ACCA Financial Reporting (F7) Practice Exam

In regards to goodwill, what does the non-controlling interest (NCI) represent?

1. The equity interest held by other shareholders not belonging to the parent company.

2. The total assets acquired in a merger.

3. The fair value of liabilities assumed in an acquisition.

4. The operating assets that the parent company will manage.

The correct answer is: The equity interest held by other shareholders not belonging to the parent company.

Non-controlling interest (NCI) represents the equity interest held by other shareholders who do not belong to the parent company in a subsidiary. This is important in the context of consolidated financial statements, as it reflects the portion of a subsidiary that is not owned by the parent company but is still part of the overall equity structure. When preparing consolidated financial statements, the parent must account for the interests of all shareholders, including those who are not part of the parent company. In this case, the correct answer highlights the essence of NCI, which is to indicate the stake that other shareholders have in a subsidiary’s equity. This is relevant for recognizing and attributing a portion of the subsidiary's profits and losses in the consolidated income statement and the equity in the consolidated balance sheet. The other choices focus on aspects unrelated to the definition of non-controlling interest. While total assets acquired in a merger, fair value of liabilities assumed, and operating assets managed by the parent are all essential for understanding an acquisition, they do not directly define what NCI represents within the context of consolidated financial reporting.