Non-Controlling Interests Accounting Under Ind AS

Non-controlling interests accounting under Ind AS

Introduction The International Accounting Standards Board (IASB) changed the term ‘minority interest’ to ‘Non-Controlling Interest’ (NCI) in 2008 in the International Financial Reporting Standards (IFRS). The change in terminology reflects the fact that an owner of a minority interest in an entity might control that entity and, conversely, that the owners of a majority interest in an entity might not control the entity. Therefore, NCI is This article aims to a more accurate description than minority interest of the interest of those –– Provide an overview of the accounting of owners who do not have a controlling interest in an entity. non-controlling interests under Ind AS. Indian Accounting Standards (Ind AS) are converged with IFRS and therefore, Ind AS 110, Consolidated Financial Statements defines NCI as equity in a subsidiary not attributable, directly or indirectly, to a parent. Ind AS 110 requires a parent to present NCI in the Consolidated Financial Statements (CFS) within equity, separately from the equity of the owners of the parent. For example, if a parent owns 80 percent of a subsidiary directly and the remaining 20 percent is owned by a third party, then in the parent’s CFS the 20 percent interest held by the third party is presented as NCI in that subsidiary (within equity). This is because existence of NCI in the net assets of a subsidiary does not give rise to a present obligation, the settlement of which is expected to result in an outflow of economic benefits from the group. It represents equity i.e. residual interest in the assets of the entity after deducting all its liabilities.

On the other hand, Accounting Standards (AS) use the term minority interest and not NCI. AS 21, Consolidated Financial Statements, defines minority interest as that part of the net results of operations and of the net assets of a subsidiary attributable to interests which are not owned, directly or indirectly through subsidiary(ies), by the parent. AS 21 prescribes that while preparing CFS a parent is required to identify and present minority interest separately from liabilities and the equity of the parent’s shareholders. Thus, under AS minority interest is not presented as part of equity. NCI can be categorised as:

• Present ownership interests that entitle their holders to a proportionate share of the entity’s net assets in liquidation (ordinary NCI)

• All other NCI (other NCI) e.g. equity components of convertible bonds or options under share-based arrangements, etc.

