Consolidation When Control Exists Without Majority Voting
Parent Co. acquires 45% of Target Inc.'s voting shares for ₱9,000,000. The remaining 55% is widely dispersed among many unrelated shareholders, none holding more than 4%. Historically, attendance at Target's shareholder meetings is about 60% of shares, and Parent has successfully elected all five directors in the last two meetings. A shareholders' agreement gives Parent the right to appoint the chief executive and three of five board members. Another investor holds 20% and has board representation but no veto over operating decisions. Parent also holds options to acquire a further 8% at a fixed price exercisable within 12 months. Target's net identifiable assets have a fair value of ₱18,000,000.
1. Determine whether Parent controls Target and therefore must consolidate. Support the conclusion with the relevant indicators and address the 45% holding.
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Control exists when an investor has power over the investee, exposure to variable returns, and the ability to use its power to affect those returns. A majority shareholding is not required.
Parent has power despite holding only 45% because the remaining shares are widely dispersed and historical attendance is about 60%, so Parent's 45% is a dominant block that has reliably elected the entire board. The shareholders' agreement reinforces this by giving Parent the right to appoint the CEO and three of five directors, which conveys the ability to direct relevant activities. The 20% investor has board representation but no veto, so it does not share control. Parent's options over a further 8% add potential voting power that is currently exercisable and should be considered.
Exposure to variable returns arises through dividends, capital appreciation, and management fees. Parent can use its power to affect returns through board and management appointments. Conclusion: Parent controls Target and must consolidate, attributing the 55% non-controlling interest. The 45% is not automatically an associate; substance, not the percentage, governs.
2. Compute the non-controlling interest at acquisition using both the proportionate-share and fair-value methods, and explain which presentation the standard permits.
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Target's net identifiable assets fair value is ₱18,000,000. The non-controlling interest is 55%.
Proportionate method: NCI = 55% × ₱18,000,000 = ₱9,900,000.
Fair-value method: NCI = 55% × fair value of Target as a whole. If the implied fair value of the 100% equity is derived from Parent's consideration, ₱9,000,000 ÷ 45% = ₱20,000,000, so NCI = 55% × ₱20,000,000 = ₱11,000,000. This creates goodwill attributable to NCI of ₱11,000,000 − ₱9,900,000 = ₱1,100,000.
The standard permits either method for each business combination, measured at the NCI's proportionate share of identifiable net assets or at fair value. The choice affects goodwill and NCI but not the parent's share of goodwill. The auditor should verify the valuation of Target's net assets and confirm the fair value of the NCI if the fair-value method is elected, since that measurement is judgmental and drives the goodwill balance.