NCI, a step-up purchase and impairment in a fully-goodwilled group
Pinnacle Holdings Ltd acquired 60% of Suryan Ltd on 1 April 20X2 for ₹480 crore, measuring the non-controlling interest at its fair value of ₹300 crore. The fair value of Suryan's identifiable net assets at that date was ₹660 crore. On 1 October 20X5 Pinnacle bought a further 25% from two family shareholders for ₹260 crore, reducing its holding to 85%. At 1 October 20X5 Suryan's consolidated net assets were ₹840 crore, comprising ₹720 crore of net assets and ₹120 crore of goodwill recognised on the original acquisition. For the year to 31 March 20X6 Suryan reported profit after tax of ₹96 crore, earned evenly through the year. During that year Suryan sold goods to Pinnacle for ₹70 crore at a mark-up of 40% on cost; goods invoiced at ₹21 crore were still in Pinnacle's inventory at 31 March 20X6. On 1 April 20X5 Pinnacle sold plant to Suryan for ₹90 crore, earning a gain of ₹18 crore; Suryan depreciates plant over five years on a straight-line basis. In February 20X6 Suryan lost its largest customer; management treats Suryan as a single cash-generating unit with a carrying amount of ₹1,150 crore (including recognised goodwill of ₹100 crore) and a recoverable amount of ₹1,000 crore.
1. Compute goodwill at acquisition and account for the purchase of the additional 25%. Show the equity effect.
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Goodwill at 1 April 20X2 (full goodwill method)
- Consideration transferred: ₹480 crore
- NCI at fair value: ₹300 crore
- Less fair value of identifiable net assets: ₹(660) crore
- Goodwill = ₹120 crore
Had the proportionate-share method been chosen, NCI would have been 40% × ₹660 = ₹264 crore, goodwill ₹84 crore, and none of the NCI's share of goodwill would appear in the group balance sheet - the choice matters for the later impairment.
The 1 October 20X5 purchase
- NCI before the purchase = 40% × ₹840 crore = ₹336 crore
- Share acquired = 25/40 = 62.5% of the NCI = ₹210 crore
- Consideration paid = ₹260 crore
- Excess = ₹260 − ₹210 = ₹50 crore
Control did not change, so this is a transaction between owners in their capacity as owners. No gain or loss arises, no goodwill is created, and the ₹50 crore is debited to equity attributable to the owners of Pinnacle (retained earnings or a separate component).
Journal Dr NCI ₹210 crore; Dr equity attributable to owners ₹50 crore; Cr cash ₹260 crore.
After the purchase NCI = 15% × ₹840 crore = ₹126 crore, and the group's net assets are unchanged - only their allocation between owners and NCI has moved. Disclosure of the transaction and of the NCI balance is required.
2. Compute the NCI share of profit for the year and set out the consolidation eliminations, explaining why the plant gain is treated differently from the inventory profit.
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Elimination 1 - upstream inventory profit (Suryan to Pinnacle)
- Invoiced value of unsold goods ₹21 crore; cost = 21 ÷ 1.40 = ₹15 crore
- Unrealised profit = ₹6 crore; Suryan's profit becomes ₹96 − ₹6 = ₹90 crore
Because the sale is upstream, the profit sat in Suryan's accounts, so the elimination is shared with the NCI in the usual ratio.
NCI share, weighted for the change in holding
- 1 April to 30 September (40%): 90 × 6/12 × 40% = ₹18.00 crore
- 1 October to 31 March (15%): 90 × 6/12 × 15% = ₹6.75 crore
- NCI share of profit = ₹24.75 crore; owners' share = ₹65.25 crore
(This assumes profit accrues evenly, as stated. If profit were seasonal, split by actual monthly results.)
Elimination 2 - downstream plant gain (Pinnacle to Suryan)
- Remove the ₹18 crore gain in full against Pinnacle's profit
- Suryan is depreciating the inflated carrying amount, so add back excess depreciation: 18 ÷ 5 = ₹3.60 crore
- Net reduction in group profit = ₹14.40 crore
Why the difference The plant gain was earned by the parent. Under the group's ownership-interest approach the NCI has no claim on profits generated by the parent, so the entire unrealised gain is attributed to the owners. The inventory profit, by contrast, was earned inside the subsidiary and the NCI shares in it. Get this direction wrong and both the NCI and the owners' figures are misstated.
3. Allocate the impairment loss. Does the 15% NCI require any gross-up of goodwill before testing?
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Step 1 - Trigger and base The loss of the largest customer is a clear impairment indicator. Recoverable amount is the higher of fair value less costs of disposal and value in use: given as ₹1,000 crore, against a carrying amount of ₹1,150 crore.
- Impairment = ₹150 crore
Step 2 - Is a gross-up needed? No. Pinnacle measured NCI at fair value, so goodwill of ₹120 crore at acquisition represented 100% of the goodwill in Suryan, including the NCI's share. There is no unrecognised goodwill to add back. Grossing up is needed only where the proportionate-share method was used: there the recognised goodwill is the parent's share alone and the carrying amount must be notionally increased by the NCI's share of goodwill before testing, with any impairment on the unrecognised portion not recognised in the accounts. A candidate who mechanically grosses up here would overstate the impairment.
Step 3 - Allocation
- Reduce goodwill of ₹100 crore to nil - ₹100 crore
- Allocate the remaining ₹50 crore pro rata to the other assets of the CGU (carrying ₹1,050 crore), i.e. 4.76% of each, subject to no asset falling below its own recoverable amount.
Step 4 - Split between owners and NCI Because the full goodwill method applies, the goodwill impairment is shared: NCI 15% × ₹150 crore = ₹22.50 crore, owners ₹127.50 crore.
Disclosure Set out the trigger, the recoverable amount and basis, the discount rate and growth assumptions, and the allocation. Do not reverse the impairment in a later period merely because the customer relationship stabilises - reversal of goodwill impairment is prohibited.