How starter kits meet IFRS – IAS 27 (part 3)
This series of blogs describes how SAP® BusinessObjectsTM Financial Consolidation, Starter Kit for IFRS has been configured to meet International Financial Reporting Standards (IFRS).
In our previous blogs, we have covered the following topics:
- Brief overview of SAP BusinessObjects Financial Consolidation, Starter Kit for IFRS (How Starter kits Meet IFRS requirements – Introduction)
- Presentation of consolidated financial statements according to How Starter Kits meet IFRS – IAS 1 and How Starter Kits meet IFRS – IAS 7
- Translation of a foreign entity’s financial statements as part of the consolidation process following the principles set out in How Starter Kits meet IFRS – IAS 21
- Current consolidation process (How starter kits meet IFRS – IAS 27 (part 1))
- Loss of control (How starter kits meet IFRS – IAS 27 (part 2))
In this blog, we will carry on our analysis of IAS 27 with a focus on equity transactions.
Changes in a parent’s ownership interest in a subsidiary that do not result in a loss of control are accounted for as equity transactions. The carrying amounts of the controlling and non-controlling interests should be adjusted to reflect the changes in their relative interests in the subsidiary. Any difference between the amount by which the non-controlling interests is adjusted and the fair value of the consideration paid or received should be recognized directly in equity and attributed to the owners of the parent.
IAS 27 does not give detailed guidance on how to measure the amount to be allocated to the parent and non-controlling interest to reflect a change in their relative interests in the subsidiary. Main issues regard goodwill and accumulated OCI.
IAS 27 states that no change in the carrying amounts of the subsidiary’s assets (including goodwill) should be recognized as a result of such transactions. But it does not specify whether the allocation of goodwill between parent and non-controlling interests should be modified.
In the Basis for conclusions on IFRS 3, the Board explains that the adjustment to the carrying amount of non-controlling interests, that will be recognized when the acquirer purchases shares held by non-controlling interests, will be affected by the choice of measurement basis for non-controlling interests at acquisition date (fair value or proportionate share of net assets). It means that, when parent acquires non-controlling interests that have been initially measured at their fair value, goodwill is included in the carrying amount of non-controlling interests that is transferred to group equity.
With partial disposals, where the parent disposes part of its interest to non-controlling interest without losing control, the question remains whether part of the parent’s goodwill should be transferred to NCI or not. Interpretations published by professional bodies differ. Some consider that goodwill is part of the transfer whereas others think that no goodwill has to be allocated to NCI (which means that principles apply differently whether the equity transaction is an increase or a decrease in the parent’s ownership interest).
Accumulated other comprehensive income
The question is: should accumulated other comprehensive income (for example: exchange differences on foreign subsidiaries) be part of the transfer between group and non-controlling interest in case of an equity transaction?
As regards partial disposals, IAS 21 requires that “the entity shall re-attribute the proportionate share of the cumulative amount of the exchange differences recognized in other comprehensive income to the non-controlling interests in that foreign operation” (§ 48.C). IAS 39 has been amended in the same manner regarding hedging reserves.
On the other hand, IFRS are silent when it comes to an increase in parent’s ownership interest. SFAS 160 NonControlling Interests in Consolidated Financial Statements, which is supposed to be the US GAAP equivalent of IAS 27, is clearer:
“A change in a parent’s ownership interest might occur in a subsidiary that has accumulated other comprehensive income. If that is the case, the carrying amount of accumulated other comprehensive income shall be adjusted to reflect the change in the ownership interest in the subsidiary through a corresponding charge or credit to equity attributable to the parent (§ 34)”.
As a consequence, we assume that accumulated other comprehensive income has to be re-allocated between group and NCI according to their new respective shares, regardless of whether there is an increase or a decrease in the parent’s ownership interest.
In the starter kit
Configuration principles are the following:
- The amount to be transferred from group’s equity to NCI (or conversely) is calculated on the basis of the subsidiary’s opening equity after deduction of dividends paid on the period (but relating to prior benefits).
- Accumulated OCI is part of the transfer.
- This transfer is recognized on flow F92 ‘Increase / decrease in interest rate’.
- If need be, the amount of goodwill to be transferred from NCI to group (or conversely depending on the interpretation of IAS 27), is declared by manual journal entry on flow F92
In the next blog, we will focus on How starter kits meet IFRS – IAS 28