SESSION 18 GROUP ACCOUNTS REVISION OF BASICS

1801
OVERVIEW
Objective
To revise the basic techniques of consolidation before moving onto more complex issues
in later sessions.


CONCEPTUAL
BACKGROUND
CONSOLIDATED
STATEMENT OF
COMPREHENSIVE
INCOME
CONSOLIDATED
STATEMENT OF
FINANCIAL
POSITION
QUESTION
APPROACH
Specific steps
Control and ownership
Unrealised profits on trading
Non current asset transfers
Mid-year acquisitions
UNREALISED
PROFIT
Background
The group suffers whole
charge
The group shares charge with
non-controlling interest
Exception
Deferred tax
THE ISSUE
Background
Definitions
Rule
Types of consolidation


SESSION 18 GROUP ACCOUNTS REVISION OF BASICS
1802
1 THE ISSUE
1.1 Background
Many companies carry on part of their business through the ownership of other
companies which they control. Such companies are known as subsidiaries.
Controlling interests in such companies would appear at cost in the statement of
financial position of the investing company. Such interests may result in the control of
assets of a very different value to the cost of investment. In other words the accounts
will not provide the shareholders of the parent (or holding) company with a true and
fair view of what their investment actually represents.
The substance of the relationship is not reflected.
1.2 Definitions

Consolidated financial statements are the financial statements of a group
presented as those of a single entity.
Group is a parent and all its subsidiaries.
The definition of a group does not include associates or jointly controlled
entities.
Subsidiary is an entity that is controlled by another entity (known as the
parent).
Parent is an entity that has one or more subsidiaries.
Non-controlling interest is the equity in a subsidiary not attributable,
directly or indirectly, to a parent.


1.3 Rule
A company which has a subsidiary on the last day of its accounting period must
prepare consolidated financial statements in addition to its own individual accounts. In
practice a holding company will usually prepare (and publish) the following:
Its own statement of financial position with relevant notes and
Consolidated versions of its statement of financial position, statement of
comprehensive income, and statement of cash flows, all with relevant notes.
1.4 Types of consolidation
IFRS 3 Business Combinations only allows the acquisition method of consolidation.
Prior to IFRS 3 being issued the IASB also allowed the use of the Uniting of Interest
method of consolidation if certain criteria were met.
SESSION 18 GROUP ACCOUNTS REVISION OF BASICS
1803
Commentary

This session is only concerned with acquisition accounting.
2 CONCEPTUAL BACKGROUND
Replace cost of investment with what it represents i.e.

Share of net assets at the end of the reporting period and
goodwill at the date of acquisition

AND
Credit reserves with Ps share of the post acquisition growth in Ss
reserves


3 CONSOLIDATED STATEMENT OF FINANCIAL POSITION
2 steps
Process individual company adjustments
Consolidate
SESSION 18 GROUP ACCOUNTS REVISION OF BASICS
1804

Step 1 Individual company adjustments
Items not accounted for
Group accounting policy adjustments
Fair valuation adjustments
Translation of the subsidiarys accounts into the presentation currency in
accordance with IAS 21
Unrealised profit

P S CBS
Net assets X + X X

Share capital X X Step 2 consolidation X
Reserves X X

X
X X X

Goodwill
Non-controlling
Interest
Consolidated reserves
And
Cancellation of inter
company balances


4 QUESTION APPROACH
4.1 Specific steps
1 Establish group structure
2 Proforma the answer fill in easy figures eg share capital
3 Process individual company adjustments
do double entry on face of question as far as possible
tick off points on paper as they are dealt with

SESSION 18 GROUP ACCOUNTS REVISION OF BASICS
1805
4 Prepare a net assets summary for each subsidiary





At reporting date At date of acquisition

Share Capital X X
Retained earnings:
per Q X X
Adjustments (X) X (X) X

___ ___




___

___

X X

___

___




5 Consolidation schedules

Goodwill
Cost X
Share of net assets at acquisition (X)

___

X

___

Remaining portion - to the SOFP X
Impaired portion to P&L (and then RE) X

Non-controlling interest
x% Net assets at consolidation

Consolidated retained earnings

All of P
as per Q X
Adjustments made (X)

___

X

Share of Ss post
acquisition profit
x% (X X) X

Less impaired goodwill (X)

