646 CHAPTER 26 26.1 INTRODUCTION In the last chapter, we discussed accounting for business combinations where an ag, sequires an acquitee, After aequistion, the acquirer is a parent and the acquires subsidiary. Both parent and subsidiary need to draw up their financial statements org legal entity. But this gives ust a limited view of what happens in the group, the patent st the subsidiary together. Remember that the parent exercises control over the subsidian it also exercises control over all the assets and liabilities in the subsidiary. A user offinare statements would be interested in financial statements where all assets and liabilities an revenues and costs that are under the control of the parent are reflected, This is the why a parent not only prepares its own legal entity set of financial statements but consolidated financial statements, financial statements of a parent and all its subsidiaries, In this chapter, we will discuss the isstes that arise in preparing, consolidated accounts, 26.2 CONTROL 26.2.1 The concept of control in IFRS 10 We refer back to Chapter 25 where we discussed the concept of control. A parent exercises control over a subsidiary. Control means that a parent is exposed, or has rights, to variable returns from its involvement with the subsidiary and has the ability — to affect those returns through its power over the subsidiary (IFRS 10, Para. 5), So the three essential elements for an investor (parent) are: ‘© power over the investee (subsidiary) © exposure, or rights, to variable returns from its involvement with the investee © the ability to use its power over the investee to affect the amount of the investor’s returns. An investor has power over the investee when the investor has existing rights that give it the current ability to direct the relevant activities of the investee. Power arises from rights, such as voting rights attaching to shares. Power can also result from one or more contractual arrangements. — i 9, Variable returns from its involvement with, its involvement have the potential to ‘The investor’s returns can be positive, to use its power to affect I, it has delegated decision party, Such an investor__B has 90 per cent. Based on this scenario igh! hd B have contracted a substantive. A ational right to acquire 43 per cent of if cami, A controls © w las Fg call option eit can at any ti nd then having 55 per chot the folowing cicumstances whether Bis wang Le whether A eere8 con ove 28240 percent of the voting rights of 8 and 4 AON Seement with a shareholder who holds 3s 2g et cent ofthe voting rights that atte’ 10 vole for these shares as wel oe 42 per cent ofthe voting rights of B but g aowns “yn agreement to govern the financial and also Bing policies of B op = 35 per cent of the voting rights of B and 3 AoW" the power 10 ABPOInt or remove five of rine ‘members of the board of directors, PY A Cp COST) 100% 20% all oj the shares in © held by B at fair ne direct the relevant acti nt of the voting rights) 26.2 CO! alone, B would have control on for A, giving A the ics of te of Band 4 ‘owns 38 per cant ofthe voting nights ot are 100 per cent ofthe voting rights of C whic holds 20 per cent of the voting rights o Activity feedback Incases 1, 2ana a, A clear conto th do and therefore Bw a subsidiary ol i Se eee acanpia ca aubsidayrtatons?P and Figure 26.1 should show this more clearly A controls C and therelore also 20 per cent of B, WET together with its own 33 per cent holding. gives, contol over 83 per cont of B. This 18 an oxamp! mixed group cisions of B 33% Xa iA aad We explore mixed groups a litle further in this Activity inthe examples given, identify the parent-subsidiary tlatonships 1 Howns 75 per cent of the voting shares of S, Which in turn owns 40 per cent of the voting shares of $1. H also owns directly 15 per cent of the voting shares of S1 2 H owns 100 per cent of the voting shares of S, which in turn owns 30 per cent of $1. H also owns, 75 per cent of S2, which in turn owns 25 per cent of S1 H 100% 75% 30% 25% St (Continued) TROL a7648 CHAPTER 26 3-H owns 60 per cent ofthe voting shares of $ \which in turn owns 20 per cent ofthe voting Shares of S1.H also owns directly 20 per cent of the voting shares of $1 H A st Activity feedback Example 1 * S's a subsidiary of H (75 per cent ownership). 1 is not a subsidiary of S (assuming no information in respect of dominant influence). * Hoirectly owns (75% x 40%) of $1 + 15% of St = 30% + 15% = 45% which would imply no subsidiary relationship. ‘© However, H controls $ and thus con, St plus 15% MO 405 + Therelore, St isa subsiciary of Hang yy consolidated wih anon-contoing an 55% tor Example 2 # Sand S2 are subsidiaries of H. S1 p further analysis. SAutes +H dlecty o4ns (100% X 30%) + (759. 2 of $1 = 30% + 18.75% = 48.75% ony, %) + However, H controls 30% + 25% ~ 559 ‘© Thus, 1 is also a subsioiary of H anc wy, consolidated with a non-controling interes 51.25%. Example 3 * Sis. subsioiary of H. +H owns 60% x 20% + 20% of S1 = 32% ey, © H controls 20% + 20% of S1 = 40%, * Thus, $1 is not a subsidiary of H (assuming ng indication of dominant influence) and val rot pe consolidated. A 1 H currently holds 48 per cent of the shares ofS. H does not have the power to govern the policies Of S, or the power to remove members of the board or the power to cast the majority of votes at meetings. The remaining 52 per cent of S's shares are held by four investors that each have 13 per cent of the shares. Is S a subsidiary of H? 2 Entities A and B currently own 55 per cent and 45 per cent respectively of the ordinary voting right shares of Entity C. Entity B also holds debt instruments that are convertible into ordinary shares in Entity C at any time. If the debt were converted, Entity B would hold 70 per cent of the voting shares and Entity Ais holding would become 30 per cent. The conversion would require Entity 8 to borrow additional funds to make the conversion payment. Is C a subsidiary of A, B or neither? Activity feedback 1 The question is whether H has de facto contol in . In this situation, the four investors can easily organize themselves and together outnumber H. So this would not be a case of de facto contol However, if the 52 per cent shares were divided ‘equally among about 30 shareholders, there could be more reason to conclude that H controls $ and that S therefore is a subsidiary of H. There isa high degree of judgement involved in determining whether de facto control exists. 