P.

BAG 9055 Tel: 227411

Gweru Fax: 260442
Zimbabwe

FACULTY OF COMMERCE
DEPARTMENT OF ACCOUNTING

MODULE TITLE: GROUP STATEMENTS AND STATEMENTS OF CASHFLOW

(ACC 219)

1. Preamble

This is the forth module of a series of six financial accounting modules presented by
the Department of Accounting. The module is intended to introduce the learner to the
dynamics of group structures and statements of cash flow.

2. Module assessment
Continuous assessment (coursework) will contribute 30% to the overall assessment
while the sessional examination will contribute 70% to the overall assessment.
Continuous assessment will be by way of in-class tests.

3. Purpose of the module

This module aims at providing a thorough knowledge which at the end should enable

students to:

 Develop an understanding of the framework (2010)

 gain knowledge and understanding of simple group structures
 Determine when control exists or when an investor can consolidate.
 Prepare simple group structures in accordance with the companies Act and
IFRSs
 acquire a broad understanding of accounting for statements of cash flow
 prepare statements of cash flows

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 4. Module objectives

By the end of the module the students should be able:

 Explain the objective of financial reporting

 Describe and list the qualitative characteristics of useful information
 State and explain the underlying assumption in preparation of financial
statements
 Define and explain the elements of financial statements
 Discuss the concepts of capital measurement and capital maintenance
 define the various accounting terms in consolidations;
 Distinguish between the types of group structures;
 Differentiate between the previous IAS for consolidation (previous IAS
27) and IFRS10
 Apply the principle of control in consolidation
 explain the 3 elements of control
 Explain the factors considered in determining control
 Define relevant activities and explain how they apply in consolidations
 Define potential voting rights and how they are useful in determining
control
 Assess relevance of relationship with other parties in determining control;
 Consolidate a wholly owned and partly owned subsidiary at date of
acquisition (application of IFRS 3);
 Consolidate a wholly owned partly owned subsidiary after date of
acquisition;
 Consolidate an acquisition of an interest during the year ( interim
acquisition)
 Elimination of intercompany transactions ;
 Treatment of dividends during consolidation
 Calculate gains or losses on disposal of an interest;
 Describe the elements of statements of cash flows
 Distinguish between direct and indirect methods of preparing statements
of cash flows.
 Analyse the current statement of comprehensive income and previous
financial statements (statement of financial position and notes)
 Prepare statements of cash flows.;

5. Module outline

5.1 Conceptual framework

 Objective of accounting reporting

 Scope of the framework
 Qualitative characteristics of useful information

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  Underlying assumptions
 Recognition of elements of financial statements
 Concept of capital and capital maintenance


5.2 consolidated financial statements

 Types of groups
 Overview of IFRS 10
 Consolidated financial statements of a wholly owned and partly owned
at date of acquisition (IFRS 3)
 Consolidated financial statements of a partly owned and wholly owned
subsidiary after date of acquisition
 Consolidation of an interest acquired during the year
 Elimination of intercompany transactions
 Treatment of dividends during consolidations;
Calculation of a loss or gain on disposal of an interest;

5.3 Statements of cash flows

 Overview of IFRS 7
 Elements of statements of cash flows
 Preparation of statement of cash flows

6.0 Recommended texts

 Binnekade C et al- group statements volume 1 13th edition

 UNISA module –FCA 2602 (2014)


UNIT1: CONCEPTUAL FRAMEWORK

Conceptual framework for Accounting reporting (2010): a coherent system of interrelated

objectives and fundamental principles which prescribes the nature, functions and limits of
financial accounting and financial statistics. This is the document issued by IASB to serve as
a source of general Accounting concepts that provide a benchmark of Accounting practices
and principles.

Purpose of the Framework

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- It sets out the concepts that underlie the preparations and presentation of financial
statements for external users.

(i) It assists the board in the development of future IFRS(International Financial Reporting
Standards) and in the review of existing IFRS.

(ii)The framework assists the board in promoting harmonisation of regulators, Accounting

standards and procedures, relating to the presentations of financial statements by providing a
basis for reducing the number of alternative accounting treatments.

(iii)To assist national standard setting boards in developing national standards(if a country
wants something for their own) .

(iv) To assist preparers of financial statements in applying IFRS and dealing with topics that
have yet to form the subject of IFRS.

(v) To assist Auditors in forming an opinion on whether financial statements comply with
IFRS.

(vi) To assist users of financial statements in interpreting the information contained in

financial statements prepared in compliance with IFRS.

(vii) To provide those who are interested in the works of IASB with information about its
approach to the formulation of IFRS.

NB The framework is not an IFRS hence does not define standards for any particular
measurement or disclosure issues i.e. nothing in the framework overrides IFRS

Scope of the framework (Contents within)

(1) Objectives of financial reporting

(2) Qualitative characteristics of useful information

(3) Definition, recognition and measurement of elements from which financial statements are
constructed.

(4) Concepts of capital and capital maintenance

Objectives of Financial Reporting (Aim of producing financial positions)

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  T o provide financial information about the reporting entity to users (investors,
lenders, and creditors that is used in making decisions about providing resources to
the entity.
 Financial reporting provides information about the financial position of the entity and
the effects of transactions that change the entity‘s resources and claims.
 It also provides users of financial statements with a better basis for accessing the
entity‘s past and future performance.

Qualitative characteristics of useful information

 These are qualities or attributes that financial information should be implored in order
to be useful to the existing and potential investors, lenders and creditors.
 If financial information is to be useful, it must be relevant and faithfully representing
what it purports to represent.

1) Fundamental broad Faithful representation

Relevance

2) Enhancing

Qualitative characteristics

Fundamental Enhancing

Relevance, faithful Timely, understandable,

comparable, verifiable

FUNDAMENTAL QUALITATIVE CHARACTERISTICS OF USEFUL INFORMATION

There are two fundamental qualitative characteristics of useful information namely:

(i)Relevance

(ii)Faithful representation

Relevance

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  Relevant information is capable of making a difference in the decisions made by
users.
 Information may be capable of making a difference if it has a confirmatory or
predictive value or both.

Predictive value/forecast

 If it can be used as an input used by users to predict future outcomes

Confirmatory value

 If it provides feedback about past estimates or previous evaluations

Faithfull Representation

Information must not only represent a relevant phenomena but it should faithfully represent
the phenomena that it purports to represent.

 To faithfully represent phenomena, information should have three elements .i.e. it

should be complete, neutral and free from error.
 Faithfull representation does not mean accurate in all respects, free from error means
there are no errors or omissions in the description of the phenomena and the process
used to produce the reported information has been selected and applied no errors in
the process.

Enhancing Qualitative characteristics

There are four enhancing qualitative characteristics of useful information namely:

(1)Timeliness

(2)Comparability

(3)Verifiability

(4)Understandability

(1)Comparability

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Information about the entity is more useful, if it can be compared .Similar information about
other entities in the same line or industry and similar information about the same entity for
another period or reporting date.

 This gives users the chance to access and identify differences among items .
 For information to be comparable, the same methods for recording and reporting
should be used for the same items from period to period in the reporting entity and
across entities.
 The same accounting policies and methods should be applied consistently.

(2)Verifiability

 This helps ensure users that information faithfully represents the economic
phenomena it purports to represent.
 Verifiability means that different knowledge and independent observers could reach a
consensus although not necessarily a complete agreement that a particular depiction is
a faithful representation.
 Information can be verified directly or indirectly .Direct verification is when
observing the bookkeeper, counting cash or a stock account by cost accountancy.

Direct verification is verifying an amount or other presentation through direct observation.

Indirect verification involves checking the inputs to a model or formula or other technic and
recalculating the output using the same methodology.

Timeliness

Information should be made available to decision makers in time to be capable of

influencing their decision.
If information is provided as soon as requested, but its full of errors then it is relevant
but not faithfully represented.
Also the correct information can be provided later than when needed.
It is faithfully represented but no longer relevant.

Understandability

Classifying, characterising and presenting information clearly and concisely make it

understandable.

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 Financial reports are prepared for users who has a reasonable knowledge of business
and economic activities and who review and analyse information diligently.

