Download FREE ACCA STUDY MATERIALS from "https://www.ACCAGlobalBox.com” The consolidated Sea financial position oon 7 eo Ce ae 9 Acquisition of subsidiary during its accounting period Introduction ‘This chapter introduces the hase procedures required in consolidation and ives a formal step plan for carrying outa statement of nancial position ‘consolidation. This step procedure shouldbe useful to you asa starting guide {or answering any question, but remember that you cannot rely on itto answer the question fr you Each question must be approached and answered on Its own metits. The ‘amination team often put small extra or dfferent problems in because, 2 {thay ae alvays reminding students, ts not possible to ote-ear’ ‘consolidation. ‘The method of consolidation shown hare uses schedules for workings (cetained earnings, non-contolng intrest et) rather than the ledger accounts used in some oer tts. This is because we bev that ledger accounts aad stugents to ‘eam’ te consolation journals without thinking about what they are doing ~ alvays a dangerous practice in consolidation questions. “There are plenty of questions inthis chapter - work through all of them carefully. www.ACCAGIobalBox.com 121Study guide ‘M4 The concepts and principles of groups and consolidaled financial statements (@)__| Explain why itis necessary to eliminate intra-group transactions 2 (i) Explain why it is necessary to use fai values forthe consideration for an 2 Investment in a subsidiary together withthe far values ofa subsidiry's identiiable assets and liabilities when preparing consolidated financial statements D2 __ Preparation of consolidated financial statements including an associate (@) | Prepare a consolidated statement of financial postion fora simple group 2 (parent and one subsidiary and associate) dealing wth pre and post acquisition profits, non-controling interests and consolidated goodwill (0) | Explain and account for other reserves (eg share premium and revaluation 1 surplus) (@ Account forthe effects in the financial statements of intra-group tracing (@) | Account forthe effects of fir value adjustments (including their effect on consolidated goodwil) to: (i) _Depreciating and non-depreciating non-current assets (il)_Inventory| (ii) Monetary liabitties (iv) Assets and lialities not included in the subsidary's own statement of financial poston, including contingent assets and labilties (| Account for goodwill impairment 2 () | Desoribe and apply the required accounting treatment of consolidated 2 goodwill 1 IFRS 10: Summary of consolidation procedures MESES ns 01 oun asic procedres tor repan consolidated aril statements 1.1 Basic procedure ‘The financial statements ofa parent and its subsidiaries are combined on a line-by-line together like tems of asses, lables, equity, income and expenses. ‘The following steps are then taken, in order that the consolidated financial statements should show financial information about the group as it it was a single entity. (a) The carying amount of the parent's Investment in each subsidlary and the parent's portion of ‘equity of each subsidiary are eliminated or cancelled, sis by adding (b) _Non-controlling interests inthe net income of consolidated subsidiaries are adjusted against ‘group income, to arrive at the net income attributable tothe owners ofthe parent. (©) Non-controlling interests inthe net assets of consolidated subsidiaries should be presented separately in the consolidated statement of financial position, aided statement of financial psn Fen Reperng 30x, corr iDownload FREE ACCA STUDY MATERIALS from "https://www.ACCAGlobalBox.com” Other matters to be dealt with include: (@) Goodwill on consolidation should be dealt with according to IFRS 3 (b) Dividends pad by a subsidiary must be accounted for IFRS 10 states that all intragroup balances and transactions, and the resulting unrealised profits, should be eliminated in full. Unrealised losses resulting from intragroup transactions should also be eliminated unless cost can be recovered (IFRS 10: 886). This will be explained later in tis chapter. 1.2 Cancellation and part cancellation ‘The preparation ofa consolidate statement of financial position, in very simple form, consists of two procedures: {@) Take the indviual accounts ofthe parent company and each subsidiary and eancel out tems which appear as an asset in one company and aliablity or equity in another. (0) Add together al the uncancelled assets and lables throughout the group lems requiring cancellation may include: {@) The asst ‘shares in subsidiary companies’ which appear in the parent company's accounts wil be matched withthe fability ‘share capita’ inthe subsidiaries’ accounts, (b) There may be intra-group trading within the group. For example, $ Co may sell goods on credit to P Co. P Co would then bea receivable inthe accounts ofS a, while § Co would bea payable in the accounts of P Co 1.3 Example: cancellation Park Co regulary sells goods to its one subsiciary company, Suyin Co, which it has owned since Suyin o's incorporation. The statement of financial postion ofthe two companies on 31 December 20X6 are siven below. ‘STATEMENT OF FINANCIAL POSITION AS AT 31 DECEMBER 20x6 Park Co Suyin Co $ s Assets Non-current assets Property, plant and equipment 35,000 45,000 Investment in 40,000 $1 shares in $ Co at cost 40,000 75,000 Current assets Inventories 16,000 12,000 Trade receivables: Suyin Co 2,000 -— oe Other 6,000 9.000 ‘Cash and cash equivalents 4,000 Total assets 700,000 6000 Equity and labilties Equity 40,000 $1 ordinary shares - 40,000 70,000 $1 ordinary shares 70,000 - Retained earnings 16,000 19,000 6,000 59,000 Current abies Bank overdraft 3,000 Trade and other payables: Park Co 2.000 Trade and other payables: Other 14,000 2,000 Total equity and liabilities {00,000 000 Required Prepare the consolidated statement of financial position of Park Co at 31 December 20X6. statement of financial posit it www ACC Alene Besseig dt The comaSolution The canceling items are (2) Park Co's asset ‘investment in shares of Suyn Co ($40,000) cancels with Swyin Co's equity ‘share capita (40,000) (0) Park Co's asset ‘rade receivables: Suyin Co’ ($2,000) cancels with Suyin Co's liblty "rade and ater payables: Park Go’ ($2,000) ‘The remaining assets and liabilties are added together to produce the following consolidated statement of financial position, PARK CO ‘CONSOLIDATED STATEMENT OF FINANCIAL POSITION AS AT 31 DECEMBER 20X8 Assets $ s ‘Non-current assets Property, plant and equipment 80,000 Current assets Inventories 28,000 Trade receivables 16,000 Cash and cash equivalents 4,000 44,000 Total assets 24.000 Equity and labittes Equity 70,000 $1 ordinary shares 70,000 Rotained earings 705,000 Current abilities Bank overdraft 3,000 Trade and other payables 16,000 19,000 Total equity and labilties {24.000 Notes Park Co's bank balance isnot netted off with Suyin Co's bank overdrat. To offset one against the ‘other would be less informative and would conflict with the principle that assets and lables sould not be netted off 2 The share capital in the consolidated statement of financial positon isthe share capital of the parent company alone. This must always be the case, ne matter how complex the consoldation, because the share capital of subsidiary companies must always be a wholly canceling tem. 1.4 Part cancellation ‘An item may appear inthe statements of financial position ofa parent company and its subsidiary, but not atthe same amounts. (2) The parent company may have acquired shares in the subsidiary at a price greater or less than their nominal (or ‘par’ value, The asset will appear inthe parent company's accounts at cost, white the ability will appear inthe subsidiary's accounts at nominal value. This rases the issue of ‘goodwill, wnich is delt with later inthis chapter. (b) Even if the parent company acquired shares at par value it may not have acquired all the shares ofthe subsidiary (so the subsidiary may be only party owned). This raises th issue of non- controlling interests, which are also dealt with later inthis chapter, aided statement of financial psn Fen Reperng 30x, corr iDownload FREE ACCA STUDY MATERIALS from "https://www.ACCAGlobalBox.com” (0) The int company trading balances may be out of step because of goods or cash in transit (4) One company may have issued loan stock of which a proportion only is taken up by the other company. The following question illustrates the techniques needed to deal wit items (c) and (4) above, The procedure is to cancel as far as possible. The remaining uncancelled amounts will appear inthe Consolidated statement of financial position, Toan stock wil appear as 2 lability ofthe group. balances on intra-group accounts represent goods or cash in transit, which will pear in the consolidated statement of financial postion. f cancelation The statements of financial posttion of Paula Co and of Its subsidaty Shen Go have been made up to 30 June. Paula Co has owned all the ordinary shares and 40% ofthe loan stock of Shen Co since ts incorporation ‘STATEMENT OF FINANCIAL POSITION AS AT 30 JUNE PaulaCo Shen Co s s Assots Non-current assets Property, plant and equipment 120,000 100,000 Investment in Shen Co, at cost £80,000 ordinary shares of $1 ezch 80,000 $20,000 of 12% loan stock in Shen Co 20,000 20,000 Currentassets Inventories 50,000 60,000 Trade receivables 40,000 30,000 CCurrent account with Shen Co 18,000 ‘Cash and cash equivalents 4,000 712,000 Total assets 382,000 Equity and iabities Equity Ordinary shares of $1 each, fully paid Retained earnings 795,000 Non-currentlabiltes 10% loan stock 75,000 12% loan stock Current abies Trade and other