2 The conversion rights owned by B give B the power to set the operating and financial policies Of C. Therefore, C is a subsidiary of B not ofA This is an example of potential voting rights. The fact that adcitional funds have to be borrowed is not relevant. However, if 8 were unlikely o be able to obtain such funds, the potential voting rights would not have substance and therefore would ‘not be taken into consideration in determining whether a subsioiary exists263 THENEED FOR CONSOLIDATED ACCOUNTS (6451) 2 Non-controlling interest “OR CONSO! 0" ae jacused tC CONCEPE OF oH we ‘ eg. This non-controlli, ont w ol ne ont ingioterst i that par gp pe Subsidiary th, . ING inter lat the hol Je 2 of Activity 26.2, can be pen Usually Jess gh c © More oat Hye control. This is the pest, 0" than " xi wt ing j 8 interest in Cy diary fee tt Chapter 25, Put simply, non. ding (parent) entity does 50 per tt 50 per cent but, asin SON Why the 2 PEF cent if owner 5 an ‘minority interes, ae sp"? “HY the phrase a ship does not er rity of the shares.” S the non-conty On-controlling interest’ is xc a minonny ares, ‘rest does not necessarily rolling int ye examine the Separate accounts of twa enti ofthe ordinary voting shares of§, then y's Fl and S, where H holds 55 per Sle rus, We wil eer to Hag the pays Mili Ni considering both entities together eS wince ijn H’s statement of financial Position hee aditionally simply appear as an inye, sprorcal cost. However, TERS Standard sievalue OF at Met asset value. As the fa iasubsiiaries, we will not discuss that seoption of net asset value, the inv shestatement of financial Position, and its share in Profits is inch afcomprehensive income. This gives more infor ad profitability. However, we do not know which awets and liabilities contribute wthesubsidary’s value and which revenues and costs contribute to ne profitability. qty accounting is discussed further in Chapter 27, . Inthis chapter, our assumption is that the investment is recorded at historical cost However, a8 with other assets in a statement of financial pos ast as the basis of valuation would not normally indation of the value of the subsidiary or the underlying assets and liabilities, Inelation to the holding entity’s statement of comprehensive income (or surement of profit or loss) the only reference to the subsidiary would be ‘dividends retived from S” (assuming there were any) and, of course, this w intcation of the subsidiary’s profitability. Asfaras the group is concerned, the holding entity’s financial statements therefore 8x¢ n0 or limited meaningful information about the group’s activities, hence it Would be useful to find a way to prepare information about the related activities of H ‘nd in a consolidated (combined) format. Thisis where the need for group accounts arises: to provide useful information to ‘uarcholders and other users of the holding entity’s financial statements about the Soup as a whole. Sing FRS 10, Paragraph 19, requires a parent to prepare onsolian angi ‘ements using uniform accounting policies for like isgpcions an pcre "Similar circumstances. Consolidated accounts combine assets, liabilities, equity, ‘ome, expenses and cash flows of the parent with those of its subsidiaries into a Single ind the following information tprise, S as the ‘subsidiary’ and id them as.a ‘group’, _ Ane shareholding (interest) in § will luded in the statement Mation about the subsidiary’s value mn, the use of historical give the sharcholders of H any ould give no ‘onomic entity.y [NGO cHaPten 26 { J NN exempts a parent from presenting ci g conditions: so TERS 10, Paragraph 4a, howeveh semee financial statements if it meets all of the wholly owned or partly owned subsidiary of anogh wholly ¢ « ramen are not traded ina pubic + The parent * The parent's debt or equ mens SF ’ Pa ot in the process of issuing any class of instrume ermediate parent produces consol i * The ultimate or any intermediate parent pr pes conscite ge Me available for public use that comply wit 26.4 PREPARATION OF CONSOLIDATED STATEy; War Vee In this section, we will discuss the preparation of consolidated Statements Of fin, Position, and, in the next section, the preparation of consolidated Stateme, comprehensive income. In preparing the consolidated accounts, we yi da deta he need fr eiminating inercompany relationships. The principe gah are in line with the requirements of IFRS 10. 