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Measurement of NCI and further losses are adjusted For example, the parent buys against the parent’s share, except shares from, or sells shares to, Ind AS 103, Business Combination where the minority has a binding NCI or the subsidiary issues new requires that for each business obligation to make good such shares or reacquires its shares. combination, where an acquirer losses. does not acquire 100 per cent of a As per Ind AS 110, transactions subsidiary, then the acquirer can • Potential voting rights and the that result in changes in elect on a transaction-by-transaction NCI proportion ownership interests while basis to measure ordinary NCI on As per the requirements of retaining control are accounted initial recognition either at: Ind AS 110, the determination for as transactions with equity holders in their capacity as • Fair value at the date of of control of an entity takes equity holders. As a result, no acquisition, which means that into account potential voting gain or loss on such changes goodwill, or the gain on a bargain rights that are substantive. is recognised in profit or loss; purchase, includes a portion However, Ind AS clarifies that instead, it is recognised in attributable to ordinary NCI; or NCI is generally based on current ownership interests because this equity. Also, no change in the • The holders’ proportionate corresponds to the economic carrying amounts of assets interest in the recognised amount interests of the parties. (including goodwill) or liabilities of the identifiable net assets of is recognised as a result of such the acquiree, which means that This includes in substance current transactions. goodwill, or the gain on a bargain ownership interest i.e. as a result The interests of the parent and purchase, relates only to the of a transaction that gives it NCI in the subsidiary are adjusted controlling interest acquired. access to the returns associated with an ownership interest. to reflect the relative change in This accounting policy choice relates In this case, the proportion their interests in the subsidiary’s only to the initial measurement of allocated to the parent and NCI is equity. As per Ind AS 110, any ordinary NCI. After initial recognition, determined by taking into account difference between the amount the option of measuring ordinary NCI the eventual exercise of those by which NCI are adjusted and at fair value is not available. potential voting rights and other the fair value of the consideration paid or received is recognised Measurement of other NCI derivatives that currently give the entity access to the returns directly in equity and attributed to The accounting policy choice associated with an ownership the owners of the parent. These available to ordinary NCI (as interest. principles also apply when a explained above) does not apply subsidiary issues new shares and to ‘other NCI’. Such instruments • Calculation of Earnings Per the ownership interests change are measured as prescribed by the Share (EPS) as a result. relevant Ind AS. For the purpose of calculating EPS • Non-reciprocal capital based on CFS, the entity would contribution: Practical application areas consider profit or loss attributable Sometimes an entity receives While preparing CFS, a parent may to the ordinary equity holders of amounts from shareholders in have to consider some practical the parent entity and if presented, the form of capital contributions, application areas while accounting profit or loss from continuing being either cash or other non- and presenting NCI. Some of the operations attributable to those monetary assets, which are significant areas are as follows: equity holders. non-reciprocal - i.e. no financial • Attribution of profit and losses The Ind AS Transition Facilitation or non-financial obligation exists. Group (ITFG) of the Institute As per Ind AS 110, an entity is This may happen, for example, of Chartered Accountants of required to attribute the profit or when an entity requires additional India (ICAI) in its recent bulletin, loss and each component of other financing or is in financial difficulty. Bulletin 111 also reiterated that comprehensive income to the Amounts might be received while calculating EPS, profit or owners of the parent and to the from all shareholders or only loss attributable to the parent NCI. Additionally, Ind AS requires certain shareholders. The non- entity refers to profit or loss of the an entity to allocate the losses reciprocal capital contributions consolidated entity after adjusting incurred by subsidiary between made by a parent to a non-wholly profit attributable to NCI. the parent and NCI even if it owned subsidiary should be allocated proportionately to NCI, results in a negative balance of • Sale/purchase of equity the NCI. Whereas under AS 21, if interest to/from NCI: After a i.e. they should be accounted the losses attributable to minority parent has obtained control of a for as transactions between interest in a subsidiary exceed the subsidiary, there may be a change shareholders, which have a direct minority interest in the equity of in its ownership interest in that impact on equity. the subsidiary, then such excess subsidiary without losing control.

1. Ind AS Transition Facilitation Group (ITFG) of ICAI issues Clarifications Bulletin 11 dated 1 August 2017

For example: Company X makes attributable to NCI would not be and the NCI. If an impairment loss non-reciprocal capital contribution recognised in the parent’s CFS. attributable to a NCI relates to of 100 to its subsidiary, Y, in However, in this case, goodwill goodwill that is not recognised in which it holds a 75 per cent attributable to NCI is included in the parent’s CFS, that impairment interest. The NCI in Y makes no the recoverable amount of the is not recognised as a goodwill capital contribution. As per NCI related CGU or group of CGUs. impairment loss. In such cases, accounting an amount of INR25 only the impairment loss relating Hence, while conducting is allocated to NCI and INR75 is to the goodwill that is allocated impairment testing of goodwill, in allocated to parent equity directly to the parent is recognised as a this case, the carrying amount of in equity in the CFS of X. goodwill impairment loss. goodwill allocated to such a CGU • Impairment testing of cash- or group of CGUs is grossed up to Presentation in the financial generating units with goodwill include the unrecognised goodwill statements and NCI attributable to the NCI. This In the parent’s CFS, as mentioned Ind AS 36, Impairment of adjusted carrying amount is then above, NCI are presented within Assets requires an entity to compared with the recoverable equity, separately from the equity of test goodwill acquired in a amount of the unit to determine the owners of the parent. Therefore, business combination each year whether the CGU is impaired. if there are NCI in more than one for impairment. The testing for This gross-up is not required if subsidiary, then those interests impairment involves comparing NCI were initially measured at fair are presented in aggregate in the the recoverable amount of a Cash value. CFS. In the parent’s consolidated Generating Unit (CGU) with the If a non-wholly owned CGU is statement of profit and loss, the carrying amount of the CGU. impaired, then impairment losses amount of profit or loss and total An entity may measure NCI at are allocated between the amount comprehensive income attributable their proportionate interest in attributable to the parent and to to owners of the parent and NCI the identifiable net assets of the NCI. Ind AS 36 requires an are shown separately; they are not the subsidiary (that is a CGU or entity to allocate the impairment presented as an item of income or group of CGUs) at the date of loss on the same basis as profit expense. acquisition. Therefore, goodwill or loss is allocated to the parent

