Group accounting:

IFRS 10- Consolidated financial

statements
IFRS 3- Business Combinations
IFRS 11- Joint Arrangements
IAS 28- Investment in Associate
IAS 27- Separate Financial
statements
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Agenda
01 02
Concept of Group IFRS 10 –
consolidated
03 financial
IFRS 3 Business statements
combinations Control

05 04
Consolidated
Joint
procedure under
arrangements
IFRS 10
IFRS 11 &
Investment in 06
associates IAS 28
Disclosure
07 requirement
BPP Question
Practice
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Concept of
Group

3
What is a ‘group’?
Group
Parent

Control Control

Indian Foreign
subsidiary Fellow subsidiary
subsidiaries

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What is a ‘group’?

Subsidiaries

Parent

Joint
Associates
arrangements

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IFRS 10 –
Consolidated
Financial Statements
Control

6
Financial Statements prepared by Parent

Separate financial statements Consolidated financial statements

► financial statements of a group
► investments accounted for at:
► parent and subsidiaries presented as a
► cost, or
single economic entity
► in accordance with IFRS 9

Components of consolidated financial statements

• consolidated statement of financial position

• consolidated statement of profit or loss and other comprehensive income
• consolidated statement of changes in equity
• consolidated statement of cash flows
• notes comprising significant accounting policies and other explanatory information

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Features of Consolidated Financial
Statements
• Single economic entity
• Uniform accounting policies
• Elimination of intra-group balances
• Elimination of intra-group transactions
• Elimination of un-realised profits
• Same year ends

Different reporting date of subsidiary

▪ Prepare special statements of subsidiary as at the same date as the group

▪ If impracticable, use financial statements of subsidiary subject to:

▪ difference ≤ 3 months

▪ adjustments for effects of significant transactions/ events between these dates

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Scope and Exemption
An entity that is parent shall present consolidated financial statements.

- Parent get exemption for not preparing consolidated financial statements when:
• parent is wholly-owned; or partially-owned as long as other shareholders have no objection
• its debt/ equity not traded on public market
• it does not file its financial statements with a recognised stock exchange

&

- Its ultimate (or intermediate) parent presents consolidated financial statements in accordance with IFRS

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Definition of Control

Exposure, or rights, to
variable returns from its
involvement with the
investee

Ability to use its power over

Power over the investee the investee to affect
returns

Control

All three elements of control must be present to conclude that an investor controls an investee

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Applying the Control Model - focus on
'power'
Exposure, or rights, to
variable returns from its
involvement with the
investee

Ability to use its power over

Power over the investee the investee to affect
returns

Control

Power = Existing rights that give the current ability to direct the relevant activities

Current ability does not necessarily require the rights to be exercisable immediately. Instead, the key factor is whether the rights can be exercised
before decisions about relevant activities need to be taken.

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Rights that can give an Investor Power over
an Investee
Voting rights

Potential voting rights

Rights to appoint/remove Key Management Personnel/Board of directors

Rights to enter into transactions

To have power over an investee, an investor must have existing rights that give it the current ability to direct the relevant activities.

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Applying the Control Model - focus on
'power'
Who appoints Major capital
expenditures
the Board and
key Acquiring/
Appointing Disposing
management Board members
personnel? subs

Relevant Who can change the

Activities strategic direction of the
Approving entity?
Selling/ budgets /
buying goods determining
and services funding
Dividend and
remuneration
decisions

Relevant activities are those activities that significantly affect the investee's return.

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Group Question
Example
Investor A holds 48% of the voting rights of an investee (Investee B). The remaining voting rights are held by thousands of other shareholders, none
individually holding more than 1% of the voting rights. None of the shareholders has any arrangements to consult with any other shareholders or make
collective decisions. Relevant activities are directed by a simple majority vote.

Is the information provided enough to conclude Investor A has power over Investee B or should A consider other facts and circumstances?

Solution
In this case, on the basis of the absolute size of its holding and the relative size of the other shareholdings, the investor may conclude that it has a
sufficiently dominant voting interest to meet the power criterion without the need to consider any other evidence of power.

