Corporate: Generally Accepted Accounting Principles and General Reserve

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Corporate Accounting III
Assignment 2
Question 1: What is the difference between direct and indirect NCI?
Under AASB127, the group is required to prepare the consolidation statement when parent entity acquires shares in the subsidiary. There are two parties who own shares in the subsidiary if it’s not a wholly-owned subsidiary consolidation. One is the parent entity while the other is non-controlling interest. Non-controlling interest (NCI) is defined as “the portion of the profit or loss and net assets of a subsidiary attributable to equity interest that are not owned, directly or indirectly through subsidiaries, by the parent” (Leo, et, al. 2009, p. 895).

The NCI can be classified as either direct (DNCI) or indirect (INCI).
Differences between them arise when there are multiple subsidiaries in the group.
DNCI refers to “an NCI that holds shares directly in a subsidiary” (Leo, et,al. 2009, p. 895).
INCI refers to “an NCI that has an interest in a subsidiary as a result of having an interest in the parent of that subsidiary” which means the ownership in the subsidiary is indirectly via the parent of the subsidiary (Leo, et, al. 2009, p. 895).

A subsidiary in which the NCI group owns direct ownership becomes the parent entity of another subsidiary; the same party will have an indirect NCI in that subsidiary. Importantly, indirect NCI exists only where, there is a DNCI in the immediate parent of that entity (Leo, et, al. 2009, p. 879). More specifically, when the subsidiary partially owned by the parent becomes parent of any other subsidiary; the non-controlling interest that is outside of the group is indirectly entitled to the proportion of shares in that subsidiary because non-controlling interest is treated as the equity participant under AASB 127.

Word count: 252

Question 2: Explain the difference in the calculation of the direct and indirect NCI. The calculation of non-controlling interest is based on the sequence of business acquisition because it impacts on the way we calculate the consideration transferred and the pre-acquisition equity at the acquisition date. DNCI receives a proportionate share of all equity recorded by the subsidiary while INCI receives a proportionate share of subsidiary’s post-acquisition equity only (Leo, et, al. 2009, p. 878). For example, given B Ltd the subsidiary of its immediate parent A Ltd, the proportionate share of B Ltd is eliminated in the pre-acquisition entry for A Ltd and the DNCI in B Ltd is given the rest of direct share. All the pre-acquisition equity of B Ltd is effectively allocated and none left for the INCI. In relation to Dividend, we need to calculate the “current year profit which is after any elimination of unrealised profits from intergroup transactions, and opening balance of retained earnings adjusted by a share of dividends paid and declared, and transfers to and from reserve in order to work out the DNCI ‘s share” (Leo, et, al. 2009, p. 884). On the other hand, INCI is allocated “a share of the current periods post-acquisition profits, opening balance of post-acquisition retained earnings, and transfer to and from post-acquisition reserves” (Leo, et, al. 2009, p.884). For intra-group transaction where dividends are paid or payable in the group, NCI share of equity should be adjusted to eliminate double accounting. Word count: 216

Question3: Why does the indirect NCI receive a share of only post-acquisition equity?
The main reason for the indirect NCI (INCI) limited to a share of post-acquisition equity only is to avoid double counting.
An INCI arises only when a partly owned subsidiary holds shares in another subsidiary. As long as there is an INCI in an entity, there must be a DNCI in the immediate parent of that entity and they are the same party of shareholders. The DNCI is entitled to a share of the net assets of the parent and one of the assets of the parent is the investment share in the subsidiary, which reflects the...
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