The following illustration explains the disclosure Extract of Statement of Profit and Loss for the year ended 31 March 2017

Year ended Year ended Note 31 March 2017 31 March 2016 Profit attributable to owners of the company 5,848 3,738 NCI 19 376 219 Profit for the year 6,224 3,967

Year ended Year ended Note 31 March 2017 31 March 2016 Other comprehensive income attributable to owners of the 597 553 company NCI 19 27 22 Other comprehensive income for the year 624 576

Year ended Year ended Note 31 March 2017 31 March 2016 Total comprehensive income attributable to owners of the 6,445 4,291 company NCI 19 403 241 Total comprehensive income for the year 6,848 4.532

(Source: KPMG in India’s publication: Illustrative Ind AS consolidated financial statements – First-time adoption, March 2017 edition)

Disclosure requirements –– Dividends paid to NCI distributions being paid, or loans and advances being made Ind AS 112, Disclosure of Interests –– Accumulated NCI of the or repaid, to (or from) other in Other Entities requires that an subsidiary at the end of the entities within the group entity should disclose information reporting period. –– Nature and extent of protective that enables users of its CFS to • Summarised financial understand: information about subsidiaries: rights of NCI that can For each subsidiary that has NCI significantly restrict the entity’s • The composition of the group, and that are material to the reporting ability to access or use the • The interest that NCIs have in the entity, summarised financial assets and settle the liabilities group’s activities and cash flows. information about the assets, of the group e.g. Therefore, following disclosures liabilities, profit or loss and cash * Parent obliged to settle should be given: flows of the subsidiary that liabilities of a subsidiary enables users to understand before settling its own • Each material subsidiary with the interest that NCI have in liabilities, or NCI: The disclosure should the group’s activities and cash * Approval of NCI is required include for each of its subsidiaries flows has to be provided. That either to access the assets that have NCIs that are material information may include but would or to settle the liabilities of to the reporting entity. These not be limited to, for example, a subsidiary. In particular disclosures should enable current assets, non-current related to transfer of cash users of the CFS to understand assets, current liabilities, non- and dividends or other capital the interests that NCI have in current liabilities, revenue, profit distributions (e.g. in case the group’s activities and cash or loss and total comprehensive of capital and/or foreign flows. Materiality assessment income. This summarised exchange controls or other is important when identifying financial information should be the regulatory limitations). subsidiaries that NCI that are amounts before inter-company material to the reporting entity. A eliminations. Additionally, an entity would reporting entity would provide: need to disclose the carrying • Significant restrictions: An amounts in the CFS of the assets –– The name of the subsidiary entity is required to disclose and liabilities to which above –– The principal place of business the nature and extent of any restrictions apply. (and country of incorporation significant contractual or statutory • Statement of cash flows:In if different from the principal restrictions on an entity’s ability relation to above mentioned place of business) of the to access or use the assets and disclosure requirement, Ind subsidiary settle the liabilities of the group such as AS 7, Statement of Cash Flows –– The proportion of ownership specifically requires disclosure interests held by the NCI –– Restrictions on the ability of to include, together with the a parent or its subsidiaries to –– The proportion of voting commentary of management, the interests held by NCI, if transfer cash or other assets to amount of significant cash and different from the proportion of (or from) other entities within cash equivalent balances held by ownership interests held the group the entity that are not available for –– Guarantees or other use by the group. –– The profit or loss allocated to NCI of the subsidiary during the requirements that may restrict reporting period dividends and other capital