While other facts and circumstances should or may always be considered; in this case, other facts and circumstances (including voting behaviour of other
shareholders) is unnecessary, but not precluded.

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See Case Study 1:
Rights to direct
different relevant
activities

15
Applying the Control Model - exposure or
rights to variable returns

Exposure, or rights, to
variable returns from its
involvement with the
investee

Ability to use its power over

Power over the investee the investee to affect
returns

Control

All three elements of control must be present to conclude that an investor controls an investee.

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Variable Returns

Variable returns are returns that are not fixed and have the potential to vary as a result of the performance of an investee. Variable returns can be
only positive, only negative or both positive and negative.

look again!
'returns' not substance over
'benefits'…think form
broadly

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Applying the Control Model -- ability to use
its power over the investee to affect returns

Exposure, or rights, to
variable returns from its
involvement with the
investee

Ability to use its power over

Power over the investee the investee to affect
returns

Control

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Principal vs. Agent Considerations

scope of decision-making
remuneration
authority over investee

rights held by other exposure to variable returns from other

parties principal vs. agent
interests that it holds in the investee

An agent is a party primarily engaged to act on behalf of and for the benefit of another party or parties (the principal(s)) and
therefore does not control the investee when it exercises its decision-making authority.

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Accounting Requirements
Separate financial statements of Consolidated financial statements
Replaced with
parent

• net assets of subsidiary at fair value

Cost of investment • post acquisition reserves
• goodwill/ gain on bargain purchase

Consolidation procedures Uniform accounting Profit / loss allocation Non-controlling interest

policies (NCI)
Line by line addition of assets Profit/loss allocation is between
and liabilities, intercompany Accounting policies of all entities controlling and non-controlling • NCI is shown separately

elimination, translation of foreign consolidated need to be interest is based on actual share within equity

operations harmonised ownership • Loss is allocated even if NCI

balance is negative

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 Page 379 - 1.3
Page 384 – 2.2
Accounting Requirements
Separate statement of financial position Consolidated statement of financial
position

Parent Subsidiary
Consolidated

Net assets Xxx + xxx + consolidation adjustments Total xxx

Issued capital Xxx xxx Only parent’s Capital

Reserves Xxx xxx to be calculated

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Accounting Requirements
Page 420 – 1.2, 1.4,
Page 423 question Separate Profit and loss Consolidated Profit and loss
Page 428 2.5 Account Account

Parent Subsidiary Consolidated

Revenue XXX XXX + XXX
[Parent + Subsidiary (100%) Consolidation
– intra-group items] adjustments

↓ ↓
Profit for the period (CONTROL) XXX XXX XXX

Owners (equity holders) of the parent XXX

NCI % of subsidiary’s profit after tax XXX

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 Page 387
4.1 and 4.3

Goodwill / Gain on bargain purchase calculation

Approach 1 Approach 2
Particulars Amount (INR) Particulars Amount (INR)

Parent NCI
Fair value of consideration xxx
Fair value of consideration/ NCI xxx xxx
Amount of NCI xxx
Less: Fair value of net assets at xxx xxx
Less: Fair value of net assets at xxx acquisition Parent / NCI
acquisition
Goodwill Parent share/ NCI share xxx xxx
Goodwill
xxx Total Goodwill Parent + NCI xxx

Result Treatment
goodwill • recognised as a separate asset in the acquirer's consolidated financial statements
• goodwill is not amortised but is subject to at least an annual impairment test

gain from a bargain purchase • double check identification and measurement of the assets and liabilities
• recognised in profit or loss immediately

Under Ind AS 103 – Gain on bargain purchase to be recognised in other comprehensive income and accumulated as capital reserve

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 Page 389
4.4 and 4.5

Non-Controlling Interest (NCI) 4.7 and 4.8

4.10 and 4.11

NCI

proportionate share of subsidiary’s

Measurement method fair value
identifiable net assets

Impact on Goodwill
not allocated to NCI allocated to NCI
impairment

Election of method on transaction-by-transaction basis

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Determine the Consideration Transferred
consideration transferred is the sum of the acquisition-date fair values of:
• the assets transferred by the acquirer
• the liabilities incurred by the acquirer to former owners of the target company and
• equity interests issued by the acquirer
in exchange for the acquiree (excludes
acquisition costs)

