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BPP IFRS 3 Study Text Supplement

BPP IFRS 3 Study Text Supplement

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S T U D Y T E X T

CORPORATE REPORTING (INTERNATIONAL) TOPIC SUPPLEMENT

This Topic Supplement covers Chapter 13 Complex Groups and Chapter 14 Changes in Group Structures of your July 2008 BPP Study Text, together with their related questions from the Exam Question Bank. The Chapters and related questions are fully up-to-date for the revised IFRS 3 Business Combinations.

FOR EXAMS IN DECEMBER 2008

bLANK

Complex groups

Topic list 1 Complex groups 2 Consolidating sub-subsidiaries 3 Direct holdings in sub-subsidiaries

Syllabus reference D1 D1 D1

Introduction
This chapter introduces the first of several more complicated consolidation topics. The best way to tackle these questions is to be logical and to carry out the consolidation on a step by step basis. In questions of this nature, it is very helpful to sketch a diagram of the group structure, as we have done. This clarifies the situation and it should point you in the right direction: always sketch the group structure as your first working and double check it against the information in the question.

1

Study guide
Intellectual level D1 (a) Group accounting: statement of cash flows Apply the method of accounting for business combinations including complex group structures 3

Exam guide
If the groups questions does not involve an acquisition or disposal or a statement of cash flows, then it is likely to involve a complex group.

1 Complex groups
FAST FORWARD

When a holding company has several subsidiaries, the consolidated statement of financial position shows a single figure for non-controlling interests and for goodwill arising on consolidation. In cases where there are several subsidiary companies the technique is to open up a single non-controlling interest working and a columnar goodwill working.

1.1 Introduction
In this section we shall consider how the principles of statement of financial position consolidation may be applied to more complex structures of companies within a group. (a) Several subsidiary companies

You have already seen this type of structure in your previous studies. (b) Sub-subsidiaries

P holds a controlling interest in S which in turn holds a controlling interest in SS. SS is therefore a subsidiary of a subsidiary of P, in other words, a sub-subsidiary of P.

2

13: Complex groups⏐ Part C Group financial statements

(c)

Direct holdings in sub-subsidiaries: 'D' shaped groups

In this example, SS is a sub-subsidiary of P with additional shares held directly by P. In practice, groups are usually larger, and therefore more complex, but the procedures for consolidation of large groups will not differ from those we shall now describe for smaller ones.

1.2 A parent company which has several subsidiaries
Where a company P has several subsidiaries S1, S2, S3 and so on, the technique for consolidation is exactly as previously described. Cancellation is from the holding company, which has assets of investments in subsidiaries S1, S2, S3, to each of the several subsidiaries. The consolidated statement of financial position will show: (a) (b) A single figure for non-controlling interest, and A single figure for goodwill arising.

A single working should be used for each of the constituents of the consolidated statement of financial position: one working for goodwill, one for non-controlling interest, one for retained earnings (reserves), and so on.

1.3 Sub-subsidiaries
A slightly different problem arises when there are sub-subsidiaries in the group, which is how should we identify the non-controlling interest in the retained earnings of the group? Suppose P owns 80% of the equity of S, and that S in turn owns 60% of the equity of SS. It would appear that in this situation:

(a) (b) (c)

P owns 80% of 60% = 48% of SS The non-controlling interest in S owns 20% of 60% = 12% of SS The non-controlling interest in SS itself owns the remaining 40% of the SS equity

SS is nevertheless a sub-subsidiary of P, because it is a subsidiary of S which in turn is a subsidiary of P. The chain of control thus makes SS a sub-subsidiary of P which owns only 48% of its equity. The total non-controlling interest in SS may be checked by considering a dividend of $100 paid by SS where S then distributes its share of this dividend in full to its own shareholders.

Part C Group financial statements ⏐ 13: Complex groups

3

$ S will receive P will receive Leaving for the total minority in SS $60 80% × $60 = 48 52 100

Question

Effective interest

Top owns 60% of the equity of Middle Co, which owns 75% of the equity of Bottom Co. What is Top Co's effective holding in Bottom Co?

Answer
Top owns 60% of 75% of Bottom Co = 45%.

1.4 Date of effective control
The date the sub-subsidiary comes under the control of the holding company is either: (a) (b) The date P acquired S if S already holds shares in SS, or If S acquires shares in SS later, then that later date.

The dates of acquisition and the order in which the group is built up will make a difference to how we calculate goodwill and non-controlling interest.

1.5 Pro-forma goodwill calculation
Before we progress to the complex group calculations, here is a reminder of how the revised IFRS 3 Business combinations requires goodwill to be measured: Consideration transferred Amount of any non-controlling interests Fair value of acquirer's previously held equity interest (for business combinations achieved in stages – see Chapter 14) Less net acquisition-date fair value of identifiable assets acquired and liabilities assumed $ X X X X X X

While the above layout reflects the wording of the standard, for the purposes of your workings in the examination, the following layout is recommended: Group $ Consideration transferred/Fair value of non-controlling interests Less: Net fair value of identifiable assets acquired and liabilities assumed × Group/NCI % X (X) X X (X) X $ X NCI $ X

4

13: Complex groups⏐ Part C Group financial statements

The NCI (non-controlling interest) column is only needed if the NCI interest is to be measured at fair value. As we saw in Chapter 12, when the NCI is measured at fair value, goodwill arises that is attributable to the NCI.

Exam focus point

The examiner has strongly indicated that fair value NCI will not be tested with more difficult group topics in December 2008 and June 2009. Accordingly, this chapter uses examples where the NCI is valued at its proportionate share of the subsidiary’s identifiable net assets. Fair value NCI is shown as an alternative. You should keep an eye on Student Accountant magazine for articles by the examiner giving further advice on this point.

2 Consolidating sub-subsidiaries
FAST FORWARD

When dealing with sub-subsidiaries, you will need to calculate effective interest owned by the group and by the non-controlling interest. The date of acquisition is important when dealing with sub-subsidiaries. Remember that it is the post-acquisition reserves from a group perspective which are important. Don't panic when a question seems very complicated – sketch the group structure and analyse the information in the question methodically. The basic consolidation method is as follows. (a) (b) Net assets: show what the group controls. Equity (capital and reserves): show who owns the net assets included elsewhere in the statement of financial position. Reserves (retained earnings), therefore, are based on effective holdings.

Exam focus point

As indicated earlier, the major problem on consolidation is to identify the non-controlling interest share of the retained earnings of S and (especially) SS.

2.1 Example: subsidiary acquired first
The draft statements of financial position of P Co, S Co and SS Co on 30 June 20X7 were as follows. Assets Non-current assets Tangible assets Investments, at cost 80,000 shares in S Co 60,000 shares in SS Co Current assets Equity and liabilities Equity Ordinary shares of $1 each Retained earnings Payables P Co $ 105,000 120,000 – 80,000 305,000 S Co $ 125,000 – 110,000 70,000 305,000 SS Co $ 180,000 – – 60,000 240,000

80,000 195,000 275,000 30,000 305,000

100,000 170,000 270,000 35,000 305,000

100,000 115,000 215,000 25,000 240,000

P Co acquired its shares in S Co on 1 July 20X4 when the reserves of S Co stood at $40,000; and S Co acquired its shares in SS Co on 1 July 20X5 when the reserves of SS Co stood at $50,000. It is the group’s policy to measure the non-controlling interest at acquisition at its proportionate share of the fair value of the subsidiary’s net assets.

Part C Group financial statements ⏐ 13: Complex groups

5

Required Prepare the draft consolidated statement of financial position of P Group at 30 June 20X7. Note. Assume no impairment of goodwill.

Solution
This is two acquisitions from the point of view of the P group. In 20X4, the group buys 80% of S. Then in 20X5 S (which is now part of the P group) buys 60% of SS. P buys 80% of S, then S (80% of S from the group's point of view) buys 60% of SS. Having calculated the non-controlling interest and the P group interest (see working 1 below), the workings can be constructed. You should, however, note the following. (a) (b) (c) Group structure working (see working 1) Goodwill working: compare the costs of investments with the effective group interests acquired (80% of S Co and 48% of SS Co). Non-controlling interest working: bring in the total non-controlling interests in S Co's share capital and retained earnings (20%), and the total non-controlling interests in SS Co's share capital and retained earnings (52%). Retained earnings working: bring in the share of S Co's and SS Co's post-acquisition retained earnings in the normal way. Group structure

(d) 1

P
1.7.20X4 80%

S
1.7.20X5 60%

Effective interests in SS: P Group (80% × 60%) NCI

= 48% = 52%

SS
2 Goodwill $ Consideration transferred Fair value of identifiable NA acquired: Share capital Retained earnings

P in S $ 120,000 $

S in SS $ 88,000
(80% × 110,00

100,000 40,000 140,000 80% (112,000) 8,000

100,000 50,000 150,000 48% (72,000) 16,000 24,000

Group share

6

13: Complex groups⏐ Part C Group financial statements

3

Non-controlling interests Net assets per Q Less investment in SS S $ 270,000 (110,000) 160,000 × 20% 32,000 SS $ 215,000 215,000 × 52% 111,800

$ 143,800 Note. The cost of the investment in SS Co must be split between the non-controlling interest and the goodwill workings to ensure that we have only P Co’s share of the goodwill arising in the S Co subgroup appearing in the consolidated statement of financial position. This is done by taking the group share of the subsidiary's 'cost' in the goodwill working and by deducting the cost from the net assets allocated to the non-controlling interests. 4 Retained earnings Per question Pre-acquisition Post-acquisition Group share: In S Co ($130,000 × 80%) In SS Co ($65,000 × 48%) Group retained earnings P Co $ 195,000 S Co $ 170,000 (40,000) 130,000 SS Co $ 115,000 (50,000) 65,000

104,000 31,200 330,200

P CO CONSOLIDATED STATEMENT OF FINANCIAL POSITION AT 30 JUNE 20X7 Assets Non-current assets Tangible assets Goodwill Current assets Equity Ordinary shares of $1 each fully paid Retained earnings 3 Non-controlling interest Payables

$

410,000 24,000 210,000 644,000 80,000 330,200 410,200 143,800 554,000 90,000 644,000

2.2 Date of acquisition
Care must be taken when consolidating sub-subsidiaries, because (usually) either: (a) (b) The parent company acquired the subsidiary before the subsidiary bought the sub-subsidiary (as in the example in 2.1 above); OR The parent holding company acquired the subsidiary after the subsidiary bought the subsubsidiary
Part C Group financial statements ⏐ 13: Complex groups

7

The rule to remember here, when considering pre- and post-acquisition profits, is that we are only interested in the consolidated results of the parent company. We will use the example above to demonstrate the required approach.