Underlying assumptions

 The financial statements are normally prepared or the assumption that the entity is a
going concern and will continue in operation for the foreseeable future.
 It is assumed that the entity has neither the intention to close or curtail materially or
liquidate materially the scale of its operations.
 If the entity has an intention to do so then the financial statements are prepared on a
different basis which should be disclosed.

Elements and recognition of an element

ELEMENTS OF FINANCIAL STATEMENTS

The framework identifies five interrelated elements of financial statements. These are the
items from which financial statements are constructed.

STATEMENT OF FINANCIAL POSITION

ELEMENTS

Assets Position networking of the business

SFP Equity

Liabilities

Statement of Income (Y /I)

Comprehensive income Financial performance

(SCI) Expenses

5 elements of financial statements

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 (a)Assets

(b)Equity

(c)Liabilities

(d)Income

(e)Expenses

ASSETS

Current definition: An asset is a resource controlled by the entity as a result of past events
from which future economic benefits are expected to flow to the entity.

Components of the definition are : resource

: Controlled by

: Past events

: Future economic benefits expected to flow to the

entity.

Components of definition explained:

Controlled by:

Control is the ability to obtain the economic benefits and to restrict the access of others ( e.g
by a company being the sole user of its plant and machinery or by selling surplus plant and
machinery.)

Past events:

The event must be ‘past’ before an asset can arise, e.g. equipment will only become an asset
when there is the right to demand delivery or access to the asset’s potential. It depends
however on the terms of the contract, this maybe on acceptance of the order or on delivery.

Future economic benefits:

These are evidenced by the prospective receipt of cash. This could be cash itself, a debt
receivable or any item which may be sold, although, for e.g. a factory may not be sold (on a

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going concern basis) it houses the manufacture of goods for sale. When goods are sold the
economic benefit resulting from the use of the factory is realised as cash.

Tentative definition of an asset: An asset is a present economic resource to which the entity
has a right or access that others do not have.

Components of the definition

1. Present

On the date of financial statements, both the economic resource exists and the entity has a
right or other access that others do not have.

2. Economic Resource (e.g. a house)

-An economic resource is something that is scarce and capable of producing cash inflows or
reducing cash outflows directly or indirectly, alone or together with other economic
resources .e.g. MSU building new blocks.

3.A right or other access

-This enables the entity to use the economic resource and its use by others is prohibited
unless permission is granted by the entity.

-A right or other access that others do not have maybe enforced by legal or equivalent needs.

Liabilities

Current Definition: A liability is a present obligation of an entity arising from past events.
The settlement of which is expected to result in an outflow from the entity of resources
embodying economic benefits.

Components of definition:

 Obligation:

These may be legal or not, e.g. the year end tax liability relates the year’s (i.e. past) events
but in law this liability does not arise until it is assessed some time later.

 Past transaction

The event must be ‘past’ before a liability can arise.

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  Transfer /outflow of economic benefits:

This could be a transfer of cash or other property, the provision of a service, or the
refraining from activities which could otherwise be profitable

Tentative Definition: A liability of an entity is a present economic obligation for which the
entity is the obligor

 Present

-Present means that on the date of the financial statements both the economic obligation
exists and the entity is the obligor.

 Economic obligation

-This is the unconditional promise or other requirement to provide or forego economic

resources including through risk protection.

 Obligor

-This means the entity acknowledges the liability and can also be sued for it in case of default
in payment e.g. mortgages

RECOGNITION CRITERIA of an assets and liability

Recognition- Is the process of in cooperating in the statement of comprehensive income and

statement of financial position an item which needs the definition of an element and satisfies
the criteria for recognition.

An asset will only be recognised if it:

-Meets the definition of an asset.

-it gives rights or other access to the future economic benefits controlled by an entity as a
result of past events.

-it can be measured with sufficient reliability.

A liability will only be recognised if it:

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-meets the definition of a liability

-there is an obligation to transfer economic benefits as a result of past events.

-it can be measured reliably

Practice Questions and answers assets and liabilities.

Below are four situations.

1. M has paid $3 million towards the cost of a new hospital in the nearby town, on condition
that the hospital agrees to give priority treatment to its employees if they are injured at work.
2. N is the freehold legal owner of a waste disposal tip. It has charged customers for the right
to dispose of their waste for many years. The tip is now full and heavily polluted with
chemicals. If cleaned up, which would cost $8 million, the site of the tip could be sold for
housing purposes for $6 million.
3 P has signed a contract to pay its finance director $300,000 per year for the next five years.
He has agreed to work full time for the firm over that period.
4 Q has paid $25,000 to buy a patent right, giving it the right to sole use, for 8 years, of a
manufacturing method which saves costs.
For each situation, state whether an asset or a liability is created.
Solutions
1 The Framework defines an asset as resources controlled by the enterprise as a result of past
events and from which future economic benefits are expected to flow to the enterprise. M
cannot control the actions of the hospital, nor is it certain that there is access to future
economic benefits. Therefore M does not have an asset.
2 N controls the tip as the result of a past transaction, but there does not appear to be any
access to future economic benefits, as the tip cannot be sold in its present state and no further
income can be obtained from it. Therefore the site of the tip is not an asset.
It is possible that N has a liability for the cost of cleaning up the tip. A liability is an
obligation to transfer economic benefits as a result of past transactions or events. In practice,
N may be legally obliged to clean up the tip so that it is no longer in a dangerous condition. If
this were the case, there would be a liability of $8 million and a corresponding asset for $6
million.

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3 At first, the contract between P and its finance Director may appear to give P a liability.
However salary is paid a result of the director’s work during the next 5 years. There is no past
event and therefore P cannot have a liability.
4 It is clear that Q has acquired rights to future economic benefits (through cost savings)
through a past transaction (the purchase) and that it controls the benefits (it has sole use of the
method for 8 years). The patent rights are an asset of Q.
Further practice questions

a) A river cuts through MSU commerce campus and is very useful to the Faculty of
Commerce where an Orchard and Market gardening are being practiced. The
University sells produce from the garden and orchard at a substantial profit. The
university bought the faculty premises in 2007 and are the owners thereon. Does MSU
recognise the river in its financial statements?

b)

Equity-Ownership interest in a firm

-It is the residual or remaining interest in the assets of the entity after deducting all its
liabilities.

Equity =Assets – liabilities

Owners equity includes

1) Funds contributed by the owner

2) Reserves

3)Profit

4) Deduction of the drawings

Equity is different from liabilities in that liabilities are obligations which must be settled out
of the assets of the entity while equity is not an obligation but what is left over.

-After all the liabilities are deducted hence the equation Equity=Assets –Liabilities.

Income

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Income is increases in economic benefits during the accounting period in the firm of inflows
or enhancements of assets or decreases of liabilities that results in increases in equity other
than those relating to contributions from equity participants

Income

Revenue Gains

Revenue is earned from the entity ‘s ordinary activities e.g. fees earned ,sales ,interests
,income, dividend ,income, rental income, settlement discount received, commission income
and credit losses recovered.

Gains-these are increases in economic benefits which do not arise from the normal activities
of the entity but could be from profit on disposal of noncurrent assets.

Recognition criteria of income:

Income is recognised when:

-the definition meets that of income

-an increase in future economic benefits arises from an increase in an asset (or reduction of a
liability; decrease in allowance for credit losses).

Expenses

These are decreases in economic benefits during the accounting period in the form of
outflows or depreciation of assets or insurances of liabilities that result in decreases in equity
other than those relating to distributions to equity participants.

Expenses

Normal expenses Losses

These include:

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  Cost of sales
 Credit losses
 Rent expense
 Settlement discount granted
 Carriage on sales
 Insurance
 Salaries and wages
 Depreciation
 Water and electricity
 Advertising
 Interest expenses
 Insurance

Losses

Decreases in economic benefits which do not arise from the normal activities of the entity
e.g. loss of sale of PPE.

Recognition criteria of expenses

Expenses are recognised when:

- it meets the definition of an asset

- there is a decrease in future economic benefits from a decrease in an asset (or an

increase in a liability)

- it can be measured reliably.