8c Sn oO 26.4.1 Consolidated statement of financial position atthe date of acquisition So far, we have identified a need for group accounts to show usefil information to User, But what would be useful information to these users? We can presume that they wil ney to know the total assets and labiltes of the subsidiary that they control, together ih the parent’s own assets and liabilities. From this, we can assume that we will add together all the assets and libilties of the parent and subsidiary. IF we do this, we will ther eed to eliminate the investment from the parent statement of financial Position (as we haye included the net assets) and add in the goodwill on acquisition. If we have not acquired the whole ofthe subsidiary, there will also be a non-controlling interes, and we wil need to include this in the group statement of financial position or the statement of fnancid Position will not balance. The following example demonstrates the consolidation proces; where there is no non-controlling interest, ic. 100 per cent ow nership. This example Prepares a consolidated statement a the date of acquisition of the subsidiary, Example 26.1 The statements of financial position of H and $ as at 31 December 20X6 are x follows: H 5 € . Property, plant and equipment 140,000 Investment in $ 75,000 Net current assets 20,000 Share capital Reservesy <<< 26.4 PRE PARATION OF CONSOLIDATED STATEMENTS OF FINANCIAL POSITION 651 ad the whole of the share tle fair value oe share capital of § for €75,000 cash on 31 December Net assets at this date were €67,000. Prepare the uncial p , Position of H group as at 31 December 20X6. jd this consolidation there ae se sre f a slidated statement of fin, ys ral steps 4 Calculate the goodwill g Revalue the net assets of the subsidiary § asolidate H and S. to fair value 3 Cor 1 Purchase price 75,000 Fair value of net assets acqui 7, acquired Goodwill . 00 § revalued statement of financial position Net assets Share capital Reserves Revaluation reserve Group consolidated statement of financial position Net assets (140,000 + 20,000 + 67,000) Goodwill on acquisition Share capital Reserves Note that the share capital of $ and the reserves from $ at the date of acquisition, including the revaluation reserve, do not appear in the consolidated statement of fnancial position. This is because they have been replaced with the net assets acquired and the goodwill value. The following example shows the preparation of the group consolidated statement of financial position when there is less than 100 per cent ownership. We determine the non-controlling interest on the basis of the proportion in the fair value of the net assets acquired. Example 26.2 The statements of financial position of A and B as at 31 December 20X2 are as follows: A B € € Net assets 403,000 87,000 Investment in B 72,000 - 475,000 7,000 Share capital 350,000 60,000 Reserves 125,000 27,000 475,000 87,000CHAPTER 26 A bought 75 per cent o! 1 Purchase price Fair value of net assets acquired (75% * 87,000) Goodwill 2 Group consolidated statement of financial position sat 31 December 20X2 for a purchase price and the value of the net assets bought equalled fair value. FE 4 Net assets (403,000 + 87,000) Goodwill Share capital Reserves Equity attributable to the shareholders of H st (25% X 87,000) Non-controlling inte Total equity Now try Activity 26.4. re Nera On 31 December 20X5, H acquired 1 million shares of S with @ nominal value of €0.10 per share, at a fair value of €120,000 for cash (the transaction has not yet been entered). The statements of financial position of H and S at the date of acquisition were as follows H s €000 €000 Land and buildings 650 105 Plant and equipment 110 24 Net current assets 163 at 223 12 Share capital €1 shares Share capital €0.10 shares 125 Reserves 12 cid The fair value of S's net assets at the date of acquisition was €142,000 (€108,000 land and buildings, €22,000 plant and equipment, €12,000 net current assets) Prepare the consolidated statement of financial position of H group as at 31 December 20XS after the acquisition Activity feedback Remember first to amend H's statement of financial position for the purchase of the shares in S. This will require an entry ‘investment in S €120,000' and net curen assets will be reduced to €43,000 for the cash payment H acquired 1 million shares of €0.10 (€100,000) rom a total of 1.25 million shares of €0.10 (€125,000), ie 80 per cent ownership. Consolidated statement of financial position of H group as at 31 December 201X 1 Purchase price 120,000 Fair value of net assets acquired (80% x 142,000) 113,600 Goodwill 6.400 2 — Group consolidated statement of financial position Net assets (923,000 - 120,000 + 142,000) 945,000 Goodwill Share capital £800,000 Reserves 423,000 Equity attributable to the shareholders of 923,000 Non-controlling interest (20% x 142,000) Total equity- consolidated statement of oi? Conm date of acquisition financial position lat 26.4 PREPAI RATION OF CONSOLIDATED STATEMENTS OF Fl aly have to prepare consolidated ac prio ed accounts subse e date cae as Tong as We know the fe value of bsequent to the date of tl + a sition, this is quite r value of the assets acquired and the wot thats 2 s quite easy. We can only include the parent share of ist c seve post-acquisition in the consolidation. The following example shows you spesorves BON a consolidated statement of financial posi ie yoof prep here ‘i of financial position later than the date of “re there is a 100 per cent ownership ample 26-3 {purchased 100 per cent of the equity share capital of § for cash at 1 pecember OY3 at a price of €2 per share, when the balance on S entity’s reserves dat C4000. “The consolidation is required at 31 December 20Y4, at which point the individual jaumonts of financial position of the two entities areas follows st H Ss € € Property, plant and equipment 75,000 13,000 favestment in S (at cost) 20,000 — Current assets 23,000 4,000 118,000 17,000 Share capital €1 =60,000 0,000 Reserves 58,000 7,000 118,000 17,000 Xo further shares have been issued by $ during 20Y4 Purchase price 20,000 Fair value of net assets acquired: 10,000 (shares) + 4,000 (pre-acquisition reserves) 14,000 Goodwill 6,000 Con diincesl eiarement of financial postion fou Escala: at 31 December 20Y4 Property, plant and equipment 88,000 Current assets 27,000 Goodwill 6,000 121,000 Share capital =60,000 Reserves (58,000 + (7,000 ~ 4,000)) 61,000 121,000 iNOW try Activity 26 5, but note that in this Activity there is also a non-controllin, interest : ANCIAL POSITIO! iB nu | 6sWH, conten re H entity purchased 80 per cent of the equity share Notes: Capital of S Ltd for cash at 31 December 20Y7 at a — Cost af investment in S entity e Price of €1.50 