2.3 Example: Sub-subsidiary acquired first
In this version, there is only one acquisition from the perspective of P group: ie on 1 July 20X5 it acquires S and SS as a 'job lot'. Putting it another way, it acquires a pre-existing group. So we do one calculation of goodwill looking at what P paid – ie the $120,000, versus what it acquired – ie 80% of the consolidated net assets of S and 48% of the consolidated net assets of SS. Again using the figures in Section 2.1, assume that: (a) (b) S Co purchased its holding in SS Co on 1 July 20X4 P Co purchased its holding in S Co on 1 July 20X5

The retained earnings figures on the respective dates of acquisition are the same, but on the date P Co purchased its holding in S Co, the retained earnings of SS Co were $60,000. It is the group’s policy to measure the non-controlling interest at its proportionate share of the fair value of the subsidiary’s net assets.

Solution
The point here is that SS Co only became part of the P group on 1 July 20X5, not on 1 July 20X4. This means that only the retained earnings of SS Co arising after 1 July 20X5 can be included in the postacquisition reserves of P Co group. Goodwill arising on the acquisition will be calculated by comparing the cost of the investment to the consolidated separable net assets of S (as represented by share capital and consolidated retained earnings, net of all goodwill). P CO CONSOLIDATED STATEMENT OF FINANCIAL POSITION AS AT 30 JUNE 20X7 Non-current assets Tangible Goodwill (W2) Current assets Equity and liabilities Ordinary shares $1 each, fully paid Retained earnings (W4) Non-controlling interest (W3) Payables

$ 410,000 19,200 429,200 210,000 639,200 80,000 325,400 405,400 143,800 549,200 90,000 639,200

8

13: Complex groups⏐ Part C Group financial statements

Workings 1 Group structure

P
1.7.20X5 80%

S
1.7.20X4 60%

SS
P owns an effective interest of 48% in SS. NCI in SS is 52%. 2 Note. Cost of investment in sub-sub is always deducted because we are looking at the net assets that would actually appear on the consolidated SOFP Goodwill The working should be set out as: $ Consideration transferred Less: Fair value of identifiable assets and liabilities acquired S Share capital Pre-acquisition retained earnings Less investment in SS 80% SS Share capital Pre-acquisition retained earnings 48% 3 Non-controlling interests The cost of investment in SS is again deducted as the NCI is being calculated on the net assets that have been consolidated (see note above). S SS $ $ Net assets per Q 270,000 215,000 Less investment in SS (110,000) 160,000 215,000 × 20% × 52% 32,000 111,800 100,000 60,000 160,000 (76,800) 19,200 $ 120,000

100,000 40,000 (110,000) 30,000 (24,000)

$ 143,800 4 Retained earnings P Co (as above) S Co (as above) SS Co (115 – 60) × 48% $ 195,000 104,000 26,400 325,400

Part C Group financial statements ⏐ 13: Complex groups

9

2.4 Example: subsidiary acquired first: non-controlling interest at fair value
Exam focus point
This example is for completeness only. The examiner has strongly indicated that fair value NCI will not be tested with more difficult group topics in December 2008 and June 2009. However, you may wish to see how this topic might be approached. Keep an eye on Student Accountant for further guidance from the examiner – he may change his approach to testing this area, and if you are taking the exam later than June 2009 you may need to deal with complex groups and fair value NCI.

The draft statements of financial position of P Co, S Co and SS Co on 30 June 20X7 were as follows. Assets Non-current assets Tangible assets Investments, at cost 80,000 shares in S Co 60,000 shares in SS Co Current assets Equity and liabilities Equity Ordinary shares of $1 each Retained earnings Payables P Co $ 105,000 120,000 – 80,000 305,000 S Co $ 125,000 – 110,000 70,000 305,000 SS Co $ 180,000 – – 60,000 240,000

80,000 195,000 275,000 30,000 305,000

100,000 170,000 270,000 35,000 305,000

100,000 115,000 215,000 25,000 240,000

P Co acquired its shares in S Co on 1 July 20X4 when the reserves of S Co stood at $40,000; and S Co acquired its shares in SS Co on 1 July 20X5 when the reserves of SS Co stood at $50,000. It is the group’s policy to measure the non-controlling interest at fair value at the date of acquisition. The fair value of the non-controlling interests in S on 1 July 20X4 was $29,000. The fair value of the 52% noncontrolling interest on 1 July 20X5 was $80,000. Required Prepare the draft consolidated statement of financial position of P Group at 30 June 20X7. Note. Assume no impairment of goodwill.

Solution
The main difference from the example in 2.1 above is that extra columns are needed in the goodwill calculation for the goodwill attributable to the non-controlling interest. As explained in Chapter 12, the goodwill attributable to the non-controlling interest is also added to the NCI figure at the year end.

10

13: Complex groups⏐ Part C Group financial statements

P CO CONSOLIDATED STATEMENT OF FINANCIAL POSITION AT 30 JUNE 20X7 Assets Non-current assets Tangible assets Goodwill (W2) Current assets Equity Ordinary shares of $1 each fully paid Retained earnings (W4) 3 Non-controlling interest (W3) Payables 1 Group structure

$

410,000 27,000 210,000 647,000 80,000 330,200 410,200 146,800 557,000 90,000 647,000

P
1.7.20X4 80%

S
1.7.20X5 60%

Effective interests in SS: P Group (80% × 60%) NCI

= 48% = 52%

SS

2

Goodwill P in S Group $
Consideration transferred/ FV NCI Fair value of identifiable net assets acquires Share capital Retained earnings Group/NCI Share

NCI $ $ 29,000 $ (80% x 110,000) 100,000 50,000 150,000

S in SS Group NCI $ $ 88,000 80,000

120,000

100,000 40,000 140,000 80% (112,000) 8,000 (20%) (28,000) 1,000

48% (72,000) 16,000

(52%) (78,000) 2,000

$27,000 3 Non-controlling interests The non-controlling interest working in this example has one extra step: adding on the noncontrolling interest in goodwill as calculated in working 2. The cost of investment in SS is again deducted as the NCI is being calculated on the net assets that have been consolidated (see note above).
Part C Group financial statements ⏐ 13: Complex groups

11

Net assets per Q Less investment in SS

Non-controlling interests in goodwill (W2)

S $ 270,000 (110,000) 160,000 × 20% 32,000 1,000 33,000

SS $ 215,000 215,000 × 52% 111,800 2,000 113,800 146,800

4

Retained earnings Per question Pre-acquisition Post-acquisition Group share: In S Co ($130,000 × 80%) In SS Co ($65,000 × 48%) Group retained earnings

P Co $ 195,000

S Co $ 170,000 (40,000) 130,000

SS Co $ 115,000 (50,000) 65,000

104,000 31,200 330,200

Question
Learning outcome: A (ii)

Sub-subsidiary

The statements of financial position of Antelope Co, Yak Co and Zebra Co at 31 March 20X4 are summarised as follows. Assets Non-current assets Freehold property Plant and machinery Investments in subsidiaries Shares, at cost Loan account Current accounts Current assets Inventories Receivables Cash at bank Antelope Co $ $ 100,000 210,000 310,000 110,000 – 10,000 120,000 170,000 140,000 60,000 370,000 800,000 20,500 50,000 16,500 87,000 289,200 6,200 3,800 12,200 22,200 15,000 1,000 4,000 20,000 23,000 Yak Co $ $ 100,000 80,000 180,000 $ Zebra Co $ – 3,000 3,000 – – – 3,000

12

13: Complex groups⏐ Part C Group financial statements

Equity and liabilities Equity Ordinary share capital Retained earnings Current liabilities Trade payables Due to Antelope Co Due to Yak Co Taxation

200,000 379,600 579,600 160,400 – – 60,000

100,000 129,200 229,200 40,200 12,800 – 7,000 – – 220,400 800,000 60,000 289,200

10,000 (1,000) 9,000 800 600 12,600 – – – 14,000 23,000

Antelope Co acquired 75% of the shares of Yak Co in 20X1 when the credit balance on the retained earnings of that company was $40,000. No dividends have been paid since that date. Yak Co acquired 80% of the shares in Zebra Co in 20X3 when there was a debit balance on the retained earnings of that company of $3,000. Subsequently $500 was received by Zebra Co and credited to its retained earnings, representing the recovery of a bad debt written off before the acquisition of Zebra's shares by Yak Co. During the year to 31 March 20X4 Yak Co purchased inventory from Antelope Co for $20,000 which included a profit mark-up of $4,000 for Antelope Co. At 31 March 20X4 one half of this amount was still held in the inventories of Yak Co. Group accounting policies are to make a full allowance for unrealised intra-group profits. It is the group’s policy to measure the non-controlling interest at its proportionate share of the fair value of the subsidiary’s net assets. Prepare the draft consolidated statement of financial position of Antelope Co at 31 March 20X4. (Assume no impairment of goodwill.)