___

X

___

Aim: to give the corrected figures
To CRE
To NCI To Goodwill
SESSION 18 GROUP ACCOUNTS REVISION OF BASICS
1806
Notes:
At P2 be prepared to calculate Ss net assets from either the equity or net asset position,
both have been examined.
IFRS 3 allows the non-controlling interest, at the acquisition date, to be based on either
the fair value or at the non-controlling interests proportionate share of the subsidiarys
identifiable net assets.
This choice can be made independently for each acquisition.
The implication of this choice is that if non-controlling interest is valued at fair value
then the goodwill included in the consolidated statement of financial position will
reflect 100% of the subsidiaries goodwill.
If fair value is used to value non-controlling interest then both the value of goodwill and
non-controlling interest will be higher to the extent of the non-controlling interest share
of goodwill.
Goodwill calculation:
If NCI is to be valued at fair value on acquisition then goodwill should be
calculated as follows:
Consideration given, plus
FV of NCI, less
FV of identifiable net assets (100%).
Any impairment loss should be shared between the parent and NCI in the same
proportion as to which profits are shared.
If NCI is to be valued at its proportionate share of the identifiable net assets then
goodwill should be calculated as follows:
Consideration given, less
P share of FV of identifiable net assets
Any impairment loss is charged solely to consolidated retained earnings.

NCI calculation to be included in statement of financial position:
If NCI is to be valued at fair value on acquisition then NCI should be calculated as
follows:
FV of NCI on acquisition, plus
NCI share of post acquisition profits, less
Any goodwill impaired in respect of NCI proportion.
If NCI is to be valued at its proportionate share of the identifiable net assets then
NCI should be calculated as follows:
NCI % of net assets at reporting date.
The examiner will direct you on how non-controlling interest should be measured.
SESSION 18 GROUP ACCOUNTS REVISION OF BASICS
1807
5 UNREALISED PROFIT
5.1 Background
IAS 27 says that unrealised profit on inter company trading and sale of assets must be
removed in full. This will result in the restatement of the asset to the cost to the group.
There are two common ways of reflecting the write downs:
Charge the whole amount to consolidated reserves, and
Charge the non-controlling interest with their share of any adjustment where
appropriate.
IAS 27 gives no guidance on which treatment to adopt.
5.2 The group suffers the whole charge
Process the following entry in the consolidated accounts
Dr Closing inventory in the consolidated statement of comprehensive income
Cr Closing inventory in the consolidated statement of financial position
5.3 The group shares the charge with the non-controlling interest where
appropriate
It is appropriate where S has made the sale to P.
The double entry required is:
Dr Closing inventory in the consolidated statement of comprehensive income
Cr Closing inventory in the consolidated statement of financial position
AND
Dr Statement of financial position - non-controlling interest
Cr Statement of comprehensive income non-controlling interest
With the non-controlling share.
The effect in the statement of financial position is:
Cr Closing inventory in the consolidated statement of financial position
Dr Retained earnings
Dr Statement of financial position - non-controlling interest
In most statement of financial position questions this is easily carried out by treating the
write down as an individual company adjustment in the books of the selling company
SESSION 18 GROUP ACCOUNTS REVISION OF BASICS
1808
The non-controlling interest will then automatically share in the adjustment when
necessary.
5.4 Exception
This will usually work but there is a rare circumstance where this would not give the
correct answer.
This is where there is a piecemeal acquisition and Ps percentage holding in S has
changed after the date of the inter company transfer of the inventory in question.

Illustration 1

As at 31 December 2008 P owned 80% of S. This holding consisted of 75%
which was acquired many years ago and 5% which was acquired on 31st
December 2008. S has made sales to P and P holds inventory at the year end
which S had sold to it at a mark up of $1,000.
If the adjustment is processed in the accounts of S and the year end non-
controlling interest percentage (20%) is applied to the resultant net assets
figure this would mean that the group had been charged with 80% of the
adjustment.
There is no need to charge the group with unrealised profit on transfers before
S became a subsidiary. By extension there is no need to charge the group with
that part of the unrealised profit which relates to the latest acquisition.
The solution to this problem is to carry out the consolidation without the
adjustment and then to process the following double entry in the consolidated
accounts.
Dr Retained earnings 750
Dr Non-controlling interest 250
Cr Inventory 1,000



SESSION 18 GROUP ACCOUNTS REVISION OF BASICS
1809

Example 1

Statements of financial position as at 31.12.2008
P S
$ $
Non current assets
Cost of investment in S 10,000
Tangible assets 8,000 2,000

Current assets 5,000 7,000

_____

____

23,000 9,000

_____

____


Share capital 1,000 500
Retained earnings 21,000 5,500
Payables 1,000 3,000

_____

____

23,000 9,000

_____

____

Further information
1 P acquired 80% of S 2 years ago when the balance on Ss retained earnings
was $4,000.
2 At acquisition Ss assets included one with a book value of $1,200 and a
fair value of $1,500. This asset was being written off over 10 years.
3 During the year S had sold goods to P. At the year end P retained goods at
a value of $450 above the cost to S. It is group policy to charge the non-
controlling interest with their share of any adjustments in respect of
unrealised profit.
4 Non-controlling interest is valued at their proportionate share of the
subsidiarys identifiable net assets.
5 Goodwill had been impaired by $2,464 since the acquisition occurred.
Required:
Produce the consolidated statement of financial position as at 31.12.2008.


