CHAPTER 9: BALANCE SHEET – MEASUREMENT OF FINANCIAL HEALTH

CHAPTER 9: BALANCE SHEET – MEASUREMENT OF FINANCIAL HEALTH

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Of Minority Interest, Associates, & Joint Ventures
Minority Interest
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Of Minority Interest, Associates, & Joint Ventures
 
Although these three are related to the income statement, we will touch on these in the balance sheet chapter as we find it easier for readers to understand these concepts after they understand balance sheet as well.

These three refer to the relationship, or the degree of ownership, that one company (i.e. the parent company) holds over another company or other companies.
 
[1]. Minority Interest
 
A parent-subsidiary relationship is when the parent company either holds the majority stake in the subsidiary or has influence over the operational and financial decisions of the subsidiary. If the parent company owns a 100% stake in the subsidiary, the subsidiary will be known as a wholly-owned subsidiary. The parent company is usually referred to as the holding company.

In accounting, a parent needs to “include” the performance of the subsidiary, i.e. the financial statements, into the parent’s accounts as well. This is termed as “consolidation” in accounting language.

If the parent company owns the majority stake, but not 100% stake, in the subsidiary, then the other company will only be known as “subsidiary”. In this case, the scenario of “Minority Interest”, or non-controlling interest surfaces.

In TexCycle’s case, there is no Minority Interest as all: TexCycle’s subsidiaries are wholly owned by TexCycle, as disclosed in Note 15 in page 97.

The concept for minority interest is best explained by Figure 4.
 

 
As explained earlier, minority interest exists if the holding company does not hold 100% of a subsidiary. In this instance, profits generated by the subsidiary have to be allocated proportionately to the other shareholders based on shareholding.

Using Figure 4 as an example, Company X is a subsidiary of Company A, and Company B is a minority of Company X. Of the RM16 million recorded by Company X, Company A is not able to recognise the full amount, but has to allocate 20% of the RM16 million, which is RM3.2 million, as belonging to minority interest, i.e. Company B.

We will use the Axiata Group Bhd (“Axiata”) as reference for discussion. Table 6 shows the income statement with extracted 2016 financials from Axiata’s 2016 Annual Report.

The column for “Company” shows the performance of the holding company (i.e. Axiata alone), whereas the “Group” column shows the performance of Axiata group, after consolidating the performance of all its subsidiaries and also recognising the contribution of joint venture and associates, which we will discuss later.

From Axiata’s financials, the group earned RM657.158 million profits. However, of this amount, RM152.904 million belongs to shareholders of the subsidiaries that Axiata does not own 100% of the stake. Thus, the profit that belongs to Axiata’s shareholders is RM504.254 million.
 

Table 6: Extracted financial data from Axiata’s 2016 Statement of Comprehensive Income (in RM ‘000)
	Group	Company
Operating revenue	21,565,392	1,049,838
Operating costs
-depreciation, impairment and amortisation	(5,666,505)	(8,431)
-foreign exchange (losses)/gains	(85,342)	889,149
-domestic interconnect and international outpayment	(2,096,123)	–
-marketing, advertisement and promotion	(1,817,599)	(26,554)
-other operating costs	(8,074,312)	(146,398)
-staff costs	(1,564,710)	(113,131)
-other (losses)/gains -net	(68,161)	–
Other operating income – net	534,566	2,184
Operating profit before finance cost	2,727,206	1,646,657
Finance income	183,394	25,143
Finance cost excluding net foreign exchange losses on financing activities	(1,201,184)	(57,000)
Net foreign exchange losses on financing activities	(599,720)	(392,372)
Joint ventures – Share of results (net of tax)	(95,842)	–
Associates
-share of results (net of tax)	131,124	–
-loss on dilution of equity interest	(5,398)	–
Profit before taxation	1,139,580	1,222,428
Taxation and zakat	(482,422)	(19,126)
Profit for the financial year	657,158	1,203,302
Profit attributable to non-controlling interests	(152,904)	–
Profit attributable to owners of the Company	504,254	1,203,302

 
At the balance sheet level, the holding company will also consolidate all the assets and liabilities of the subsidiaries. Again, if the subsidiaries are wholly owned, then it is more straightforward.

However, if minority interest exists, the holding company still consolidates all the assets and liabilities of the subsidiaries. Table 7 shows selected financial information extracted from Axiata’s balance sheet.
 

Table 7: Extracted Group Financial Data from Axiata’s 2016 Statement of Financial Position (in RM ‘000)
Capital & Reserves Attributable to Owners of the Company
Share capital	8,971,415
Share premium	4,081,106
Reserves	10,528,131
Total equity attributable to owners of the Company	23,580,652
Non-controlling interests	5,039,552
Total equity	28,620,204

 
Axiata’s assets and liabilities include the assets and liabilities of all the subsidiaries, including wholly owned and partially owned. For partially owned entities, Axiata recognised a “Non-controlling interest” worth RM5,039.552 million under its Capital & Reserves, which means there is a total net asset worth RM5,039.552 million that belongs to minorities.

Next week, to conclude Chapter 9, we will discuss about Associates and Joint Ventures.
 

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