Answer
A
20X1 75%

Y
20X3 80%

Effective interests in Z: A Group (75% × 80%) NCI

= 60% = 40%

Z

Part C Group financial statements ⏐ 13: Complex groups

13

Workings 1 Goodwill $ Consideration transferred Fair value of identifiable NA acquired: Share capital Retained earnings: ($3,000) + $500 A in Y $ 110,000 Y in Z $ $ (75% × 45 6,200) 4,650

100,000 40,000 140,000 75% (105,000) 5,000

10,000 (2,500) 7,500 60% (4,500) 150 $ 5,150

Group share

2

Non-controlling interests Net assets per Q Less investment in Zebra Yak $ 229,200 (6,200) 223,000 × 25% 55,750 Zebra $ 9,000 9,000 × 40% 3,600

59,350 3 Retained earnings Per question Adjustment bad debt recovery Pre-acquisition profit/losses Post-acquisition profits Group share In Yak ($89,200 × 75%) In Zebra ($1,500 × 60%) Unrealised profit in inventories sitting in parent ($4,000) × ½) Group retained earnings

Antelope $ 379,600

Yak $ 129,200 (40,000) 89,200

Zebra $ (1,000) (500) 3,000 1,500

66,900 900

(2,000) 445,400

14

13: Complex groups⏐ Part C Group financial statements

ANTELOPE CO CONSOLIDATED STATEMENT OF FINANCIAL POSITION AS AT 31 MARCH 20X4 $ Assets Non-current assets Freehold property Plant and machinery Goodwill (W1) Current assets Inventories $(205,500 – 2,000) Receivables Cash at bank $

200,000 293,000 493,000 5,150 498,150 203,500 191,000 80,500 475,000 973,150

Equity and liabilities Equity Ordinary share capital Retained earnings (W3) Shareholders' funds Non-controlling interests (W2) Current liabilities Trade payables Taxation

200,000 445,400 645,400 59,350 704,750 201,400 67,000 268,400 973,150

2.5 Section summary
You should follow this step by step approach in all questions using the single-stage method. This applies to Section 3 below as well.

Step 1 Step 2 Step 3 Step 4 Step 5 Step 6

Sketch the group structure and check it to the question Add details to the sketch of dates of acquisition, holdings acquired (percentage and nominal values) and cost Goodwill working: compare costs of investment with the effective group interests acquired. Non-controlling interest working: total NCI in subsidiary plus total NCI in sub-subsidiary Reserves working: include the group share of subsidiary and sub-subsidiary postacquisition retained earnings (effective holdings again) Prepare the consolidated statement of financial position (and statement of comprehensive income if required).

Part C Group financial statements ⏐ 13: Complex groups

15

3 Direct holdings in sub-subsidiaries
Consider the following structure, sometimes called a 'D-shaped' group.

P

80% 20% (NCI direct) 75% 15% (NCI direct) In the structure above, there is: (a) (b) (c) A direct non-controlling share in S of A direct non-controlling share in SS of An indirect non-controlling share in SS of 20% × 75% = 20% 15% 15% 30% SS S 10%

The effective interest in SS is: Group 80% × 75%

=

∴ NCI

60% interest 10% 70% 30% 100%

Having ascertained the structure and non-controlling interests, proceed as for a typical sub-subsidiary situation.

Question
Learning outcome: A (ii)

'D' shaped group

The draft statements of financial position of Hulk Co, Molehill Co and Pimple Co as at 31 May 20X5 are as follows. Hulk Co $ Assets Non-current assets Tangible assets Investments in subsidiaries(cost) Shares in Molehill Co Shares in Pimple Co $ Molehill Co $ $ Pimple Co $ $

90,000

60,000

60,000

90,000 25,000 115,000 205,000 40,000 245,000

– 42,000 42,000 102,000 50,000 152,000

– – – 60,000 40,000 100,000

Current assets

16

13: Complex groups⏐ Part C Group financial statements

Hulk Co $ Equity and liabilities Equity Ordinary shares $1 Share premium account Retained earnings Non-current liabilities 12% loan Current liabilities Payables (a) (b) (c) (d) (e) $

Molehill Co $ $

Pimple Co $ $

100,000 50,000 45,000 195,000 – 195,000 50,000 245,000

50,000 20,000 32,000 102,000 10,000 112,000 40,000 152,000

50,000 – 25,000 75,000 – 75,000 25,000 100,000

Hulk Co acquired 60% of the shares in Molehill on 1 January 20X3 when the balance on that company's retained earnings was $8,000 (credit) and there was no share premium account. Hulk acquired 20% of the shares of Pimple Co and Molehill acquired 60% of the shares of Pimple Co on 1 January 20X4 when that company's retained earnings stood at $15,000. There has been no payment of dividends by either Molehill or Pimple since they became subsidiaries. There was no impairement of goodwill. It is the group’s policy to measure the non-controlling interest at acquisition at its proportionate share of the fair value of the subsidiary’s net assets.

Required Prepare the consolidated statement of financial position of Hulk Co as at 31 May 20X5.

Answer

(NCI

Effective interests in Pimple: Hulk (60% × 60% + 20%) = 56% ∴ NCI = 44%

(NCI

The direct non-controlling interest in Molehill Co is The direct non-controlling interest in Pimple Co is The indirect non-controlling interest in Pimple Co is (40% of 60%) The total non-controlling interest in Pimple Co is The group share of Molehill Co is 60% and of Pimple Co is (100 – 44)% = 56%

40% 20% 24% 44%

Part C Group financial statements ⏐ 13: Complex groups

17

Workings 1 Goodwill Hulk in Molehill $ Consideration transferred Fair value at NA acquired Share capital Retained earnings Group share $ 90,000 Molehill in Pimple $ (60% × 42,000) 50,000 15,000 65,000 36% $ 25,200 Hulk in Pimple $ $ 25,000

50,000 8,000 58,000 60%

(34,800) 55,200

(23,400) 1,800 $69,000

50,000 15,000 65,000 20% 13,000 12,000

2

Non-controlling interests Molehill $ 102,000 (42,000) 60,000 × 40% $24,000 Type here $57,000 Hulk $ 45,000 Molehill $ 32,000 (8,000) 24,000 Pimple $ 25,000 (15,000) 10,000 Pimple $ 75,000 – 75,000 × 44% $33,000

Net assets per question Investment in Pimple

3

Retained earnings Per question Pre-acquisition profits Post-acquisition retained earnings Group share: In Molehill ($24,000 × 60%) In Pimple ($10,000 × 56%) Group retained earnings

14,400 5,600 65,000 $ 50,000 12,000 62,000

4

Share premium account Hulk Co Molehill Co: all post-acquisition ($20,000 × 60%)

18

13: Complex groups⏐ Part C Group financial statements

HULK CO CONSOLIDATED STATEMENT OF FINANCIAL POSITION AS AT 31 MAY 20X8 $ Assets Non-current assets Tangible assets Goodwill (W1) Current assets Equity and liabilities Equity Ordinary shares $1 Share premium (W4) Retained earnings (W3) Shareholders' funds Non-controlling interests (W2) Non-current liabilities 12% loan Current liabilities Payables $

210,000 69,000 279,000 130,000 409,000

100,000 62,000 65,000 227,000 57,000 284,000 10,000 294,000 115,000 409,000

Part C Group financial statements ⏐ 13: Complex groups

19

Chapter Roundup
• When a holding company has several subsidiaries, the consolidated statement of financial position shows a single figure for non-controlling interests and for goodwill arising on consolidation. In cases where there are several subsidiary companies the technique is to open up a single non-controlling interest working and a single goodwill working. When dealing with sub-subsidiaries, you will need to calculate effective interest. The date of acquisition is important when dealing with sub-subsidiaries. Remember that it is the post-acquisition reserves from a group perspective which are important.

Quick Quiz
1 2 3 B Co owns 60% of the equity of C Co which owns 75% of the equity of D Co. What is the total noncontrolling interest percentage ownership in D Co? What is the basic consolidation method for sub-subsidiaries? P Co owns 25% of R Co's equity and 75% of Q Co's equity. Q Co owns 40% of R Co's equity. What is the total non-controlling interest percentage ownership in R Co?

Answers to Quick Quiz
1 B 60% C 75% D Non-controlling interest = 25% + (40% of 75%) = 55% 2 3 75% 25% (NCI direct) 40% 35% (NCI direct) Q • • Net assets: show what the group controls Equity (capital and reserves): show who owns the net assets P

25%

R

Total non-controlling interest in R is 35% + (25% × 40%) = 35%
Now try the question below from the Exam Question Bank

Number Q16

Level Examination

Marks 10

Time 18 mins

20

13: Complex groups⏐ Part C Group financial statements

Changes in group structures

Topic list 1 Disposals 2 Business combinations achieved in stages

Syllabus reference D3 D3

Introduction
Complex consolidation issues are very likely to come up in this, the final stage of your studies on financial accounting. Your approach should be the same as for more simple consolidation questions: methodical and logical. If you understand the basic principles of consolidation, you should be able to tackle these complicated questions.

21

Study guide
Intellectual level D3 (a) (b) Changes in group structure Discuss the reasons behind a group reorganisation Evaluate and assess the principal terms of a proposed group reorganisation 3 3

Exam guide
IFRS 3 has changed the way piecemeal acquisitions and disposals are accounted for.

1 Disposals
FAST FORWARD

Disposals can drop a subsidiary holding to associate status, long-term investment status and to zero, or a the parent might still retain a subsidiary with a reduced holding. Once again, you should be able to deal with all these situations. Remember particularly how to deal with goodwill.

1.1 Types of disposal 1.1.1 Disposals where control is lost
There are three main kinds of disposals in which control is lost: (a) (b) (c) Full disposal: all the holding is sold (say, 80% to nil) Subsidiary to associate (say, 80% to 30%) Subsidiary to trade investment (say, 80% to 10%)

In your exam, you are most likely to meet a partial disposal, either subsidiary to associate or subsidiary to trade investment.

1.1.2 Disposals where control is retained
There is only one kind of disposal where control is retained: subsidiary to subsidiary, for example an 80% holding to a 60% holding. Disposals where control is lost are treated differently from disposals where control is retained. There is a reason for this.

1.2 General principle: ‘crossing an accounting boundary’
Under the revised IFRS 3 disposal occurs only when one entity loses control over another, which is generally when its holding is decreased to less than 50%. The Deloitte guide: Business Combinations and Changes in Ownership Interests calls this ‘crossing an accounting boundary’. On disposal of a controlling interest, any retained interest (an associate or trade investment) is measured at fair value on the date that control is lost. This fair value is used in the calculation of the gain or loss on disposal, and also becomes the carrying amount for subsequent accounting for the retained interest. If the 50% boundary is not crossed, as when the interest in a subsidiary is reduced, the event is treated as a transaction between owners. Whenever you cross the 50% boundary, you revalue, and a gain or loss is reported in profit or loss for the year. If you do not cross the 50% boundary, no gain or loss is reported; instead there is an adjustment to the parent’s equity.