Measurement bases

There are basically 4 measurement bases in the framework namely:

 Historical cost
 Current cost
 Realisable value/settlement value
 Present value

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Historical costs- This is the actual amount paid for the particular asset at the time it was
acquired.

Current costs -The amount of cash which an entity would have to pay at present to acquire
the same time of asset bought previously.

Realisable value- The amount of cash that will be received if the asset is sold in an ordinary
disposal

Present value-The discounted value of the future expected net cash flows which the asset
should generate in the future.

UNIT 2 :CONSOLIDATED FINANCIAL STATEMENTS

IFRS 10: CONSOLIDATED FINANCIAL STATEMENTS.

2.0 INTRODUCTION

Consolidated financial statements (aggregate financial statements of a group of business

entities) are useful to both the parent’s shareholders and the subsidiary’s shareholders. Both
existing and potential investors require the consolidated position of a group for subsequent
decision making. The consolidated position is essential for trend analysis, ratio analysis and
conditions analysis which helps in cash flow predictions and failure predictions of the group.
It is also important to management of the group, as this information is essential in additional
acquisition assessments i.e. whether to acquire an additional business unit and mix with the
existing portfolio or not. Continuous research identified four areas of divergence in
determining whether an investee should be consolidated or not these are:

 Where an investor controls an investee with less than a majority of voting

rights
 Special purpose entities application of SIC 12’s economic substance over form
notion
 Issues around agency and principal relationships; and
 Consideration of protective rights

Due to the importance of the provisions of consolidated financial statements the existence of
areas of uncertainties or grey areas saw the International Accounting Standards Board (IASB)
separating the former IAS 27 (consolidated and separate financial statements) into two

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distinct standards i.e. IFRS 10 consolidated financial statements and IAS 27 now
concentrating on separate financial statements.

2.1 BACKGROUND OF IFRS 10

The IASB issued the first standard on consolidations in 1989 i.e. IAS 27 Consolidated
financial statements and accounting for investments in subsidiaries in April 1989 effective
date (1 January 1990) which was reformatted in 1994.IAS 27 was subsequently amended by
the following pronouncements:

 IAS 39 Financial instruments :recognition and measurement issued (1 January

2001)
 IFRS 3 Business combinations issued (22 May 2008)
 IFRS 5 Noncurrent assets held for sale issued (22May2008)

IFRS 9 Financial instruments: measurement and disclosures issued (May 2011)

Until May 2011 the standard IAS 27 consolidated and separate financial statements was in
use. The Board removed the consolidation aspect from IAS 27 leaving it as separate
financial statements. The consolidation aspect of groups is now covered by IFRS 10 which
is applicable to annual financial statements from periods 1 January 2013 but earlier
adoption was permitted.

The main changes from IAS 27:

 Definition of control and control as the only basis for consolidation

 The 3 elements of control

Control as the basis of consolidation in special purpose entities.

2.1.2 Comparison of IFRS 10 and previous IAS 27

IAS 27 (previous)

Previously control was regarded as the power to govern the financial and operating policies
of an entity so as to obtain benefits from its activities. Control over another entity only
required the ability or power to direct or dominate decision making. This shows that the
standard focused on power as the bases for control.

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IFRS 10 now gives the following conditions which should ALL be prevalent before an
investor can say it controls an investee. Control of an investee (IFRS 10.Appendix A and
IFRS 10.5-18); an investor controls an investee when the investor is exposed, or has rights,
to variable returns from its involvement with the investee and has the ability to affect
those returns through its power over the investee.

As a matter of interest it is also noted that the Board edited the definition of consolidated
financial statements in IFRS 10 to encompass the five elements of financial statements and
added definitions for the following: power, protective rights and relevant activities

The three elements of control

IAS 27 focused on power as the main element in the principle of control i.e. the ability to
direct and dominate decision making was the sole element. It also required that when
identifying the nature of relationships between entities specifically the identification of
subsidiaries the concept of economic substance over form be considered.

IFRS 10 identifies the following three elements of control

 Power over the investee

 Exposure ,or rights to variable returns from involvement with the investee
 The ability to use power over the investee to affect the amount of the
investee’s returns to which it is exposed

It considers that an investor must possess all three elements of control to conclude that it
controls the investee. The assessment of control is based on all facts and circumstances and
the conclusion is reassessed if there is an indication that there are changes to at least one of
the three elements of control.

SIC 12-consolidation-special purpose entity.

The interpretation required that for control to be prevalent the risks and rewards of the special
purpose entity should lie with the investor and that the concept of economic substance over
form be considered

IFRS 10 requires that all the three elements of control should exist for a special purpose
vehicle to be consolidated and it eliminates the risks and rewards approach and the substance
over form applicability in consolidation of special purpose entities

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 2.2 IFRS 10 consolidated financial statements– Overview

IFRS
Overview – IFRS 10 Consolidated financial statements

 Control of investee: IFRS 10 Appendix A and IFRS 10.5-9 10

 Decision maker: IFRS 10 Appendix A
 Group: IFRS 10 Appendix A
 Non-controlling interests: IFRS 10 Appendix A and IFRS 10.22-24
-  Parent: IFRS 10 Appendix A -
Definition

 Power: IFRS 10 Appendix A and IFRS 10 .10-14

 Protective rights: IFRS 10 Appendix A and IFRS 10.B26-B28
 Variable returns: IFRS 10.B55-B57
 Relevant activities: IFRS 10 Appendix A
 Removal rights: IFRS 10 Appendix A
 Substantive voting rights: IFRS 10.B22-B25
 Potential voting rights: IFRS 10.B47-B50
 Subsidiary: IFRS 10 Appendix A

(a) Combine like items of assets, liabilities, equity, income, expenses and cash 10.B86
Consolidation

Procedure

flow of parent with those of subsidiary.

(b) Eliminate the carrying amount of the parent’s investment in subsidiary and
the parent’s portion of equity of the subsidiary.
(c) Eliminate intergroup transactions and balances.

If a parent loses control of a subsidiary, the parent 10.B97-B99

a) Derecognizes assets (including goodwill) and liabilities of subsidiary

b) Derecognize the carrying amount of any non-controlling interest
Recognition

c) Recognize the fair value of the consideration received

d) Recognize the retained investment at fair value
e) Reclassify to P/L or transfer directly to retained earnings the amounts
recognized in OCI
f) Recognize gain /loss associated with loss of control
Disclosure

Refer to IFRS 12 Disclosure of interests in other entities 12

Framework

Schem  Definitions of liabilities: Paragraph 49(b) and 60-64

 Definition of equity: Paragraph 49(c) and 65-68

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2.2.1 Scope of IFRS 10

The IFRS applies to all profit companies i.e. public companies, private companies and state
owned companies (state owned companies :in case of a conflict with Public Finance
Management Act, the Act prevails) with the exclusion of SMESs which fall into the scope of
IFRS for SMEs(IFRS 10:19),

a parent prepares consolidated financial statements using uniform accounting policies for like
transactions and other events in similar circumstances. A parent however need not present
consolidated financial statements if it meets all the following requirements of (IFRS 10:4a)
which are as follows:

 It is a wholly owned subsidiary or is a partially owned subsidiary of another entity

and its owners including those not otherwise entitled to vote have been informed
about and do not object to the parent not presenting consolidated financial statements.
 Its debt or equity instruments are not traded in a public market( a domestic /foreign
stock exchange) or an over the counter market ,including local and regional markets
 It did not file, nor is it in the process of filing its financial statements with a securities
commission or other regulatory organization for the purpose of issuing any class of
instruments in a public market.
 Its ultimate or intermediate parent of the parent produces consolidated financial
statements available for public use which comply with IFRSs

IFRS 10 establishes the principle for the preparation and presentation of consolidated fin
statements when an entity controls one or more entities.

 IFRS 10 determines when an entity should present Consolidated Fin Statements

and sets out the principle to be applied in the preparation.

2.2.2 Key terms of IFRS 10

Consolidated fin statements

 These are fin statements of a group where the assets, liabilities, equity ,income
,expenses and cash flows of the parent and its subsidiaries are presented as
those of a single economic entity.

