Page 17 - CIMA May 18 - MCS Day 2 Suggested Solutions

CIMA MAY 2018 – MANAGEMENT CASE STUDY

Non‐controlling interest is stated at its fair value at the date of acquisition for inclusion in
the calculation of goodwill. It is defined and explained in more detail in the following
section.

The net assets acquired need to be adjusted to their fair values at the date of acquisition.
The most frequent adjustment required is to adjust land and buildings from their carrying
amount (normally accounted for using the cost model) to their fair value.

3. Non‐controlling interest represents the equity in a subsidiary not attributable to the parent.

For example, if Menta owned 80% of the equity shares in a subsidiary, the remaining 20%
interest held by outside parties would be referred to as the non‐controlling interest. This
group of shareholders have the right to their share of any surplus assets upon winding up
and have voting rights and entitlement to receive a dividend if declared. However, they will
always be outvoted by Menta if they vote in a different way at a shareholders’ general
meeting. The amount of the non‐controlling interest at any reporting date is included as
equity in the consolidated statement of financial position. In Menta’s case, it appears that
all subsidiaries are wholly‐owned as there is no reference to non‐controlling interest in the
consolidated financial statements.

4. Associates – IAS 28 Accounting for Investments in Associates and Joint Ventures (IAS 28)

defines an associate as an entity over which an investor has significant influence. IAS 28
defines significant influence as the ability to participate in the financial and operating policy
decisions, but without exercising control. It is normally indicated by having an equity
shareholding of between 20% ‐ 50% in another entity.
As an associate is not controlled by the investor, goodwill cannot be calculated and
recognised in the consolidated financial statements. Instead, such an investment is ‘equity
accounted’ by accounting for the initial cost of the investment, plus the investor’s share of
post‐acquisition retained earnings. It is classified as a non‐current asset in the consolidated
statement of financial position.

5. Joint arrangements – IFRS 11 Joint Arrangements (IFRS 11) defines a joint arrangement as
an arrangement over which two or more parties have joint control. Joint control is
established by having a contractual agreement between two or more parties so that there
will be unanimous decision‐making in relation to the joint arrangement. There are two
forms of joint arrangement as follows:
 joint operation – where joint operation parties have joint control of the assets and
liabilities arising from the joint arrangement. In effect, each joint operation party
records transactions it enters into on behalf of the joint arrangement, and there is
periodic ‘settling up’ of any amounts due to/from the joint operation parties.
Normally, there would be a current account balance outstanding between joint
operation parties in the financial statements of each party.
 joint venture – this is characterised by the setting up of a separate entity under joint

control, and each party has an interest in the net assets of that separate entity, based
upon their respective shareholding in that entity. An interest in a joint venture is
equity accounted in the consolidated financial statements in the same manner as for
an interest in an associate.

104 KAPLAN PUBLISHING