In case consideration is deferred beyond 12 months,

includes contingent consideration

• Cost of acquisition includes FV of contingent consideration • bring down cost of acquisition to present value

• Contingent consideration recognised as liability measured at FV • deferred consideration would appear as liability in financial
at each reporting date (changes recognised in P&L) statements
• difference between amount recorded and amount paid would be
treated as Finance cost

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IFRS 3 Business
Combinations

26
Definition of a Business
(Amendments to IFRS 3)
In October 2018, the IASB issued ‘Definition of a Business’ making amendments to IFRS 3 ‘Business Combinations’.

Change in
definition

The amendments replace the wording in the definition of a business

New definition of business from:
An integrated set of activities and assets that is capable of
• ‘providing a return in the form of dividends, lower costs or other
being conducted and managed for the purpose of providing
economic benefits directly to investors or other owners, members or
goods or services to customers, generating investment income
participants’ to
(such as dividends or interest) or generating other income from
• ‘providing goods or services to customers, generating investment
ordinary activities.
income (such as dividends or interest) or generating other income from
ordinary activities.’
This narrows the definition by focusing on goods or services rather than
returns.

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Definition of a Business
(Amendments to IFRS 3)
What is the optional concentration test?
The amendments introduce an optional test (the concentration test) that allows the acquirer to carry out a simple assessment to determine whether the
set of activities and assets acquired
is not a business. If the test is successful, then the set of activities and assets acquired is not a business and no further assessment is required. If the
test is not met or the entity does
not carry out the test, then the entity needs to assess whether or not the acquired set of assets and activities meets the definition of a business in the
normal way.

The test is met if substantially all of the fair value of the gross assets acquired is concentrated in one or a group of similar identifiable assets. Gross
assets exclude cash and cash equivalents, deferred tax assets and goodwill from the effects of deferred tax liabilities. The amendments also provide
guidance on what a single identifiable asset or a group of similar identifiable assets would be.

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 Definition of a Business
(Amendments to IFRS 3)

Effective date and transition Number of entities affected Impact on affected entities

• The changes are to be applied prospectively to ❑ Some ❑ Medium

business combinations and asset acquisitions • The amendments could impact all business • The impact could be significant if the outcome
for which the acquisition date is on or after the combinations and purchases where it is as to whether there is a business changes.
beginning of the first annual reporting period unclear whether an asset or a business has
beginning on or after 1 January 2020. been acquired.
Companies can apply them earlier if they
disclose this fact.

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Determine the Consideration Transferred:
Contingent consideration
Example
An acquirer purchased a business in the pharmaceutical industry. The sale and purchase agreement specifies the amount payable as:

• cash of $100 million to be paid on the acquisition date

• an additional 1,000,000 shares of the acquirer to be paid after 2 years if a specified drug receives regulatory approval.

What is the consideration transferred and how should it be accounted for?

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Determine the Consideration Transferred:
Contingent consideration
Solution
Consideration transferred =
• cash paid ($ 100 million) + fair value of 1,000,000 shares in 2 years' time (contingent consideration)
‒ fair value of the contingent consideration would be based on a 2-year forward price, reduced by the effect of the performance conditions
‒ classification based on definition in IAS 32 (only settled by issuing fixed number of shares or 'fixed for fixed' = equity)
• no subsequent adjustment for changes in fair value of shares

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Deferred Consideration
Example
• The parent acquired 75% of the subsidiary's 80 million $1 shares on 1 January 2017.
• It paid $3.50 per share and agreed to pay a further $108million on 1 January 2018.
• The parent company's cost of capital is 8%.
• In the financial statements for the year to 31 December 2017 .

• What will be the cost of the combination ?

