Skip to content
Subject guides

Consolidation explained: control, goodwill and the non-controlling interest

The Summo Notes team10 min readUpdated August 2026
  • Classify first
  • Then a fixed sequence
  • Two ways to measure NCI
Consolidation explained header, two accountants working through a set of group accounts spread across a desk in an Australian office.

Consolidation presents a parent and its subsidiaries as one entity. Before you consolidate anything, classify the investment: control leads to consolidation, joint control or significant influence lead to the equity method, and anything less is just an investment. Once you are consolidating, the sequence is fixed and drills well. What actually varies is how goodwill and the non-controlling interest are measured at acquisition.

On this page
  1. Start one step earlier than you think
  2. The decision that comes first
  3. The sequence, once you are in it
  4. Where goodwill comes from
  5. The two ways to measure the non-controlling interest
  6. Eliminating the internal transactions
  7. Where this sits in your subject
  8. Make it automatic
  9. Questions people ask
  10. Keep going

The short version

  • Classify the investment before you do anything else. Control, joint control, significant influence and none of these each lead somewhere different.
  • Only control leads to consolidation. Joint control and significant influence lead to the equity method.
  • Once you are consolidating, the sequence never changes. Only the numbers do, which is why it drills so well.
  • Goodwill is what you paid above the fair value of what you actually bought.
  • There are two ways to measure the non-controlling interest, and they give different goodwill. Pick one and stay with it.
Jump to the checklist

Start one step earlier than you think

Most consolidation questions are lost before the consolidation starts.

The sequence itself is mechanical. Add the lines, fair value the net assets, strip out the internal transactions, split the equity. It never changes, which is exactly what you want in an exam: a fixed process you can drill until it is quick and hard to get wrong.

What varies is the step before it. You have to decide what kind of investment you are looking at, because only one of the answers leads to a consolidation at all.

The decision that comes first

Classifying the investmentControl means you consolidate the subsidiary in full. Joint control means you apply the equity method. Significant influence also means the equity method. If none of the three apply, the holding is carried as an ordinary investment and there is no consolidation.ControlConsolidate in fullEvery line of the subsidiary joins the parent’s.Joint controlEquity methodOne line, moving with your share of the profit.Significant influenceEquity methodSame treatment as joint control.None of theseHold it as an investmentNo consolidation, no equity method.
What each kind of investment makes you doA high-level illustration of the method, not a substitute for the standard.

Only the top row leads to a consolidation. That is the whole reason this decision comes first.

Control is the power to direct what the investee does and to get a return that varies with how it goes. Joint control is where decisions need the agreement of everyone sharing control. Significant influence is a say without a decision, typically a board seat or a real voice in policy.

Exam trap

The shortcut everyone reaches for is the percentage holding. It is a signal, not the test. A holding above half usually means control and a holding around a fifth to a half usually means significant influence, but a question that mentions voting agreements, board composition or contractual rights is telling you the arithmetic is not the answer. Read what the parent can actually decide.

The sequence, once you are in it

If it is control, the process is fixed. Confirm control, add the lines, fair value the net assets at acquisition and recognise goodwill, eliminate the intra-group items, then split the equity between the parent and the non-controlling interest.

The steps never change, only the numbers do. That is why this topic rewards drilling more than reading. Once the sequence is automatic a consolidation question becomes data entry, which frees your time for the parts that actually vary.

Two of them vary, and both sit at acquisition.

Where goodwill comes from

Goodwill is what you paid above the fair value of what you actually bought.

That is the sentence to hold. Everything else is working out the two sides of it.

The build-up

Goodwill = consideration + NCI + FV of prior interest − net identifiable assets

Read it as two halves. The first three terms are what the whole subsidiary was valued at: what you handed over, what the non-controlling interest is worth, and what any stake you already held is worth. The last term is the fair value of the identifiable assets and liabilities you got. The gap between them is goodwill.

Note that the net assets are at fair value at the acquisition date, not at their carrying amount in the subsidiary’s own books. Remeasuring them is a step in its own right, and skipping it moves the whole answer.

Goodwill is what you paid above the fair value of what you actually bought. Everything else is working out those two numbers.

The two ways to measure the non-controlling interest

Here is the part both study guides warn about and neither explains.

You get a choice at acquisition about how to measure the non-controlling interest, and the choice changes goodwill.