SESSION 18 GROUP ACCOUNTS REVISION OF BASICS
1810
Solution 1

Consolidated statement of financial position as at 31.12.2008

$

Tangible assets

Current assets


____



____


Share capital

Retained earnings

Non-controlling interest

Other Payables


____



____


5.5 Deferred tax
Unrealised profit in the group accounts will give rise to a deductible temporary
difference. The tax base of the inventory will reflect the cost to the buying company
whereas the carrying value in the consolidated accounts will be based on cost.
IAS 12 requires the buyers tax rate to be applied to the deductible temporary difference.
This requirement is different to other tax regimes, such as UK, which tax the difference
at the sellers tax rate.
6 CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME
6.1 Control and ownership Principles
Group accounts reflect control and ownership.
Prepare the consolidated statement of comprehensive income on basis consistent
with the consolidated statement of financial position.
SESSION 18 GROUP ACCOUNTS REVISION OF BASICS
1811
Preparation overview
Show income generated from net assets under Ps control.
Reflect ownership by deducting the non-controlling interests share of Ss profit
after tax in the consolidated statement of comprehensive income.
The non-controlling share of both consolidated profit or loss for the year and total
comprehensive income must be disclosed on the face of the statement of
comprehensive income.
Eliminate effect of intra-group transactions.
6.2 Unrealised profits on trading
Adjustment
Inventory needs reducing to lower of cost or NRV to group.
Dr Statement of comprehensive income - closing inventory X
Cr Statement of financial position - closing inventory X
This should normally be done in the accounts of the company selling the inventory.
6.3 Non current asset transfers
Adjustments
Again need to be consistent with treatment in the consolidated statement of
financial position.
Eliminate profit or loss on transfer and adjust depreciation in full.
The profit or loss will normally be adjusted in the records of the selling company
and the depreciation adjustment will normally be reflected in the records of the
buying company.
6.4 Mid-year acquisitions
Inclusion of Ss results
Consolidate S from date of acquisition.
Assume revenue and expenses accrue evenly over time unless contrary indicated.
FOCUS
You should now be able to:

apply the basic principles of group accounts.
SESSION 18 GROUP ACCOUNTS REVISION OF BASICS
1812
EXAMPLE SOLUTION
Solution 1
Consolidated statement of financial position as at 31 December 2008
$
Intangibles 3,696
Tangible assets (8,000 + 2,000 + 300 60) 10,240
Current assets (5,000 + 7,000 450) 11,550

______
25,486

______

Share capital 1,000
Retained earnings (W5) 19,328

______

20,328
Non-controlling interest (W3) 1,158

______

21,486

Other payables 4,000

______

25,486

______

WORKINGS
(1) Adjustments made on face of question

Statements of financial position as at 31.1.2.2008
P S
$ $
Cost of investment in S 10,000
300
Tangible assets 8,000 2,000
(60)
Current assets 5,000 7,000
(450)

______ ______
22,000 6,000

______

______


Share capital 1,000 500
Retained earnings 21,000 5,500 (60)
(200) (100)
80 (450)
FV difference 300
Payables (1,000) (3,000)

______

______

22,000 6,000

______

______

SESSION 18 GROUP ACCOUNTS REVISION OF BASICS
1813
Explanation:
Ss books
$300 asset revaluation
$60 extra depreciation on revalued asset (
2
10
300)
$450 unrealised profit adjustment

(W2) Net assets summary
At date of At date of
consolidation acquisition
Share capital 500 500
Retained earnings
per Q 5,500 4,000
extra dep
n
(60)
UP (450) 4,990

______

FV difference 300 300

______

______

5,790 4,800

______

______


(W3) Non-controlling interest 20% 5,790 (W2) = 1,158

(W4) Goodwill
$
Cost 10,000

SNA
80% 4,800 (W2) (3,840)

_______

6,160

_______

Asset 3,696
Impaired 2,464

(W5) Consolidated retained earnings

All of P
per Q 21,000
Share of S 80% (4,990 4,000) (W2) 792
Goodwill (W4) (2,464)

________

19,328

________
SESSION 18 GROUP ACCOUNTS REVISION OF BASICS
1814