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Hello all

As the title suggests is it possible to recognize non controlling interest based on profit sharing agreement?

Let me give you brief background to the arrangement:

A newly formed entity (“PropCo”), will be formed Group A into which Group A shall contribute all of its portfolio of properties in a specific jurisdiction. In exchange for Group A’s contribution of the Assets, Group A shall receive 100% of the common equity of PropCo. PropCo and Group A also enter into a master lease agreement (“MLA”) pursuant to which PropCo will lease the Assets to Group A.

Enters a Purchaser, referred to as a Purchaser.

Purchaser shall purchase from PropCo all right, title and interest in 49% of the Net Profit/Cash Flows of PropCo and PropCo shall secure and assign 49% of the Property Rent due under the MLA to Purchaser, for a period of 20 years for the Purchase Price pursuant to a profit sharing agreement.

Will this arrangement be accounted for as non controlling interest or a deferred obligation or a debt?

Not a joint arrangement?

Well the Group still controls PropCo so I am not sure we can establish joint control here.

JRSB wrote: ↑11 Oct 2021, 14:30 Not a joint arrangement?

If it were a joint arrangement, how would the accounting work?

OK - forget that!

I can't see that it's NCI as it's not a residual interest.

To me it's almost that the company are borrowing, secured against the property cash flows. Presumably there's a discount on the cash received now against expected flows over 20 years.

This is the whole point.

The transaction is in essence a borrowing transaction but the company wants to achieve equity accounting with it as the debt ratios are stressed right now. Hence it is being structured like this.

To me it's also debt as you have contractual obligation to deliver cash on the money received ('rent'). Plus, as JRSB noted, there is no residual interest for the Purchaser.

Well if the agreement is worded as though there is no obligation to deliver cash but it would be on discretion of PropCo to declare dividend. Would that change your view?

Then you would be more likely to classify this as equity (assuming no contractual repayment of the principal amount either). This page provides a neat overview on the distinction between debt and equity:

https://ifrscommunity.com/knowledge-bas ... vs-equity/

would the counterparty really enter into that arrangement? Why wouldn't the property owner repay all the profits to itself (upwards)?