F1 6.07 The Consolidated Statement of Profit or Loss: Part 4 Non-controlling interests

In this session we shall look at how the group’s profit or loss for the period is split between those that are attributable to the equity holders of the parent and those attributable to the non-controlling interests in the subsidiary.

Non-controlling interests

When we prepare a consolidated statement of profit or loss we add the parent company’s income and expenses to all of the subsidiary’s income and expenses, even though the parent might not own all of the share capital of the subsidiary.

Where the parent does not own all of the subsidiary, we must ensure that the users of the consolidated statement are not given the impression that all of the group’s profit for the period will go to the owners of the parent company.

We therefore calculate the group’s profit as seen in earlier sessions but then split that profit between:

• The profit attributable to the equity owners of the parent company
  • i.e. all of the parent company’s profits plus the parent’s share of the subsidiary’s profits
• The profit attributable to the non-controlling interests
  • i.e. the other owners’ share of the subsidiary’s profits

Calculating non-controlling interests

1. Start with the subsidiary’s profit for the period
2. Identify whether there were any unrealised profits held in the parent’s inventory at the period-end (nb. if the inventory is held by the parent it means that the profits made on the associated intragroup sale will have been made by the subsidiary)
   1. If there are unrealised profits included in the value of the parent’s inventories you should deduct the unrealised profit from the subsidiary’s profits
   2. If there are no unrealised profits in the parent’s inventories, no adjustment is required (this is also the case where there are unrealised profits held in the subsidiary’s inventory)
3. Multiply the adjusted profits by the percentage of the subsidiary’s ordinary shares that are not owned by the parent company – this figure is the non-controlling interests

Calculating the profits attributable to the equity holders of the parent

1. Start with the group’s profit for the period
2. Deduct the profit attributable to non-controlling interests – this is the profit attributable to the equity holders of the parent

Illustration 1: No unrealised profits in inventories

Pan Ltd owns 80% of the share capital of Echo Ltd. Pan Ltd also owns £200,000 of 5% debentures in Echo Ltd. During the year ended 31/12/2019, Echo Ltd sold goods to Pan Ltd for £100,000. None of these goods remained in Pan Ltd’s inventories at the year-end.

The two company’s statements of profit or loss for the year ended 31/12/2019 are as shown below.

The group revenue, cost of sales, finance income and finance costs are all calculated as before by combining Pan Ltd and Echo Ltd’s figures an deducting the intragroup sales and intragroup interest.

The consolidated statement of profit or loss is shown below, completed down to the profit for the period. You will not that the statement includes an additional section at the bottom which is yet to be completed.

We can now calculate the non-controlling interests.

The non-controlling interests of £16,000 can be entered in the statement. The profits attributable to the equity holders of the parent are the group’s profits for the period of £144,000 less those attributable to the non-controllable interest (£16,000). The statement can now be completed as shown below.

Illustration 2 Unrealised profits in inventories held by the parent

Theia Ltd owns 70% of the share capital of Eos Ltd. During the year ended 31/12/2019 Eos Ltd sold goods costing £200,000 to Theia Ltd for £300,000. Of these goods £60,000 were still held by Theia Ltd at the year ended 31/12/2019.

The parent and subsidiary’s statements of profit or loss are shown below.

Group revenue and cost of sales are calculated as shown below.

[NB. The unrealised profit on inventories are calculated as the profit of £100,000 made on the total intragroup sale (i.e. £300,000 less £200,000), multiplied by the portion of goods still held in inventory at the period end which was 0.2 (i.e. £60,000/£300,000). The unrealised profit is therefore £100,000 x 0.2 = £20,000]

The rest of the top part of the statement of profit or loss is therefore easy to complete as shown below.

To calculate the non-controlling interest we will start with the subsidiary’s profit for the year of £330,000. We will then deduct the unrealised profit on inventories held by the parent company of £20,000 leaving us with an adjusted profit of £310,000.

The adjusted profit of £310,000 is then multiplied by the percentage of the subsidiary not owned by the parent; i.e. 30% to give us the non-controlling interest of £93,000.

The last section of the consolidated statement can now be completed.

Question 2

L Ltd and M Ltd have a year ends of 30 June. L Ltd owns 90% of the share capital of M Ltd. In the year ended 30/06/2020, M Ltd paid dividends of £4,000 to its shareholders. In the same year, M Ltd sold goods that had cost it £20,000 to L Ltd for £30,000. Of these goods, L Ltd still held £9,000 of them at its year-end.

The two companies’ statements of profit or loss are shown below.

Prepare L Ltd’s consolidated statement of profit or loss for the year ended 30/06/2020.

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Illustration 3 Unrealised profits in inventories held by the subsidiary

Ares Ltd owns 60% of the share capital of Phobus Ltd. During the year ended 31/08/2020 Ares Ltd sold goods costing £6,000 to Phobus Ltd for £8,000. Of these goods Phobus Ltd still held goods that cost it £2,000 in its inventories at the year-end.

The statements of profit or loss for both companies for the year-ended 31/08/2020 are shown below.

Calculation of the group’s revenue and cost of sales are as follows:

[NB. The unrealised profit on inventories are calculated as the profit of £2,000 made on the total intragroup sale (i.e. £8,000 less £6,000), multiplied by the portion of goods still held in inventory at the period end which was 0.25 (i.e. £2,000/£8,000). The unrealised profit is therefore £2,000 x 0.25 = £500]

The consolidated statement down to profit for the period is therefore:

To calculate the non-controlling interests we will start with the subsidiary’s profits for the period of £16,600. We then consider whether there are any unrealised profits on inventories held by the parent company. In this example, there are unrealised profits but they are held by the subsidiary company so no adjustment is required. We will then multiply the profits of £16,600 by the portion of the subsidiary not owned by the parent; that is 40%.

The non-controlling interests are therefore £6,640 (£16,600 x 40%) which will be recorded in the statement and which enables the statement to be completed.

Question 3

N Ltd and O Ltd have year-ends of 30 September. N Ltd owns 60% of the share capital of O Ltd and also owns £100,000 of 7% debentures in O Ltd. During the year, N Ltd sold goods that cost it £60,000 to purchase to O Ltd for £80,000. Of these goods, L Ltd still held £10,000 of them at the year-end.

The companies’ statements of profit or loss for the year ended 30/09/2020 are shown below.

Prepare N Ltd’s consolidated statement of profit or loss for the year ended 30/09/2020.

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