Italian law requires full consolidation of assets, liabilities, revenue and expenses even if the controlling company’s share in the affiliate is less than 100%.
The consolidation automatically means that net worth and financial results from minority interests are recorded in the consolidated statement, although according to book values on individual balance sheets, regardless of adjustments for consolidation differences. Even intra-company profits earned by the subsidiary for an amount less than 100% must be entirely eliminated, except the separation of the share to the majority from the share attributable to the minority.
The assets and liabilities of the subsidiary, including new intangible assets or alleged liabilities, are measured at a fair value of 100% at the time of purchase, regardless of the percentage of ownership, and regardless of the percentage of shares.
As a result the consolidation controls also relate to the minority interests. However Goodwill is determined and attributed solely on the share belonging to the majority as an excess of the purchase price on the % of equity at fair value. Any exceptions are stated in the IFRS 3 revised in 2008.
On the 10th of January 2008 the IASB issued a revised version of IFRS 3 (revised in 2008) Business combinations and IAS 27 (revised in 2008) Consolidated and Separate financial Statements of the parent company.
The application of these new documents is mandatory for the aggregation of companies accounted for in the financial statements beginning from or after the 1st of July 2009 (for annual reports with the closure coinciding with the calendar year, the first application will cover aggregations carried out after the 1st of January 2010).
In addition to the acknowledgment of 100% of fair value purchased assets and liabilities, the new standards also allow the registration of Goodwill from minorities.
The option of “full goodwill” is based on the entity’s theory and allows the buyer to recognize 100% of the goodwill from the acquired companies, rather than just the goodwill belonging to the majority.
Minority interests (non-controlling interests) are recognized in the net consolidated equity.
Company A pays 800 to acquire 80% of company B. The 100% of equity in the fair value is 600.
If A decides to apply the partial goodwill method, the calculation is as follows:
Partial Goodwill: 800-80% of 600 = 320
If A decides instead to apply the full goodwill method, the first thing to do is to estimate the 100% buying price of the acquired B.
Supposing that the mentioned price is 950, the calculation is as follows: Full Goodwill: 950 – 600 = 350
The fair value of 20% minority interests in B does not necessarily follow the rule of proportionality in relation to the price paid by A to acquire 80% due mainly to the control premium or possible minority discount.
In other words it rarely happens that the price for the acquisition at 100% of B is determined according to the following proportion:
80%: 800 = 100%: X
X = 1000
National and international standards, under the heading “consolidated net equity”, record the share of equity attributable to minority shareholders separately from that of majority shareolders under an entry termed “Capital and third party reserves”:
Group shareholders’ equity
+ Capital and third party reserves
= Shareholder’s equity of groups and third parties
National and International standards record minority interests’ profit share separately from that of the majority shareholders..
Net company profit attributable to:
• minority interests.
We use the example of Luxottica to illustrate the elimination of investment cost against net equity and the adjustment of the consolidation difference.