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Deferred Consideration
Solution
The cost of the combination will be as follows:

$m

80m shares x75% x $3.50 210

Deferred consideration:

$108m x 1/1.08 100

Total consideration 310

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Recognition and Measurement
Measurement

Assets acquired and liabilities assumed are recognised at fair value if:

• meet the definition of an asset or liability at the acquisition date

• are part of exchange in the business combination

All assets and liabilities of the subsidiary that are recognized in the consolidated statement of financial position are measured at their
acquisition date fair values.

Exceptions:-
• Deferred taxes are recognized and measured in accordance with IAS 12.

• Employee benefits are recognized and measured in accordance with IAS 19.

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Recognition and Measurement
Classification

The acquirer classifies and designates assets and liabilities at acquisition date based on:

• acquirer's economic conditions

• contractual terms of the assets/liabilities
• acquirer's operating or accounting policies
Acquirer's classification/designations may differ from those of the acquiree

Exception to the classification

Leases are classified based on contractual terms and other factors as determined at the inception of lease contract and not on the acquisition date

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Recognition : Exceptions
Contingent liabilities

• a contingent liability is…a present obligation that arises from past events but is not recognised because: (i) it is not
probable…or (ii) the amount of the obligation cannot be measured with sufficient reliability
IAS 37

• recognised only if a present obligation exists and fair value can be measured reliably
• recognised even if an outflow of economic benefits is not probable (uncertainty is considered in the determination of fair

IFRS 3 value)

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Recognition and Measurement
Intangible assets
Is the asset identifiable?

does the asset meet the contractual-legal criterion does the asset meet the separability criterion

Yes
Yes

is the entity prohibited from transferring/exchanging the information

No

recognise, separately from goodwill, the identifiable intangible assets acquired

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 Measurement Period
Initial accounting incomplete at the reporting date
Other adjustments during measurement
Measurement period adjustments Post-measurement period adjustments
period

• limited to those that arise from new • include adjustments for developments Accounting:
information obtained about facts and after the acquisition date but during the • no adjustment to the accounting for the
circumstances that existed at the measurement period (eg changes in business combination allowed except for
acquisition date estimates) the correction of an error in accordance with
Ind AS 8

Accounting:

Accounting: • prospectively adjust provisional amounts

• retrospectively adjust the provisional to reflect new information arising after the

amounts and/or recognise new acquisition date

assets/liabilities to reflect the new • no adjustment to goodwill

information • correct errors retrospectively in accordance
• adjust goodwill with Ind AS 8

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Intra-group Transactions and Balances in
Balance sheet
Intra-group balances Eliminated on
consolidation

For elimination, direction of transaction is irrelevant

Intra-group leads to Eliminated on

transaction Unrealised profit consolidation

Sale of goods by parent subsidiary Sale of goods by subsidiary to parent

• Reduce consolidated RE • Reduce net assets of subsidiary
• Reduce inventory • Reduce inventory

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Unrealised Profit: Non-current asset
Page 400 – 5.2, 5.3 and question
transfers Page 405 – 6.2

Eliminated on consolidation

Selling company Buying company

eliminate profit adjust depreciation

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 Page 431 - question

Disposal of Shares of Subsidiary

Pre sale Post sale

Subsidiary Subsidiary

Subsidiary Associate

Subsidiary Investment (IFRS 9)

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Joint Arrangements
IFRS 11 &
Investment in
Associates IAS 28

42
Overview
Associate Joint arrangement

Joint venture Joint operation

IAS 28 IFRS 11

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What do you mean by an ‘associate’?
An associate is an entity over which an investor has Significant influence

Significant influence

Power to participate in financial and operating policy decisions of investee

General presumption - 20% or more voting rights constitute significant influence

Accounting Method Equity Method

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IFRS 11 Definitions and Terminology

01 03
Joint arrangement A party to a joint arrangement
An arrangement of which two or more parties An entity that participates in a joint arrangement,
have joint control regardless of whether that entity has joint control
of the arrangement

02 04
Joint control Collective control
The contractually agreed sharing of control of When all the parties, or a group of the
an arrangement, which exists only when parties, must act together to direct the activities
decisions about the relevant activities require that significantly affect the returns of the
the unanimous consent of the parties sharing arrangement (i.e. the relevant activities)
control

