CFA Level II Exam · Intercorporate Investments

Consolidated Financial Statements and Non-Controlling Interest

Updated 7 October 2026 · Fact-checked

Consolidation combines the parent's and subsidiary's statements line by line when the parent controls the subsidiary. You add 100% of assets, liabilities, revenue and expenses, then show the outside owners' share as non-controlling interest (NCI). You also eliminate intercompany balances and unrealised profits so the group looks like one entity.

Understand Consolidated Financial Statements and Non-Controlling Interest

When a company controls another entity, IFRS 10 and US GAAP require consolidation. Control is based on power over the investee, exposure to variable returns, and the ability to use that power to affect those returns. Owning more than 50% of the votes usually indicates control, but it is not the test itself. Control can also come from contracts or other rights. The parent adds up 100% of the subsidiary's assets, liabilities, revenues and expenses, even if it owns only 70%.

Because the parent reports 100% but owns less, someone else owns the rest. That claim is non-controlling interest (NCI). It appears in equity on the balance sheet, separate from the parent's shareholders' equity. On the income statement, net income is split between the parent's owners and NCI. NCI's share of income is not an expense; it is an allocation of profit.

The acquisition method sets the starting point. At acquisition, the subsidiary's identifiable net assets are measured at fair value. Goodwill is the excess of consideration plus NCI over that fair value. Under IFRS you may measure NCI at fair value (full goodwill) or at its share of identifiable net assets (partial goodwill). US GAAP requires fair value for NCI, so it gives full goodwill.

Deals between group members must be removed. Intercompany sales, loans, interest and dividends are eliminated because the group cannot earn revenue from itself. If inventory sold within the group is still on hand at year end, the profit on it is unrealised and must be removed from inventory and income. If the subsidiary made the sale (upstream), the unrealised profit is usually shared with NCI. If the parent made the sale (downstream), it is usually charged fully to the parent.

Compare this with the equity method for significant influence (usually 20% to 50%). Equity method shows one line on the balance sheet and one on the income statement. Consolidation shows everything. Net income and parent equity are normally the same under both, but assets, liabilities, revenue, margins and leverage ratios differ. Also know variable interest entities (VIEs) under US GAAP, and the broader IFRS idea of structured entities. These are entities where control comes from exposure to returns and power over key decisions, not votes. The primary beneficiary (US GAAP) or the entity with control (IFRS) consolidates them.

Key formulas to remember

NCI on balance sheet (fair value method): NCI = NCI fair value at acquisition + NCI share of subsidiary net income since acquisition − NCI share of dividends; Under partial goodwill (IFRS option), the starting value is NCI % × fair value of identifiable net assets.
NCI share of net income: NCI income = NCI % × subsidiary net income (adjusted for fair value amortisation and any upstream unrealised profit); Parent's share = consolidated net income − NCI income.
Goodwill (full goodwill): Goodwill = consideration transferred + fair value of NCI − fair value of identifiable net assets; Partial goodwill uses NCI % × identifiable net assets instead of NCI fair value.
Unrealised profit in ending inventory: Unrealised profit = intercompany profit margin × inventory still held by the buyer; Remove from inventory and from consolidated income. Upstream: allocate NCI % of it to NCI. Downstream: charge it to the parent.
Consolidated sales with intercompany sales: Consolidated sales = parent sales + subsidiary sales − intercompany sales; Cost of goods sold is also reduced by the intercompany sales amount, adjusted for unrealised profit.
Consolidation vs equity method: Equity method: investment = cost + share of income − dividends; consolidation: 100% of line items; Parent net income is usually equal under both; ratios such as margins and debt-to-equity differ.

How to solve Consolidated Financial Statements and Non-Controlling Interest questions

Use this order for any consolidation or NCI item set. Pull data from the vignette and exhibits first, then calculate.

1Decide the method: control means consolidate, significant influence means equity method. Check the ownership %, voting rights, and any VIE or control clues.
2Note the parent's ownership % and compute NCI % = 100% − parent %.
3Find acquisition-date fair values and the NCI measurement choice (IFRS option, or US GAAP fair value). Compute goodwill if asked.
4Adjust subsidiary net income for fair value excess amortisation and unrealised intercompany profit, noting upstream or downstream.
5Compute NCI income, then NCI on the balance sheet: opening NCI plus its share of adjusted income minus its share of dividends.
6Eliminate intercompany sales, balances and dividends from the consolidated figures.
7Calculate any ratios asked for (margin, ROE, debt-to-equity) from the consolidated numbers and read the question stem for what is being compared.
8Check the sign and direction: does your answer make assets, income and NCI move the way the logic says?

Quickest way: Three-line NCI shortcut

When to use it: Use when the question asks only for NCI income or ending NCI and gives clean data.

Write NCI % and the subsidiary's adjusted net income, then multiply for NCI income.
Ending NCI = starting NCI + NCI income − NCI % × subsidiary dividends.
For goodwill or ratios, only compute what the options need. Compare options by rough size first to drop obvious wrong answers.