payables 47,000 Taxatlon 416,000 (Current account with Paula Co 62,000 Total equity and liabilities The difference on current account arises because of goods in transit Required Prepare the consolidated statement of financial position of Paula Co. statement of financial posit it www ACC Alene Besseig dt The comaPAULA CO ‘CONSOLIDATED STATEMENT OF FINANCIAL POSITION AS AT 30 JUNE $ Assets Non-current assets Property, plant and equipment (120,000 + 100,000) 220,000 Current assets Inventories (50,000 + 60,000) 110,000 Goods in transit (18,000 - 12,000) 6,000 Trade receivables(40,000 + 30,000) 70,000 Cash and cash equivalents (4,000 + 6,000) 10,000 Total assets 416,000 Equity and iabities Equity Ordinary shares of $1 each, fully paid (parent) 400,000 Retained earnings (95,000 + 28,000) 123,000 223,000 Non-current liabilties 10% loan stock 75,000 412% loan stock (50,000 x 60%) 30,000 105,000 Current abies ‘Trade and other payables (47,000 + 16,000) 63.000 Taxatlon (18,000 + 10,000) 25,000 Total equity and liabilities 716,000 Note especially how: (@) The uncancelled loan stock in Shen Co becomes a lability ofthe group () The goods in transit is the difference between the current accounts ($18,000 $12,000) (©) The investment in Shen Co's shares is cancelled against Shen Co's share capital 2 Non-controlling interests MES inne conoiate statment of nani postion ts necessary to estngish non-ontling interests ‘from those net assets attributable to the group and financed by shareholders’ equity. 2.1 Introduction It was mentioned earlier that te total assets and lables of subsidiary companies are included in the Consolidated statement of financial postion, even in the case of subsidiaries which are only partly owned. [A proportion ofthe net assets of such subsidiaries in fact belongs to investors from outside the group (non-controting interest). IFRS 9 allows two alternative ways of calculating non-controling interest inthe group statement of financial psiton. Non-controling interest can be valued at: {@) Its proportionate share of te fir value ofthe subsidiary's net assets; or (b) Full (or fait) value (usually based on the market value ofthe shares held by the non-controling Imeres) (IFRS 3: B44) aided statement of financial psn Fen Reperng 30x, corr iDownload FREE ACCA STUDY MATERIALS from "https://www.ACCAGlobalBox.com” You are required tobe able to apply both ofthese methods in Financial Reporting, The exam question will tell you which method to use. If you ae required to use the ‘fll (or fair) value’ method, then you will be iven the share price or told what the fair value ofthe non-contrlling interest is. You will normally be required to use the fair value method. 2.2 Procedure (@) Aggregate the assets and liailties in the statorent of financial position ie 100% Perfect Co + 100% Superior Co irrespective of how much Perfect Co actualy owns. This shows the amount of net assets controlled by the group. (©) Share capital is that of the parent only. (©) Balance of subsidary's post-acquisition reserves are consolidated (ter canceling any intra-group items). (4) Calculate the non-controlng interest share ofthe subsidiary'snet assets (share capital plus reserves). ‘The following example shows non-contolling interest calculated a its proportionate share of subsidiary’s net assets. 2.3 Example: non-controlling interest Perfect Co has owned 75% of the share capital of Superior Co since the date of Superior Co's incorporation. Their latest statements of financial position are given below. Perfecto Superior Co s 8 Assets Non-current assets Property, plant and equipment 30,000 $1 ordinary shares in Superior Co at cost Current assets Total assets Equity and tabities Equity $1 ordinary shares Retained earnings 706,000 Current abies 20,000 Total equity and labiltes 125,000 Required Prepare the consolidated statement of financial postion, Solution All of Superior Co's net assets are consolidated despite the fact that the company is only 75% owned. The amount of net assets attributable to non-controlling interests is calculated as follows. 8 Non-contralling share of share capital (25% x $40,000) 10,000 Non-contralling share of retained earnings (25% x $10,000) 2,500 a 500 0 Superior Co's share capital of $40,000, $10,000 is included in the figure for non-controllng interest, \while $30,000 is cancelled with Perfact Co's asset Investment in Superior Co ra statement of financial posit it www ACC Alene Besseig dt The coma‘The consolidate statement of financial position can now be prepare. $ $ Assets Propery plant and equipment 5,000 Current assets 20,000 Total assets 765,000 Equity and lebities Enutyatribtable to owners of the parent Share capital 0.000 Retaines earnings (25,000 + 75% x $1,000)) 32500 112500 Non-contoling intrest 12,500 725,000 Current ites 40,000 Total equity and abies 75,000 Exam focus ‘The Examiner's reports from September 2017, December 2017, March 2018 and June 2018 all highlighted point that some candidates are incerecty using proprionateconslidtion, Remember ‘o aggregate the substi’ assets an ities In fll and then causing te non controling interest ete he minority share 3 Dividends paid by a subsidiary When a subsidiary pays a dividend during the year the accounting treatment s not dificult. Suppose Subsidiary Co, a 80% subsidiary of Parent Co, pays a dvidend of $1,000 on the last day of its accounting period, Its total reserves before paying the dividend stood at $5,000, (2) $400 ofthe ividend is paid to non-contrlling shareholders. The cash leaves the group and will ‘not appear anywhere in the consolidated statement of financial position (b) The parent company receives $600 of the dividend, debiting cash and crediting profit or loss. This will be cancelled on consolidation, (©) The remaining balance of retained earings in Subsidiary Co's statement of rancial positon {$4,000) willbe consolidated in the normal way. Te group's share (60% x $4,000 = §2,40) wll be included in group retained earnings inthe statement af financial position; the non-cortraling Interest sare (40% x $400 = $1,600) i creed tothe non-contoling interest account inthe statement of financial poston 4 Goodwill arising on consolidation MESEEWD oodwit isthe excess of tne amount transferred pls the amount of noncontroling intrest over the fr vale ofthe et ast ofthe subi, 4.1 Accounting To begin with, we will examine the entries made by the parent company in its own statement of financial position when it acquires shares. \When a company Parsley Co wishes to purchase shares in a company Sage Co it must pay the previous ‘owners of those shares. The mst obvious form of payment would bein eash. Suppose Parsley Co purchases all 40,000 $1 shares in Sage Co and pays $60,000 cash tothe previous shareholders in consideration. The entries in Parsley Co's books would be: DEBIT —_ Investment in Sage Co at cost $60,000 CREDIT Bank $60,000 aided statement of financial psn Fen Reperng 30x, corr iDownload FREE ACCA STUDY MATERIALS from "https://www.ACCAGlobalBox.com” However, the previous shareholders might be prepared to accept some other form of consideration. For ‘example, they might accept an agreed number of shares in Parsley Co, Parsley Co would then issue now shares inthe agreed number and allot them tothe former shareholders of Sage Co. This kind of deal might be attractive to Parsley Co since it avolds the need fora heavy cash outlay. The former shareholders of ‘Sage Co would retain an indirect interest in that company’s profitability via thelr new holding in its parent company. Continuing the example, suppose that instead of $60,000 cash the shareholders of S Co agreed to accept ‘one $1 ordinary share in P Co for every two $1 ordinary shares in § Co. P Co would then need to issue and allot 20,000 new $1 shares. How would tis transaction be recorded in the books of P Co? ‘The former shareholders of Sage Co have presumably agreed to accept 20,000 shares in Parsley Co because they consider each of those shares to have a value of $3, Tis gives us the following method of recording the transaction in Parsley Co's books. DEBIT Investment in Sage Co $60,000 CREDIT Share capital $20,000 Share premium $40,000 ‘The amount which Parsey Co records in its books as the cost ofits investment in Sage Co may be more or less than the carying amount ofthe assets it acquires. Suppose that Sage Co inthe previous example has nil reserves and nil abilities, so that its share capital of $40,000 is balanced by tangible assets with a carrying amount of $40,000. For simplicity, assume that the carrying amount of Sage Co's asses is the ssame as their market or fair value Now when the directors of Parsley Co agree to pay $60,000 fora 100% investment in Sage Co they must believe that, in adition to its tangible assets of $40,000, Sage Co must also have intangible assets worth $20,000. This amount of $20,000 paid over and above the value ofthe tangible assets acquired is called ‘goodwill arising on consolidation Following the normal cancellation procedure, the $40,000 share capital in Sage Co's statement of financial position could be cancelled against $40,000 of tne “Tnvestment in Sage Co’ in the statement of financial position of Parsley Co. This would leave a $20,000 debit uncancelled in the parent company's accounts ‘and this $20,000 would appear in the consolidated statement of financial position under the caption Intangible non-current assets: goodwill rising on consoldation 4.2 Goodwill and pre-acquisition profits Up to now we have assumed that Sage Co had nil retained earnings when its shares were purchased by Parsley Co. Assuming instead that Sage Co had earned profits of $8,000 in the