per share, when the balance on S entity's ‘Acquired ordinary shares at 31 Ley hone December 2077 (80% x 8,000) 18 Consolidation is required at 31 December 208. ‘Acquited reserves at 31 December 84y ae Cy re ania oes {being 80% of balance of €2.000 © entities are as follows. ‘onreserves of § entity at H s 31 December 207) f € € Total (80% X 10.000) we Property, plant and equipment 60,000 «5.000 Goodwin acquisition ae ‘avestment in $ entity (at cost) 9,600 2 Reserves of H enily at 31 December Current assets 35,000 _6,000 20v8 oe 4600 17,000 Reserves of S entity accruing to group Share capital “00 | “8000 since date of acquisition to 31 Reserves 64600 3000 Deoanbor 20¥8 = (3,000 ~ 2,000) a0 | (THO x em ae Activity feedback 3 Share capital as 31 December 2078 of & The consolidated statement of financial position as at S entity accruing to non-controlling 31 December 2078 would then be as follows: interests (20% x 8,000) 1,600 € Reserves at 31 December 20Y8 of § Prog entity accruing to non-controling Giantess ‘nseaenen ri) interests (20% x 3,000) _2w Goodwill (Note 1) Total (20% X 11,000) Za Share capital Reserves (Note 2) 'Non-controling interest (Note 3) 26.4.3 Intercompany trading and the elimination of unrealized profits When one member of a group, S, buys goods from an external supplier at a price of €100, and sells those goods to a fellow group entity, $1, at a price of €140, then S can legitimately show a profit of €40 in its own statement of comprehensive income. However, on consolidation of the accounts of $ and SI, it should be recognized that this sale from $ to S1 could not give rise to a profit as far asthe group statement of comprehensive income is concerned, as the sale is in effect an internal group transfer. In order for the group to realize a profit on sale, the sale must be made to a customer outside the group. Now complete the following Activity.26. owns 75 per cent of the shar nity A nen the reserves of B were e209 qty, ® / d were €200.000 The Activity feedback i pov statements of financi: widua ‘al Position of, : nonigejne 20X6 ae ven below Durng eee Consotgate statement of financial posit 381 Gods 1 at pro margin ol 25 per cen year 8 lune 20x6 % 500 of hese goods lie in A’ closing inventory ee hase 000 2 20 : psune wo a Goodwill (Note 1) 500 000 8 Land and plant 1.2000 5 €000 Inventory (1000 — 10) (Note 2) 9900 Asst nd plant 1,000 Debtors 240.0 and 200 Total assets 2,480.0 imertOF¥ aa 2.4800 pebtors a Equity and liabilities Present in B (@t Cost) . Eauty a — — re capita otal assets Fauity and Fables $40 Reserves (Note 3) 1.2805 2,280.5 equity spare capital 4,000 100 mon eal interest (Note 4) 1535, fesores cad $24 Creditors 46.0 = 624 54800 bites em Total equity and liabilit 7,480.0 creditors 30 16 tia equity ane t@pues 207s x ie of investment in B 0 it are the consolidated statement of financial position Less ordinary shares acquired 750 150.0 Preps as at 30 June 20X6. Reserves acquired (75% x 200) Goodwill 2 Goods in A inventory delivered by B: Profit margin included: (50 — 50/1.25) 3 Reserves A Reserves post-acquisition B (75% x (624 ~ 10 ~ 200)) 4. Non-controliing interest 25% ordinary shares 25% reserves = 25% x (524 — 10) 26.4.4 Reconciliation of intercompany balances within a group to shuffle liquidity and inventories Leaves ae and when required and indeed this is one of the advantages of \ piomp aerecrnes. Cbevlonaly, wit reference no wacky tga the indebtedness to/from member entities will need to be recorded in the individual entities’ books of account as appropriate. Hence, each entity will carry balances within the group. In relation to the group's position as regards the outside world, these balances are internal balances and therefore will not be shown in the group statement of financial Position, In fact, they are cancelled on consolidation across the individual statement Itis commonplace for entitie 4 PREPAR, ATION N OF CONSOLIDATED STATEMENTS OF FINANCIAL position 655 jon as at 275.0 225.0 | x iS jo | g 8 3 1,045.0 235.5 4,280.5 25.0 128.5 153.5656) CHAPTER 26 embers. If, for example, a subsidi ry born i ie Ow of financial positions of grou : - from its p arent, this will be a financial asset in the individual accounts of he 7 Dorel aR Re subsidi: . and a financial liability in the individual accounts of the On cone these balances are eliminated t it is not possible to cancel out such inter-engi : of goods or cash between gro Occasionally, however, alan SiS thisiity often be a to 3 fA consolidation adjustment is equ tt straddling the financial year end. A eee enti ited ap Year etd fo adjust for goods or cash in transit between two entities before, th y ee The ent « carry out the consolidation of accounts. The eee s that we cat for the transit item as though it had reached its aan on itis lbortsiteaea that the adjustments we are making here only a fect A ie a He Accounts make no adjustment for these inter-entity balances to the individual acco, "* cach entity. nt The financial year end of two entities, A and B, within Or Goods in transit €40,000 the same group is 31 December. On 29 December, A Cr As current account £40,000 despatched goods to B to the invoice value of €40,000 and charges B's ledger account accordingly. B does not receive the goods or the invoice until 4 January. Prepare the consolidation adjustment in B's books and note any other adjustment that may be required on consolidation On consolidation, the respective intercompany balances in the current accounts, which are now in agreement cy cancel out. However, we must remember that this inventory ¢y €40,000 in transit will contain an element of unreaty Activity feedback profit and this wil need eliminating on consolidation ag well The adjustment will bring the goods into B's books as at 31 December, 26. .5 Consistency of reporting dates and accounting policies within the group Generally, the