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Definitions continued…

05 06
Joint operation Joint venture
A joint arrangement whereby the parties that A joint arrangement whereby the parties that
have joint control of the arrangement have have joint control of the arrangement have
rights to the assets, and obligations for the rights to the net assets of the arrangement
liabilities, relating to the arrangement

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Characteristics of a Joint Arrangement

e.g. shareholder
agreement

parties bound by contractual arrangement

joint arrangement

contractual arrangement gives two or more of

those parties joint control of the arrangement

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Joint control?
Does a contractual arrangement give all the parties, or N Outside the scope of Ind
a group of parties, control of the arrangement AS 111 (no joint control)
collectively?

Y
Do decisions about the relevant activities
require the unanimous consent of all the Outside the scope of Ind
parties, or a group of parties, that collectively AS 111 (no joint control)
control the arrangement?
Collective control exists N
when all the parties, or a
group of the parties, must act Y
together to direct the relevant
There is joint control (the arrangement is a
activities
joint arrangement)

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Classification of a Joint Arrangement
Not structured through a separate vehicle Structured through a separate vehicle

Evaluate rights and obligations of the parties:

• Legal form of the separate vehicle
• Terms of the contractual arrangement
• When relevant, other facts and circumstances
Rights to the assets, and
obligations for the liabilities
Rights to the net
assets

Joint operation Joint venture

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Takeaways

• Arrangements structured through a separate vehicle will normally (but not always) be a joint venture which must be equity accounted

• The mechanics of accounting for a joint operation may not always be the same as proportionate consolidation

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Financial Statement (FS) of a Joint Operator
Its revenue from the sale of
its share of the output
arising from the joint
operation

Its liabilities, including its Its share of the revenue

share of any liabilities from the sale of the output
incurred jointly by the joint operation

FS of a joint operator
Its assets, including its Its expenses, including its
share of any assets held share of any expenses
jointly incurred jointly

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Financial Statement of Joint Venture

Consolidation

Joint Venture Equity method of accounting IAS 28

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Equity Method of Accounting
No line-by-line consolidation

Consolidated balance sheet - Single line share of net assets in Associate/ JV

Consolidated statement of comprehensive income - Single line share of profits (after tax)

Treatment in consolidated statement of profit or loss and other

Treatment in consolidated statement of financial position
comprehensive income

• include cost of investment +/- share of post-acquisition P&L – • include share of profits (after tax)
impairment loss (if any) • eliminate dividend income
• eliminate investment in separate financial statements
• include post acquisition reserves
• share of net assets in excess of cost of investments included in profit
or loss

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Inter-company items

Inter-company balances Inter-company transactions

• No elimination • dividend- eliminated

• others- no elimination

Unrealized profit Eliminated to extent of investor’s interest

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Exemptions to Equity Accounting

An entity that is parent shall present consolidated financial statement.

• Parent get exemption for not preparing consolidated financial statements when:
- parent is wholly-owned; or partially-owned as long as other shareholders have no objection
- its debt/ equity not traded on public market
- it does not file its financial statements with a recognised stock exchange

&

• Its ultimate (or intermediate) parent presents consolidated financial statements in accordance with IFRS

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Other Requirements - Separate financial
statements

separate financial statements of investors that share joint control

joint venturer joint operator

either at cost or under IFRS 9 applies same accounting as in consolidated f/s

(accounts for its interest in the underlying assets and
in accordance with IAS 27 liabilities)

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Disclosure
Requirement

57
Disclosures (under IFRS 12)

• Information that enables users of financial statements to evaluate:

- Nature of, and risk associated with, entity’s interest in other entities
- Effects of those interests on its financial statements

• Significant judgements and assumptions made in determining:

• Nature of entity’s interest in another entity or arrangement

• Type of joint arrangement in which it has an interest

• That entity meets the definition of investment property, if applicable

• Information about entity’s interests in:

• Subsidiaries

• Joint arrangements and associates

• Unconsolidated structured entities

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Thank you for your attention

Any questions?

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