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The following diagram, from the Deloittes guide may help you visualise the boundary:

As you will see from the diagram, the situation in paragraph 1.1.2, where an interest in a subsidiary is reduced from say 80% to 60%, does not involve crossing that all-important 50% threshold.

1.3 Effective date of disposal
The effective date of disposal is when control passes: the date for accounting for an undertaking ceasing to be a subsidiary undertaking is the date on which its former parent undertaking relinquishes its control over that undertaking. The consolidated income statement (statement of comprehensive income) should include the results of a subsidiary undertaking up to the date of its disposal. IAS 37 on provisions (Chapter 9) and IFRS 5 on disclosure of discontinued operations will have an impact here (see Chapter 15).

1.4 Control lost: calculation of group gain on disposal
A proforma calculation is shown below. This needs to be adapted for the circumstances in the question, in particular whether it is a full or partial disposal: $ X X (X) (X) X/(X) X/(X)

Fair value of consideration received Fair value of any non-controlling interests retained net assets × share (%) held at date control lost goodwill less any NCI in goodwill at date control lost Add/less: gains/(losses) previously recognised in OCI Group profit/(loss) Less: Following IAS 1, this gain may need to be disclosed separately if it is material.

1.4.1 Analogy: trading in a large car for a smaller one
It may seem counter-intuitive that the investment retained is now part of the ‘proceeds’ for the purposes of calculating the gain. One way of looking at it is to imagine that you are selling a larger car and putting part of the proceeds towards a smaller one. If the larger car you are selling cost you less than the smaller car and cash combined, you have made a profit. Likewise, the company making the disposal sold a larger stake to gain, at fair value, a smaller stake and some cash on top, which is the ‘consideration received’. This analogy is not exact, but may help.

Part C Group financial statements ⏐ 14: Changes in group structures

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1.5 Control lost: calculation of gain in parent’s separate financial statements
This calculation is more straightforward: the proceeds are compared with the carrying value of the investment sold. The investment will be held at cost or at fair value if held as an available-for-sale financial asset: $ X (X) X/(X) X/(X)

Fair value of consideration received Less carrying value of investment disposed Add/(less) fair value changes previously recognised in OCI (if an AFSFA) Profit/(loss) on disposal

The profit on disposal is generally taxable, and the tax based on the parent’s gain rather than the group’s.

1.6 Disposals where control is lost: accounting treatment
For a full disposal, apply the following treatment. (a) Statement of comprehensive income (income statement) (i) (ii) (b) Consolidate results and non-controlling interest to the date of disposal. Show the group profit or loss on disposal.

Statement of financial position There will be no non-controlling interest and no consolidation as there is no subsidiary at the date the statement of financial position is being prepared.

For partial disposals, use the following treatments. (a) Subsidiary to associate (i) Statement of comprehensive income (income statement) (1) (2) (3) (ii) Treat the undertaking as a subsidiary up to the date of disposal, ie consolidate for the correct number of months and show the non-controlling interest in that amount. Show the profit or loss on disposal. Treat as an associate thereafter.

Statement of financial position (1) (2) The investment remaining is at its fair value at the date of disposal (to calculate the gain) Equity account (as an associate) thereafter, using the fair value as the new ‘cost’. (Post ‘acquisition’ retained earnings are added to this cost in future years to arrive at the carrying value of the investment in the associate in the statement of financial position.)

(b)

Subsidiary to trade investment (i) Income statement (statement of comprehensive income) (1) (2) (3) Treat the undertaking as a subsidiary up to the date of disposal, ie consolidate. Show profit or loss on disposal. Show dividend income only thereafter.

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14: Changes in group structures ⏐ Part C Group financial statements

(ii)

Statement of financial position (i) (2) The investment remaining is at its fair value at the date of disposal (to calculate the gain). Thereafter, treat as an available-for-sale financial asset under IAS 39.

1.7 Disposals where control is retained
Control is retained where the disposal is from subsidiary to subsidiary. The accounting treatment is treatment is as follows:

1.7.1 Statement of comprehensive income (income statement)
(a) (b) (c) The subsidiary is consolidated in full for the whole period. The non-controlling interest in the income statement will be based on percentage before and after disposal, ie time apportion. There is no profit or loss on disposal.

1.7.2 Statement of financial position
(a) (b) (c) The non-controlling interest in the statement of financial position is based on the year end percentage. The change (increase) in non-controlling interests is shown as an adjustment to the parent’s equity. Goodwill on acquisition is unchanged in the consolidated statement of financial position.

1.7.3 Adjustment to the parent’s equity
This reflects the fact that the non-controlling share has increased (as the parent’s share has reduced). A subsidiary to subsidiary disposal is, in effect, a transaction between owners. Specifically, it is a reallocation of ownership between parent and non-controlling equity holders. The goodwill is unchanged, because it is a historical figure, unaffected by the reallocation. The adjustment to the parent’s equity is calculated as follows: $ Fair value of consideration received X Increase in NCI in net assets at disposal (X) Increase in NCI in goodwill at disposal * (X) Adjustment to parent's equity X * Note. This line is only required where non-controlling interests are measured at fair value at the date of acquisition (ie where there is an increase in the non-controlling interest share of goodwill already recognised). It is included for completeness only, as the examiner has strongly indicated that he will not test fair value NCI in this context in December 2008 or June 2009. If you are wondering why the decrease in shareholding is treated as a transaction between owners, look back to Chapter 12, where we explained that the revised IFRS 3 views the group as an economic entity, and views all providers of equity, including non-controlling interests, as owners of the group. Noncontrolling shareholders are not outsiders, they are owners of the group just like the parent. You can practise the adjustment to parent’s equity in the example and question below.

1.7.4 Gain in the parent’s separate financial statements
This is calculated as for disposals where control is lost: see Paragraph 1.5 above.

Part C Group financial statements ⏐ 14: Changes in group structures

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1.8 Example: Partial disposals
Chalk Co bought 100% of the voting share capital of Cheese Co on its incorporation on 1 January 20X2 for $160,000. Cheese Co earned and retained $240,000 from that date until 31 December 20X7. At that date the statements of financial position of the company and the group were as follows. Chalk Co $'000 160 1,000 1,160 400 560 200 1,160 Cheese Co $'000 – 500 500 160 240 100 500 Consolidated $'000 – 1,400 1,400 400 800 200 1,400

Investment in Cheese Other net assets Share capital Retained earnings Current liabilities

It is the group’s policy to value the non-controlling interest at its proportionate share of the fair value of the subsidiary’s identifiable net assets. On 1 January 20X8 Chalk Co sold 40% of its shareholding in Cheese Co for $280,000. The profit on disposal (ignoring tax) in the financial statements of the parent company is calculated as follows. Chalk $'000 Fair value of consideration received 280 64 Carrying value of investment (40% × 160) Profit on sale 216 We now move on to calculate the adjustment to equity for the group financial statements. Because only 40% of the 100% subsidiary has been sold, leaving a 60% subsidiary, control is retained. This means that there is no group profit on disposal in profit or loss for the year. Instead, there is an adjustment to the parent’s equity, which affects group retained earnings.

Point to note

Remember that, when control is retained, the disposal is just a transaction between owners. The noncontrolling shareholders are owners of the group, just like the parent. The adjustment to parent’s equity is calculated as follows: Fair value of consideration received Increase in non-controlling interest in net assets at the date of disposal (40% × 400) Adjustment to parent’s equity $'000 280 160 120

This increases group retained earnings and does not go through group profit or loss for the year. (Note that there is no goodwill in this example, or non-controlling interest in goodwill, as the subsidiary was acquired on incorporation.)

Solution: subsidiary status
The statements of financial position immediately after the sale will appear as follows. Chalk Co $'000 96 1,280 1,376 400 776 200 1,376 Cheese Co $'000 – 5500 500 160 240 100 500 Consolidated $'000 – 1,780 1,780 400 920 300 1,620 160 1,780

Investment in Cheese (160-64) Other assets Share capital Retained earnings* Current liabilities Non-controlling interest

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14: Changes in group structures ⏐ Part C Group financial statements

*Chalk's retained earnings are $560,000 + $216,000 profit on disposal. Group retained earnings are increased by the adjustment above: $800,000 + $120,000 = $920,000.

Solution: associate status
Using the above example, assume that Chalk Co sold 60% of its holding in Cheese Co for $440,000. The fair value of the 40% holding retained was $200,000. The gain or loss on disposal in the books of the parent company would be calculated as follows. Parent company $'000 Fair value of consideration received 440 96 Carrying value of investment (60% × 160) Profit on sale 344 This time control is lost, so there will be a gain in group profit or loss, calculated as follows: Fair value of consideration received Fair value of investment retained Less Chalk’s share of consolidated carrying value at date control lost 100% × 400 Group profit on sale $'000 440 200 (400) 240

Note that there was no goodwill arising on the acquisition of Cheese, otherwise this too would be deducted in the calculation. The statements of financial position would now appear as follows. Chalk Co $'000 64 1,440 1,504 400 904 200 1,504 Cheese Co $'000 – 500 500 160 240 100 500 Consolidated $'000 200 1,440 1,640 400 1,040 200 1,640

Investment in Cheese (Note 1) Other assets Share capital Retained earnings (Note 2) Current liabilities Notes 1

The investment in Cheese is at fair value in the group SOFP. In fact it is equity accounted at fair value at date control lost plus share of post-‘acquisition’ retained earnings. But there are no retained earnings yet because control has only just been lost. Group retained earnings are $800,000 (per question) plus group profit on the sale of $240,000, ie $1,040,000.

2

The following comprehensive question should help you get to grips with disposal problems. Try to complete the whole question without looking at the solution, and then check your answer very carefully. Give yourself at least two hours. This is a very difficult question.

Exam focus point

Questions may involve part-disposals leaving investments with both subsidiary and associate status. Disposals could well come up at P2, since you have not covered them before.

