CHAPTER 1

INTRODUCTION TO GROUP
ACCOUNTING
Introduction
 The development of group accounting was apparent
in Ireland and the UK from as early as the1920s and
was largely in response to the rise in the number of
merged companies and the prevalence of using
holding companies.
 It was also used as a measure to combat ‘creative
accounting’ whereby consolidated accounts would
ensure less scope for income smoothing and ‘secret’
reserves. There has been much activity in this the
area of accounting for such entities over the last
eighty years.
Introduction (CONT…)

 The most recent guidance relating to group

accounts1 are
 IAS27Consolidated and Separate Financial
Statements
 IAS28 Investments in Associates
 IFRS3 Business Combinations
Identification of a business
combination
 A business combination is defined as the bringing
together of separate entities or businesses into one
reporting entity.
 The following types of transactions generally meet the
definition of business combinations
1. the purchase of equity of another entity
2. the purchase of all assets, liabilities and rights to
the activities of an entity
Identification of a business
combination (CONT…)
3. the purchase of some of the assets, liabilities and
rights to activities of an entity that together meet
the definition of a business
4. the establishment of a new legal entity in which
the assets, liabilities and activities of combined
businesses will be held
Identification of a business
combination (CONT…)
 Another dominant feature of the IFRS is that the element
of control is critical; one of the combining entities
effectively acquires control over the other entities and is
deemed the acquirer. This ‘control’ may be characterised
by one or more of the following:
1. having more than half of the voting rights in the
combined entities
Identification of a business
combination (CONT…)
2. the power to appoint or remove the majority of
the members of the board
3. the power to cast the majority of votes at board
meetings
4· the ability to determine the selection of the
combined entity’s management team
Positive goodwill

 Purchased positive goodwill arises where the

value of the consideration exceeds the total of
the fair values of net assets acquired.
 This guidance states that this positive goodwill
must be recognised as an asset.
Negative goodwill

 Negative goodwill arises where the acquirer

effectively pays a consideration which is less than
the fair value of the identifiable net assets.
 The IFRS3 guidance states that negative goodwill
should be recognised immediately in the income
statement.
Minority Interests
 The minority interest in a business combination refers to
that portion of the profit or loss and net assets of a
subsidiary attributable to equity interests that are not
owned, directly or indirectly through subsidiaries, by the
parent.
 In terms of inclusion, all of the net assets of the acquiree
are included in the combined entity balance sheet
because the acquirer controls them. The minority interest
element is shown as a separate item, as partly financing
those net assets.
 In the consolidated income statement, all acquiree profit
is highlighted but a deduction is then made for the
minority interest element.