period before acquisition, ts statement of financial position just before the purchase would ook as follows. s Total assets 48,000 Share captal Retained earnings It Parsley Co now purchases all he shares in Sage Coit will acquire total assets worth $48,000 at a cost ‘of $60,000, Clearly inthis case Sage Co's intangible assets (goodwill are being valued at $12,000. it ‘should be apparent that any earnings retained by the subsidiary prior to its acquisition by the parent company must be incorporated inthe cancellation process so as to arrive ata figure for goodwill arising ‘on consolidation. In other words, not only Sage Co's share capital, but also its pre-acquisition retained earings, must be cancelled against the asset Investment in Sage Co’ inthe accounts of the parent company. The uncancelled balance of $12,000 appears in the consolidated statement of financial positon. ‘The consequence of this s that any pre-acquisition retained earnings of a subsidiary company are not aggregated withthe parent company's retained earnings in the consolidated statement of financial position. The figure of consolidated retained earnings comprises the retained earnings ofthe parent statement of financial posit it www ACC Alene Besseig dt The comacompany plus the post-acquisition retained earnings only of subsidiary companies. The post-acquisition retained earnings are simply retained earings now less retained earnings at acquisition, ‘The subsidiary may also have share premium or revaluation surplus balances atthe acqulsttion dat, ‘These will be brought into the goodwill calculation along witn other pre-acquisition reserves, Any post acquisition mavement on these balances will be spit between group and NCI. 4.3 Example: goodwill and pre-acquisition profits Sing Co acquired the ordinary shares of Wing Co on 31 March when the draft statements of financial position of each company were as follows. SING CO ‘STATEMENT OF FINANCIAL POSITION AS AT 31 MARCH s Assets Non-current assets Investment in 50,000 shares of Wing Co at cost 80,000 ‘current assets 40,000 Total assets 720,000 Equity and labities Eauty Ordinary shares 75,000 Retained earings 45,000, Total equity and fables 20,000 wing co ‘STATEMENT OF FINANCIAL POSITION AS AT 31 MARCH Curent assets 60,000 Eauly 50,000 ordinary shares of $ each 50,000 Retained earnings 410,000 80,000 Required Prepare the consolidated statement of financial postion as at'34 March. Solution The technique to adopt here is to produce a new working: ‘Goodwill. proforma working is set out below. Goodwill $ $ consideration vantered K Naas acquired as represented by Ordinary share canta x Stare premium x Retained earings on azquistion X % ood X Agpyn tit our example the woking wil ok het : ; Consideration wastered 20,000 Nt asesacqured as represents by Ordinary share capa 50.000 Retained earnings 0 aqution 10.000 (60,000) Goodwill 20,000 nied sateen of nna pestn Fen Pern a30x. Corr eeeDownload FREE ACCA STUDY MATERIALS from "https://www.ACCAGlobalBox.com” SING CO CONSOLIDATED STATEMENT OF FINANCIAL POSITION AS AT 31 MARCH s Assets Non-current assets Goodwill rising on consolidation (iN) 20,000 ‘Current assets (40,000 + 60,000) +100,000 Total assets 420.000 Equity and liabilities Ordinary shares 75,000 Retained earnings 45,000 Total equity an liabilities 20,000 4.4 Goodwill and non-controlling interest Now let us look at what would happen it Sing Co had obtained less than 100% of the shares of Wing Co. It Sing Co had paid $70,000 for 40,000 shares in Wing Co, the goodwill working would be as follows: $ Consideration transferred 70,000 Non-controliing interest (60,000 x 20%) 12,000 Net assets acquired (60,000) Goodwill 22,000 4.5 Non-controlling interest at fair value IFRS 8 glves entities the option of valuing non-contollng Interest (NCI) a fal value (para. 844) The thinking behind ths is that the NCI also owns some ofthe goodwill in the subsidiary, and that valuing NCI atts share of net assets does not show this goodwill IFRS 3 suggests that the closest approximation to flit value willbe the market price ofthe shares held by non-controling shareholders just before acquistion by the parent (para. B44) Continuing our example above, we will assume thatthe market price of the shares was $1.25. The ‘goodwill calculation will then be as follows: s Consideration transferred 70,000 Fair value of NCI (10,000 x $1.25) 12,500 Not assets at acquisition (60,000) Goodwill 22,500 Goodwill (total $22,500) is $500 higher than goodwill caloulated measuring NCI a its share ofthe net assets ofthe subsidiary. This $500 represents the goodwill attributable tothe NCI 4.6 Non-controlling interest at year end \Where the option is used to value non-controlling interest at fair value, the goodwill attributable tothe NCI will lso be added to the NCI atthe year end, The most straightforward way to calculate this is to start with the fair value of the NCI at acquisition and add the NCI share of post-2cquistion retained earnings. This is lustated in the following worked example 4.7 Worked example Pumpkin Co acquired 75% of the shares in Sesame Co on 1 January 20X7 when Sesame Co had retained ‘earings of $16,000. The market price of Sesame Co's shares just before the dat of acquisition was $1.60, Pumpkin Co values NCI at fair value, Goodwill is nat impaired. statement of financial posit it ovo ACC AaeRI Berri Te como‘The statements of financial position of Pumpkin Co and Sesame Co at 31 December 20X7 were as follows: Pumpkin Co Sesame Co § § Property, plant and equipment 60,000 50,000 Shares in Sesame Co 68,000 = 28,000 50,000 Current assets 52,000 35,000 780,000 15,000 Share capital ~ $1 shares 100,000 50,000 Retained earings 70,000 25,000 770,000 75,000 Current abilities 10,000 10,000 720,000 15,000 Required Prepare the consolidated statement of financial position of the Pumpkin Co Group. 4.8 Solution ‘CONSOLIDATED STATEMENT OF FINANCIAL POSITION : Assets Property plant and equipment (60,000 + 50,000) 110,000 Goodwill (W1) 23,000 Current asets (52,000 + 35,000) 87,000 Total assets 20,000 Equity and labities Equly attributable to the owners of Pumpkin Co Share capital 100,000 Retalned earnings (W2) 77,500 17500 Nol (W3) 221500 Total equity 200,000 Current iabilties (10,000 + 10,000) 20,000 220,000, Workings + Goodwit Group $ Consideration transterred 68,000 Fale value of NCI (12,500 x $1.60) 20,000 Net assets of Sesame Co at acquisition (60,000 + 15.000) 65,000) Goodwill 23,000 2 Retained earnings Pumpkin Co Sesame Co $ $ Per statement of financial position 70,000 25,000 Less pre-acauisition (15,000) 10,000 Group share of Sesame Co (10,000 x 75%) 7,500 Group retained earnings 7,500 nied sateen of nna pestn Fen Pern a30x. Corr eeeDownload FREE ACCA STUDY MATERIALS from "https://www.ACCAGlobalBox.com” 3 NClatyear end 8 Ncl at acquisition 20,000 ‘Share of post-acquisition retained earnings (10,000 > 25%) 2,500, 22.500 4.9 Effect of non-controlling interest at fair value You can see from the above example that the use of the fir value option increases goodwill and non- controling interest by the same amount. That amount represents goodwill attributable tothe shares held by non-controlling shareholders. Its not necessarily proportionate to the goodwill attributed to the parent ‘The parent may have paid proportionately more to acquire a controlling interest. If NCI was valued at share ‘of net assets, goodwill and NCI inthe example above would be as follows: W1 Goodwill, : Considered transferred 68,000 NI ((60,000 + 18,000) » 26%) 16,250 Net assets of Sesame Co at acquisition (50,000 + 1,000) (85,000) 79,250 W9 Nol at year end Nel at acquisition Share of post-acquisition retained earnings ‘Compare these with goodwill and NCI in te solution above and you wil see that both have been reduced by $3,750 the goodwill attrioutabe to the NCI. So whether NCI is valued at share of net assets or at fir value, the statement of financial postion wil stil balance Exam focus rou ‘The option to value non-controling interest at far value is allowed by IFRS 3, but Its ust an option. Companies can choose to adopt tor value non-contrlling interest a share of net assets Inthe exam you will probably be directed to apply the far value option. Ifyou are required to use the fair value option, the FR examining team has stated that there are two possible options: (1) You may be given the share price ofthe subsidiary just before acquisition, (2) You may be told that the non-controling intrest is valued at a certain amount, In the exam, the consoldation question wil tll you which method to use. It wil stat ether: + this the group policy to value the non-controling interest at ful (or fait) value’ or + ‘tis the group policy to value the non-controling interest at its proportionate share of the (fait value of the) subsidiary's identifiable net assets You are more likely tobe tested on non-contralling interest at fll fal) value 4.10 Impairment of goodwill ‘Goodwill arising on consolidation is subjected to an annual impairment review and impairment may be expressed as an amount or a a percentage. The double entry to rite off the impairment is: DEBIT Group retained earnings CREDIT Goodwill However, when NCI is valued at fair value the goodwill inthe statement of financial position includes goodwill attributable tothe NCI. In this case the double entry will retlect the NCI proportion based on thelr shareholding as follows, DEBIT Group retained earnings CREDIT Goodwill DEBIT Non-controling interest statement of financial posit it www ACC Alene Besseig dt The comaIn our solution above in Section 4.8 the NCI holds 25%. Ifthe total goodwil of $23,000 was impaired by 20% the double entry for this would be: 8 $ DEBIT Retained earnings 3.450 CREDIT Goodwill 4,600 DEBIT Non-controling interest 1,150, Nl atthe year-end would then be $21,350. 