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Control of an Investee

 An investor controls an investee when the investor is exposed or has rights to

variable returns from its involvement with the investee and has the ability to
affect those returns through its power over the investee.

Parent

 A parent is an entity that controls one or more entities.

Protective Rights

 These are rights designed to protect the interests of the party holding those
rights without giving that party power over the entity to which those rights
relate.

Decision Maker

 Is an entity with decision making rights that is either a principal or an agent

Group

 Is a parent and its subsidiaries

Non-Controlling Interest (NCI)

 Is the equity of a subsidiary not attributable directly or indirectly to the parent

Relevant Activities

Are activities of the investee that significantly affect the investee‘s returns.

2.2.3 Core principle of IFRS 10

The parent company in a group of companies prepares and presents consolidated financial
statements. The IFRS defines the principle of control and establishes control as the basis
for consolidation. It also sets out how the principle of control is applied in identifying
whether an investor controls the investee or not. The accounting requirements for the
preparation and presentation of consolidated financial statements are also set out in IFRS 10

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2.2.4 Assessment of control. IFRS 10.B3 provides guidance on factors to be considered
when assessing control which are summarized below

Assessing Control

The board categories of factors to be considered when assessing control are as follows:

a) Relationship with other parties

b) The purpose and design of the investee

c) Power over the Investee

d) Exposure or rights to variable returns

e) The liability link between power and returns

f) Continuous assessment

a) Relationship with other parties

 In order for an investor to control the investee, it should be able to exercise control
unilaterally.
 If the concept of one or more other investors is required in order to exercise control so
that no investor or individual controls the investee, IFS 10 is not applied to the
investment.
 Instead the investor considers if it is a part in a joint arrangement in terms of IFRS 11
or if it has significant influence in terms of IAS 28.
 An investor with decision making rights determines whether it acts as a principal
or an agent of other parties.
 An agent is a party primarily engaged to act on behalf and for the benefit of
another party and it does not control the investee when it exercises its decision
making authority.

 IFRS 10 also gives the guidance when an investor may have a relationship with
another part such that the investor may direct the other party in acting on behalf of the
investor (referred to as a ‘de facto agent’ a careful analysis of the investor’s relations
is necessary. a special relationship with the investee which suggests that the investor

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 has more than a passive interest in the investee should be analysed. Indicators of
special relationships with other parties include:

 Related parties(as defined by IAS 24 Related party disclosures)

 An investor who received their interest in the investee as a result of a loan or
contribution from the investor.
 An investor who has agreed not to sell ,transfer or encumber their interest in
the investee without prior approval of the another investor
 A party that cannot finance its operations without subordinated financial
support from the investor.
 An investee who shares a majority of their Board or key management
personnel with an investor
 A party with a close business relationship with the investor (such as a service
provider and a significant client)

Rights held by the Investor and other parties

Substantive rights held by the investor and other parties may affect the decision maker’s
ability to direct relevant activities. If the investor holds substantive removal rights and can
remove the decision maker without a cause. This in isolation is sufficient to determine that
the decision maker is an agent of the investor hence cannot consolidate.

Principal /agent relationships- the standard introduces guidance on assessing whether an

entity with decision making rights acts as a principal or an agent of other parties. IFRS 10;
B58, IFRS 10:B60 describes an “agent” as a party who has been engaged to act on behalf,
and for the benefit of another party (the “principal”). In deciding whether a decision maker is
an agent the following factors should be considered along with any other relevant elements of
the relationship between the decision maker and other parties involved with the investee:

 Scope of the decision making authority over investee

 Rights held by other parties
 The remuneration to which it is entitled (including whether it is commensurate
with the services provided and whether any non standard terms are included)
 The exposure to variability of returns from other interest held in the investee
 The rights of a single party to remove the decision maker.


:
b) power over the investee

IFRS 10.10-14, states that power exists when the investor has existing rights that give it the
current ability to direct the activities that significantly affect the investee’s returns (the
relevant activities). Under normal circumstances Power normally arises through voting rights
(straightforward rights) granted by equity instruments, but can also arise through other
contractual arrangements (complex rights). If two or more investors have rights to direct
different relevant activities the investors must decide which relevant activities most
significantly affect the returns of the investee.

Existing rights –the first requirement for an investor to have power over an investee is that
the investor should have existing rights at the date when the assessment of power is made
i.e. the rights should be existing already for the investor to be said to have power. The
standard states that the rights that can give an investor power over an investee differ from
entity to entity. IFRS 10 however provides the following examples of rights that can
individually or in combination, give an investor power over an investee:

 Voting rights granted by equity instruments

 Potential voting rights
 Rights to appoint reassign or remove members of an investee’s key management
personnel who have the ability to direct relevant activities
 Rights to appoint or remove another entity that directs the relevant activities
 Rights to direct the investee to enter into or veto any changes to ,transactions for the
benefit of the investor
 Other rights (such as decision making rights specified in a management contract) that
give the holder the ability to direct the relevant activities.

Substantive rights- (IFRS 10, 11) specify that only substantive and rights that are not
protective rights are considered in assessing power. Substantive rights give their holder the
practical ability to exercise the right when the decisions about the relevant activities of the
investee need to be made. Substantive rights do not need to be currently exercisable to be
substantive i.e. they can be potential. For a right to be substantive it should be assessed
whether there is a:

 Barrier that would prevent the holder from exercising the right(e.g. incurring a
substantial penalty or fee if the right were exercised)

:
  Mechanism that provides parties with the practical ability to permit the investor to
exercise its right.

Benefit from the investor exercising that right (e.g. by exercising an “in the money” call
option)

Example: existing rights –substantive rights

On 1 June 2012 CBZ Ltd held 21% of the voting rights of Datvest Ltd. In addition, on the
same date CBZ Ltd entered into a forward contract that obligates it to acquire ordinary shares
with an additional 34% of the voting rights in Datvest Ltd. The contract will be settled on the
26th of June i.e. exactly 25 days from the contract date. Assume that only voting rights are the
relevant element in determining power over Datvest Ltd, and that all significant decisions
regarding the relevant activities are required to be taken on a shareholders meeting. Suppose
that a 30 day notice is required by law to call a shareholders’ meeting.

Determine a) if CBZ Ltd has power over Datvest Ltd under the existing conditions on 1June
2012

b) If a shareholders’ meeting is scheduled to take place on the 3rd of June 2012 i.e.
only 2days after CBZ Ltd entered into the forward contract. Determine whether CBZ Ltd has
power over Datvest Ltd on 1 June 2012 and why?

c) What if the forward contract was an option contract exercised the same date as the forward
option would CBZ Ltd exercise power over Datvest limited?

Suggested solution:

a) The voting rights under the forward contract are substantive from the date that CBZ
Ltd enters into the contract i.e. 1 June 2012, as they will be exercisable on the first
date that significant decisions relating to the relevant activities may be taken. CBZ
Ltd has power over Datvest Ltd as it has substantive voting rights of 55% {21%
+34%}
b) If a shareholder’s meeting is scheduled for the 3rd of June 2012, CBZ Ltd will only
acquire substantive rights under the forward contract immediately after the close of
the meeting in question .this is because the voting rights will only be exercisable at
subsequent meetings.

:
 c) The same situations would apply if CBZ Ltd had entered into an option contract
(instead of a forward contract), exercisable 22 days from the date of issuance,
provided that there are no other barriers to the exercise of the option (e.g. the option is
deeply in the money and CBZ Ltd has the financial resources to exercise the option

Protective rights- (IFRS 10.14) distinguish between substantive rights and protective rights.
An investor who holds only protective rights would not have power over an investee and
could not prevent another party from having power over an investee. Protective rights relate
to fundamental changes to the activities of an investee or apply in exceptional circumstances
e.g. the right to approve new debt financing, the right of a party holding Non controlling
interest in an investee to approve the investee’s issuance of additional equity instruments or
the right of a lender to seize assets in the event of default. (In essence the above mentioned
examples of protective rights protect the investor who is generally not involved in the day to
day decisions concerned with relevant activities of the investee)

c) Purpose and Design of the Investee

By considering the purpose and design of the investee the relevant activities may be clear
.Also it may be clear an investee is controlled through proportionate voting rights attached to
equity instruments i.e. voting rights will be dominant factor in determining control.