• Disclosure of significant • Restate all business combinations the amount by which the NCI is judgements: Ind AS 112 does that occurred after a particular adjusted and the fair value of the not clarify whether the NCI date of the first-time adopter’s consideration paid or received, disclosures should be given choice but before the date of and attribute it to the owners of at the subsidiary level or at a transition or the parent). subgroup level for the subgroup • Do not restate any business c. When there is loss of control of the subsidiary. The IFRS combinations prior to the date of over a subsidiary, account for it Interpretations Committee transition. in accordance with Ind AS and clarified that in the context of related requirements of Ind the disclosure objective of Ind The exemption for past business AS 105, Non-current Assets 2 AS 112 , materiality should combinations also applies to past Held for Sale and Discontinued be assessed by the reporting acquisitions of investments in Operations. entity on the basis of the CFS associates, interests in joint ventures of the reporting entity. In this and interests in joint operations Additionally, if a subsidiary is being assessment, a reporting entity in which the activity of the joint consolidated for the first time, then would consider both quantitative operation constitutes a business. NCI are recognised as part of the considerations (i.e. the size of Furthermore, the date selected initial consolidation adjustment. the subsidiary) and qualitative to restate previous business On the other hand, if a first- considerations (i.e. the nature combination applies equally for all time adopter elects to restate of the subsidiary). The approach such acquisitions. past business combinations in chosen by the reporting entity If a first-time adopter opts to avail accordance with Ind AS, then should best meet the disclosure the business combination exemption the balance of NCI related objective of the Ind AS 112 in then in such a case the balance of to all such restated business the circumstances. The IFRS NCI under AS is not changed other combinations would be determined Interpretations Committee than for adjustments made as part of retrospectively, taking into account observed that this judgement the transition to Ind AS. the impact of other elections made would be made separately for as part of the adoption of Ind AS. each subsidiary or subgroup that With respect to the business 3 has a material NCI. combinations that are not restated, NCI holding put options a first-time adopter should apply Sometimes NCI of an entity’s Key Ind AS 101 requirements the following requirements of Ind subsidiary are granted put options Ind AS 101, First-time Adoption of AS 110, in relation to accounting for that convey to those shareholders Indian Accounting Standards allows NCI, prospectively from the date of the right to sell their shares in that a first-time adopter to choose to not transition to Ind AS: subsidiary for an exercise price (fixed or variable) specified in the to apply Ind AS 103 retrospectively a. An entity should attribute option agreement. In the CFS, the to past business combinations i.e. the profit or loss and each put option written by the entity those transactions which occurred component of the OCI to the represents the group’s obligation before the date of transition to owners of the parent and to the to acquire one class of its own Ind AS. Additionally, it has been NCI, even if this results in the NCI non-derivative equity instruments provided that if an entity opts to having a deficit balance. restate any business combination to (shares in subsidiary) by delivering b. When the proportion of the comply with Ind AS 103, then such either cash, or a variable number of equity held by owners of the entity should restate all business a different class of its own equity parent and NCI changes (without combinations later than the date of instruments (shares in parent). loss of control), an entity should such business combination. In the absence of direct guidance adjust the carrying amounts of in Ind AS 32, Financial Instruments: Therefore, Ind AS 101 provides the owners of the parent and Presentation or 109, Financial following options for business NCI to reflect the changes in Instruments, we consider that parent combinations that occurred before their relative interests in the may elect an accounting policy the date of transition: subsidiary. Such transactions based on either of the approaches would be recognised directly in • Restate all business combinations provided in subsequent section. equity (i.e. difference between

2. IFRIC Update, September 2014, IFRS IC Foundation 3. Reference taken from KPMG in India’s publication: Financial Instruments: Application under Ind AS March 2017 edition