4.11 Gain on a bargain purchase Goodwill rising on consolidation is one form of purchased goodwill. It should be capitalised in the consolidated statement of financial position and reviewed for impairment every year. Goodwill arising on consolidation isthe difference between the cost of an acquisition and the value ofthe subsidiry's net assets acquired. This difference can be negative: the aggregate ofthe far values of the separable net assets acquired may exceed what the parent company paid for them, This is often referred to. negative goodwill. IFRS 3 refers to it asa ‘gain on a bargain purchase’ (|FRS 10: para 34). In this situation (2) Anentty should first re-assess the amounts at which It has measured both the cost ofthe combination and the acquire's identifiable net assets. This exercise should identity any errors. (&) Any excess romaining should be recognised Immediately In profit or loss. 4.12 Forms of consideration The consideration paid bythe paentfor he shares inthe subsidiary cn ak ferent forms and this wil affect he calelaton of goodwil, Here are some examples 4.12.1 Contingent consideration ESE) FAs 3 equres recognition o all contingent consideration, measured at rv, atthe aoquistion date Contingent consideration is of the acquirer to transter aditional assets or equity interests to the former ‘owners ofan acquiree as part ofthe exchange for control ofthe acquiree if specified future events occur ‘or conditions are met”. However, contingent consideration also may ge the acquirer the right tothe return of previously transferred consideration if specified conditions are met. (IFRS 3: Appencix A) IFRS 8 requires that all contingent consideration, measured acquisition date (IFRS 3: para. 39). alr value, Is recognised atthe ‘The acquirer may be required to pay contingent consideration in the form of equity or ofa debt instrument ‘or cash. A debt instrument should be presented In accordance with IAS 32 Flnancial Instruments: Presentation. Contingent consideration can also be an asset, if the consideration has already been transferred and the acquirer nas te right o require the return of some of tif certain considerations are met IFRS 9 sets out the treatment according to the circumstances (@) Ifthe change in far value is due to additional information obtained that affects the position at the acquisition date, goodwill sould be re-measured. (&) tthe change is due to events which took place ater the acquiston date then: {) Account under IFRS 9 Financial Instruments If the consideration isin the form of a financial instrument (such as loan notes) (il) Recount under IAS 37 Provisions, Contingent Liabilities and Contingent Assets i the consideration isin the form of cash (ii) Equity instruments are not re-measured. elt statement of nancial poston, Fen Ferg. aI2.0%. com ikDownload FREE ACCA STUDY MATERIALS from "https://www.ACCAGlobalBox.com” 4.12.2 Deferred consideration ‘An agreement may be made that part of the consideration for the combination will be paid at a future date This consideration will therefore be discounted to its present value using the acquiring entity's cost of capital Example ‘The parent acquired 75% of the subsidary’s 6Om $1 shares on t January 20X6. It paid $3.50 per share and agreed to pay 2 further $108m on 1 January 20X7, ‘The parent company's cost of capital ls 8% In the financial statements forthe year to 31 December 20XS the cost af the combination wil be $m 0m shares x 75% ~ $3.60 210 Deferred consideration 108m x 11.08 100 Total consigeraion 310 |AL31 December 20X6 $8m willbe charged to finance costs, being the unwinding ofthe discount on the deferred consideration. The deferred consideration was discounted by $8m to allow forthe time value of money. At 1 January 20X7 the full amount becomes payable. Exam focus a ‘The examination for September 2017 had a question which included deferred consideration which needed tobe discounted, and then in consolidation unwinding of part of the discount. 4.12.3 Share exchange ‘The parent has acquired 12,000 $1 shares in the subsidary by issuing 5 of its own $1 shares for every 4 shares in the subsidiary. The market value ofthe parent company’s shares is $6. Cost ofthe combination: s 12,000 x 5/4 x $6 90,000 Note that this erelted to the share capital and share premium ofthe parent company as follows. Debit Greott Investment in subsidiary 90,000 ‘Share capital ($12,000 x 5/4) 16,000 ‘Share premium ($12,000 x 5/4 x 5) 75,000 4.12.4 Expenses and issue costs Expenses of the combination, such as lawyers and accountants fees are written off as incurred. However, IFRS 3 requires thatthe costs of issuing equlty are treated as a deduction from the proceeds ofthe equity issue (IFRS 3: para, 63). Share issue costs will therefore be debited to share premium. Issue costs of financial instruments are deducted from the proceeds ofthe financial instrument, 4.13 Consolidation adjustments [At the date of acquisition the parent recognises the assets, labilties and contingent iabiltes of the subsidiary at thelr far values atthe date when controls acqulre. It may be that some of these assets or co lables haa not previously been recognised by the acquire For instance, the subsidiary may have tax losses brought forward, but had not recognised these as an asset because it could not foresee future profits against which they could be offset. If the tax losses can now be utlised by the acquirer they willbe recognised as an Identifiable asset and included inthe goodwill calculation, statement of financial posit it www ACC Alene Besseig dt The coma5 Non-controlling interest at fair value ‘The daft statements of financial position of Ping Co and Pong Co on 30 June 20X8 were as follows. ‘STATEMENT OF FINANCIAL POSITION AS AT 30 JUNE 20X8 Ping Co Pong Co 8 § Assets ‘Non-current assets Property, plant and equipment 50,000 40,000 20,000 ordinary shares in Pong Co at cost 30,000 80,000 Current assets Inventories 3,000 8,000 Owed by Ping Co 10,000 Trade receivables 16,000 7,000 Cash and cash equivalents 2,000 - 21,000 25,000 Total assets Fo7,000 000 Equity and liabilities Equity Ordinary shares of $1 each 45,000 Revaluation surplus 12,000 Retained earings 26,000 83,000 Current abies (Owed to Pong Co 8,000 - Trade and other payables 40,000 7,000 18,000 7,000 Total equity and liabilities {07,000 000 Ping Co acquired its investment in Pong Co on 1 July 20X7 when the retained earings of Pong Co stood at $6,000. The egreed consideration was $30,000 cash and a further $10,000 on 1 July 20X8. Ping Co's cost af capital is 7%. Pong Co has an internally-developed brand name ~ Pongo’ ~ which was valued at {$5,000 at the date of acquisition. There have been no changes inthe share capital or revaluation surplus of Pong Co since that date. At 30 June 20X@ Pong Co had invoiced Ping Co for goods to the value of $2,000 ‘and Ping Go had sent payment in full but tis had not been received by Pong Co, ‘There is no impairment of goodwill, Itis group policy to value NCI a ful fair value. At the acquisition date the NCI was valued at $9,000. Required Prepare the consolidated statement of financial position of Ping Co as at 30 June 20X@, nied sateen of nna pestn Fen Pern a30x. Corr eeeDownload FREE ACCA STUDY MATERIALS from "https://www.ACCAGlobalBox.com” Calculate goodwill Goodwill Group $ Consideration transferred (W2) 98,794 Fair value of NCI 9,000 Net assets acquired as represented by: Orainary share capital 25,000 Revaluation surplus on acquisition 5,000 Retained eamings on acquisition 6,000 Intangible asset- brand name (41,000) Goodwill 8.734 This goodwill must be capitalised inthe consolidated st 2 Consideration transferred ent of financial position Cash pala Fale value of deferred consideration (10,000 x 1/(1.07°)) 38,734 “Note thatthe deferred consideration has been discounted at 7% fortwo years (1 July 20X7 to 1 ily 20X8), However, at te date of the current financial statements, 30 June 20XB, the discount for one year has unwound. The amount ofthe discount unwound is: 8 (10,000 « 11.07) - 8,734 612 0 this amount will be charged to finance costs in the consolidated financial statements and the deferred consideration under liabilties will be shown as $9,346 (8,734 + 612) 3 Calculate consolidated reserves Consolidated revaluation surplus 8 Ping Co 12,000 Share of Pong Co's post acquisition revaluation surplus E000 i Consolidated retained earnings Ping Pong s s Retained earnings per question 26,000 28,000 Less pre-acauisition (6,000) Discount unwound finance costs (612) 22,000 ‘Share of Pong: 80% x $22,000 47,600 22,988 4 Cateulate non-controling interest at year end ; Fair value of NCI 9,000 ‘Share of post-acquisition retained earings (22,000 x 20%) 4.400 73.400 137 non www AC CAI Retard Te comtdtd stoma of ancal pst5 Agree current accounts Pong Co has cash in transit of $2,000 which should be added to cash and deducted from the amount owed by Ping Co, Cancel common items: these are the current accounts between the two companies of $8,000 each 6 Propare the consolidated statement of financial position, PING CO CONSOLIDATED STATEMENT OF FINANCIAL POSITION AS AT 30 JUNE 20X8 s s Assets ‘Non-current assets Property, plant and equipment (50,000 + 40,000) 90,000 Intangible assets: Goodwill (W1) 6.734 Brand name (W1) 5,000 Current assets Inventories (3,000 + 8,000) 11,000 Trade receivables (16,000 + 7,000) 23,000 ‘Cash and cash equivalents (2,000 + 2,000) 4,000 Total assets 739,734 Equity and tables Equity Orainary shares of $1 each 45,000 Revalation surplus (W3) 12,000 Retained earnings (W3) 42,988 ict (wa) Current abies Trade and other payables (10,000 + Deferred consideration (W2) Total equity and tabiltes 000) Exam focus nut ‘The FR examining team has stated that twill usually examine the goodwill calculation in which non- controling intrest i stated at far value, so make sure you understand how to do ths. 6 Intra-group trading MESEIEWD ipv-ccup train can give ae to unrealised prot nich elias on consaidaton 6.1 Unrealised profit ‘Any receivablepayable balances outstanding between the companies are cancelled on consolidation. No further problem arses if ll such intra-group transactions are undertaken at cost, without any mark-up for profi However, each compary in a group is separate trading entity and may wish to treat other group ‘companies n the same way as any other customer. In this case, a company (Say Apple Co) may buy ‘goods at one price and sell them ata higher price to another group company (Banana Co). The accounts ‘of Apple Co will quite properly include the profit earned on sales to Banana Co; and similarly Banana Co's aided statement of financial psn Fen Reperng 30x, corr iDownload FREE ACCA STUDY MATERIALS from "https://www.ACCAGlobalBox.com” statement of financial postion will nclude inventories at ther cost to Banana Co, ie a the amount at which they were purchased from Apple Co This 25 rie to two problems: (@) Although Apple Co makes 2 profit as soon ast sells goods to Banana Co, the group does not make sale or achieve a profit until an outside customer buys the goods from Banana Co. (&) Any purchases from Apple Co which remain unsold by Banana Co atthe year end wil be included in Banana Co's inventory. Their value in the statement of financial positon will be their cost to Banana Co, which isnot the same as thelr cost to the group. ‘The objective of consolidated accounts is to present the financial position of several connected companies, as that of a single entity, the group. This means that in a consolidated statement of financial position the ‘only profits recognised should be those earned by the group in providing goods or services to outsiders and similarly, inventory inthe consolidate statement of financial position should be valued at cost tothe group. ‘Suppose that a parent company Snow Co buys goods for $1,600 and sell them to a wholly owned ‘subsidiary Stark Co for $2,000. The goods are in Stark Co's inventory atthe yearend and appear in Stark Co's statement of financial position at $2,000. In this case, Snow Co will record a profit of $400 in its individual accounts, bt from the group's point of view the figures are Cost $1,600 External sales nil Closing inventory at cost $1,600 Profivloss nil It we add together the figures for retained earnings and inventory in the individual statements of financial position of Snow Co and Stark Co the resulting figures for consolidated retained earnings and consolidated inventory will each be overstated by $400. A consolidation adjustment is therefore necessary as follows: DEBIT —_—_Group retained earnings, CREDIT Group inventory (statement of financial position), with the amount of prfit unrealised by the group 6.2 Non-controlling interests in unrealised intra-group profits [Aturther problem occurs where a subsidiary company whichis not wholly owned Is involved in int ‘group trading within the group. ita subsidiary Keith Co is 75% owned and sells goods tothe parent company for $18,000 cast plus $4,000 proft, fe for $20,000 and if these items are unsold by Mick Co at the end ofthe reporting period, the ‘unrealised profit of $4,000 earned by Keith Co and charged to Mick. — Co willbe partly owned by the NCI of Keith Co, The correc treatment ofthese intragroup profits i to remove the whole profi, charging the NCI with their proportion, Note that where te sale has been made by the parent none ofthe unrealised proft will be charged to the NCI fies to DEBIT Group retained earnings leer DEBIT —_Non-contrlling interest CREDIT Group inventory (statement of financial position) women www ACCTATanes Bertin dT cone statement of financial posit6.3 Example: non-controlling interests and intra-group profits Powell Co has owned 75% ofthe shares of Sinclair Co since the incorporation of that company, During the year to $1 December 20X2, Sinclair Co sold goods costing $16,000 to Powell Coat a price of $20,000 and these goods were still unsold by Powell Co atthe end of the year. Draft statements of financial postion of each company at 31 December 20X2 were Powell Co Sinclar Co 8 8 8 8 Assets ‘Non-current assets Property, plant and equipment 425,000 420,000 Investment: 75,000 shares in Sinclair Co at cost 75,000 200,000 120,000 Current assets Inventories 48,000 Trade receivables 70,000 64,000 Total assets 270,000 84,000 Equity and labitties Equity Ordinary shares of $1 each fully paid 80,000 100,000 Retained earnings 150,000 60,000 230,000 460,000 Current abilities 40,000 24,000 Total equity and liailtios 270,000 ¥e4,000 Required Prepare the consolidated statement of financial position of Powell Co at 31 December 20X2, The far value ‘of the non-controlling interest at acquisition was $25,000. Solution ‘The profit eared by Sinclair Co but unrealised by the group is $4,000 of which $3,000 (75%) is attributable tothe group and $1,000 (25%) to the NCI Powell Co Sinclair Co s s Retained earnings Per question 180,000 60,000 Less unrealised profit (4,000) 356,000 Share of Sinclair Co: $56,000 x 75% 42,000 792,000 ‘Non-controling interest Fair value at acquisition 25,000 Share of post-acquisition retalned earnings (56,000 x 25%) 14,000 39,000 CONSOLIDATED STATEMENT OF FINANCIAL POSITION AS AT 31 DECEMBER 20X2 8 s Assets Property, plant and equipment 248,000 Current assets Inventories $(50,000 + 48,000 — 4,000) 94,000 Trade receivables 36,000 Total assets 375,000 nied sateen of nna pestn Fen Pern a30x. Corr eeeDownload FREE ACCA STUDY MATERIALS from "https://www.ACCAGlobalBox.com” 8 s Equity and labities Ordinary shares of $1 each 80,000 Retained earnings 192,000 272,000 No} 39,000 34,000 Current Habiites 4,000 Total equity an liabilities 375,000 Patsy Go acquired 80% of the shares in Safty Co one year ago when the reserves of Safty Co stood at $10,000. Dratt statements of financial position foreach company are Patsy Co Say Co 8 8 Assets Non-current assets Property, plant and equipment 80,000 40,000 Investment in Satfy Co at cost 46,000 428,000 Current assets 40,000 Total assets 768,000 70,006 Equity and liabities Equity Ordinary shares of $1 each 100,000 30,000 Retained earnings 45,000 22,000 145,000 52,000 Current Habities 21,000 118,000 Total equity and liabilities 766,000 70,000 During the year Satty Co sold goods to Patsy Co for $50,000, the profit to Safty Co being 20% of selling price. At the end ofthe reporting period, $15,000 of these goods remained unsold in the inventories of Patsy Co. Atthe same date, Patsy Co owed Saffy Co $12,000 for goods bought and this debt is included in the trade payables of Patsy Co and the receivables of Say Co. NCI is valued at full far value. It was valued at $9,000 at the date of acquisition, Required Prepare a draft consolidated statement of financial position fo Patsy Co, PATSY CO CONSOLIDATED STATEMENT OF FINANCIAL POSITION Assets Non-current assets Property, plant and equipment (80,000 + 40,000) 120,000 Goodwill (Wt) 45,000 Current assets (W3) Total assets statement of financial posit it www ACC Alene Besseig dt The comaEquity and labilties Equity Ordinary shares of $1 each 100,000 Retained earnings (W2) 52,200 Nel (WS) Current iabities (W4) Total equity and liabilities Workings Goodwill 8 Consideration transferred Fair value of NCI Net assets acquired as represented by Share capital 30,000 Retained earnings 10,000 Goodwill 2 Retained earnings Patsy Co $ Retained earings per question 45,000 Unrealsed prof: 20% x $15,000 Pre-acqusition Share of Safty Co 60% 7.200 52.200 3 Curent assets : In Patsy Co's statement of financial position In Satty Co's statement of financial position 30,000 Less Safty Co's current account with Patsy Co canceled (12.000) Less unrealised profit excluded from inventory valuation 4 Current ables In Patsy Co's statement of financial position Less Patsy Co's current account with Safty Co canceled In Safty Co's statement of financial position 5 NGI Fair value at date of acquisition Share of post-acquisition retained earings (9,000 « 20%) ated sateen of financial peso Feil Pepin 18.0%. con 152,200 10,800 27,000 {0,000 46,000 9,000 (40,000) 45,000 Satty Co 8 22,000 (3.000) 10,000) i 3,000 BPPDownload FREE ACCA STUDY MATERIALS from "https://www.ACCAGlobalBox.com” 7 Intra-group sales of non-current assets MESEID a wetss engin intacng atts with each ter, group compan transfer non-current assets. ‘may on occasion wish to 7.1 Accounting treatment In their individual accounts the companies concerned will treat the transfer just Ike a sale between unconnected partes: the selling company will record a profit or loss on sale, while the purchasing company will record the asset at the amount paid to acquire it, and wil use that amount asthe basis for calculating depreciation On consolidation, the usual ‘group entity principle applies. The consolidated statement of financial position must show assets at their cost to the group, and any depreciation charged must be based on that cost. Two consolidation adjustments will usually be needed to achieve tis. (@) _Anadjustment to alter retained earings and non-current assets cost so as to remove any element of untealised profit or oss. This is similar to the adjustment required in respect of unrealised profit in inventory, (b) Anadjustrent to alter retained earings and accumulated depreciation is made so that consolidated depreciation is based on the asset's cost to the group. ‘The retained earnings of the entity making the sale are debited with the unrealised profit and the addtional depreciation is credited back tothe entity holding the asset ‘The double entry is as follows. (@) Sate by parent DEBIT Group retained earnings With the profit on disposal with the excess depreciation. (b) Sale by subsidiary with the profit on disposal With the aditional depreciation 7.2 Example: intra-group sale of non-current assets Percy Co owns 60% of Edmund Co and on 1 January 20K: § Co sells plant costing $10,000 to Percy Co for $12,500. The companies make up accounts to 31 December 20Xt and the balances on their retained ceamings at that date are Percy Co after charging depreciation of 10% on plant $27,000 Edmund Co including profit on sae of plant $18,000 Required ‘Show the working for consolidated retained earnings, statement of financial posit it www. AC CPanel Rerring lc ReThe consolSolution Retained earnings Percy Co Edmund Co s $ Per question 27,000 18,000 Disposal of plant Profit (2,500) Depreciation: 10% x $2,500 280 15500 Share of Edmund Co: $15,500 » 60% Notes ‘The NCI in the retained earnings of Edmund Co is 40% x $15,500 = $6,200. 