financial statement of a parent and its subsidiaries will be drawn up to the same date to enable easy preparation of consolidated financial statements. However, sometimes it is impracticable t do this and consolidation can take place using the accounts prepared to different dates provided the difference is no greater than a specified number of months, for example three months. Activity 26.8 will test your understanding of the preparation of consolidated statements of financial Position for a parent and its subsidiary where there are several adjustments to make before consolidation can take place ACTIVITY 26.8 On 1 October 20X4, H entity acquired 2 million of S entity's ordinary shares, paying €4.50 per share. At the date of acquisition, the retained earnings of S were €4,200,000. The draft statements of financial position Of the two entities as at 30 September 20X6 were as follows:4 s 000 e000 14,000 6,000 10.225 5.110 2.000 = 30225 T1110 4,925 5.710 pe 14.130 41,355 5,000 2.600 25,920 8.290 30.900 70780 yoncurrent liaities 10,700 10% 102s Roane ate on Curent abilles ae sade payables 3,200 ark overdraft °° Tee 1,235 4435 otal equity and liabilities 41.355 suracis irom the statement of comprehensive income ere entily before inter-group adjustments for the year enced 30 September 20X6 2re: €000 Proit before tax 2,700 Taxation _800 Proft alter tax 7900 The following information is also relevant 1 During the year, S sold goods to H for €0.9m. S adds a 20 per cent mark-up on cost to all its sales. Goods with a transfer price of €240,000 were included in H's inventory as at 30 September 20%6. 2 The fair values of S's land and plant and equipment at the date of acquisition were €1m and €2m, respectively, in excess of the carrying values, S's statement of financial position has "ot taken account of these fair values. Group depreciation policy is land not depreciated, and Plant and equipment depreciated at 10 per cent Per annum on fair value 3 An impairment review has bee" Ce consolidated goodwill a: and it has been found thé impaired by €400,000 during Prepare the consolidated statement of 1 of H group as at 30 Septe' taxes. Activity feedback Purchase of 80% (2 million/2 5 million) Purchase price (2 millon x 450) Fair value of net assets acquired (80% x (2,500 + 4,200 + 3,000 revaluation)) Goodwill vat the goodw the year Consolidated statement of financial P as at 30 September 20X6 Assets Non-current assets Land (11,000 + 6,000 + 1,000) Plant and equipment (10,225 + 5.110 + 2.000 ~ 400 (10% X 2 million x 2 years) depreciation) Intangible assets (1.240 goodwill — 400 impairment) Current assets Inventory (4,925 + 3,295 — 40 unrealized profit, 240/120 x 100 = 200 cost for S) Trade receivables (5,710 + 1.915) Cash Total assets Equity and liabilities Equity Ordinary share capital Retained earnings (25,920 + (8,290 ~ 4,200 pre-acq, ~ 400 dep. ~ 40 unrealized profit) x 80% ~ 400 impairment) Non-controlling interest (20% x (10,790 ~ 400 = 40 + 3,000 revaluation) Non-current liabilities. 40% loans (6,000 + 2,000) Current liabilities Trade payables (3,200 + 2,255) Bank overdraft Tax (1,235 + 990) Total equity and liabilities ‘mber 20X6. 1gN0" sosition for H grouP €000 18,000 16,935es CHAPTER 26 4 dl 26.4.6 Summary so far We can usefully refresh ou (Activity 26.9), using the rt F memory of group accounts and work through 2 full example a ules we have identified so far. "Po ™~ ™ Non-current assets Land ana buildings The statements of Britton on 30 June 20X1 were as follows Alexanger 108.000 Depreciation 20.000 88,000 Prant anc machinery Depreciation 25000 _40, investments, Shares in Briton (at cont Current assets invert y Trace recervabies Barn Total sesets Bausty anc apites taut Share capt fetarers earnings nde pabyaties Tote! equity ane 65.000 25,000 48 000 8 | a 8 8 25 00 00,00: 46 0x financial position of Alexander and Britton 64,000 se000 43.000 28.000 + 000 6.000 14,000 % 000 1 Alexander acquired 37,500 shares in several years ago when there was a on the retained earnings of €3,000 bt balan, 2 During the year ended 30 June 203 purchased a machine from Briton or €5 oop which had yielded a proton seling pricey 30 per cent to that company Depreciation en machine had been charged in he accounts 20 per cent on cost 3 Britton purchases goods from Alexander providing Alexander with a gross prot on invoice price of 33% per cent On 39, 20X1, Britton’s inventory included an of €8,000, being goods purchased trom Alexander for €9,000 (Britton has (900ds to sts lower net realizable valve by an ‘amount of €1.000) Prepare the consolidated statement o asition of Alexander and ts SuBSciery as a 0 ue 2oxt Activity feedback Prrchase of 75%. (37 $0080 000 f Pircrase price Xs Fan va ch et aes agar (75% » t Negative good : austenand and ouildings (B8,000 + 172.000) and machinery (40,000 + rt 900 - 1.200) yrrent assets ventory (25,000 + 27,000 ~ rerotl 50,000 rae receivables (48,000 + 21,000) gank (22,000 + 6,000) 69.000 2000 total assets Equity and liabilities gquty snare capital Retained earnings (Note 1) Non-controling interest (25% x (66,000 ~ 1,200)) Liabilities Trade payables (112,000 + 34,000) Total equity and liabilities 52,800 52.800 17; 72.800 Note 1 Ret Uren 2208 of Alexander 46,000 aes rofit on inventory (2,000) (Te est Profits of Brtton (75% {16.000 tae earnings 3061) * + 290 Tobe Balance at aca. date) (unrealized protit on sale of rachine))) 13.360 Negative goodwill 250 57,600 26.4.7 Preparation of consolidated accounts involving more than one subsidiary These are relatively straightforward if you remember the rules already explained. The following example shows how consolidations of more than one subsidiary are made. Example 26.4 H entity purchased 80 per cent of the equity share capital of $1 for cash at 31 December 20Y6 at a price of €7,000 when the balance on S1’s reserves stood 2t (4,000. H also