Question

Disposal

Smith Co bought 80% of the share capital of Jones Co for $324,000 on 1 October 20X5. At that date Jones Co's retained earnings balance stood at $180,000. The statements of financial position at 30 September 20X8 and the summarised statements of comprehensive income (income statements) to that date are given below.
Part C Group financial statements ⏐ 14: Changes in group structures

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Non-current assets Investment in Jones Co Current assets Equity $1 ordinary shares Retained earnings Current liabilities Profit before tax Tax Profit for the year

Smith Co $'000 360 324 370 1,054 540 414 100 1,054 153 (45) 108

Jones Co $'000 270 – 370 640 180 360 100 640 126 (36) 90

No entries have been made in the accounts for any of the following transactions. Assume that profits accrue evenly throughout the year. It is the group’s policy to value the non-controlling interest at its proportionate share of the fair value of the subsidiary’s identifiable net assets. Ignore taxation. Required Prepare the consolidated statement of financial position and income statement at 30 September 20X8 in each of the following circumstances. (Assume no impairment of goodwill.) (a) (b) (c) (d) Smith Co sells its entire holding in Jones Co for $650,000 on 30 September 20X8. Smith Co sells one quarter of its holding in Jones Co for $160,000 on 30 June 20X8. Smith Co sells one half of its holding in Jones Co for $340,000 on 30 June 20X8, and the remaining holding (fair value $250,000) is to be dealt with as an associate. Smith Co sells one half of its holding in Jones Co for $340,000 on 30 June 20X8, and the remaining holding (fair value $250,000) is to be dealt with as an available-for-sale financial asset.

Answer
(a) Complete disposal at year end (80% to 0%) CONSOLIDATED STATEMENT OF FINANCIAL POSITION AS AT 30 SEPTEMBER 20X8 Non-current assets Current assets (370 + 650) Equity $1 ordinary shares Retained earnings (W2) Current liabilities CONSOLIDATED INCOME STATEMENT FOR THE YEAR ENDED 30 SEPTEMBER 20X8 Profit before tax (153 + 126) Profit on disposal (W1) Tax (45 + 36)

$'000 360 1,020 1,380 540 740 100 1,380

$'000 279 182 (81) 380

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Profit attributable to: Owners of the parent Non-controlling interest (20% × 90) Workings 1 Profit on disposal of Jones Co Fair value of consideration received Less share of consolidated carrying value when control lost: net assets (540 × 80%) goodwill $'000

362 18 380

$'000 650

432 36 (468) 182

Note: goodwill Consideration transferred Acquired: 80% × (180 + 180) 2 Retained earnings carried forward Smith per question Jones: 80% × (360 − 180) Profit on disposal (W1) (b) Partial disposal: subsidiary to subsidiary (80% to 60%) CONSOLIDATED STATEMENT OF FINANCIAL POSITION AS AT 30 SEPTEMBER 20X8 Non-current assets (360 + 270) Goodwill (part (a)) Current assets (370 + 160 + 370) Equity $1 ordinary shares Retained earnings (W2) Non-controlling interest (40% × 540) Current liabilities (100 + 100) CONSOLIDATED INCOME STATEMENT FOR THE YEAR ENDED 30 SEPTEMBER 20X8 Profit before tax (153 +126) Tax (45 + 36) Profit for the period Profit attributable to: Owners of the parent Non-controlling interest 20% × 90 × 9/12 40% × 90 × 3/12 $'000 630 36 900 1,566 540 610 1,150 216 200 1,566 $'000 324 (288) 36 $'000 414 144 182 740

$'000

$'000 279 (81) 198 175.5

13.5 9.0 22.5 198.0 19 29

Part C Group financial statements ⏐ 14: Changes in group structures

Workings 1 Adjustment to parent’s equity on disposal of 20% of Jones Fair value of consideration received Less increase in NCI in net assets at disposal 20% × (540 – (3/12 × 90)) 2 Group retained earnings $'000 $'000 160.0 (103.5) 56.5 Smith $'000 414.0 56.5 Jones 60% $'000 360 (180) 180 108.0 31.5 610.0 Jones 20% sold $'000 337.5 (180.0) 157.5

Per question/at date of disposal (360 – (90 × 3/12)) Adjustment to parent's equity on disposal (W1) Retained earnings at acquisition Jones: share of post acqn. earnings (180 × 60%) Jones: share of post acqn. earnings (157.5 × 20%) (c) (i) Partial disposal: subsidiary to associate (80% to 40%)

CONSOLIDATED STATEMENT OF FINANCIAL POSITION AS AT 30 SEPTEMBER 20X8 $'000 Non-current assets 360 Investment in associate (W3) 259 Current assets (370 + 340) 710 1,329 Equity $1 ordinary shares 540 Retained earnings (W2) 689 Current liabilities 100 1,329 CONSOLIDATED INCOME STATEMENT FOR THE YEAR ENDED 30 SEPTEMBER 20X8 Profit before tax (153 + 9/12 × 126) Profit on disposal (W1) Share of profit of associate (90 × 3/12× 40%) Tax 45 + (9/12 × 36) Profit for the period Profit attributable to: Owners of the parent Non-controlling interest (20% × 90 × 9/12)

$'000 247.5 140.0 9.09 (72.0) 324.5 311.0 13.5 324.5

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14: Changes in group structures ⏐ Part C Group financial statements

Workings 1 Profit on disposal in Smith Co Fair value of consideration received Fair value of 40% investment retained Less share of consolidated carrying value when control lost 80% × ((540 – (90 × 3/12)) Goodwill (part (a)) $'000 $'000 340 250

414 36 (450) 140

2

Group retained earnings

Smith $'000 414 140

Per question/at date of disposal (360 – (90 × 3/12)) Group profit on disposal (W1) Retained earnings at acquisition Jones: share of post acqn. earnings (180 × 40%) Jones: share of post acqn. earnings (157.5 × 40%) 3 Investment in associate Fair value at date control lost (new ‘cost’) Share of post ‘acq'n’ retained reserves (90 × 3/12 × 40%) (d)

Jones 40% $'000 360 (180) 180

Jones 40% sold $'000 337.5 (180.0) 157.5

72 63 689 $'000 4250 9 259

Partial disposal: subsidiary to available-for-sale financial asset (80% to 40%) CONSOLIDATED STATEMENT OF FINANCIAL POSITION AS AT 30 SEPTEMBER 20X8 Non-current assets Investment Current assets (370 + 340) Equity $1 ordinary shares Retained earnings (W) Current liabilities CONSOLIDATED INCOME STATEMENT FOR THE YEAR ENDED 30 SEPTEMBER 20X8 Profit before tax (153 + (9/12 × 126) Profit on disposal (See (c) above) Tax (45 + (9/12 × 36)) Profit for the period Profit attributable to: Owners of the parent Non-controlling interest

$'000 360 250 710 1,320 540 680 100 1,320

$'000 247.5 140.0 (72.0) 315.5 302.0 13.5 315.5

Part C Group financial statements ⏐ 14: Changes in group structures

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Working: retained earnings Per question/at date of disposal (360 – (90 × 3/12)) Group profit on disposal (W1) Retained earnings at acquisition Jones: share of post acqn. earnings (157.5 × 80%)

Smith $'000 414 140

Jones $'000 337.5 (180.0) 157.5

126 680

1.9 Section summary
Disposals occur frequently in Paper 2 consolidation questions. • • • The effective date of disposal is when control passes. Treatment of goodwill is according to IFRS 3. Disposals may be full or partial, to subsidiary, associate or investment status. – – if control is lost, the interest retained is fair valued and becomes part of the calculation of the gain on disposal.

if control is retained, the change in non-controlling interests is shown as an adjustment to parent’s equity. Gain or loss on disposal is calculated for the parent company and the group.

2 Business combinations achieved in stages
FAST FORWARD

Transactions of the type described in this chapter can be very complicated and certainly look rather daunting. Remember and apply the basic techniques and you should find such questions easier than you expected. Business combinations achieved in stages (piecemeal acquisitions) can lead to a company becoming a non-current asset investment, an associate and then a subsidiary over time. Make sure you can deal with each of these situations. A parent company may acquire a controlling interest in the shares of a subsidiary as a result of several successive share purchases, rather than by purchasing the shares all on the same day. Business combinations achieved in stages may also be known as ‘piecemeal acquisitions’.

Point to note

Business combinations achieved in stages are in many ways a mirror image of disposals. The same principles underly both.

2.1 Types of business combination achieved in stages
There are three possible types of business combinations achieved in stages: (a) (b) (c) A previously held interest, say 10%, with no significant influence (accounted for under IAS 39) is increased to a controlling interest of 50% or more. A previously held equity interest, say 35%, accounted for as an associate under IAS 28, is increased to a controlling interest of 50% or more. A controlling interest in a subsidiary is increased, say from 60% to 80%.

The first two transactions are treated in the same way, but the third is not. There is a reason for this.

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2.2 General principle: ‘crossing an accounting boundary’
Under the revised IFRS 3 a business combination occurs only when one entity obtains control over another, which is generally when 50% or more has been acquired. The Deloitte guide: Business Combinations and Changes in Ownership interests calls this ‘crossing an accounting boundary’. When this happens, the original investment – whether an investment under IAS 39 with no significant influence, or an associate – is treated as if it were disposed of at fair value and re-acquired at fair value. This previously held interest at fair value, together with any consideration transferred, is the ‘cost’ of the combination used in calculating the goodwill. If the 50% boundary is not crossed, as when the interest in a subsidiary is increased, the event is treated as a transaction between owners. Whenever you cross the 50% boundary, you revalue, and a gain or loss is reported in profit or loss for the year. If you do not cross the 50% boundary, no gain or loss is reported; instead there is an adjustment to the parent’s equity. The following diagram, from the Deloitte guide may help you visualise the boundary:

As you will see from the diagram, the third situation in paragraph 2.1, where an interest in a subsidiary is increased from, say, 60% to 80%, does not involve crossing that all-important 50% threshold. Likewise, purchases of stakes of up to 50% do not involve crossing the boundary, and therefore do not trigger a calculation of goodwill.