2 The profit on the transfer less related deprecation of $2 250 (2,500 ~250) willbe deducted from the carrying amount ofthe plant to write It down to cost tothe group 8 Summary: consolidated statement of financial position show the net assets which P controls and the ownership of those assets Netassets | Always 100% P plus 100% S providing holds a major of voting rights Share captal_—_| P only Reason ‘Simply eporting tothe parent company’ shareholders in another form Retained 100% P plus group share of post-acquisition retained eanings ofS less consolidation earings ajstments Reason To show the extent o which the group actualy owns total assets less lables Non-controling_| Fair value at acquisition plus share of post-acquisition retained profit (ss) interest Reason To show the equ in a subsidiary nat attributable tote parent 9 Acquisition of a subsidiary during its accounting period MES atten a parent company acquires a subsitay during its accoutng period the only accouting entries ‘made atthe time will be those recording the cost of acquisition inthe parent company’s books. At the end of the accounting perio the consolidation adjustments will be made. 9.1 Pre-acquisition profits ‘As we have already seen, atthe end ofthe accounting year it willbe necessary to prepare consolidated accounts ‘The subsidiary company's accounts to be consolidated will show the subsidiary profit or loss forthe whole year. For consolidation purposes, however, tt will be necessary to distinguish between: (a) Profits earned before acquisition (b) Profits earned after 2cquistion In practice, a subsidiary company’s profit may not accrue evenly over the year for example, the subsidiary might be engaged in a trade, such as toy sales, with marked seasonal fluctuations. Nevertheless, the nlite statement of nancial poston, Feil Feprsa.a|S}0% com ikDownload FREE ACCA STUDY MATERIALS from "https://www.ACCAGlobalBox.com” assumption can be made that profits acerue evenly whenever itis impracticable to arrive at an accurate split of pre-and post-acquisition profits. ‘Once the amount of pre-acquistion profit nas been established the appropriate consoldation workings (goodwil, retained earnings) can be produced Itis worthwhile to summarise what happens on consolidation tothe retained earnings figures extracted ‘rom a subsidiary’ statement of financial position. Suppose the accounts of Subject Co, @ 60% subsidiary ‘of Prince Co, show retained earings of $20,000 at the end ofthe reporting period, of which $14,000 were ‘eared prior to acquiston, The figure of $20,000 will appear in the consolidated statement of financial position as follows. $ Non-controlling interests working: ther share of post-acquisition retained earnings (40% x 6,000) 2,400 Goodwill working: pre-acquistion retained earnings 14,000 Consolidated retained earnings working: group share of post-acquisition retained earnings (60% x $6,000) 3.600 20,000 Hinge Co acquired 80% ofthe ordinary shares of Singe Co on 1 April 20X5, On 31 December 20Xé Singe Co's accounts showed a share premium account of $4,000 and retained earnings of $15,000. The statements of financial position of the two companies at 31 December 20XS are set out below. Neither ‘company has pad any dividends during the year NCI should be valued at ful flr value. The market price ofthe subsidiay's shares was $2.50 prior to acquisition by the parent. Required You are require to prepare the consolidate staternent of fiancial postion of Hinge Go at 31 December 20X5, ‘There has been no impairment of goodwil ‘STATEMENT OF FINANCIAL POSITION AS AT 31 DECEMBER 20x5 Hinge Co Singe Co 8 $ Assets Non-current assets Property, plant and equipment 32,000 30,000 16,000 ordinary shares of 50c each in Singe Co Current assets 43,000 — Total assets 73,000 Equity and labiltes Equity Ordinary shares of $1 each 100,000 Ordinary shares of 5c each 10,000 Share premium 7900 4,000 Retained earnings 40,000 47.000 53,000, Current abies 20,000 Total equity and liabilities 767.000 © 73,000, non www AC CAI Retard Te comtdtd stoma of ancal pst‘Singe Co has made a profi of $24,000 ($39,000 - $15,000) forthe year. In the absence of any direction to the contrary, this should be assumed to have ar'sen evenly over the year, $6,000 in the three months to {31 March and $18,000 in the nine months after acquisition. The company’s pre-acqusiion retained earings are therefore as follows. 8 Balance at 31 December 20x4 16,000 Profit for three months to 31 March 20X6 6,000 Pre-acquisition retained earnings ‘The balance of $4,000 on share premium is al pre-acquisition ‘The consoldation workings can now be drawn up. Goodwill 8 $ Consideration transferred 50,000 Nol ($2.50 x 4,000) 40,000 Net assets acquired represented by Ordinary share capital 410,000 Retained earings (pre-acquisition) 21,000 Share premium 4,000 (35,000) Goodwill at acquisition 25,000 2 Retained earnings Hinge Co Singe Co 8 $ Per question 40,000 39,000 Pre-acquisition (see above) 21,000) 18,000 Share of Singe Co: $18,000 x 80% 14,400 54,400 3 NClatreporting date $ NCL at acquisition 10,000 Share of post-acquisition retained earings (18,000 x 20%) 3,600 73,600 HINGE co CONSOLIDATED STATEMENT OF FINANCIAL POSITION AS AT 31 DECEMBER 20X5 8 8 Assets Property, plant and equipment 62,000 Goodwill (W1) 25,000 Current assets 428,000 Total assets 215.000 ost eal Resrseal0x. corr wotDownload FREE ACCA STUDY MATERIALS from "https://www.ACCAGlobalBox.com” coo) it ovo ACC AaeRI Berri Te como $ $ Equity and lites Equity Orainar shares of$t each 400,000 Share premum 7,000 Retained earnings (W2) 54,400 a 461.400 NCI (W3) 13,600 775,000 Current abiites 49,000 Total equity and lites 775,000 9.2 Exampl {Asan illustration of the entries arising when a subsidiary has pre-acqusition losses, suppose Push Co acquired al 50,000 $1 ordinary shares in Scramble Co for $20,000 on 1 January 20X1 when there was a debit balance of $35,000 on Scramble Co's retained earnings. Inthe years 20X' to 20K4 Scramble Co makes proits of $40,000 in total, leaving a credit balance of $5,000 on reined earnings at 31 December 20X4, Push Co's retained earnings atthe same date are $70,000. Solution The consolidation workings would appear as follows. + Goodwit 8 s Consideration transferred 20,000 Netassets acquired as represented by Ordinary snare capital 50,000 Retained earings (35.000) (15,000) Goodwill 5,000 2 Retained earnings Poo Sco $ s [tthe end ofthe reporting period 70,000 5,000 Pre-acquisition loss — 36,000 40,000 Scramble Co ~ share of post-acquisition retained earings . (40,000 « 100%) 10 Disposals of subsidiaries Only ‘ull disposals’ where the entie shareholding is sold are examinable under Financial Reporting ‘The subsidiary will be removed from the consolidated statement of financial positions anda profit or loss ‘on disposal will nee to be calculated and accounted for Disposals are considered in Chapter 9 where we look atthe preparation ofthe consolidated statement of profit or loss and other comprehensive income. statement of financial posit ur11 Fair values in acquisition accounting MES i ates are veryimportant in caeutnggooel Key term Key term 11.1 Goodwill Goodwill. An asset representing the future economic benefits arising trom other assets acquired ina business combination that are not individually identified and separately recognised. (IFRS 3: App A) ‘The stalement of financial position ofa subsidiary company a the date it is acquired may not bea guide to the fair value ofits net assets, For example, the market value of a freehold building may have risen greatly since it was acquired, but it may appear inthe statement of financial position at historical cost less accumulated deprecation 11,2 What is fair value? Fair value is defined as follows by IFRS 19 Fair Value Measurement. tis an important definition Fair value. The price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date, (IFRS 13: para. 9) 11.3 Fair value adjustment calculations Until now we have calculated goodwill s the diference between the consideration transfered and the carying amount of net assets acquired by the group. If this calculation 's to comply with the definition above we must ensure thatthe book value ofthe subsidiary’s net assets isthe same as their flr value, There ae two passible ways of achieving this: (@)__ The subsidiary company might incorporate any necessary revaluations in its own books of account. In this case, we can proceed directly tothe consolidation, taking asset carrying amounts anc reserves figures straight from the subsidiary company’s statement of financial position, (b) The evaluations may be made as a consolidation adjustment without being incorporated in the subsidiary company's books. In this case, we must make the necessary adjustments tothe subsidiary’s statement of financial position as a working. Only then can we proceed tothe consolidation Remember that when deprecating assets are revalued there may be a corresponding alteration in the amount of depreciation charged and accumulated. 