Consider Company X with assets of Rs. 120 and liabilities of Rs. 220, and consequently a negative net worth of Rs. 100, which comprises of accumulated losses of Rs. 120 and share capital of Rs. 20. Company Y acquires 51% shares of Company X, directly from promoters, for a consideration of Rs. 25. Accordingly, Company Y would recognize in the consolidated financial statements (CFS) a net liability of Rs100, goodwill of Rs. 76 and a negative minority interest (MI) of Rs. 49. The question is how does Company Y account for the negative MI of Rs. 49?
View 1: The negative MI of Rs. 49 is reduced againstthe parent’s reserves in the CFS.
The author believes that it may not be appropriate to record the unabsorbed losses on MI at the date of acquisition in the parent’s reserves in CFS. Recording unabsorbed minority losses in the parent’s reserves in CFS would carry a presumption that the parent always owned the entity. This presumption is obviously not correct and hence this view is not tenable.
View 2: The negative MI of Rs. 49 is included in goodwill on acquisition
In accordance with paragraph 13 of AS 21, goodwill is determined as follows
(a) the cost to the parent of its investment in each subsidiary and the parent’s portion of equity of each subsidiary, at the date on which investment in each subsidiary is made, should be eliminated;
(b) any excess of the cost to the parent of its investment in a subsidiary over the parent’s portion of equity of the subsidiary, at the date on which investment in the subsidiary is made, should be described as goodwill to be recognised as an asset in the consolidated financial statements;
The parent’s portion of the equity at the date of acquisition should also include the MI losses (since the minority does not absorb it the parent will have to absorb it). Thus on the basis of the above MI losses should also be included in goodwill. The total goodwill should therefore be Rs. 125. This view seems an acceptable alternative.
View 3: The negative MI of Rs. 49 is included in MI
Paragraph 26 of AS 21 Consolidated Financial Statements states: “The losses applicable to the minority in a consolidated subsidiary may exceed the minority interest in the equity of the subsidiary. The excess, and any further losses applicable to the minority, are adjusted against the majority interest except to the extent that the minority has a binding obligation to, and is able to, make good the losses. If the subsidiary subsequently reports profits, all such profits are allocated to the majority interest until the minority’s share of losses previously absorbed by the majority has been recovered.” Paragraph 13(e) states: Minority interests in the net assets consist of: (i) the amount of equity attributable to minorities at the date on which investment in a subsidiary is made; and (ii) the minorities’ share of movements in equity since the date the parent subsidiary relationship came in existence.
Paragraph 26, prohibits the recognition of negative MI, unless there is a binding obligation by the minority to make good the losses. Thus no negative MI can be recognised in the CFS. However a careful reading of paragraph 13(e) suggests that losses at the date of acquisition relating to minority are attributable to minority.
Thus a negative MI can be recorded at the date of acquisition. However, losses subsequent to the acquisition should not be attributed to the MI.
View 4: The negative MI of Rs. 49 is ignored
It is not possible to ignore the negative MI, as the balance sheet would not tally. Hence this view is ruled out.
The author’s opinion is that View 2 & View 3 are appropriate under the circumstances.
