NCI measurement

EveT

hi,

Im having trouble with these 2 concepts, on Q1 of a pack of 35 and just cant get my head around the 2 ways of valuing NCI, Ive looked at the text book and just dont get it, can anyone explain these to me in baby language or advise where to look? am beginning to panic!

Thanks in advance

hivizman

EveT wrote: »

hi,

Im having trouble with these 2 concepts, on Q1 of a pack of 35 and just cant get my head around the 2 ways of valuing NCI, Ive looked at the text book and just dont get it, can anyone explain these to me in baby language or advise where to look? am beginning to panic!

Thanks in advance

The two approaches to measuring Non-Controlling Interest (NCI) in a business combination are (1) the proportion of the fair value of the net assets of the subsidiary attributable to the non-controlling equity holders - this is the traditional way of measuring NCI (or as it used to be called, "Minority Interest") - and (2) the fair value of the NCI determined directly.

These two measures are not the same, because the fair value of the NCI will represent the amount that the non-controlling equity holders will be willing to accept for the transfer or cancellation of their interest in the subsidiary. That amount will depend on such factors as the future dividends expected from the subsidiary, rather than just on the subsidiary's net assets.

In method (1), it is necessary to calculate the net amount of the identifiable assets less the liabilities of the subsidiary at the date of acquisition, measured in accordance with IFRS3 (that is, basically at fair value). In examination questions, this usually involves (a) working out what the net assets would have been in the subsidiary's balance sheet at the date of acquisition - which will be equal to the share capital and reserves at the date of acquisition - and making any adjustments necessary to reflect assets and liabilities at fair value.

For example, suppose the subsidiary had 100 of share capital and 400 of reserves at the date of acquisition, and its property, plant and equipment had a fair value that was 100 greater than book value. Then the net assets of the subsidiary at the date of acquisition for the purpose of determining NCI would be 100 + 400 + 100 = 600. If the non-controlling equity holders own 20% of the shares of the subsidiary, the NCI at the date of acquisition will be 20% of 600, which is 120. If the subsidiary had made 200 of post-acquisition profits up to the latest balance sheet date, all of which had been retained, then the NCI at the latest balance sheet date would be 120 +20% of 200, which equals 160.

In method (2), you would have to be told what the fair value of the NCI at the date of acquisition was, because this amount is not derived from the subsidiary's financial statements.

You need to know what the NCI at the date of acquisition is in order to calculate goodwill. IFRS3 defines goodwill as the difference between two amounts (a) the aggregate of (i) the acquisition-date fair value of the consideration transferred, (ii) the amount of any NCI, and (iii) in a business combination achieved in stages, the acquisition-date fair value of the acquirer's previously-held equity interest in the acquiree; and (b) the net of the acquisition-date amounts of the identifiable assets acquired and the liabilities assumed (measured in accordance with IFRS 3).

Suppose, in the earlier example, that the parent company acquired 80% of the shares in the subsidiary for cash of 800. Then, in method (1), goodwill will be equal to 800 (fair value of consideration) plue 120 (amount at which NCI is measured) less 600 (fair value of identifiable assets less liabilities of subsidiary), that is, 320.

This is basically the same calculation as the more traditional approach that defined goodwill as the difference between the fair value of the consideration and the parent company's share of the net assets of the subsidiary.

However, if method (2) is used, you need to know the fair value of the NCI. Suppose that this is 185. Then goodwill will be calculated as 800 (fair value of consideration) plus 185 (NCI) less 600 (fair value of identifiable assets less liabilities of subsidiary), which equals 385.

Post-acquisition, under method (2), the NCI will be equal to the fair value at the date of acquisition plus the non-controlling equity holders' share of the subsidiary's retained post-acquisition profits, so in the example the NCI would be 185 + 20% of 200, equal to 225.

What if you are not told what the fair value of the NCI is at the date of acquisition? There is a way of approximating it: simply work out the implied value of 100% of the subsidiary's equity capital by "grossing up" the consideration given by the parent company, and work out the NCI as the difference between this and the consideration given by the parent company. Using the numbers in the example, if the parent company pays 800 for 80% of the subsidiary, this implies that the subsidiary as a whole is worth 1,000, so the NCI would be 200. However, this method is only an approximation, because, as IFRS3 points out, part of the consideration paid by the parent company reflects the benefits of gaining control of the subsidiary, and clearly this is something that the non-controlling equity shareholders will not have. So generally the fair value of the NCI will be less than this approximation.

Sorry that this is so complex - most people have to work through a lot of examples before the calculations really click.

EveT

hivizman wrote: »

The two approaches to measuring Non-Controlling Interest (NCI) in a business combination are (1) the proportion of the fair value of the net assets of the subsidiary attributable to the non-controlling equity holders - this is the traditional way of measuring NCI (or as it used to be called, "Minority Interest") - and (2) the fair value of the NCI determined directly.

wow thanks a mill for this, I printed it out and read through it, it is the new method I was mainly having problems with, Im going to go back to my examples having read this a couple of times and hopefully they will make more sense. I understand it when I am reading what you said, with simple examples, it makes sense, fingers crossed my question pack does now! thanks again

RT2010

EveT wrote: »

wow thanks a mill for this, I printed it out and read through it, it is the new method I was mainly having problems with, Im going to go back to my examples having read this a couple of times and hopefully they will make more sense. I understand it when I am reading what you said, with simple examples, it makes sense, fingers crossed my question pack does now! thanks again

Hey Eve

Was looking for a CAP2 FR question pack.. you have a soft copy of it by any chance?

Much appreciated if ya do.

EveT

RT2010 wrote: »

Hey Eve

Was looking for a CAP2 FR question pack.. you have a soft copy of it by any chance?

Much appreciated if ya do.

Hi there,

presume its consolidations you want? find attached!

RT2010

EveT wrote: »

Hi there,

presume its consolidations you want? find attached!

Thats great thanks a mill. Have FR left to repeat from CAP2 last year so trying to get some new question packs.

Many thanks

EveT

RT2010 wrote: »

Thats great thanks a mill. Have FR left to repeat from CAP2 last year so trying to get some new question packs.

Many thanks

no problemo! Good luck