11.4 Example: fair value adjustments Pine Co acquired 75% of the ordinary shares of Sequoia Co on 1 September 20X. At that date the value of Sequoia Co's non-current assets was $23,000 greater than thelr carrying amount, and the balance ‘of retained earings was $21,000, The statements of financial position of botn companies at 31 August 20XS are given below. Sequoia Co has not incorporated any revaluation in its books of account. NCI is valued a full far value which was deemed to be $18,000 a the acquisition date PINE CO ‘STATEMENT OF FINANCIAL POSITION AS AT 31 AUGUST 20X6 8 $ Assets Non-current assets Property, plant and equipment 63,000 Investment in Sequoia Go at cost 51,000 114,000 Current assets 82,000 Total assets 796.000 aided statement of financial psn Fen Reperng 30x, corr iDownload FREE ACCA STUDY MATERIALS from "https://www.ACCAGlobalBox.com” BPP Equity and liabilities Eauity Ordinary shares of $1 each 80,000 Retained earnings 96,000 176,000 Current Habities 20,000 Total equity and liabilities 796,000 SEQUOIA CO ‘STATEMENT OF FINANCIAL POSITION AS AT 31 AUGUST 20X68 ; ‘ Assets Property, plant and equipment 28,000 Current assets 43,000 Total assets 77,000 Equity and liabities Eauity Ordinary shares of $1 each 20,000 Retained earnings 41,000 61,000 Current Habiites 10,000 Total equity and liabilities 77,000 It Sequola Co had revalued its non-current assets at 1 September 20XS, an addition of $3,000 would have been made tothe depreciation charged for 20X5/X8, Required Prepare Pine Co's consolidated statement o nancial position as at 31 August 20X8, Solution PINE CO CONSOLIDATED STATEMENT OF FINANCIAL POSITION AS AT 31 AUGUST 20X8 $ s Non-current assets Property, plant and equipment (63,000 + 28,000 + 28,000 ~ 3,000) 111,000 Goodwill (Wt) 5,000 116,000 Curent assets 125,000 24,000 Equity and labile Equity = Ordinary shares of $1 each 80,000 Retained earnings (W2) 108,750 188,750 Nol (w3) 22.250 247,000 Current labities 000 24,000 soomerttfonce eee ECO worw AC CATER erring dR Te comal£ Workings + Gocdwit Group 8 Consideration transferred 51,000 Fair value of NCI 18,000 Net assets acquired as represented by Ordinary share capital 20,000 Retained earnings 21,000 Fair value adjustment 23,000 (64,000) Goodwill 5,000 2 Retained earnings Pine Co Sequoia Co § $ Per question 96,000 41,000 Pre acquisition profits (24,000) Depreciation adjustment (3,000) Post acquisition Sequoia Co 17,000 Group share in Sequola Co ($17,000 x 75%) Group retained earings 3 NClatreporting date 8 Fale value at acquisition 18,000 ‘Share of post-acquisition retained earnings (17,000 x 25%) 4,250 22,250 Fair value ‘An assets recorded in Spice Co's books tits historical cost of $4,000. On t January 20XS Paprika Co ought 80% of Spice Co's equ. Its directors attrbuted afar value of $3,000 to the asset as at that date, Ithad been depreciated for two years out ofa useful life of four years onthe straight line basis. There was. ro expected residual value. On 30 June 20XS the asset was sold for $2,600, What Is te profit or loss on disposal ofthis asset to be recorded in Spice Co's aocounts and in Paprika Co's consolidated accounts for the year ended 31 December 20X57 Spice Co: Carrying amount at disposal (at historical cost) = $4,000 x 1144 = $1,500 Prof on disposal = $1,100 (deprecation charge for the year = $500) Paprika Co: Carrying amount at disposal (at far value) = $3,000 x 14/2 = $2,250 Profit on disposal for consolidation = $350 (depreciation forthe year = $750) ‘The NCI would be crested with 20% of both the profit on disposal and the depreciation charge as part of the one line entry inthe consolidated statement of profit or loss ated sateen of financial peso Feil Pepin 18.0%. con noneeDownload FREE ACCA STUDY MATERIALS from "https://www.ACCAGlobalBox.com” 11.5 IFRS 3 and IFRS 1: MESES) a5 3 sets out the accounting requirements and disclosures of he fir valu IFRS 13 gives gucance on how the fir value of assets and lables shouldbe established xercise ‘The general rule under IFRS 3s thatthe subsiciay's assets and liabilties must be measured at fair value except i limite, stated cases, The assets and lables must (a) Meet the definitions of assets and labile inthe Conceptual Framework (b) Be part of what the acquiree (or its former owners) exchanged inthe business combination rather than the result of separate transactions IFRS 13 provides extensive guidance on how the fair value of assets and liabilities should bo established. This standard requires thatthe following are considered in determining fair value (@) _Theasset or liability being measured (IFRS 19: para. 11) (b) The principal market (e that where the most activity takes place) or where there is no principal ‘market, the most advantageous market (ie that in which the best price could be achieved) in which an orderly transaction would take place for the asset or lability (IFRS 18: para. 16) (0) The highest and best use ofthe asset or liallty and whether itis used on a standalone basis or in conjunction with other assets or libities (IFRS 18: para. 27) (6) Assumptions that market participants would use when pricing the asset or lability Having considered these factors, IFRS 13 provides a hierarchy of inputs for arriving at flr vale. It requires that level 1 inputs are used where possible Level1 Quoted prices in active markets for identical assets thatthe entity can access atthe ‘measurement date (IFRS 13: para. 76) Level2 Inputs other than quoted prices that are directly or indirectly observable for the asset (IFRS 18: para. 81) Level3 _Unobservable inputs forthe asset (IFRS 19: para. 86) ‘We wil lok atthe requirements of IFRS 3 regarding fair value in more detail below. First let us look ata practical example. Example: Land ‘Anscome Co has acquire land in a business combination. The land is currently developed for industrial use asa site fora factory. The current use of land is presumed tobe its highest and best use unless market or other factors suggest a different use. Nearby sites have recently been developed for residential use as sites fr high-rise apartment buildings. On the basis ofthat development and recent zoning and ‘other changes to facilitate that development, Anscome determines that the land currently used as a site for a factory could be developed as a site for residential use (ie fr high-rise apartment buildings) because market paticipants would take into account the potential to develop th site for residential use wren pricing the and, How would the highest and best use ofthe land be determined? Solution = ‘The highest and best use ofthe land would be determined by comparing both of (@) The value ofthe land as currently developed for industrial use (e the land would be used in combination with other assets, such as the factory, or with other assets and liabilities) following: statement of financial posit it sy ACC ed ho(&) Thevalue ofthe land asa vacant site for residential use, taking into account the costs of demolishing the factory and other costs (including the uncertainty about whether the entity would be able to convert the asset to te alternative use) necessary to convert the land toa vacant site {ie the land is to be used by market participants on a stand-alone basis) ‘The highest and best use ofthe land would be determined on the basis of the higher of those values, 11.5.1 IFRS 3 Fair values IFRS 9 sets out general principles for arriving a the fair values ofa subsidiay's assets and labile. (IFRS 3: para. 18) The acquirer should recognise the acquire's identitiable assets, liailtes and Contingent lables atthe acqulstion date only if they sat'sty the following crea (a) Inthe case of an asset other than an intangible asset, itis probable that any associated future ‘economle benefits will lw tothe acquirer, and its fir value can be measured rallaby. (&) Inthe case of lablly other than a contingent liability, itis probable tat an outflow of resources. ‘emlodying economic benefts will be required to settle the obligation, and its far value can be measured reliably. (0) Inthe case of an Intangible asset or a contingent lability, its fir value can be m sued rellably. (IFRS 3: para. 1) ‘The acqulre's identilable assets and lallties might include assets and labilties not previously recognised in the acquree's financial statements. For exemple, a tax benefit arising fram the acqulree's tax losses that was not recognised by the acquiree may be recognised by the group ifthe acquirer has future taxable profits against which the unrecognised tax beneftcan be applied 11.5.2 Restructuring and future losses [An acquirer should not recognise labilties for future losses or other costs expected tobe incurred as a result ofthe business combination, (IFRS 3: para, 11) IFRS 9 explains that a plan to restructure a subsidiary following an acquisition is not a present obligation ‘ofthe acquire atthe acquisition date, Nelther does it meet the definition of a contingent labilty. Therefore ‘an acquirer should not recognise a liability for such a