purchased 70 per cent of the equity share capital of S2 for cash at 31 December 20Y6 at a price of €12,000 when the balance on $2’s reserves stood at €8,000, The individual statements of financial position to be consolidated of the three entities at 31 December 20Y7 are as follows: Current assets Investment in 1 (at cost) Investment in $2 (at cost) Plant and machinery H 15,000 7,000 12,000 30,000 64,000 Sl S2 3,000 10,000 8,000 14,000 11,000 24,000fi (1660) cHaPTER 26 Share capital €1 Reserves Fair value of net assets acquired (80% X (4,000 + 4,000)) 400 Goodwill 600 Non-controlling interest (20% * 11,000) 2205 Post-acquisition reserves accruing to group (80% X (7,000 ~ 4,000)) ae Purchase $2 Purchase price 12,000 Fair value of net assets acquired (70% X (8,000 + 8,000)) 1.200 Goodwill 800 Non-controlling interest (30% X 24,000) 7200 5,600 Post-acquisition reserves accruing to group (70% X (16,000 — 8,000)) 5,600 Consolidated statement of financial position as at 31 December 20Y7 Current assets 28,000 Plant and machinery 52,000 Goodwill (600 + 800) 1,400 81,400 Share capital 40,000 Reserves (24,000 + 2,400 + 5,600) 32,000 Non-controlling interests (2,200 + 7,200) 9,400 81,400 We include an Activity here (Activity 26.10) of a consolidation involving several companies to test your understanding and application of the techniques of consolidation ACTIVITY 26.10 Aple acquired 5m €1 shares of B Lid five years ago when A 8c # rercwersman onan om eo ey Der ec Fixed assets 450 50 15 20 reserves of C were €0.5m. A ple also acquired 3m €1 shares of D Ltd two years ago when D's reserves were —«(nvestmentinB_ = 160, — €0.3m. At the date of acquisition, the net book value of —_‘!nvesiment in C - 45 = ¥ all assets equated to fair value. There has been no issue Investment in D 4.0 = of shares in any of these companies throughout the five- Netcurrentassets 32.0 18.0 year period. The statements of financial position of the a0 O78 group companies as at 31.12.20Y8 are Share capital 70 75 Reserves 79.0 200 wo Bs Prepare the consolidated statement of financial position of A group as at 31.12.208psidiaries of A with contr saree roling inter ‘and 75% (3m/4m), respectively C H n ownership of 75% (2.25m/3m) rj gary of A then Cis also a subsids ory of ing interest of 50 per cent (the eae Min Cis 66 6% x 75% = 50%, the remaning vn non-controling interest) Figure 262 008 sarang neve coal calculations at acquisition are a & oD Total €m €m 16000 4500 4.000 5000 2.250 3.000 4000 0375 0.225 9.000 2625 3.225 vil 7000 _1875 0775 com erre (Note 1 “F000 “1250 0775 9025 Ropeeling inert caiodations qparetassets 28.000 4.000 3.000 33% 50 25 nici share ~ % 2.000 0.750 10.420 The principles of preparing @ consolidated statem same as those for the statement of financial position. individual line from the state transactions as we go- At Some point, We to the non-controlling interest: ‘A simple © Pines consolidated statement of compre 26.5 PREPAI RATIO? NN OF CONSOLIDATED STATEMENT OF COMPRE ment of comprehe! “Thus we will add £0} Ment of comprenensi ie income, of COMP ET need to deduct the Pr© HENSIVE INCOME 661 Note 1 Goodwill s 100% for 8 a"d D (directly netd By A). good for Cis drecty neld by B 190%) snare of A in B is (66.6% x 1875 = 1250) Consolidated statement of financial position €m Goodwill 9.025 Fixed assets 53.500 Net current assets 53.500 716.025 Share capital 78.000 Reserves (79 + 74(20 - ©) * (1 — 0.5) + 4-1 -03)] 87.605 Non-controlling interest 10.420 S08 rasive income are the gether each deducting inter-entity fit attributable rates the preparation Of @662, CHAPTER 26 Example 26.5 The individual statements of comprehensive income of High and Loy, 31 December 20X6 are as follows: Ba Low Revenue 50,000 Cost of sales 30,009 Gross profit 20,005 Distribution expenses 3,009 Administration expenses 8.009 9,006 Investment income: Dividends received iad 9,000 Taxation 3 “sop =—_ Net income/Comprehensive income The share capital of Low consists of 100,000 €1 shares of which High bough, 75,000 on 1 January 20X6 for €90,000. The fair value of Low’s assets at the da. of acquisition equated to net book values, and the only reserves existing when Fj bought in were retained profits of €4,000. During the year, High sold goods to gy, for €12,000, which included a profit of €2,000. As at 31.12.X6, 40 per cent of thew goods still remain in Low’s inventory. The dividends paid and proposed by Low are all paid out of current profits. First, we need to identify the goodwill on acquisition: Purchase price 90,000 Bought 75% of Low’s shares (100,000) 75,000 Bought 75% of Low’s retained profits (4,000) 3,000 78,000 Goodwill 12,000 Next, we need to eliminate intercompany trading: Reduce consolidated Revenue by 12,000 Reduce consolidated Cost of Sales by (10,000 + (60% x 2,000)) 11,200 Consolidated statement of comprehensive income for the year ended 31.12.X6 Revenue (150,000 — 12,000) 138,000 Cost of sales (105,000 ~ 11,200) 93,800 44,200 Distribution expenses 7,000 Administration expenses 15,000 — 22,200 Taxation 10,000 10,008 Consolidated comprehensive income on ordinary 12,200 activities after tax Attributable to non-controlling interest (25% x 6,000 (= Low’s net income / comprehensive income)) Attributable to shareholders of HighyD OO ——_——— 26.5 PREPAI RAT! ION OF CONSOLIDATED STATEMENT OF COMPREHENSIVE income 663 call allocation of profits to the non « ot Natelating consolidated carn era sion rtaion 10 Low's dividends paid to 1 tio that the toral of income soft *g included in the e ing interest for the year takes tax and that the inte! 8 a B ¢ intercompany ai i i Ee if to High is eliminated. and exper poe an expenditure for the parent and the statement of comprehensive income dia ibs accordance W ith the inch f ctspe consolidated sheer TERS Standards require the division eee hac attribur able tothe: eats income attributable to shareholders of the sett 11 requires you to pre controlling interest to be shown separately: ‘activ a Bonnie d ae ‘epare both a consolidated statement of fi nancial io" 2 ‘nt of comprehensive income summarized statements for the year end bes for A, Band C entities are as follows cated noe giatements of comprehensive income for the year L°a"S _450 _170 | ended 30 une 20X6 CURRENT LIABILITIES a B oc Trade payables 470-280 €000 €000 © €000.