Measuring the non-controlling interestMeasuring the non-controlling interest at fair value produces full goodwill, which covers both the parent’s share and the non-controlling interest’s share. Measuring it at its proportionate share of the identifiable net assets produces partial goodwill, which covers the parent’s share only. Both are permitted and the choice is made at acquisition.NCI at fair valueNCI at its share of net assetsGoodwill covers the parent’sshare and the non-controllinginterest’s share.Goodwill covers the parent’sshare only.Full goodwillLarger goodwill, larger NCI.Partial goodwillSmaller goodwill, smaller NCI.
The two measurement choices, and what each does to goodwillA high-level illustration of the method, not a substitute for the standard.

Both are permitted. Neither is more correct than the other, and a question will usually tell you which one to use or give you the fair value of the non-controlling interest as a hint that it wants the first.

The error that costs a whole question

Choosing one method for goodwill and the other for the non-controlling interest. The two numbers come out of the same decision, so a mixed answer is internally inconsistent and every figure downstream of it is wrong. Write down which method you are using before you calculate anything, and check the non-controlling interest against it at the end.

Eliminating the internal transactions

A group cannot trade with itself and call it revenue.

So anything that happened between group members comes out: internal sales, balances owed between them, and profit sitting in inventory or an asset that has not been sold outside the group yet.

The test is whether the transaction left the group. If it did not, the profit has not been earned from the group’s point of view, however real it looks in the subsidiary’s own accounts.

Exam trap

Leaving intra-group transactions in is the most common consolidation error there is. You count the same revenue twice and carry profit that never left the group. Whenever a question tells you two group members have traded, strip the internal effect out before you go any further, not at the end as a tidy-up.

Where this sits in your subject

Must know
The classification decisionControl, joint control, significant influence, or none. It decides whether you consolidate at all, and reaching for consolidation when the equity method applies loses the whole question.
Should know
Goodwill and the NCI choiceThe build-up, the fair value remeasurement, and the two ways to measure the non-controlling interest. This is the part that actually varies between questions.
Worth a pass
The harder edgesChanges in ownership, step acquisitions and foreign subsidiaries. Worth knowing they exist and roughly what each does, and worth real hours only if your subject covers them.

Group accounting is the largest single topic in the CPA Program’s Financial Reporting subject, and a module of its own in the CA Program’s Financial Accounting and Reporting. In both it is described the same way: the most mechanical thing in the subject, which is exactly what you want from the biggest one.

Make it automatic

Before your exam

0 of 6 done

Six drills that turn the classification decision and the sequence into things you do without thinking. Progress saves in your browser.

Nice. That is the hard thinking done.

The first and fifth are the ones worth doing properly. Everything else on this page follows from them.

Questions people ask

When do I consolidate and when do I use the equity method?
Consolidate only when the parent has control. Joint control and significant influence both lead to the equity method, which puts a single line in the accounts rather than combining every line. If none of the three apply, the holding is carried as an ordinary investment.
Does a holding above 50 per cent always mean control?
Usually, but not always, and the percentage is a signal rather than the test. Control is about what the parent can actually decide and whether its return varies with the investee. A question that mentions voting agreements, board composition or contractual rights is telling you to look past the arithmetic.
What exactly is goodwill?
The amount paid above the fair value of the identifiable assets and liabilities acquired. It is the gap between what the whole subsidiary was valued at, including the non-controlling interest, and the fair value of what you can actually identify and measure.
Why are there two ways to measure the non-controlling interest?
Both are permitted, and they answer a different question about whose goodwill you are recognising. Measuring at fair value recognises goodwill attributable to the non-controlling interest as well as the parent. Measuring at a proportionate share of net assets recognises the parent's share only. The choice is made at acquisition and must be applied consistently.
Why do intra-group transactions have to be removed?
Because the group is being presented as one entity, and an entity cannot earn revenue from itself. If a transaction has not left the group, the profit has not been earned from the group's point of view, so it comes out along with the internal sales and balances.

Want the sequence already on a page?

Our Financial Reporting pack puts the consolidation and deferred tax methods on a page, with practice exams and worked solutions for the extended response. Your time goes on practice, not on making notes.

See the Financial Reporting pack

Keep going

Consolidation and deferred tax are the two anchor topics in the same subject, and both reward the same approach. See deferred tax explained for the other one, then the Financial Reporting study guide or the Financial Accounting and Reporting study guide for where each sits in the whole subject.