Relevant activities

Relevant activities refer to the activities that significantly affect the investee’s returns. For
entities whose operations are directed through voting rights the fundamental relevant
activities will generally be its operating and financing activities. Examples of activities that
may be relevant activities include product development, purchases and sales of goods and
services, managing financial assets, acquiring and disposing of assets or obtaining financing.
Examples of decisions about relevant activities include establishing operating and capital
decisions of the investee and appointing and remunerating an investee’s key management
personnel or service providers and terminating their employment.

Example : relevant activities

Electric Ltd owns 55% of the equity shares of Sparky Ltd. Sparky Ltd was set up by a local
municipality to handle the supply of electricity to households and businesses within the
borders of the local municipality. The municipality owns the other 45% of the equity shares
of Sparky Ltd. The operating activities are closely regulated by the local municipality and

:
Sparky Ltd may only operate under a license granted by the local municipality. Electricity
prices are regulated by the local municipality.
Required: who controls Spark ltd?

Solution:
Electric Ltd would normally be considered to have power over Sparky Ltd as it holds 55% of
the voting rights. However, the voting rights of Electric Ltd are not considered to be
substantive. Even though Electric Ltd holds the majority of the voting rights, it does not have
power over Sparky Ltd as the relevant activities of Sparky Ltd are subject to direction by the
local municipality. The purpose and design of Sparky Ltd were such that the direction of its
activities (it operates under a licence from the local municipality) and its returns (electricity
prices are regulated) were predetermined by the local municipality. Electric Ltd would
therefore not be fully able to utilize any decision-making ability (not power) it may have over
Sparky Ltd to affect its return from Sparky Ltd. Sparky Ltd may be described as a special
purpose entity of the local municipality (see below) and may be controlled by the local
municipality.
Franchises and relevant activities

(IFRS 10.B29-33): franchise agreements often give the franchisor rights that are designed to
protect the franchise brand, but some of these rights may provide the franchisor with certain
operational decision making rights, e.g. rights to determine the ingredients to be used in
products. The standard requires that these rights be analyzed to determine if they are
substantive rights or protective rights in nature. (IFRS 10.13) determines that the franchisor
does not have power over the franchisee if other parties have existing rights that give them
the current ability to direct the relevant activities of the franchisee.

Franchise example :

d)Exposure of rights to variable returns

An investor is exposed or has rights to variable returns from its involvement with the investee
when the investor’s returns from its involvement has the potential to vary as a result of the
investee‘s performance. The use of the term returns not benefits means that the economic
exposure to an investee may be positive or negative (IFRS 10:15). Examples of such returns
include; changes in the value of the investment in the entity; residual interest in cash flows of
structured entities; dividends; interest; management or service fee arrangements; guarantees

:
,tax benefits or any other returns that may not be available to other interest holders IFRS
10:B57). Only one investor controls the entity but multiple investors may share in the returns
of the investee (IFRS 10.16). Examples of other returns that may not be available to other
interest holders are savings through combinations of operations, sourcing scarce products,
gaining access to enhance the value of the investor’s other assets.

e) Ability to use power/Link between power and returns

This element considers the link between the first to elements of control. For control to be
prevalent an investor should not only have power over an investee and exposure, or rights, to
variable returns from its involvement with the investee but it should also have the ability to
use such power over the investee to affect its returns from its involvement with the investee(
IFRS 10:17). In a nutshell this element of control calls the investor to distinguish whether it is
an agent or a principal.

F Continuous assessment

An investor should reassess whether it controls an investee whenever facts or circumstances

indicate that there has been changes to one or more elements of control.

Example continuous assessment of control: (adapted from UNISA FAC 4863).

Semnet Ltd acquired 80% of the voting rights in Shyna Ltd on 1 January 2010 for $300 000
when the equity of Shyna Ltd (fairly valued) was $350 000. On 1 January 2011 Semnet Ltd
disposed of half of its interest for $130 000 resulting in a 40% remaining interest in Shyna
Ltd when the fair value of the assets and liabilities was still $350 000. NCI is accounted for
at the proportionate share of the net assets. The fair value of the remaining interest in Shyna
Ltd is $150 000. What is the gain/loss that should be recognized in profit or loss in the
consolidated financial statements?

A) $20 000(loss)

B) $150 000 (Loss)

C) $50 000 (Loss)

D) 70 000 (GAIN)

E) None of the above

:
Suggested solution

1. Calculation of profit/loss on sale of interest in subsidiary

Derecognise the asset and liabilities ($350 000)

Derecognise goodwill [($350 000*80%)-$300 000] ($ 20 000)

Derecognize non controlling interest (($350 000*20%) $ 70 000

Fair value of consideration $130 000

Fair value of remaining interest $150 000

Consolidated loss ($ 20 000)

Consolidation process\

Basic consolidation techniques include the following:

1) Elimination of common items

2) Elimination of inter co// transactions

3) Consolidation of remaining items

:
Schematic view of IFRS 10: Consolidated financial statements

Presentation of consolidated financial statements

A parent presents consolidate financial statements

Control

An investor controls an investee when it has the following:

 Power over the investee

 Exposure(or rights ) to variable returns through its relationship with the investee
 The ability to use its power over the investee to affect the amount of the returns to which it is exposed

Consolidation procedures-from date control is acquired

Parent Non-controlling interest

 Eliminate carrying amount of investment  Profit or loss

against parent’s portion of equity of subsidiary
 Line by line adding of like items  Components of other comprehensive
 Intra-group balances , transactions, income and income
expenses should be eliminated in full
 Net assets

 Should be disclosed –present as equity

in statement of financial position
(separate from equity of owners of the
parent)

Change in ownership without loss of control

 Accounted for as a transaction between owners acting in their capacity as owners (in the statement of
changes in equity)
 Adjust the carrying amount of controlling and non-controlling interest to reflect changes in their
respective interests in subsidiary (in the statement of changes in equity)
 Differences between the fair value of the consideration paid/received and adjustment against non-
controlling interest is recognized directly in equity and attributed to owners of the parent ( in the
statement of changes in equity)

Loss of control

:
  If control is lost because of two or more transactions ,consider if they should be treated as a single
event
 On the date control is lost parent should
-derecognise assets (Including goodwill) and liabilities of subsidiary

-derecognise the carrying amount of non-controlling interest in former subsidiary

-recognise the fair value of proceeds.

-recognise distribution of shares of subsidiary to owners in their capacity as owners.

-recognise any retained investment in former subsidiary at its fair value.

-reclassify /transfer other components of comprehensive income.

Recognize any resulting difference as a gain or loss in profit or loss attributable to parent.

Consolidated financial statements :( IFRS 10: B86)

1) Elimination of common items

One of the first adjustments which should be made in consolidated financial statements is the
elimination of investment in the parent’s books and the shareholders equity section in the
subsidiary. For example, the following are the statements of financial positions of A. limited,
and its subsidiary B. limited as at 28 February 2013

A. LimitedB. Limited

Assets

Investment in B ltd at fair value 10 000

Cash and cash equivalent 10 000 10 000

20 000 10 000

Equity and Liabilities

Ordinary share of $1 each 20 000 10 000

:
Prepare a consolidated statement of financial position of a limited group at 28 February
2013.Assume that limited acquired its interest at that date and B. ltd was incorporated at
that date .

Consolidation / Proforma journals

DR CR

Ordinary share capital 10 000

Investment in B 10 000

Being elimination of stakeholders equity of B limited at date of acquisition.

A. Limited group

Consolidated financial statements as at 28 February 2013.

Assets

A. Limited 10 000 + B. Limited 10 000

Cash and cash equivalent 20 000

Equity and Liability

Ordinary share capital 20 000

Elimination of intercompany items

It is commonly found in practise that companies in the same group sell inventories and assets
to one another. This is an in-house transaction which should be eliminated as there is no
money coming in from a 3rd party outside the group.