Exam focus point

In an exam, if you get a question with a business combination achieved in stages, ignore all purchases made before control is achieved, that is purchases bringing the total holding to less than 50%.

2.3 Investment or associate becomes a subsidiary: calculation of goodwill
The previously held investment is re-measured to fair value, with any gain being reported in profit and loss, and the goodwill calculated as follows:

Part C Group financial statements ⏐ 14: Changes in group structures

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Consideration transferred/Fair value of NCI Fair value of acquirer's previously held equity interest Less: Net fair value of identifiable assets acquired and liabilities assumed × Group/NCI %

Group X X X (X) X

NCI X

(X) X

Note. You only need the NCI if NCI at acquisition are measured at fair value. The examiner has strongly indicated that he will not examine fair value NCI in the same question as the more difficult group topics.

2.3.1 Analogy: trading in a small car for a larger one
It may seem counter-intuitive that the previous investment is now part of the ‘cost’ for the purposes of calculating the goodwill. One way of looking at it is to imagine that you are part-exchanging a small car for a larger one. The value of the car you trade in is put towards the cost of the new vehicle, together with your cash (the ‘consideration transferred’). Likewise, the company making the acquisition has partexchanged its smaller investment – at fair value – for a larger one, and must naturally pay on top of that to obtain the larger investment. This analogy is not exact, but may help. Try the following question to get the hang of the calculation of goodwill and profit on de-recognition of the investment.

Question

Piecemeal acquisition 2

Good, whose year end is 30 June 20X9 has a subsidiary, Will, which it acquired in stages. The details of the acquisition are as follows: Date of acquisition 1 July 20X7 1 July 20X8 Holding acquired % 20 60 Retained earnings at acquisition $m 270 450 Purchase consideration $m 120 480

The share capital of Will has remained unchanged since its incorporation at $300m. The fair values of the net assets of Will were the same as their carrying amounts at the date of the acquisition.Good did not have significant influence over Will at any time before gaining control of Will. The group policy is to measure non-controlling interest at its proportionate share of the fair value of the subsidiary's identifiable net assets. Required (a) (b) Calculate the goodwill on the acquisition of Will that will appear in the consolidated statement of financial position at 30 June 20X9. Calculate the profit on the derecognition of any previously held investment in Will to be reported in group profit or loss for the year ended 30 June 20X9.

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Answer
(a) Goodwill (at date control obtained) Consideration transferred Fair value of previously held equity interest ($480m × 20/60) Fair value of identifiable assets acquired and liabilities assumed Share capital Retained earnings × 80% (b) Profit on derecognition of investment Fair value at date control obtained Cost $m $m 480 160

300 450 7 750

(600) 40

$m 160 (120) 40

In this short example, the figures for goodwill and profit on derecognition are the same. In the more complicated examples, such as the one in Paragraph 2.5 below, they may different because the investment (an available for sale financial asset) may be revalued before or after control was obtained.

2.4 Increase in previously held controlling interest: adjustment to parent’s equity
An example of this would be where an investment goes from a 60% subsidiary to an 80% subsidiary. The 50% threshold has not been crossed, so there is no re-measurement to fair value and no gain or loss to profit or loss for the year. The increase is treated as a transaction between owners. As with disposals, ownership has been reallocated between parent and non-controlling shareholders. Accordingly the parent’s equity is adjusted. The required adjustment is calculated by comparing the consideration paid with the decrease in non-controlling interest. (As the parent’s share has increased, the NCI share has decreased.) The calculation is as follows: $ Fair value of consideration paid (X) Decrease in NCI in net assets at date of transaction X Decrease in NCI in goodwill at date of transaction * X Adjustment to parent's equity (X) *Note. This line is only required where non-controlling interests are measured at fair value at the date of acquisition (ie where there is an decrease in the non-controlling interest share of goodwill already recognised). It is included for completeness only, as the examiner has strongly indicated that he will not test fair value NCI in this context in December 2008 or June 2009. If you are wondering why the increase in shareholding is treated as a transaction between owners, look back to Chapter 12, where we explained that the revised IFRS 3 views the group as an economic entity, and views all providers of equity, including non-controlling interests, as owners of the group. You can practise this adjustment in the example below.

Part C Group financial statements ⏐ 14: Changes in group structures

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2.5 Comprehensive example: piecemeal acquisition of a subsidiary
Peace acquired 25% of Miel on 1.1.20X1 for $2,020,000 (equivalent to the fair value of $10.10 per share acquired on that date) when Miel's reserves were standing at $5,800,000. The fair value of Miel's identifiable assets and liabilities at that date was $7,200,000. Both Peace and Miel are stock market listed entities. A further 35% stake in Miel was acquired on 30 September 20X2 for $4,025,000 (equivalent to the fair value of $14.375 per share acquired on that date) giving Peace control over Miel. The fair value of Miel's identifiable assets and liabilities at that date was $9,400,000, and Miel's reserves stood at $7,800,000. Summarised statements of financial position of the two companies at that date show: Peace $'000 Non-current assets Property, plant and equipment 38,650 Investment in Miel 7,020 45,670 Current assets Equity Share capital Reserves Liabilities 12,700 58,370 10,200 40,720 50,920 7,450 58,370 Miel $'000 7,600 – 7,600 2,200 9,800 800 7,900 8,700 1,100 9,800

The difference between the fair value of the identifiable assets and liabilities of Miel and their book value relates to the value of a plot of land. The land had not been sold by 31 December 20X2. For consistency with the measurement of other shares, Peace holds all investments in subsidiaries and associates as available-for-sale financial assets in its separate financial statements as permitted by IAS 27. At 31 December 20X2, the fair value of Peace's 60% holding in Miel was $7,020,000 (equivalent to $14.625 per share). The investment in Miel figure at 31.12.20X2 is therefore made up of: Purchase of 25% stake at cost Fair value adjustments on 25% stake to 30.9.X2 [($14.375 - $10.10) x 200,000 shares] Purchase of 35% stake at cost Fair value adjustments on 60% stake to 31.12.X2 [($14.625 – $14.375) x 480,000 shares] Fair value of 60% stake at 31.12.X2 $'000 2,020 855 2,875 4,025 6,900 120 7,020

Group policy is to measure non-controlling interests at the date of acquisition at their proportionate share of the net fair value of the identifiable assets acquired and liabilities assumed. No impairment losses on recognised goodwill have been necessary to date. Required (a) Prepare the consolidated statement of financial position of Peace Group as at 31 December 20X2 in the following circumstances: (i) The 25% interest in Miel allowed Peace significant influence over the financial and operating policy decisions of Miel. (ii) The other 75% of shares were held by a single shareholder and Peace was allowed no influence in the running of Miel until acquiring control. Show the consolidated current assets, non-controlling interests and reserves figures if Peace acquired an additional 10% interest in Miel on 1 January 20X3 for $1,200,000.

(b)

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Solution
Parts (a)(i) and (a)(ii) to the example would generate the same overall answer. (a) PEACE GROUP CONSOLIDATED STATEMENT OF FINANCIAL POSITION AS AT 31 DECEMBER 20X2 Non-current assets Property, plant and equipment (38,650 + 7,600 + (W2) 800) Goodwill (W3) Current assets (12,700 + 2,200) Equity attributable to owners of the parent Share capital Reserves (W5)/(W6) Non-controlling interests (W4) Liabilities (7,450 + 1,100) Workings 1 Group structure Peace 1.1.X1 30.9.X2 25% + 35% = 60% ∴ Non-controlling interests = 40% Miel 2 Fair value adjustments Measured at date control achieved (only) At acquisition 30.9.X2 $'000 800 Movement $'000 – $'000 At year end 31.12.X2 $'000 800 $'000 4,025 2,875

$'000 47,050 1,260 48,310 14,900 63,210 10,200 40,660 50,860 3,800 54,660 8,550 63,210

Land (9,400 – (800 + 7,800)) 3 Goodwill Consideration transferred FV of P's previously held equity interest Fair value of identifiable assets acq'd & liabilities assumed: Share capital Reserves Fair value adjustments (W2) × 60%

800 7,800 800 9,400 (5,640) 1,260

Part C Group financial statements ⏐ 14: Changes in group structures

37

4

Non-controlling interests Net assets at year end per question Fair value adjustment (W2) × 40% $'000 8,700 800 9,500 $'000

3,800

5

Consolidated reserves (if previously held as an associate) (a)(i) $'000 Peace Per question Profit on derecognition of investment * Fair value movement (W2) Reserves at acquisition Share of post acquisition reserves Miel 35% (100 × 35%) Miel 25% (2,100 × 25%) Less: Fair value gain recognised in Peace's separate FS (855 + 120) * Profit on derecognition of 25% associate $'000 2,875 (2,520) 355 40,720 355 $'000 Miel 35% 7,900 $'000 Miel 25% 7,900 (0) (5,800) 2,100

(7,800) 100 35 525 (975) 40,660

Fair value at date control obtained P's share of carrying value (2,020 + (7,800 – 5,800) × 25%)

6

Consolidated reserves (if previously held as an AFSFA) (a)(ii) $'000 Peace 40,720 855 $'000 Miel 7,900 (0) (7,800) 100 60 (975) 40,660

Per question Profit on derecognition of investment* Fair value movement (W2) Reserves at acquisition Miel - Share of post acquisition reserves (100 × 60%) Less: Fair value gain recognised in Peace's separate FS (855 + 120) * Profit on derecognition of 25% investment

Fair value at date control obtained Cost

$'000 2,875 (2,020) 855

The profit would be the same whether the available-for-sale financial asset had been revalued or not, as any revaluation above original cost previously recognised in other comprehensive income is transferred to profit or loss.