Approach 1 – Put option recognised the put option, on each reporting entity should also evaluate an separately as a derivative liability date, either in profit or loss or appropriate accounting treatment equity. for the corresponding impact. The shares issued by the subsidiary For example, one alternative to NCI holders are considered as In accordance with the principles could be to debit equity since equity instruments, being ownership of Ind AS 110, the other impact this represents a cost of its interests in the consolidated group of this transaction may be investment in subsidiary. The and the put option is recognised recognised on the basis of the equity shares held by NCI would separately. We consider that the NCI’s present access to the continue to be classified and entity may elect to apply one of the returns associated with the presented as equity instruments. following two accounting policies underlying shares (participation Subsequent changes in the fair for measurement of the put option in fair value changes and rights to value of the derivative liability liability: receive dividends). Thus, the NCI should be recognised in profit or holders would continue to receive • Recognise a financial liability loss. dividends on the shares held for the present value of the in subsidiary until the exercise Approach 2 – Classify shares held by exercise price of the put option: of the put option. However, the NCI together with the put option as In accordance with Ind AS 32, option is exercisable at a fixed financial liabilities the put option represents a price that is adjusted for any contractual obligation for the Under this approach, the entity may dividends previously paid and the entity to purchase its own equity apply the guidance in Ind AS 32 NCI holders cannot participate instruments for cash/another by considering all the contractual in the subsequent fair value financial asset. Therefore, the terms and conditions between the changes in their shares. This entity should recognise the group and the NCI holders. This indicates that the NCI does not present value of the amount would require analysing the shares have present access to all returns payable on exercise of the option in subsidiary held by NCI together associated with an ownership as a financial liability. with the put option written by parent interest in the shares. Therefore, in favour of NCI. On a combined The IFRS Interpretations the other impact of the put option analysis of these instruments, the Committee has considered the transaction should be recognised substance of the contractual terms issue of recognition of change in as a debit to NCI (anticipated states that there is a contractual the carrying amount of such a put acquisition method) in the CFS. obligation for the parent entity to liability and indicated that under • Recognise put options as deliver cash or a variable number of IFRS, companies could elect to derivative liabilities at FVTPL4: shares to the NCI holder at a future present such changes either in If the entity elects to apply this date, in exchange for the shares profit or loss or in equity. If the accounting policy, it is required held in the subsidiary. Therefore, the same interpretation were applied to account for put options shares held by NCI, together with under Ind AS, then the entity could separately as derivative liabilities the put option, effectively meet the elect and consistently adopt an measured at their FVTPL in definition of a financial liability and accounting policy for recognising the CFS. On initial recognition are recognised as such in the CFS. the change in the present value of of the derivative liability, the the amount payable on exercise of

Conclusion The concept of NCI under Ind AS has many new requirements. The article highlights some of the new concepts related to NCI accounting. The entities transitioning to Ind AS should consider the facts and circumstances of the transactions and the economic environment to deliberate the effect of new accounting requirements.

4. FVTPL - Fair Value Through Profit or Loss

Consider this

–– Currently, minority interest arising on consolidation is measured at proportionate share in the book values of the net assets of the subsidiary. Under Ind AS, minority interest (referred to as NCI) needs to be measured on the acquisition date at either their fair value or based on the proportionate share of the fair value of the acquired entity’s identifiable net assets. This choice can be applied on a case by case basis.

–– Ind AS 110 requires losses relating to subsidiaries to be attributed to NCI even if it results in a negative balance. Therefore, in such a case, NCI could be a debit balance.

–– The NCI in the balance sheet is classified as equity but are presented separately from the parent shareholders’ equity.

–– Profit or loss and Other Comprehensive Income (OCI) for the period are allocated between NCI and the shareholders of the parent.

–– An entity may write a put option in favour of NCI holders in an existing subsidiary which is exercisable only on the occurrence of uncertain future events that are outside the control of both parties to the contract. In this case, the entity should account for the put option only if the terms affecting the exercisability of the option are genuine.