Consolidation of remaining items

:
Once common items and intercompany items have been eliminated, a consolidated statement
of financial position, consolidated statement of comprehensive income and consolidated
statements of financial position, consolidated statements of comprehensive income and
consolidated statements of changes in equity can be drawn up.

Consolidated statements of financial position of a wholly owned subsidiary at date of

acquisition .When a parent detained an interest in a subsidiary , three scenarios can arise and
these are:

a) A subsidiary can be acquired at a net asset value i.e. purchases price paid by the parent
for the subsidiary is equal to the net value of the assets acquired.

b)A subsidiary can also be acquired at a premium(Goodwill) i.e. purchase price paid by the
parent is higher than the net asset value of the subsidiary.

c)A subsidiary can also be acquired at a discount i.e. purchase price lower than the net asset
value.

Example. Acquisition of a subsidiary at net asset value .The following represents the
statements of a financial position of a limited company and its wholly owned subsidiary ,B
Limited as at 31 December 2014, the date on which A Limited acquired its interest in B.
Limited

A.Ltd B Ltd

Investment in B. limited at fair value 90 000

Bank 30 000 50 000

Trade and other receivables 60 000 40 000

180 000 90 000

Equity and liabilities

Ordinary shares of $1.00 each 100 000 50 000

Retained earnings 80 000 40 000

180 000 90 000

:
Required: Prepare a consolidated statement of financial position

Show calculations

Solution:

Analysis of Shareholders equity of B. Limited

Details Total 100%

At acquisition since acquisition N.C.I

Ordinary share capital 50 000 50 000

Retained earnings 40 000 40 000

90 000 90 000

Investment in B Ltd ( 90 000)

Goodwill

Consolidation journal

DR CR

Ordinary share capital 50 000

Retained earnings 40 000

Investment 90 000

Being elimination of shareholders’ equity of B limited at date of acquisition

Consolidated statement of financial position

A limited Group

Consolidated statement of financial position as at 31 December 2014

Assets

Trade and other receivables (60 000+35 000) 95 000

:
Cash and cash equivalent (30 000+55 000) 85 000

180 000

Equity and liabilities

Equity

Total equity 180 000

Equity attributable to owners parent 180 000

Ordinary share capital 100 000

Retained earnings 80 000

N.C.I

Total equity and liabilities 180 000

Question: Acquisition of a subsidiary at a premium

The following represents the abridged statement of financial position of A. Limited company
and its wholly owned subsidiary B. Limited as at 31 December 2014.The date A. Ltd
acquired its interest in B Limited

Assets A. Ltd B. Ltd

Investment in B Ltd at fair value 100 000

Bank 20 000 55 000

Trade and other receivables 60 000 35 000

180 000 90 000

Equity and liabilities

Ordinary shares of $1.00 each 100 000 50 000

:
Retained earnings 80 000 40 000

180 000 90 000

Required: Prepare a consolidated statement of finance as at 31 Dec 2014

solution

Analysis of shareholders’ equity

Total at acquisition since acquisition N.C.I

Ordinary share 50 000 50 000

R.E. 40 000 40 000

90 000 90 000

Investment 100 000 100 000

Goodwill 100 000 100 000

Journals DR CR

Ordinary share capital 50 000

Retained earnings 40 000

Goodwill 10 000

Investments 100 000

Being elimination of shareholders equity of B Ltd and Goodwill at date of acquisition

A. Limited group consolidated statement of financial position as at 31dec 2014

Assets

:
Non Current. Assets 10 000

Goodwill 10 000

Current Assets 170 000

Trade and other receivables 95 000

Cash and cash equivalent 75 000

Total assets 180 000

Equity and liabilities

Equity

Total equity 180 000

Equity attributable to owners of parent 180 000

Ordinary share capital 100 000

Retained earnings 80 000

N.C.I.

Total equity and liabilities 180 000

Consolidation of a partly owned subsidiary when the company pays a premium.

Acquisition of a partly owned subsidiary at a premium, the following are the abridged
statements of financial position of A. Limited and its subsidiary B. limited as at 31 Dec
2011.The date on which A. limited acquired its interest in B. limited.

:
A. Ltd B. Ltd

Assets

PPE 160 000 160 000

Investment in B.Limited-64 000 ordinary share at fair value 140 000

Trade and other receivables 98 000 110 000

Total assets 398 000 270 000

Equity and liabilities

Ordinary shares of $1.00 each 100 000 80 000

Retained earnings 120 000 60 000

Trade and other payables 178 000 130 000

398 000 270 000

Required: Prepare the consolidated statement of financial position for A. Limited as at 31

Dec 2014

soulution

degree of control = 64 000 × 100%

80 000

= 80%

Degree of control = Number of share acquired × 100

Total number of shares

:
Analysis of shareholders equity of B. Limited.

Total 80% 20%

At Acquisition At acquisition since acquisition N.C.I.

Ordinary share capital 800 000 64 000 16 000

Retained earnings 6 000 48 000 12 000

Net asset value 860 000 112 000 28 000

Investment 140 000

Goodwill 28 000

Consolidation journal

Ordinary share capital 80 000

Retained earnings 60 000

Goodwill 28 000

Investment 140 000

N.C.I. 28 000

Being elimination of shareholders equity of B. Ltd and Goodwill at date of acquisition

A GROUP

Consolidated statement of financial position as at…………………………

Assets 556 000

Non C.A 348 000

P.P.E. (160+160) 320 000

Goodwill 28 000

:
Current assets 208 000

Trade and other receivables 98 000+110 000 208 000

Equity and liabilities 556 000

Equity

Total equity 248 000

Equity attributable to owners of parent 220 000

Ordinary share 100 000

R.Earnings 120 000

N.C.I. 28 000

Liabilities

Total liabilities 308 000

Non C.L.

Current liabilities 308 000

Trade and other payables(130 000+178 000) 308 000

Consolidation after date of acquisition

Consolidation of the partly owned subsidiary after date of acquisition

The following are abridged financial statements of X. limited and its subsidiary Y. limited

Statements of financial position as at 31 Dec 2011

Assets

P.P.E. 200 000 220 000

Investment in Y. ltd -30 000 ordinary share of $2.00 152 500

Trade and other receivables 50 500 80 000

:
Bank 27 000 45 000

430 000 345 000

Equity and liabilities

Issued share –Ordinary share $2.00 each 100 000 80 000

Retained earnings 270 000 190 000

Trade and other payables 60 000 75 000

430 000 345 000

X Ltd acquired its interest in Y Ltd on 1 January 2012.When Y‘s retained earnings amounted
to 110 000.At acquisition date, consider the carrying amount of the assets and liabilities of Y
limited to be equal to the fair value thereof.

Statement of comprehensive income for the year ended 31 Dec 2014

X Y

Gross profit 107 000 105 000

Dividends received 7 500

Profit before tax 114 500 105 000

Income tax expense 34 500 35 000

Profit for the period 80 000 70 000

Statement of changes in equity

Details Share Capital Retained Equity Total

:
 X Y X Y X Y

Balance 31/12/10 100 000 80 000 210 000 130 000 310 000 210 000

Profit for the period 80 000 70 000 80 000 70 000

Dividend paid (20 000) (10 000) (20 000) (10 000)

Balance 31/12/11 100 000 80 000 270 000 190 000 370 000 270 000

Required: Preparethe consolidated financial statements of X. Limited group for the year
ended 31 Dec 2011.

solution

Degree of control = 30 000 × 100

40 000

= 75%

75% 25%

Details Total at acquisition since acquisition N.C.I.