restructuring plan as part of allocating the cost of the combination unless the subsidiary was already committed to the plan before the acquisition, (IFRS 3: para. 11) This prevents creative accounting. An acquirer cannot set up a provision for restructuring or future losses of a subsidiary and then release ths to the profit or loss in subsequent periads in order to reduce losses or smooth profs, 11.5.3 Intangible assets ‘The acquiree may have intangible assets, such as development expenditure, These can be recognised separately from goodwill only if they are identifiable. An intangible asset is identifiable only iit (@) Is separable, ie capable of being separated or divided from the entity and sold, transferred, oF exchanged, either individually or togetner witha related contract, asset or liabilty, oF (&) Ariss from contractual or other legal rights (IAS 38; 1N8) ‘The ecquiree may also have internally-generated assets such as brand names which have not been recognised as intangible assets, As the acquiring company is giving valuable consideration for these assets, they are now recognised as assets inthe consolidated financial statements 11.5.4 Contingent liahi Contingent liabilities ofthe acquiree are recognised if their fair value can be measured reliably. This is @ departure from the normal rules in IAS 37: contingent lialltls are not normally recognised, but only disclosed. aided statement of financial psn Fen Reperng 30x, corr iDownload FREE ACCA STUDY MATERIALS from "https://www.ACCAGlobalBox.com” ‘Ate their intial recognition, the acquirer should measure contingent lables that are recognised separately atthe higher of (2) The amount that would be recognised in accordance with IAS 37 (6) The amount initially recognised (IFRS 3: para, 86) 11.5.5 Cost of a business combination ‘The general principle is that the acquirer should measure the cost of a business combination as the total ofthe fair values, atthe date of exchange, of assets given, liabilities incurred or assumed, and equity instruments issued by the acquirer, in exchange for contol of the acquire. ‘Sometimes all or pat of the cost of an acquisition is deferred (le does not become payable immediately) ‘The fait value of any deterred consideration is determined by discounting the amounts payable to their present value a the date of exchange Where equity instruments (eg ordinary shares) ofa quoted entity form part of the cost ofa combination, the published price at the date of exchange normally provides the best evidence ofthe instrument's fair value and except in rare circumstances this should be used. Future losses or other costs expected tobe incurred as a result of a combination should not be included in the cost ofthe combination, Costs attributable tothe combination, for example professional fees and administrative costs, should not be included: they are recognised as an expense when incurred. Costs of issuing debt instruments and ‘equity shares should reduce the proceeds from the debt issue or the equity Issue. (IFRS 3: para. 53) 11.5.6 Other exceptions to the recogni iM oF measurement principles (2) Deferred tax: use IAS 12 values. (&) Assets held for sale: use IFRS 5 values f Goodwill on consolidation ‘On 1 September 20X? Tyzo Co acquired 6 millon $1 shares in Kono Co at $2.00 per share, At that date Kono Co produced the following interim financial statements, $m $m Property, plant and equipment Trade payables 32 (not () 160 Taxation a8 Inventories (note ()) 40 Bank overdraft 39 Ascahvables 29 Leng-arm leans 40 Cash in hand 12 ‘Share capital ($1 shares) 80 Retained earnings 44 ae Notes 1 ‘The following information relates to the property, plant and equipment of Kono Co at 1 September 20x7 $m Gross replacement cost 234 Nat replacement cost (goss replacement cost ss deprecation) 166 Econom value 180 Nt ealsable value 80 2 The inventories of Kono Co which were shown in the interim financial statements are raw materials at cost to Kono Co of $4m. They would have cost $4.2m to replace at 1 September 20X7, pee www ACCATBRES BEE Ge ofthe coal statement of financial posit3 On4 September 20X7 Tyzo Co took a decision to rationalise the group so as to Integrate Kono Co. The costs ofthe rationalisation were estimated to total $3.0m and the process was due to start on ‘1 March 20X8, No provision for these costs has been made inthe financial statements glven above, 4 tis group policy to recognise NCI at full (fai) value. Required ‘Compute the goodwill on consolidation of Kono Co that wil be included in the consolidated financial statements ofthe Tyzo Co group for the year ended 31 December 20X7, explaining your treatment of the tems mentioned above. You should refer to the provisions of relevant accounting standards. Goodwill on consoldation of Kono Co sm $m Consideration transfered ($2.00 x 6m) 120 NO ($2.00 x 2m) 40 Fair value of net assets acquired Snare capital 80 Pre-acqulstion reserves “4 Fair value adjustments Propery, plant and equipment (16.6 ~ 16.0) 08 Inventories (4.2 ~4.0) 02 1132) Goodwill 28 Notes on treatment Share captal and pre-acquisltion profits represent the book value ofthe net assets of Kono Co at the date of acquisition. Adjustments are then required to ths book value in order to give the fair value of the net assets at the dete of acquisition. For short-term monetary items, fir vale is their carrying value on acquisition, 2 IFRS states thatthe fair value of property, plant and equipment should be determined by market value or, information an a market price isnot availble (as isthe case her), then by reference to ‘depreciated replacement cost, reflecting normal business practice. The net replacement cost (le {$16.6m) represents the gross replacement cost less deprecation based on that amount, and s0 further agjustment for extra depreciation is unnecessary 3 IFRS 3 also states tat raw materials shouldbe valued at replacement cost. In this case that amount is $4.2m 4 The rationalisation costs cannot be reported in pre-acqusition results under IFRS 3 as they are not liability of Kono Co atthe acquisition date. (ne ofthe competences you requ t fll Performance Object 7 fhe PER the biy to classy rfomationacoranc tn he req rete andl teres ofr sion disclosure notes inthe statements. You can apply the knowledge you obtain from this chapter to help to | demonstrate this competence, BPPDownload FREE ACCA STUDY MATERIALS from “https://www.ACCAGlobalBox.com’ Chapter Roundup ‘+ IFRS 10 lays out the basic procedures for preparing consolidated financial statements ‘+ Inthe consolidated statement of financial positon itis necessary to cstinguish non-controlling interests from those net assets attributable tothe group and financed by shareholders’ equity. ‘= Goodwill isthe excess ofthe amount transfered plus the amount of non-controling interests over the fai value of the net assets ofthe subsidiary. ‘© IFRS3 requires recognition ofall contingent consideration, measured at fair value, atthe acquisition date, ‘© Intra-group trading can give rise to unrealised profit which is eliminated on consolidation. ‘+ _Aswellas engaging in trading activities with each other, group companies may on occasion wish to transfer non-current assets. ‘= When a parent company acquires a subsidiary during its accounting period the only accounting entries ‘made atte time will be those recording the cost of the acquisition inthe parent company's books. At the end ofthe accounting period the consolidation adjustments will be made ‘+ Only ful disposals’ where the entire shareholding is sold are examinable under Financial Reporting, ‘+ Fairvalues are very important in calculating gooduil ‘+ IFRS sets out the accounting requirements and disclosures of the fir value exercise ‘+ IFRS13 Fair value measurement gives guidance on how the fair value of assets and lables should be established. 1 Chicken Co owns 80% of Egg Co. Egg Co sells goods to Chicken Co at cost plus 50%, The total invoiced sales to Chicken Co by Egg Co in the year ended 31 December 20X9 were $300,000 and, of these sales, ‘goods which had been invoiced at $60,000 were held in inventory by Chicken Co at 31 December 20X9, ‘What isthe reduction in aggregate group gross profit? 2 Major Co, which makes up its accounts to $1 December, hasan 80% owned subsidiary Minor Co, Minor (Co sells goads to Major Co at a mark-up on cost of 33.33%. At 31 December 20X8, Major Co had $12,000, ‘of such goods in its inventory and at 31 December 20X9 had $18,000 of such goods in its inventory, What isthe amount by which the consolidated profit attributable to Malor Co's shareholders should be adjusted in respect ofthe above? Ignore taxation A $1,000 Debit = B $800 Credit © $750 Cred D $600 Debit 0d is always postive True False 4 -Aparent company can assume that, fora subsidiary acquired during its accounting period, profits accrue evenly curing the year Tre — False 5 What entries are made inthe worklngs to record the pre-acqulstion profts ofa subsidiary? & Describe the requirement of IFRS 3 in relation tothe revaluation ofa subsidiary company's assets to flr value atthe acquisition date 7 What quielines are given by IFRS 3 in relation to valuing land and buildings fatty? coomerttfonce oie KES it® apc Papin Th eam50 1 $60,000 = = $20,000 333 = 12,000) x 33, 2D (15,000- 12,000) x FES x 80% 3 False, Goodwill can be negative ithe purchaser has gota bargain. 4 Not necessarily — the FR examining team will make this clear inthe exam, 5 See Section 42 8 See Section 105. 7 Land and buildings should be valued in accordance with IFRS 13 (generally market valu), ion Bank 9 5 12 22 mins 10 5 4 25 mins 14 5 Fy 45 mins aed statement of financial pestion Fen Resin eee