Common mistakes in Consolidated Financial Statements and Non-Controlling Interest

Consolidating only the parent's % share of the subsidiary's assets and income.
Students confuse consolidation with proportionate consolidation or the equity method.
Fix: Full consolidation always adds 100%. NCI then shows the outside share.
Treating NCI income as an expense that reduces consolidated net income.
It is subtracted on the way to income attributable to the parent.
Fix: Consolidated net income includes NCI. NCI is an allocation of it, not a cost.
Charging all unrealised profit to the parent regardless of who sold.
Students memorise one rule without the upstream/downstream split.
Fix: Upstream sale by the subsidiary: share the elimination with NCI. Downstream sale by the parent: parent bears it all.
Forgetting to reduce NCI by its share of dividends paid by the subsidiary.
Students focus on income and forget that dividends to NCI leave the group.
Fix: Ending NCI = beginning + share of income − share of subsidiary dividends.
Using the wrong goodwill basis for NCI.
IFRS allows two choices, while US GAAP allows one.
Fix: Read the vignette. Fair value of NCI gives full goodwill, proportionate share of net assets gives partial goodwill.
Saying equity method and consolidation give different net income.
Students see big differences in the statements and assume the bottom line moves.
Fix: Parent net income and equity are normally the same. Revenue, assets, liabilities and ratios differ.

Worked examples

Example 1

Parent P owns 80% of Subsidiary S. S sells goods to P (upstream). S's standalone net income is 500. This is before any consolidation adjustments, and it includes the profit S recorded on the intercompany sale. Ignore income taxes. No fair value amortisation applies. The intercompany sales were 200 at a cost of 140 to S. P still holds all of these goods at year end, so none have been sold outside the group. S paid no dividends. Questions: (1) What is the unrealised profit? (2) What is NCI income? (3) How does income attributable to P's shareholders from S compare with 80% of S's unadjusted 500?

Show the solution

Unrealised profit = 200 − 140 = 60. S booked this profit on its own books, but from the group's view it is not earned until the goods are sold outside the group. All the goods remain in P's inventory, so the full 60 is unrealised. Income taxes are ignored, so there is no tax effect on the 60.
S's standalone net income of 500 includes this 60, so it must be removed. Adjusted S net income = 500 − 60 = 440. The sale was upstream, so S's income is the figure adjusted. There is no fair value amortisation to deduct.
NCI % = 20%, so NCI income = 0.20 × 440 = 88. Without the adjustment it would have been 0.20 × 500 = 100.
P's share of S income = 0.80 × 440 = 352, compared with 0.80 × 500 = 400 unadjusted. Income attributable to P's shareholders from S falls by 48.
Check: the 60 elimination is shared 80% to P (48) and 20% to NCI (12). Then 400 − 48 = 352 and 100 − 12 = 88.

Answer: (1) 60; (2) 88; (3) P's share of S income is 352, which is 48 lower than the unadjusted 400.

Example 2

Company A buys 70% of Company B for 700. The fair value of B's identifiable net assets is 900. The fair value of the 30% NCI is 280. Under IFRS, A elects full goodwill. Questions: (1) Goodwill? (2) Initial NCI on the balance sheet? (3) Goodwill if A instead chose the proportionate share method?

Show the solution

Full goodwill = 700 + 280 − 900 = 80.
Initial NCI under full goodwill = fair value of NCI = 280.
Partial goodwill: NCI = 30% × 900 = 270.
Goodwill = 700 + 270 − 900 = 70.

Answer: (1) 80; (2) 280; (3) 70.

Exam tips

Read the vignette for ownership %, who sold in an intercompany deal, and whether the NCI choice is stated. These decide the answer.
Check whether the question asks about the consolidated group or the parent's shareholders. Their numbers differ by NCI.
For consolidation versus equity method comparisons, expect ratio questions. Consolidation raises assets and liabilities, so leverage rises and margins and ROA shift.
For VIE questions, look for who has power over key decisions and exposure to variable returns, not who holds the votes.
Small answers can be close in value. Recompute NCI separately for income and balance sheet to avoid mixing them.

Consolidated Financial Statements and Non-Controlling Interest in other exams

The same ground in other exams, if you are preparing for more than one or want another angle on it.

Consolidated Financial Statements and Non-Controlling Interest: frequently asked questions

How do I calculate non-controlling interest?

Start with NCI at acquisition, either its fair value or its share of identifiable net assets. Add NCI % of the subsidiary's adjusted net income and subtract NCI % of the subsidiary's dividends.

What is the difference between consolidation and the equity method?

Consolidation applies when the parent controls the investee and adds 100% of its line items. The equity method applies with significant influence and shows one investment line and one income line. Net income is normally the same, but ratios differ.

Which intercompany transactions are eliminated?

Sales and purchases, receivables and payables, loans and interest, and dividends within the group are eliminated. Unrealised profit in inventory or assets still held by the group is also removed.

What is a variable interest entity?

Under US GAAP, it is an entity whose equity investors lack sufficient equity at risk, or lack a controlling financial interest through their votes. The primary beneficiary consolidates it. That is the party with power over the activities that most affect the entity's performance, plus the obligation to absorb losses or the right to receive benefits that could be significant. IFRS reaches a similar outcome by applying its control model to structured entities.