At acquisition

Ordinary share capital 80 000 60 000 20 000

R.E. 110 000 82 000 27 500

Net asset value 142 500 47 500

Investment 152 500

:
Goodwill 10 000

Since Acquisition

To beginning of current yr

01/01/09-01/01/11

130 000 - 110 000 20 000 15 000 5 000

Current period

01/01/11 – 31/12/11

Profit for the period 70 000 52 500 17 500

Dividend paid (10 000) (7 500)(2 500)

270 000 60 000 67 500

Consolidation / Proforma Journals

Ordinary share capital 80 000

Retained earnings 110 000

Goodwill 10 000

Investment 152 500

N.C.I. 47 500

Retained earnings 5 000

N.C.I. 5 000

Recording of N.C.I. in A.Ltd for the period 01/01/09- 01/01/11

:
N.C.I. statement of comprehensive income 17 500

N.C.I. S.F.P. 17500

Recording of N.C.I. in profit after tax

Dividend received X Ltd 7 500

N.C.I. (SFP) 2 500

Dividend paid 10 000

Elimination of inter co// dividend and recording of N.C.I. in dividend.

Xltd Group

Consolidated statement of comprehensive income (SCY)for the year ended 31 Dec 2012

Profit before tax (114 500 + 105 000 212 000

Income tax exp(34 500 + 35 000) (69 500)

Profit for the period 142 500

Other comprehensive income

Total comprehensive income 142 500

Attributed to : (142500)

Owners of parent 125 000

NCI 17 500

X limited

Consolidated statements of changes in equity

Attributable to owners of parent

Details share K Retained TotalNCI Total

:
Balances at 31/12/10 100 000 (15 000+21 000)225 000325000 52 500 377500

Profit for the period 125 000 125 000 17500 142500

Dividend paid (20000) (20000) (2500) (22500)

Balance 31/12/11 100 000 330 000 430 000 67500 497500

X Limited

Consolidated statements of financial position as at 31/12/11

Assets

Non C Assets 430 000

PPE (200 000+220 000) 420 000

Goodwill 10 000

Current Assets 202 500

Trade and other receivables(50 500+80 000) 130 500

Cash and cash equivalent (27 000+45 000) 72 000

Total Assets 632 500

Equity and liabilities

Equity

Total Equity 497 500

Attributable to owners of parent 430 000

OSK 100 000

R.E. 330 000

NCI 67 500

Liabilities

:
Total liabilities 135 000

NCL

Current liabilities 135 000

Trade and other payables(60 000+75 000) 135 000

Total liabilities 632 500

Interim acquisition

The purchase of an interest in a subsidiary at a date other than the aching date is
known as an interim acquisition.
Allocation of SCI item is therefore necessary to determine the amount of retained
earnings at the effective date.
The allocation of CI item is the first step in preparing the consolidated financial
statements of an interim acquisition.
The SCI is apportioned between pre and post-acquisition periods

Example

The following are the trial balances of Sandy and South Ltd for the year ended 31Dec
2014.

Sendy Soute

Issued SK - $1 ordinary share 800 000 340 000

Share premium (15 000)

Retained earnings(01/01/12) (480 000) (120 000)

Gross profit (446 5000) (166 200)

:
Auditors remuneration 8 500 5 000

Depreciation 102 000 42 000

Staff costs 95 000 35 000

Interest paid on bank overdraft 3 800

Income tax expense 12 000 4200

Dividends declared (31/12/14) and paid 80 000 34 000

PPE at carrying amount 861 600 426 200

Investment in Soute Ltd(238 000) shares purchased 1 July 2014 364 700

Cash at bank 126 700 51 800

Inventory 72 200 43 000

Additional information

South Ltd became a subsidiary of Sandy limited on 01/07/14

The profit of South Ltd was earned evenly throughout the year

At the date of acquisition consider the carrying amount of the assets and the liabilities of
South limited to be equal to the fair value thereof .The excess of the purchase price over the
net carrying amount of the assets at the date of acquisition was attributable to the difference
between the carrying amount and the fairvalue of land and buildings.

Required:

Draft the consolidated statement of comprehensive income and consolidated statement of

changes of equity of Sendy Ltd group for the year ended 31 Dec 2012 so as to comply with
the requirements of IFRS.

Solution: Sandy Ltd

analysis of shareholders equity of South ltd

:
 Total 70% 30%

At acquisition at acquisition since acquisition NCI

OSK 340 000 238 000 1 02 000

Retained earnings (01/01/12) 120 000 84 000 36 000

01/07/12 40 000 28 000 12 000

Share premium 15 000 10 500 4 500

Revaluation 6 000 4 200 1 800

Net asset value 364 700

Investment 364 700

Goodwill Nil 156 300

Current period

01/01/12)-31-12-12

Profit for the period 40 000 28 000 12 000

Dividends paid (34 000) (23 800) 12 200

527 000 4 200 158 100

Apportionment of SCI South Ltd

Total pre Jan-June14 post July-Dec 14

:
Gross profit (166 200) 83 100 83 100

Auditors‘s remuneration (5000) (2.500) (2.500)

Depreciation (42 000) (21 000) (21 000)

Staff costs (35 000) (17 500) (17 500)

Income tax expense (4 200) (2 100) (2 100)

Profit 80 000 40 000 40 000

70 % = 4 200

30%=Less

= 30 × 4 200

70

= 1 800

Ssandy LTD Statement Of Comprehensive Income for year ended 31 Dec 2014

Gross profit 446 500+83 100-23 800 505 800

Admin distribution and other costs 246 500

(102 000+42 000/2) + (8 500+5000/12) + (95 000+35 000/2) 246 500

Depreciation auditors staff

Finance charges ( 3 800 )

:
Interest overdraft (3 800)

Profit before tax 255 500

Income tax expense (12 000+4200/2 (14 100)

Profit after tax 241 400

Consolidation journals

DR CR

Ordinary share capital 340 000

Share premium 15 000

Revaluation 6 000

R.E.I. 160 000

Investment 364 700

N.C.I. 156 300

NCI SCY 12 000

NCISFP 12 000

Dividend received parent 23 800

NCI 10 200

Dividend paid 34 000

Sandy ltd group

:
Consolidated statement of changes in equity for year ended 31 Dec 2014

SHARE K RETAIN E TOTAL NCI TOTAL

Balance 31/12/11 800 000 480 000 1280 000 - 1280 000

Equity on date of acq 156 300 156 300

Profit for the period 229 400 229 400 12 000 241 400

Dividends paid (80 000) (80 000) (10 200) (90 200)

800 000 629 400 1429 400 158 100 1587500

INTERGROUP TRANSACTIONS

IFRS 10 paragraph B 86 , all intra group assets , liabilities, equity, income and expenses
relating to transactions between entities of the group should be eliminated on consolidation.

Elimination of intra group balances ensures that the assets and liabilities of the group are not
overstated per individual line item.

In the consolidated statement of financial position:

Example of Intra group balances

1) Loans between entities in a group

2) Sale of P.P.E. between entities in a group

3)Sale of inventory ‘’’’’’’’’’’’’’’’’’’’’’

4) Dividends within a group

5) Bank overdraft

:
Loans between entities

Loans between entities of a group – the loan value is not shown in the consolidated financial
statement of the group and neither is the interest thereon shown.

Trading Inventories

- When entities within a group sell inventory to within the group, the entity records such sales
and reflect its profits if any in its individual profit or loss in the normal way.

- From the perspective of the group as an accounting entity, the same principles applies, that
an entity cannot sell goods to itself and make a profit out of oneself.

- i.e. The consolidated entity (the group) cannot recognise a profit from a sale within until
the inventory has been sold to a party outside the group. Profits and losses resulting from
intra group transactions that are recognised as part of the cost price of assets are eliminated in
full.

- Unrealised intra group profits / losses must be eliminated when drawing up the consolidated
financial statement.

-The group will only realise the profit or loss on the sell of the assets once the group realizes
economic benefits associated with the asset.

-Inventory is usually sold between entities at a profit where part of such inventory is still
held by the purchasing entity at the end of the reporting period, the following applies:

-The total profit or loss arising from transactions within the group to the extent that such
profit or loss is not realised or incurred in respect of a transaction with a part outside the
group is excluded in the determination of the total group profit or loss or the interest of the
parent in the profit or loss of the subsidiary

Question: P Ltd sold inventories to S Ltd at cost price plus 25%.At the end of the reporting
period, S Ltd had $50 000 of inventories on hand which were purchased from P Ltd.
Total sales of inventories from P Ltd to S Ltd during the current reporting period
amounted to $100 000.