38

14: Changes in group structures ⏐ Part C Group financial statements

(b)

Current assets (14,900 – 1,200) Non-controlling interests Net assets at year end per question Fair value adjustment (W2) × 30% Consolidated reserves

13,700 $'000 8,700 800 9,500 $'000

2,850 $'000 40,660 (250) 40,410

Per part (a) Adjustment to parent's equity on acq'n of 10% (W)

Note: no other figures in the statement of financial position are affected. Working: Adjustment to parent's equity on acquisition of additional 10% of Miel Fair value of consideration paid Decrease in NCI in net assets at acq'n (9,500 × 10%) $'000 (1,200) 950 (250)

2.6 Comprehensive example: piecemeal acquisition of a subsidiary with non-controlling interest at fair value
Exam focus point
This example is for completeness only. The examiner has strongly indicated that fair value NCI will not be tested with more difficult group topics in December 2008 and June 2009. However, you may wish to see how this topic might be approached. Keep an eye on Student Accountant for further guidance from the examiner – he may change his approach to testing this area, and if you are taking the exam later than June 2009 you may need to deal with complex groups and fair value NCI. The facts are the same as in Example 2.5 above, except that group policy is to measure non-controlling interests at the date of acquisition at fair value.

Solution
Parts (a)(i) and (a)(ii) to the example would generate the same overall answer. (a) PEACE GROUP CONSOLIDATED STATEMENT OF FINANCIAL POSITION AS AT 31 DECEMBER 20X2 Non-current assets Property, plant and equipment (38,650 + 7,600 + (W2) 800) Goodwill (W3) Current assets (12,700 + 2,200) Equity attributable to owners of the parent Share capital Reserves (W5)/(W6) Non-controlling interests (W4) Liabilities (7,450 + 1,100)

$'000 47,050 2,100 49,150 14,900 64,050 10,200 40,660 50,860 4,640 55,500 8,550 64,050

Part C Group financial statements ⏐ 14: Changes in group structures

39

Workings 1 Group structure Peace 1.1.X1 30.9.X2 25% + 35% = 60% ∴ Non-controlling interests = 40% Miel 2 Fair value adjustments Measured at date control achieved (only) At acquisition 30.9.X2 $'000 800 Movement At year end 31.12.X2 $'000 800 NCI $'000 4,600 2,875

Land (9,400 – (800 + 7,800)) 3 Goodwill

$'000 –

Group $'000 Consideration transferred FV NCI (800 × $14.375 × 40%) FV P's previously held equity interest Fair value of identifiable assets acq'd & liabilities assumed: Share capital Reserves Fair value adjustments (W2) × 60%/40%

$'000 4,025

800 7,800 800 9,400 (5,640) 1,260 2,100 (3,760) 840

4

Non-controlling interests Net assets at year end per question Fair value adjustment (W2) × 40% NCI in goodwill (W3) $'000 8,700 800 9,500 $'000

3,800 840 4,640

40

14: Changes in group structures ⏐ Part C Group financial statements

5

Consolidated reserves (if previously held as an associate) (a)(i) $'000 Peace Per question Profit on derecognition of investment * Fair value movement (W2) Reserves at acquisition Share of post acquisition reserves Miel 35% (100 × 35%) Miel 25% (2,100 × 25%) Less: Fair value gain recognised in Peace's separate FS (855 + 120) * Profit on derecognition of 25% associate Fair value at date control obtained P's share of carrying value (2,020 + (7,800 – 5,800) × 25%) $'000 2,875 (2,520) 355 40,720 355 $'000 Miel 35% 7,900 $'000 Miel 25% 7,900 (0) (5,800) 2,100

(7,800) 100 35 525 (975) 40,660

6

Consolidated reserves (if previously held as an AFSFA) (a)(ii) $'000 Peace 40,720 855 $'000 Miel 7,900 (0) (7,800) 100 60 (975) 40,660 $'000 2,875 (2,020) 855

Per question Profit on derecognition of investment* Fair value movement (W2) Reserves at acquisition Miel - Share of post acquisition reserves (100 × 60%) Less: Fair value gain recognised in Peace's separate FS (855 + 120) * Profit on derecognition of 25% investment Fair value at date control obtained Cost

The profit would be the same whether the available-for-sale financial asset had been revalued or not, as any revaluation above original cost previously recognised in other comprehensive income is transferred to profit or loss.

2.7 Section summary
Where control is achieved in stages: • • • Remeasure any previously held equity interest to fair value at the date control is achieved. Report any gain in profit or loss Where a controlling interest is increased treat as a transaction between owners and adjust parent’s equity

Part C Group financial statements ⏐ 14: Changes in group structures

41

Chapter Roundup
• Transactions of the type described in this chapter can be very complicated and certainly look rather daunting. Remember and apply the basic techniques and you should find such questions easier than you expected. Disposals can drop a subsidiary holding to associate status, long-term investment status and to zero, or a the parent might still retain a subsidiary with a reduced holding. Once again, you should be able to deal with all these situations. Remember particularly how to deal with goodwill. Business combinations achieved in stages (piecemeal acquisitions) can lead to a company becoming a non-current asset investment, an associate and then a subsidiary over time. Make sure you can deal with each of these situations.

Quick Quiz
1 2 3 4 5 Control is always lost when there is a disposal? True or false? Why is the fair value of the interest retained used in the calculation of a gain on disposal where control is lost? When is the effective date of disposal of shares in an investment? Subside owns 60% of Diary at 31 December 20X8. On 1 July 20X9, it buys a further 20% of Diary. How should this transaction be treated in the group financial statements at 31 December 20X9. Ditch had a 75% subsidiary, Dodge, at 30 June 20X8. On 1 January 20X9, it sold two-thirds of this investment, leaving it with a 25% holding, over which it retained significant influence. How will the remaining investment in Dodge appear in the group financial statements for the year ended 30 June 20X9?

Answers to Quick Quiz
1 2 3 4 5 False. Control may be retained if the disposal is from subsidiary to subsidiary, even though the parent owns less and the non-controlling interest owns more. It may be viewed as part of the consideration received. When control passes As a transaction between owners, with an adjustment to the parent’s equity to reflect the difference between the consideration paid and the decrease in non-controlling interest. At its fair value at the date of disposal plus a 25% share of the profits accrued between the date of disposal and the year end, less any impairment at the year end.
Now try the questions below from the Exam Question Bank

Number Q17 Q18

Level Examination Examination

Marks 10 22

Time 18 mins 40 mins

42

14: Changes in group structures ⏐ Part C Group financial statements

Exam question and answer bank – questions 16 to 18
BPP Note: These questions relate to topics covered in Chapters 13 and 14 of your Study Text.

43

44

16 Armoury
Bayonet, a public limited company, purchased 6m shares in Rifle, a public limited company, on 1 January 20X5 for $10m. Rifle had purchased 4m shares in Pistol, a public limited company for $9m on 31 December 20X2 when its retained earnings stood at $5m. The balances on retained earnings of the acquired companies were $8m and $6.5m respectively at 1 January 20X5. The book value of the identifiable assets and liabilities of Rifle and Pistol was equivalent to their book values at the acquisition dates. The statements of financial position of the three companies as at 31 December 20X9 are as follows: Bayonet $'000 Non-current assets Property, plant and equipment Investment in Rifle Investment in Pistol Current assets Inventories Trade receivables Cash 14,500 10,000 – 24,500 6,300 4,900 500 11,700 36,200 Equity 50c ordinary shares Retained earnings 5,000 25,500 30,500 5,700 36,200 Rifle $'000 12,140 – 9,000 21,140 2,100 2,000 1,440 5,540 26,680 4,000 20,400 24,400 2,280 26,680 Pistol $'000 17,500 – – 17,500 450 2,320 515 3,285 20,785 2,500 16,300 18,800 1,985 20,785

Current liabilities

Group policy is to value non-controlling interests at acquisition at their proportionate share of the net fair value of the identifiable assets acquired and liabilities assumed. Impairment tests in previous years did not reveal any impairment losses. Required Prepare the consolidated statement of financial position of Bayonet Co as at 31 December 20X9. 10 marks

Exam question bank

45

17 Murder, Mystery and Suspense
On 1 January 20X3 Murder acquired 60% of Mystery. On 30 July 20X1 Murder acquired 10% of Suspense and on the same day Mystery acquired 80% of Suspense. The statements of financial position of the three companies as at 31 December 20X7 are as follows: Murder $'m Non-current assets Property, plant and equipment Investment in Mystery Investment in Suspense Current assets Inventories Trade receivables Cash 2,458 900 27 3,385 450 610 240 1,300 4,685 Mystery $'m 1,410 – 240 1,650 200 365 95 660 2,310 Suspense $'m 870 – – 870 260 139 116 515 1,385

Equity Ordinary share capital Share premium Retained earnings Current liabilities Trade payables

500 250 2,805 3,555 1,130 4,685

200 120 1,572 1,892 418 2,310

100 50 850 1,000 385 1,385

During the year, Mystery sold goods to Suspense of $260,000 including a mark-up of 25%. All of these goods remain in inventories at the year end. The retained earnings of the three companies at the acquisition dates was: 30.7.X1 $'m 1,610 700 40 1.1.X3 $'m 1,860 950 250

Murder Mystery Suspense

The book values of the identifiable net assets at the acquisition date are equivalent to their fair values. The fair value of Murder's 10% holding in Suspense on 1 January 20X3 was $50m. Murder and Mystery hold their investments in subsidiaries at cost in their separate financial statements. It is group policy to value the non-controlling interests at acquisition at their proportionate share of the net fair value of the identifiable assets acquired and liabilities assumed. No impairment losses have been necessary in the consolidated financial statements to date. Required Prepare the consolidated statement of financial position of Murder group as at 31 December 20X7. 18 marks

