parent and the NCI would be unaffected.
Also note: the $1.76m credit is not distributable profit - it is a capital transaction and should be presented separately from retained earnings.