Upstream Inventory Profit and an Intra-Group Loan in Consolidation
Mindanao Agri Holdings Inc. (MAHI) acquired 75% of the ordinary shares of Davao Feed Mills Inc. (DFMI) on 1 January 2024 for ₱180,000,000. On that date DFMI's identifiable net assets had a fair value of ₱200,000,000 and a carrying amount of ₱176,000,000. MAHI measures non-controlling interests at fair value, ₱58,000,000, at the acquisition date. During 2025 DFMI sold raw materials to MAHI for ₱60,000,000 at a gross margin of 25% on selling price; ₱24,000,000 of those goods remained in MAHI's ending inventory and none had been sold externally by year-end. On 1 July 2025 DFMI lent MAHI ₱30,000,000 at 8% per annum; both entities recorded the interest for the year, and the interest was unpaid at 31 December 2025. DFMI reported profit of ₱40,000,000 for 2025 and declared no dividends. MAHI accounts for its investment at cost in its separate financial statements.
1. Compute goodwill at acquisition and explain how the choice of NCI measurement changes its amount and its attribution.
Read the worked answer
Goodwill under the fair-value method actually adopted:
₱180,000,000 (consideration) + ₱58,000,000 (NCI at fair value) − ₱200,000,000 (fair value of net identifiable assets) = ₱38,000,000.
Of this, ₱20,000,000 (180,000,000 − 75% × 200,000,000) is attributable to the owners of MAHI and ₱18,000,000 to the NCI. The NCI's goodwill of ₱18,000,000 equals the ₱58,000,000 fair value less its 25% share of net assets (₱50,000,000) - it is the premium paid for the NCI's shares, not a plug.
Had MAHI used the proportionate-share method, NCI would be ₱50,000,000 and goodwill would be only ₱30,000,000, all attributable to the parent. The ₱8,000,000 difference is entirely the NCI's goodwill, and it flows into the impairment testing of the cash-generating unit.
The ₱24,000,000 fair-value uplift over carrying amount does not create goodwill; it is recognised as an adjustment to the identifiable assets and depreciated or amortised over their remaining lives, which reduces post-acquisition consolidated profit and hence the NCI share of it.
2. Quantify the unrealised profit on the upstream sale and show how it is allocated between the owners of MAHI and the NCI. Why does upstream versus downstream matter?
Read the worked answer
Unrealised profit = ₱24,000,000 × 25% = ₱6,000,000.
The sale is upstream (subsidiary to parent), so the profit was earned by DFMI and sits in DFMI's reported profit of ₱40,000,000. The elimination entry debits DFMI's profit (through the consolidation adjustment) and credits inventory:
- Adjusted DFMI profit: 40,000,000 − 6,000,000 = ₱34,000,000
- Attributable to owners of MAHI (75%): ₱25,500,000
- Attributable to NCI (25%): ₱8,500,000, versus ₱10,000,000 on the unadjusted profit
The NCI absorbs ₱1,500,000 of the elimination because the profit was made in the entity in which the NCI shares. For a downstream sale (parent to subsidiary) the profit arises in the parent, so the full ₱6,000,000 is charged against the parent's share and the NCI is unaffected. Misclassifying the direction overstates or understates NCI by ₱1,500,000 here.
Note that the inventory in MAHI's books is carried at ₱24,000,000; the consolidated carrying amount is ₱18,000,000, and that lower amount becomes the cost base for measuring any subsequent write-down to net realisable value.
3. Explain how the ₱30,000,000 loan and its interest are presented in the consolidated financial statements and whether either affects the NCI.
Read the worked answer
Both the loan and the interest are intragroup balances. DFMI's receivable of ₱30,000,000 and MAHI's payable of ₱30,000,000 are eliminated in full; the accrued interest receivable (₱30,000,000 × 8% × 6/12 = ₱1,200,000) and the matching accrued interest payable are likewise eliminated. DFMI's interest income of ₱1,200,000 and MAHI's interest expense of ₱1,200,000 offset exactly.
The consequence is that neither the gross loan nor the interest appears in the consolidated statement of financial position or statement of profit or loss, and because the eliminations are equal and opposite, consolidated profit and the NCI are unaffected. The NCI is not reduced merely because the subsidiary is a lender - there is no unrealised profit in a principal repayment.
Judgement points: (1) do not net the loan against the investment in DFMI or against equity - it is an asset/liability elimination, not an equity transaction; (2) confirm both parties recorded the same rate and period, since any mismatch (for example, interest accrued by one party only) would leave a residual balance that must be investigated rather than plugged; (3) in MAHI's separate statements the payable is a real liability and the interest is a real expense, and the related-party disclosure is required even though the balances disappear on consolidation.