46

Exam question bank

18 Holmes and Deakin
Holmes, a public limited company, has owned 85% of the ordinary share capital of Deakin, a pubic limited company, for some years. The shares were bought for $255m and Deakin's reserves at the time of purchase were $20m. On 28 February 20X3 Holmes sold 40m of the Deakin shares for $160m. The only entry made in respect of this transaction has been the receipt of the cash, which was credited to the 'investment in subsidiary' account. No dividends were paid by either entity in the period. The following draft summarised financial statements are available: STATEMENTS OF COMPREHENSIVE INCOME FOR THE YEAR TO 31 MAY 20X3 Holmes $m Profit before tax 130 Income tax expense (40) Profit for the year 90 Other comprehensive income, net of tax 20 Total comprehensive income for the year 110 STATEMENTS OF FINANCIAL POSITION AS AT 31 MAY 20X3 $m Non-current assets Property, plant and equipment Investment in Deakin Current assets Inventories Trade receivables Cash 535 95 630 320 250 80 650 1,280 Equity Share capital $1 ordinary shares Reserves Current liabilities Trade payables Income tax payable Provisions 500 310 810 295 80 95 470 1,280 No impairment losses have been necessary in the group financial statements to date. Assume that the gain as calculated in the parent's separate financial statements will be subject to corporate income tax at a rate of 30% and that profit and other comprehensive income accrue evenly throughout the year. Holmes group policy is to measure non-controlling interests at acquisition at their proportionate share of the net fair value of the identifiable assets acquired and liabilities assumed. $m 178 – 178 190 175 89 454 632 200 170 370 171 60 31 262 632 Deakin $m 60 (20) 40 10 50

Exam question bank

47

Required Prepare: (a) (b) (c) (d) The statement of comprehensive income and a statement of changes in equity (total) of Holmes Co for the year ended 31 May 20X3 5 marks The consolidated statement of comprehensive income of Holmes for the same period A consolidated statement of financial position as at 31 May 20X3 A consolidated statement of changes in equity (total) for the year ended 31 May 20X3 6 marks 9 marks 2 marks

(Total = 22 marks)

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Exam question bank

16 Armoury
ARMOURY GROUP CONSOLIDATED STATEMENT OF FINANCIAL POSITION AS AT 31 DECEMBER 20X9 Non-current assets Property, plant and equipment (14,500 + 12,140 + 17,500) Goodwill (W2) Current assets Inventories (6,300 + 2,100 + 450) Trade receivables (4,900 + 2,000 + 2,320) Cash (500 + 1,440 + 515) $'000 44,140 2,350 46,490 8,850 9,220 2,455 20,525 67,015 Equity attributable to owners of the parent Share capital – 50c ordinary shares Retained earnings (W4) Non-controlling interests (W3)

5,000 40,680 45,680 11,370 57,050 9,965 67,015

Current liabilities (5,700 + 2,280 + 1,985) Workings 1 Group structure B 1.1.X5 R 31.12.X2 P 4,000 = 80% 5,000 Effective interest in P (75% × 80%) ∴ NCI 60% 40% 100% 6,000 = 75% ∴NCI: 25% 8,000

2

Goodwill $'000 Consideration transferred Fair value of identifiable net assets acquired: Rifle Share capital Pre-acquisition retained earnings Investment in Pistol Pistol Share capital Pre-acquisition retained earnings 4,000 8,000 (9,000) 3,000 2,500 6,500 9,000 $'000 10,000

× 75%

(2,250)

× 60%

(5,400) 2,350

Exam answer bank

49

3

Non-controlling interests Rifle $'000 24,400 (9,000) 15,400 × 25% 3,850 11,370 Pistol $'000 18,800 18,800 × 40% 7,520

Net assets at year end per question Less: cost of investment in Pistol Non-controlling interest share

4

Retained earnings Per question Retained earnings at acquisition

Bayonet $'000 25,500 25,500

Rifle $'000 20,400 (8,000) 12,400

Pistol $'000 16,300 (6,500) 9,800

Rifle– share of post acquisition earnings (12,400 × 75%) Pistol– share of post acquisition earnings (9,800 × 60%)

9,300 5,880 40,680

50

Exam answer bank

17 Murder, Mystery and Suspense
MURDER GROUP CONSOLIDATED STATEMENT OF FINANCIAL POSITION AS AT 31 DECEMBER 20X7 $'m Non-current assets Property, plant and equipment (2,458 + 1,410 + 870) Goodwill (W3) Current assets Inventories (450 + 200 + 260 – (W2) 52) Trade receivables (610 + 365 + 139) Cash (240 + 95 + 116) 4,738 100 4,838 858 1,114 451 2,423 7,261

Equity attributable to owners of the parent Ordinary share capital Share premium Retained earnings (W5) Non-controlling interests (W4) Current liabilities Trade payables (1,130 + 418 + 385) Workings 1 Group structure Murder 1.1.X3 Pre-acq'n reserves: 1.1.X3 $950m Mystery 30.7.X1 Pre-acq'n reserves: 30.7.X1 1.1.X3 2 $40m $250m Suspense 80% 60% 30.7.X1 10%

500 250 3,518 4,268 1,060 5,328 1,933 7,261

Effective interest (60% × 80%) + 10% 58% Non-controlling interests 42% 100%

Unrealised profit on inventories Mark-up = $260m ×

25 = $52m 125

Exam answer bank

51

3

Goodwill (including step acquisition of Suspense)
$'m Consideration transferred Fair value of 10% equity interest in Suspense Fair value of identifiable net assets acquired: Mystery Share capital Share premium Pre-acquisition retained earnings (1.1.X3) Investment in Suspense Suspense Share capital Share premium Pre-acquisition retained earnings (1.1.X3)

Murder in Mystery $'m 900

Murder in Suspense $'m 50

200 120 950 (240) 1,030 100 50 250 400

× 60%

(618)

× 48%

(192) 90

× 10%

(40) 10

100

4

Non-controlling interests

Mystery $'m 1,892 (52) (240) 1,600 × 40% 640 1,060 Suspense $'m 1,000

Net assets at year end per question PUP (W2) Less: cost of investment in Suspense Non-controlling interests

1,000 × 42% 420

5

Retained earnings Per question P/L gain on investment in Suspense (50 – 27) Less: unrealised profit (W2) Retained earnings at acq'n Mystery – share of post acq'n earnings (570 × 60%) Suspense – share of post acq'n earnings (600 × 58%) Impairment losses to date

Murder $'m 2,805 23 (52)

Mystery $'m 1,572

Suspense $'m 850

(950) 570 342 348 (0) 3,518

(250) 600

52

Exam answer bank

18 Holmes and Deakin
(a) HOLMES STATEMENT OF COMPREHENSIVE INCOME FOR THE YEAR ENDED 31 MAY 20X3 Profit before gain on disposal of shares in subsidiary Gain on disposal of shares in subsidiary (W3) Profit before tax Income tax expense (40 + (W3) 30) Profit for the year Other comprehensive income, net of tax Total comprehensive income for the year STATEMENT OF CHANGES IN EQUITY (TOTAL) Balance at 1 June 20X2 (810 – 110) Total comprehensive income for the year Balance at 31 May 20X3 (b) $'000 130 100 230 (70) 160 20 180 $m 700 180 880

HOLMES GROUP CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME FOR THE YEAR ENDED 31 MAY 20X3 $m Profit before tax (130 + 60) 190 Income tax expense (40 + 20) (60) Profit/ for the year 130 Other comprehensive income, net of tax (20 + 10) 30 Total comprehensive income for the year 160 Profit attributable to: Owners of the parent Non-controlling interests (40 × × 15%) + (40 × 3 × 35%) 12 12
9

122 8 130 150 10 160

Total comprehensive income attributable to: Owners of the parent Non-controlling interests (50 × × 15%) + (50 × 3 × 35%) 12 12

9

Exam answer bank

53

(c)

HOLMES GROUP CONSOLIDATED STATEMENT OF FINANCIAL POSITION AS AT 31.5.X3 Non-current assets Property, plant and equipment (535 + 178) Goodwill (W2) Current assets Inventories (320 + 190) Trade receivables (250 + 175) Cash (80 + 89)

$m 713 68 781 510 425 169 1,104 1,885

Equity attributable to owners of the parent Share capital $1 ordinary shares Reserves (W6) Non-controlling interests (W5) Current liabilities Trade payables (295 + 171) Income tax payable (80 + 60 + (W3) 30) Provisions (95 + 31)

500 493.5 993.5 129.5 1,123 466 170 126 762 1,885 $m 833 58.5 71.5 160.0 1,123.0

(d)

STATEMENT OF CHANGES IN EQUITY (TOTAL COLUMN) Balance at 1 June 20X2 (500 + (W7) 285 + ((370 – 50) x 15%)) Adjustment to parent's equity on sale of non-controlling interests ((W4) 88.5 – (W3) 30) Increase in non-controlling interests (W4) Total comprehensive income for the year Balance at 31 May 20X3 (from SOFP)

Workings 1 Timeline 1.6.X2 SOCI Subsidiary – all year 28.2.X3 31.5.X3

15% NCI × 9/12
Held 85% of Deakin

35% NCI × 3/12
Sells 40m shares = 20% of B Retain control (65%) ∴ adjust parent's equity Consol in SOFP with 35% NCI

54

Exam answer bank

2

Goodwill Consideration transferred Fair value of identifiable net assets acquired: Share capital Pre-acquisition reserves

$m

$m 255

200 20 220

× 85%

(187) 68 $m 160 (60) 100 (30) 70 $m 160 (71.5) 88.5

3

Gain on disposal of shares in parent's separate financial statements Fair value of consideration received Less: original cost of shares (255 × 20%/85%) Parent gain Less: tax on parent's gain (30%)

4

Adjustment to parent's equity on disposal of shares in group financial statements Fair value of consideration received
3 Increase in NCI in net assets at disposal [370 – (50 × 12 )) × 20%]

5

Non-controlling interests (SOFP) Net assets per question at year end NCI share (35%)

$m 370

$m 129.5

6

Group reserves at 31 May 20X3

Holmes $m 310 88.5 (30)

Per question/at date of disposal (W4) Adjustment to parent's equity on disposal (W4) Tax on parent's gain (W3) Reserves at acquisition Deakin – share of post acquisition reserves (150 × 65%) Deakin – share of post acquisition reserves (137.5 × 20%) 7 Reserves brought forward Per question (31.5.X3) Less: comprehensive income for the year Reserves at acquisition Deakin – share of post acquisition reserves (100 × 85%)

Deakin 65% $m 170

Deakin 20% sold $m 157.5

(20) 150 97.5 27.5 493.5 Holmes $m 310 (110) 200 85 285

(20) 137.5

Deakin $m 170 (50) (20) 100

Exam answer bank

55

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Exam answer bank

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