The Ace (ACCA, FIA, HDA, BBA, CAT, CIMA tuition provider in

Chittagong, Bangladesh)
Accounting for Groups, Subsidiaries, Associates and Minority
Interest (IAS 27, 28 and IFRS 3)
Applicable Standards
• IFRS 3: Business Combinations
• IAS 27: Consolidated and Separate Financial Statements
• IAS 28: Investments in Associates
•
GROUP ACCOUNTING
Note that the following applies to international accounting standards (IFRS and IAS).
Terminology
• FV = Fair value
• NCI = Non-controlling interest
• URP = Unrealized profit
• COGS = Cost of Goods Sold / Cost of Sales
• Sub = Subsidiary (with control, > 50%)
• Sub-Sub = Sub-Subsidiary (i.e. Subsidiary of a Subsidiary)
• Assoc = Associate (with significant influence, >= 20%)
• Reserves = Shareholder’s equity except for basic share capital (yes reserves include share
premiums)
•
SUBSIDIARIES
Applicable Standards
• IFRS 3: Business Combinations
• IAS 27: Consolidated and Separate Financial Statements
•
Consolidated Balance Sheet
Key Components
• NCI can be measured in two ways:
o Measured as share of the net assets of the Sub
o At fair value
 Method #1:
Share of net assets at reporting date
+ NCI goodwill
– share of goodwill impairment loss

 Method #2:
FV of NCI at acquisition
+ share of post-acquisition change in net assets
– share of goodwill impairment loss

• Goodwill
Cost of investment
+ NCI at acquisition

Abu Naser Mohd Helal, BBA, MBA, LLB, B.Sc, ACCA Finalist, CMA PL III
For more details please call: 088 01194 777 222; www.acca-theace.com
The Ace (ACCA, FIA, HDA, BBA, CAT, CIMA tuition provider in
Chittagong, Bangladesh)
– FV of net assets of Sub at acquisition

o If NCI is measured as share of net assets of sub, the goodwill calculated is just the
goodwill attributed to the parent’s share. There is no goodwill attributed to the
NCI’s share.
o If NCI is measured at fair value, a portion of the goodwill is attributed to the
parent, and a portion is attributed to the NCI.

Details on Cost of Investment

• Professional fees are expensed to P&L in the period the acquisition occurs.
• Changes in the value of contingent consideration after the acquisition would result in any
liability being remeasured, with the change recognised in P&L. Goodwill and the cost of
investment remain unchanged.

Adjustments for Intra-Group Transactions

• Cash-in-transit and inventory-in-transit can cause group receivables and payables not to
balance. To fix, adjust the recipient company’s accounts as though the cash / inventory
has been received. For example,
o For cash in transit, Dr Cash, Cr Receivables
o For inventory in transit, Dr Inventory, Cr Payables

• Profits made from intra-group transactions need to be reversed since you can’t make
profits from yourself.
o Reduce inventory / non-current assets of buyer by the amount of URP embedded
in goods sold by group entities.
o Reduce retained earnings of seller by the amount of URP.
o URP is only calculated for items that are still remaining within the group, not
items that have been further sold to external parties.
o URP for non-current assets at a reporting date is the difference between (A) the
carrying value of the asset by the buyer, and (B) the carrying value of the asset by
the seller had it not been sold.
• Intra-group receivables and payables need to be cancelled out and they should be
matching.

• Intra-group loans
o The matching asset and liability for the loan needs to be removed.
o Accrued interest payable at the borrower needs to be cancelled out with the
matching interest receivable at the lender.
o NCI is calculated as per normal in both Consolidated Balance Sheet and
Consolidated Income Statement (i.e. both loan amount and loan interest are still
included as it is from the perspective of the Sub).

• Dividends are handled in Consolidated Income Statement, no adjustment in Consolidated

Balance Sheet required because the full Consolidated Income Statement (without
dividends) matches the accounts in the Consolidated Balance Sheet.

Abu Naser Mohd Helal, BBA, MBA, LLB, B.Sc, ACCA Finalist, CMA PL III
For more details please call: 088 01194 777 222; www.acca-theace.com
The Ace (ACCA, FIA, HDA, BBA, CAT, CIMA tuition provider in
Chittagong, Bangladesh)

Preparing Consolidated Balance Sheet

• Make any fair value adjustments required (note that Retained Earnings need not be
adjusted even if the FV of assets increased because any change in FV is matched and
cancelled out by Goodwill within Assets, because Goodwill’s “less net assets” would
have included that additional FV).

• Make adjustments for intra-group transactions per above.

• Adjust the Investments line

o Subtract from Investments (under Parent), the original cost of investment in the
Sub.
o Note that any loan notes that the Parent bought from the Sub should be included
as part of the original cost of investment in the Sub, and is already part of the
Investments line in the Parent’s separate balance sheet.
o Note that the Investments (under Parent) does not increase when the sub makes
profits, the “benefits” only show up when the statements are consolidated.

• Add a Goodwill item

o Under Non-Current Assets which either shows the Parent’s goodwill (if NCI is
measured as share of net assets) or the full goodwill (if NCI is measured at FV).

• Share capital
o Note that only the Parent’s share capital is included if the share capital of the Subs
have not changed. This is because the conversion of Investments to Goodwill
would have eliminated the Sub’s share capital that existed at acquisition.

