Minority Interest and Pre/Post-Acquisition Profits under AS 21

Understand Minority Interest and Pre/Post-Acquisition Profits

Key rules to remember

Minority interest

MI = Minority % × (Share capital + all reserves and surplus of subsidiary at balance sheet date)

Take the subsidiary's net assets at the carrying amounts in its financial statements, adjusted for items the question gives (proposed dividend, unrealised profit).

Cost of control

Goodwill / (Capital reserve) = Cost of investment − Parent % × (Share capital + reserves and profits at date of acquisition)

A positive figure is goodwill. A negative figure is capital reserve on consolidation.

Post-acquisition profit

Post-acquisition profit = Reserves and profits at balance sheet date − Reserves and profits at date of acquisition

If the subsidiary has a loss since acquisition, this figure is negative.

Parent's share in consolidated reserves

Consolidated reserves = Parent's own reserves + Parent % × Post-acquisition profit of subsidiary

Deduct the parent's share of post-acquisition losses. Adjust for unrealised profits if given.

Minority interest, two-part check

MI = Minority % × equity at acquisition + Minority % × post-acquisition profit

Use this as a cross-check of the one-step MI figure.

Dividend out of pre-acquisition profits

Parent's dividend received (pre-acquisition) is credited to Investment account, not to Profit and Loss

Consistent with AS 13. For consolidation, goodwill is the same whether you use the original cost and pre-dividend equity, or the reduced cost and post-dividend equity.

Bonus shares

Bonus issue does not change cost of control, MI or the total reserves; the capitalised reserve keeps its original pre- or post-acquisition character

Show the post-bonus capital and the reduced reserves in the balance sheet working. Treat the capitalised amount as it was before.

How to solve Minority Interest and Pre/Post-Acquisition Profits questions

1. 1Note the holding percentage of the parent and compute the minority percentage as 100% − parent %. Check the date of acquisition and the balance sheet date.
2. 2Prepare a table of the subsidiary's equity: share capital, each reserve, and Profit and Loss, at the date of acquisition and at the balance sheet date.
3. 3Find post-acquisition profit for each reserve as the balance sheet date figure minus the acquisition date figure. Adjust for dividend paid, bonus issue and any other items given.
4. 4Compute cost of control: cost of investment minus parent's share of equity at the date of acquisition. Label it goodwill or capital reserve.
5. 5Compute MI as minority % × total equity at the balance sheet date, and cross-check it with the two-part method.
6. 6Compute consolidated reserves as the parent's reserves plus the parent's share of post-acquisition profit of the subsidiary.
7. 7Draw the consolidated balance sheet: add like items line by line, show goodwill as an asset (or capital reserve in reserves), show MI separately, and eliminate the investment and any inter-company balances.
8. 8Show every working as a numbered note. Step marks are given for each working.

Quickest way: Four-column equity table method

Common mistakes in Minority Interest and Pre/Post-Acquisition Profits

• Taking the whole subsidiary profit into consolidated reserves.

  You forget that the parent owns only part of the subsidiary and that pre-acquisition profits belong to the cost of control.

  Fix: Take only the parent's share of post-acquisition profit into consolidated reserves. The minority's share goes to MI and the pre-acquisition portion goes to cost of control.

• Computing MI on share capital alone or on post-acquisition profit alone.

  MI feels like a profit item, so you ignore the minority's share of the pre-acquisition reserves and capital.

  Fix: MI is the minority's share of share capital plus all reserves and profits at the balance sheet date, both pre and post acquisition.

• Crediting the pre-acquisition dividend received by the parent to the consolidated Profit and Loss.

  You treat all dividend income as revenue income.

  Fix: Dividend paid out of pre-acquisition profits reduces the cost of investment. It is not income of the group. Dividends within the group are eliminated on consolidation.

• Treating bonus shares as new profit or as extra purchase.

  Bonus shares increase the share capital figure, so it looks like the equity grew.

  Fix: A bonus issue only moves reserves into share capital. Total equity does not change. Keep the pre- or post-acquisition character of the reserve that was capitalised.

• Using the balance sheet date reserves to compute cost of control.

  You use the figures that are easiest to find in the given balance sheet.

  Fix: Cost of control always uses the equity on the date of acquisition. Write that date next to the working.

• Forgetting to show MI separately and showing it inside reserves or liabilities.

  You are unsure where MI belongs in the balance sheet.

  Fix: AS 21 requires MI to be shown separately from liabilities and from the equity of the parent's shareholders.

Worked examples