Required: Prepare consolidation journals

solution

:
Consolidation journals for P. Group

Revenue (P Ltd) 100 000

COS (S) 100 000

Elimination of intra group sales

COS (P) 1 (50 000 ×25/125) 10 000

Inventory (s) 10 000

Elimination of unrealised intra group profit

Included in the closing inventory of S Limited

(50 000/1 ×25/125)

NB :

When the parent is the seller there is no effect on NCI since the parent ‘s activities do not
affect NCI .The effect of the above journal is that the total amount of the unrealised profit
is debited against the consolidated cost of sales which leads to a decrease in the
consolidated profit of the group

Elimination of unrealised profit where a sale is made by the subsidiary

 The amount of the unrealised intragroup profit which is eliminated when a sale is
made by a subsidiary which is partially owned is not influenced by the existence of
NCI. The total (100%) unrealised intra group profit is still eliminated as a debit
against the cost of sales of the seller and the credit against the inventory of the
purchasing entity. The net impact of the elimination is reflected by the NCI ‘s balance
disclosed in the consolidated financial statement

Example

P Limited has inventories on hand amounting to $100 000(at cost price to P Limited) which
was purchased from S Limited(In which P ltd has 90% interest).S. Limited makes a profit of
25% on the cost price of goods sold to P. limited. The total sales of inventories from S limited
to P. limited during the year amounted to $250 000.

:
s/n

Revenue (S) 250 000

COS (P) 250 000

Being elimination of intra group sales

COS (S) 25/125 × 100 000) 20 000

Inventory (P) 20 000

Being elimination of unrealised intra profit included in the closing inventory of S Limited

Comprehensive Example

The following are the condensed financial statements of P Limited and its subsidiary S.
Limited which is a partially owned subsidiary.

:
Statements of Financial position as at 30 June 2011

Assets P S

Investment in S limited 64 000 at fair value 85 000

Inventories 10 000 30 000

Trade receivables 130 000 106 000

225 000 136 000

Equity and liabilities

Share capital 100 000 80 000

Mark to market reserve 15 000

R.E. 26 000 20 000

Trade and other receivables 84 000 36 000

225 000 136 000

Statements of profit and loss and other Comprehensive income for the year ended 30
June 2011

P S

Revenue 100 000 80 000

COS (50 000) (40 000)

Gross profit 50 000 40 000

Other expenses (33 000) (29 500)

Profit before tax 17 000 10 500

Income Tax expense (7000) (5000)

Profit for the period 10 000 5 500

:
Other Comprehensive income 5 000

Items that will be reclassified to profit or loss mark to

Market reserve 5 000

Total comprehensive for the year 15 000 5 500

Mark to Market reserve = fairvalue on investment

Extract statement of changes in equity for the year ended 30 June 2011

Mark to Market reserve Retained Earnings

P. Ltd S .Ltd

Balance 01/07/10 10 000 21 000 14 500

Total comprehensive income - - -

Profit for the year - 10 000 5 500

Other comprehensive income 5 000

Dividends - (5 000)

15 000 26 000 20 000

Additional information

Since 1 July 2010 P. Limited has been purchasing all its inventories from S. Limited at a
profit Mark up of 25%on the cost of the goods .These goods are inventories in the books of P
Limited. Total sales from S. Limited to P. Limited during the current reporting period
amounted to $50 000 on 1 July 2008 the date on which P. Limited acquired its interest in S.
Limited for $70 000,the R.E. of the latter amounted to $7.500.The share capital has remained
unchanged since that date.

P. Limited classifies the investment in the subsidiary as a financial asset at fairvalue through
other CI in terms of IFRS 9 (Financial instruments) changes in fairvalue are recognised in

:
OCI and accumulated in equity through the mark to market reserve. It is the entity ‘s policy to
measure any non control interest(NCI).In an acquire at their proportionate share of the
acquiree’s identifiable Net assets.

ASSUME the identifiable assets acquired and the liabilities assumed at acquisition date are
shown at fairvalue as determined by IFRS 3 (Ignore Tax implication)

Solution

Degree of control

64 000 × 100

80 000

= 80%

Proforma Journals P GAP

Mark to Market Reserve

01/07/10 10 000

SCI after comprehensive income 5 000

Investment 15 000

Reversal of fairvalue adjustment

Revenue S 50 000

COS P 50 000

Elimination of intra cost of sales

COS (S) 10 000 × 25/125 2 000

Inventory P 2 000

Elimination of intra group unrealised profit

:
 80% 20%

At acquisition Total @ acquisition since acquisition NCI

01/07/08

Share capital 80 000 64 000 16 000

R.E 7.500 6 000 1 500

NAV 70 000 17 500

Investment 85 000-15 000 70 000

Goodwill -

Since acquisition

01/07/08 - 01/07/10

RE (14 500-7 500) 7000 5 600 1 400

Current period

01/07/10-30/06/11

Profit for the year

(5 500-2000) 3 500 2 800 700

98 000 8 400 19 600

PROFORMA JOURNALS P. GROUP

Share Capital 80 000

R.E 7 500

Investment 70 000

NCI 17 500

Elimination of shareholders equity for

:
S Ltd at date of acquisition

Retained Earnings 1 400

NCI 1 400

NCI SCI 700

NCI (FCP) 700

P. LIMITED GROUP

Consolidated statement of profit or loss and other comprehensive income

Revenue (100 000+80 000-50 000) 130 000

COS (50 000+40 000-50 000+2000) (42 000)

88 000

Other expenses (33 000+29 500) (62 500)

Profit before tax 25 500

Income tax expense (7000+5000) (12000)

Profit for the period 13 500

Other comprehensive income -

Total comprehensive income 13 500

Attributable to owners of parent 12 800

NCI 700

CONSOLIDATED STATEMENT OF CHANGES IN EQUITY

:
 OSK R.E TOTAL NCI TOTAL

Balance 01/07/10 100 000 26 600 126 600 18 900 145 500

Total comprehensive income 12 800 12 800 700 13 500

Dividend ( 5 000) (5 000) (5 000)

100 000 34 400 134 400 19 600 154 000

CONSOLIDATED SFP AS AT………………………………………

Assets

Current Assets

Inventory (10 000+30 000-2000) 38 000

Trade and other receivables (130 000+106 000) 236 000

274 000

Equity and liabilities

Total equity 154 000

Equity attributable to owners of parent 134 400

Share Capital 100 000

R.E 1 34 400

NCI 19 600

Total liabilities 120 000

Current liabilities 120 000

Trade and other payables (84 000+36 000) 120 000

:
Total equity and liabilities 274 000

Unrealised profit in opening inventories

Because closing inventories of one period are the opening inventories of the following
reporting period, and the elimination of unrealised profit at (say 2012) necessarily affects the
balance of the consolidated retained earnings brought forward from 2012 as well as the
consolidated financial statements of 2013.

 It must be remembered that each entity within the group is a separate entity and that
each entity draws up its own set of financial statements within this framework. The
consolidated journal entries are proforma adjustments processed to draft the
consolidated financial statements.

 The entities in the group thus do not recognise the intra group adjustments in their
own separate financial statements.

 The consolidated financial statements of 2013 are prepared from separate financial
statements of the entities in the group.

 Should they have been an adjustment on consolidation at the end of 2012 for
unrealised intra group profit an adjustment must be made to ensure that the
consolidated retained earnings at the end of 2012 is in agreement with the
consolidated opening balance of 2013.

Example S. Limited purchased all its inventory from P. Limited at cost price 33 1/3 %. The
inventories on hand in the records of S. Limited were as follows

31 December 2010 $20 000

31 December 2011 $25 000

Total sales of inventory from P limited to S limited were as follows

2010 - $50 000

:
2011 - $ 80 000

Required : Prepare proforma Journals

s/n

Proforma journals

Revenue (P) 50 000

COS (S) 5 000

COS (P) 20 000×33 1 × 1 5 000

Inventory 5 000

RE (P) 5000

COS 5 000

Adjustment to ensure that the consolidated R.E at the beginning of 2011 is in agreement with
the consolidated R.E. at the end of 2011