-~—« Bank overratt - 70 Revenue 15,000 8,000 6,000 Tax _ 90 _10 cost of sales (7200) (4,900) (4,100) “e360 7,800 3700 1900 | TOTALEQUITY AND Expenses (3.300) (2,100) (1,100) ABILITIES 6560 2.640 Profit before tax 4,500 7,600 800 we (1,400) (650) _(260) The following information is also available: proftforthe year 3.100 7950 1540 1 A acquired a 70 per cent shave 1 B and an 80 per , Gant share in C on 1 July 20x5. The fait values of statements of financial position as at 30 June 20X6 Bis assets at that date ‘equalled those shown on A 8 c the statement of financial position. At acquisition ASSETS date, the fair value of C’s property was €500,000 Non-current assets in excess of the statement of financial position Property. plant and value. A, B and C all depreciate their property. ‘equipment 2652 1,810 1,300 plant and equipment on the same basis. Property "| investment in B (at cost) 1 302 - is depreciated on a straight line basis over | Investment in C (at cost) 1,256 = 50 years. 5210 1810 19002 Asal 30 June 20X6, the fair value of the Cunent assets consolidated goodwill was reviewed and found tnven 630 = 460-320 tonave a value 6 per cent less than its carrying Trade receivables 560 370 280 value at the consolidation date. This impairment a nea 90 is to be accounted for in the consolidated ma se = accounts TOTAL ASSETS Gseo 2,640 3 Inter-group sales (A to B) in the period from TAD es OOO” 1 July 20X5 to 30 June 20x6 are €3,100,000 on Eourry which A made a profit of 15 per cent on selling Dicey shbrwe 900 price, Or these goods, €500,000 (at selling price itere peau as from A to B) are still in B's closing inventory Reeried earnings 360 —— 1,560 (Continued)666. CHAPTER 26 oN 26.7.1 The entity concept “The entity concept (or group entity concept) views the group a8 a unit ang no aistinction between shareholders. The difference between the entity and pap concept only occurs where there isa less than 100 per cent ownership ofthe gy of an entity, In preparing consolidated financial statements according tg ppp Standards, the entity concept prevails, This means that non-controlling inte are part of equity, and net comprehensive income includes the net income thas attributable to non-controlling interests. The use of the entity concept hag extensively illustrated in the Examples and Activities in Chapter 25 and this cha TERS 3 applies the entity concept to account for business combinations, wig exception of accounting for goodwill. For goodwill accounting, there isa choi between the entity concept (the goodwill of the group as a whole) and the paren concept (the goodwill acquired by the parent). We discuss this exception below, Makes ch 26.7.2 The parent concept With the parent concept (or parent entity concept or proprietary concept) of accounting, the assumption is made that the consolidated financial statements ae being prepared to be primarily of use to the sharcholders of the controlling paren entity, The non-controlling interests are credited with their share of the net tangite assets of the subsidiary. This non-controlling shareholding can then be reflected 2 4 quasi-liability: it is not part of equity (as equity is only the amount that belongs to the sharcholders of the parent), but it can be labelled as part of group equity Furthermore, applying the parent concept results in net income being determined excluding the amount that is attributable to the non-controlling interest. In preparing consolidated financial statements, IFRS Standards do not apply the parent concepe, net income that is attributable to the shareholders Take a look again at Activity 26.11. What would be the amount of net comprehensive income and equity if applying the parent concept? Activity feedback Applying the parent concept would result in a net comprehensive income of €4,087.50, being only the ‘The parent con ¢ di of A. The amount attributable fo the non-controling interest (€391) would be considered an element of expenses, In the consolidated statement of financial positon, the equity would be €6,537.50. The amount of €7.580.50 might be labelled as group equity. ppt also has an impact on accounting for business combinations, cially in the determination of goodwill upon acquisition. In Chapter 25, we uussed the two alternatives that currently exist in IFRS 3 for measuring the nom controlling interest in the acquiree: * at the proportionate share of the acquiree’s identifiable net assets at © at fair value. value ‘The goodwill resulting from the first alternative is the goodwill that is paid by the parent in acquiring control and therefore is the goodwill amount that fits withit the parent concept. In applying the second alternative, full goodwill would be determined, which fits within the entity concept. As TERS Standards do not appl!olidated A accounts, it seems inconsistent that whi ig Stand is acceprable This inconsistency was tr aler draft, only the full goodwill det lards Board (the Board) had wanted; ‘rmination was required. However, this Fg ca ere : 338 net fierce opposition in Te ot omg he NA he rent come a re he dom nicept. For this reason, with th concept had previously 07 ehe Board decided to allow two at » With the fear of non-endorsement by jeF ed in determining cquity and net prof nthe ee pee eee oe for transactions with the n Net profit in the consolidated accounts. Also, si a concep (aly non-contoling imerest within equity doesnot lithe paren ing the parent concept would result in an additional pout ake Examples and Acti vere to acquire the non-controlling interest) aa pncept alternative fo ities in Chapter 25 and this chapter, we have used ater company. The reas * goodwill showing only the goodwill allocated to parent é ‘son for this is that most European entities apply this ei fr determining goodwill 5 a distinction is made wi Sometimes le within the parent conei the ecnoing interest a acquisition: a erp in denen rom i pe gas concert in determining if at the International Account sith . . 