• Compute Retained Earnings

o Equals to Parent’s retained earnings + Parent’s share of post acquisition change in
net assets – Parent’s share of goodwill impairment (which is full if NCI is
measured as share of net assets, or proportionate if NCI is measured at FV).
o Note that Parent’s share of Sub’s net assets at acquisition is cancelled out with the
Parent’s Investments item, with the excess classified as Goodwill.
o Note that any increase in net assets post acquisition is proportionately split
between the Parent’s retained earnings and the NCI.

• Add a NCI item

o Under Equity. Value is based on how NCI is measured (see above).
o Note that this NCI item includes the NCI’s share of Sub’s net assets at
acquisition.

Consolidated Income Statement

Adjustments for Intra-Group Transactions
• Eliminate sales and purchases (reverse the seller’s revenue and the buyer’s COGS by the
same amount)

Abu Naser Mohd Helal, BBA, MBA, LLB, B.Sc, ACCA Finalist, CMA PL III
For more details please call: 088 01194 777 222; www.acca-theace.com
The Ace (ACCA, FIA, HDA, BBA, CAT, CIMA tuition provider in
Chittagong, Bangladesh)
• Eliminate interest paid and received (reverse the payer’s interest paid and the payee’s
interest received)
• For the URP of goods that remain within the group, increase the seller’s COGS by the
URP to reverse the profit.
• For URP due to non-current assets transferred
o The depreciation charge needs to be adjusted if the depreciation charge after
transfer is different from depreciation charge had it not been transferred.
o If the transfer occurred in the current period, reverse any profit/loss on transfer.
• Dividends from the Sub to the Parent are reversed because that is an intra-group transfer.
Preparing Consolidated Income Statement
• Only the Sub’s results after acquisition should be included in the Consolidated Income
Statement.
• Make adjustments for intra-group transactions.
• Make adjustments for FV changes to non-current assets. Depreciation charge needs to be
adjusted to correspond with the new FV. The change in the FV goes into the revaluation
surplus account in Consolidated Other Comprehensive Income.
• Goodwill impairment is charged to P&L, can be put under Admin Expenses of the Parent.
• Tax charges remain unchanged despite goodwill impairment or adjustments in
depreciation because tax is assessed on the individual companies.
• Profits attributable to NCI = NCI share * Sub’s profit [note: the Sub's profit here does
not take into account adjustments to Revenue or COGS due to elimination of intra-group
sales/purchases, BUT it does take into account reduced Sub's profits due to reversal of
URP. It is not consistent treatment I know.]
• Profits attributable to Owners of the Parent = Parent’s profit + Parent’s share * Sub’s
profit (or the balancing figure if lazy)

Preparing Consolidated Statement of Comprehensive Income

• Total comprehensive income attributable to NCI = NCI share * Sub’s total
comprehensive income
• Total comprehensive income attributable to Owners of Parent = Parent’s total
comprehensive income + Parent’s share * Sub’s total comprehensive income (or
balancing figure)

ASSOCIATES
Applicable Standard
• IAS 28: Investments in Associates

Consolidated Balance Sheet

• Equity method of accounting is used.
• Adjust the Investments line
o Subtract from Investments (under Parent), the original cost of investment in the
Assoc.

Abu Naser Mohd Helal, BBA, MBA, LLB, B.Sc, ACCA Finalist, CMA PL III
For more details please call: 088 01194 777 222; www.acca-theace.com
The Ace (ACCA, FIA, HDA, BBA, CAT, CIMA tuition provider in
Chittagong, Bangladesh)
o Note that dividends received do not decrease the original cost of investment in the
Assoc, hence it doesn’t impact the Investments line (under Parent). It is simply
booked as Dr Cash, Cr Income from shares in associates (P&L).

• Add a non-current asset titled “Investment in Associate”

o Cost of Investment
o + Parent’s share of post-acquisition change in reserves of Assoc
o - Dividends paid to Parent from Assoc
o - Impairment losses
o + Loans to Assoc (this is ‘rolled in’ from what is a separate line item in the
Parent’s separate balance sheet)
o - URP if Parent sold to Assoc
• Retained earnings
o Increased by the Parent’s share of post-acquisition reserves of associate
o Less impairment loss in Assoc
o Less URP from purchases/sales between Parent and Assoc (this needs to be
specially adjusted here unlike the case for Subs because there is no consolidation
of Assoc’s accounts into the Parent’s balance sheet)
• Inventory
o Less URP if Assoc sold to Parent
• Only the Parent’s share of the URP is eliminated above. E.g. if the Parent owns 30% of
the Assoc, only 30% of the full URP is eliminated in the entries above. This is consistent
with the treatment of Subs where there is 100% consolidation and 100% of the URP is
eliminated.
• Assets and liabilities items are not consolidated, hence no cancellation of any inter-
company items (e.g. loans).

Consolidated Income Statement

• Add a line “Share of profits of associate” immediately before the group’s profit before
tax (Equity method)
o Share of profits of associate = Group’s share of Assoc profit after tax –
Impairment of Assoc arising in the year
• Cancel any dividend income received from the Assoc because that would be grouped
together and replaced with the “Share of profits of associate”
• Adjust for URP (group’s share)
o Increase COGS by the URP to remove the profit.
• No cancellation of Revenues and COGS for sales and purchases between Parent and
Assoc as the income statements are not combined.

Consolidated Statement of Comprehensive Income

• Add a line “Share of other comprehensive income of associate” under the Parent + Sub’s
Revaluation Surplus
o Group’s share of associate’s other comprehensive income

Abu Naser Mohd Helal, BBA, MBA, LLB, B.Sc, ACCA Finalist, CMA PL III
For more details please call: 088 01194 777 222; www.acca-theace.com