4, The sone interest is determined on the basis of the fair values of the assets and liabilities at the acquisition date: this is the method discussed above. + The on-controlling interest is determined on the bass ofthe book values ofthe assets and liabilities at the acquisition date; in this situation there is no revaluation of assets and liabilities at the time of acquisition. ‘he latter method is sometimes referred to as the parent concept and the first as sheparent concept extension method. We use the term parent concept for the first sherative. The second alternative is an easy one from a pragmatic point of view, but ‘sno longer applied or permitted and will therefore not be discussed any further. 26.7.3 Proportional consolidation The method of consolidation that is in line with IFRS Standards and that has been dicused in the foregoing chapters is that of fall consolidation. This means that, even aparent does not have 100 per cent of the shares, it sil consolidates 100 per cent afthe net assets as the parent has control of 100 per cent of the net assets. The economic interest is not decisive, it is the fact of having control. This results in a - ton-controlling interest. When an entity has an economic interest of 80 per cent and has control, it consolidates 100 per cent of the net assets and recognizes a non- Controlling interest for 20 per cent of the net assets, An alternative might be to apply the consolidation on the basis of the econo1 imeres. This ig what we call proportional consolidation: consolidation to the | Proportion ofthe shares held. In this case, there is no non-controlling interest. Proportional consolidation is a traditional option in accounting for joint Ventures, but since 2013, the effective date of IERS 11 Joint Arrangement, itis | to longer accepted by the Board. However, for some specific joint arrangemenss, the comparable method of proportional accounting will be applicable. This will be discussed further in the next chapter. 26.7.4. Comparison of the three concepts of consolidation ow Hi Nork through the following Activity carefially. 26,7 ALTERNATIVE CONCEPTS ON CONSOL! DATION | 667668 CHAPTER 26 A buys 80 per cent of B for cash of €2,200 when ast assets of B have a fair value of €2,000 and the net boo! value is €1,500. The fair value of 100 per cent of B is €2,700 (this is not proportional to the price for 80 per Gent because ofthe contol premium. The lar value 0 the non-controlling interest is €500 (€2,700 - €2,200). AS in Statement of financial position at the date of acquisitio was € Net assets (including investment in B) 5,000 Share capital 4,000 Reserves 4,000 5,000 Compare and contrast the information provided in the Consolidated statement of financial position of A group using the three concepts discussed - entity concept. Parent concept and proportional consolidation Activity feedback Table 26.1 gives an overview. Table 26.1 shows that the consistent figures throughout the three methods are only those of share capital and reserves of the holding company. The net assets change depending on how much of the fair value Of the net assets each method considers attributable to the group. The proportional consolidation method excludes all reference to the portion of assets owned by the non-controlling interest, whereas the parent and entity concepts assume that the group might not own all of the subsidiary’s assets, but it certainly controls them. The parent concept only incorporates the net book value Of the portion of assets owned by the non-controlling interest; it disregards the fair value of this portion. The goodwill under the entity concept includes what could be regarded as the non-controlling interest goodwill, The non-controlling interest is shown at either 25 per Cent of the fair value of net assets excluding goodwill (parent concept), or 25 per cent of the net assets at fair value including goodwill (entity concept). The Proportional method of course makes no reference to a non-controling interest. Applying the parent concept and proportional Consolidation, equity is 5,000 (excluding the non- Controlling interest), whereas the entity concept results in an equity of 5.500. IFRS Standards app) t, but allow two alternatives, resuttin, ®nitiy 400 oF 5,500; the alternative with an sah ecu, is. a mixture between the entity concept (on sony 400 interests are part of equity) and the parent gor "ling amount of the non-controlling interests). PH the TABLE 26.1 Information on statements Of financiay eter Cola (ange) concepts) Entity Parent Pro, concept concept Consotcatin Net assets 4,800 4,800 4,40 (1) (2) Goodwill 700 _ 600 00 (3) (4) os 5,500 5,400 5000 2 2400 X Share 4,000 4,000 4.000 capital Reserves 1,000 1,000 +1000 Equity 5,000 5,000 5,000 Non- : = controlling interest (5) (6) 500 _ 400 _ Equity 5,500 5,400 5,000 2 de 5,000 (1) Net assets (entity concept, parent concept): §,000 - 2,200 (investment in B) + 2,000 (assets B) = 4,800 (2) Net assets (proportional consolidation}: §,000 - 2.200 + 1,600 (80% x 2,000) = 4,400 (8) Goodwill (parent concept, proportional consolidation) 2.200 (purchase price) ~ 1,600 (80% x 2,000) = 600 (4) Goodwill (entity concept) 2,700 - 2,000 = 700 (6) Non-controlting interest (entity concept): 500 (ti va, including allocated goodwill of 100) (6) Non-controliing interest (Parent concept) 20% x 2,000 = 400