Professional Documents
Culture Documents
2
Content
1. Introduction
Introduction
2. Elimination of Investment in a Subsidiary
3. Effects of Amortization, Depreciation and Disposal of Undervalued
or Overvalued Assets and Liabilities Subsequent to Acquisition
4. Accounting for Non-controlling Interests under IFRS 3
5. Goodwill Impairment Tests
6. Conclusion
3
Introduction
Focus of chapter 4:
• Subsequent effects when identifiable net assets are sold, consumed, extinguished or
amortized.
– Sale, consumption, use or settlement of the assets and liabilities of acquiree
should be recorded at acquisition date fair value
– Test for impairment of goodwill
• Subsequent effects of acquisition
– Demonstrate how consolidation journal entries are passed to record the
subsequent effects of acquisition
• Accounting for non-controlling interests
– Show how the balance of the non-controlling interests can be analyzed with
respect to three components
– Illustrate the consolidation journal entries to recognize non-controlling interest’s
share of equity
• Accounting for business combinations in multiple periods
– Explain the re-enactment process: involving re-enacting certain past
consolidation adjusting entries.
4
Content
1. Introduction
2. Overview ofofthe
Elimination consolidation
Investment process
in a Subsidiary
3. Effects of Amortization, Depreciation and Disposal of Undervalued
or Overvalued Assets and Liabilities Subsequent to Acquisition
4. Accounting for Non-controlling Interests under IFRS 3
5. Goodwill Impairment Tests
6. Conclusion
7. Appendix 4A: Illustrations of Non-controlling Interests Measured
as a Proportion of Acquisition-date Identifiable Net Assets
5
Elimination of Investment Account
What the parent is paying for
7
Illustration 1: Elimination of Investment
Illustration
On 8 August 2010, Parent Co. bought 100% interest in subsidiary for
$200,000. At the date of acquisition, Subsidiary Co. had the following:
8
Illustration 1: Elimination of Investment
Consolidation Consolidated Statement of financial
Parent Subsidiary
adjustments position
Dr Cr
Assets
Investment in
200,000 200,000 0
Subsidiary
Goodwill (Note 2) 80,000 80,000
Other net assets
300,000 80,000 50,000 10,000 420,000
(Note 1)
500,000 80,000 130,000 210,000 500,000
Equity
Share capital 100,000 50,000 50,000 100,000
Retained earnings 400,000 30,000 30,000 400,000
500,000 80,000 80,000 0 500,000
210,000 210,000
9
Illustration 1: Elimination of Investment
Note 1:
Increase in other net assets due to recognition of intangible asset 50,000
Decrease in other net assets due to recognition of deferred tax liability (10,000)
Note 2:
Goodwill is excess of the investment amount over the FV of identifiable net assets
Investment in Subsidiary 200,000
Book value of equity or net assets (80,000)
Fair value of intangible asset 50,000
Book value of intangible asset 0
Excess of fair value over book value 50,000
Deferred tax effects (10,000)
(40,000)
Goodwill 80,000
10
Illustration 1: Elimination of Investment
CJE1: Elimination of investment in subsidiary
Dr Share capital 50,000
Dr Retained earnings 30,000
Dr Goodwill 80,000
Dr Intangible asset 50,000
Cr Investment in Subsidiary 200,000
Cr Deferred tax liability 10,000
210,000 210,000
Re-enacting CJE
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Content
1. Introduction
2. Elimination of Investment in a Subsidiary
12
In Subsequent Years
13
In Subsequent Years
14
Illustration 2:
Amortization of Fair Value Differentials
• P Co. paid $6,200,000 and issued 1,000,000 of its own shares to
acquire 80% of S Co. on 1 Jan 20×5
• Fair value of P Co’s share is $3 per share
• Fair value of net identifiable assets is as follows:
Book value Fair value Remaining useful life
Leased property 4,000,000 5,000,000 20 years
In-process R&D 2,000,000 10 years
Other assets 1,900,000 1,900,000
Liabilities (1,200,000) (1,200,000)
Contingent liability (100,000)
Net assets 4,700,000 7,600,000
16
Illustration 2:
Amortization of Fair Value Differentials
• Consideration transferred = Cash consideration + Fair value
of share issued
= $6,200,000 + (1,000,000 × $3)
= $9,200,000
17
Illustration 2:
Amortization of Fair Value Differentials
• P’s share of goodwill = Consideration transferred – 80% × Fair
value of net identifiable assets, after tax
= $9,200,000 – [80% ×($7,600,000-
$580,000) $7,020,000] = $9,200,000 – $5,616,000
= $3,584,000
18
Illustration 2:
Amortization of Fair Value Differentials
Consolidation adjustments for 20×5
19
Illustration 2:
Amortization of Fair Value Differentials
CJE 2: Depreciation and amortization of excess of FV over book value
Dr Depreciation of leased property 50,000
Dr Amortization of in-process R&D 200,000
Cr Accumulated depreciation 50,000
Cr Accumulated amortization 200,000
Under dep. by Under amort. by
$50k $200k
Dep exp:
$50,000
Amort exp:
Dep. of
Amort. of $200,000
$200,000 $250,000 R&D
leased
property $0
Based on
Based on Based on FV
Based on FV book value
book value
20
Illustration 2:
Amortization of Fair Value Differentials
CJE 3: Reversal of entry relating to provision for loss
21
Illustration 2:
Amortization of Fair Value Differentials
22
Illustration 2:
Amortization of Fair Value Differentials
Explanatory note to CJE 5:
• NCI have a share in the extinguishment of the initial FV differences
and in the impairment of goodwill.
• Net profit after tax represents that increase in the book value of
equity of the subsidiary
• Other adjustments relate to the extinguishment of the FV
differentials
• NCI have a share of $176,000 of adjusted profit which represents
– Increase in book value
– Decrease in fair value differentials
23
Illustration 2:
Amortization of Fair Value Differentials
Utilizing the Analytical approach to determine NCI balance:
NCI balance:
NCI at acquisition date (CJE1) $2,300,000
Income allocated to NCI for 20×5 (CJE 5) 176,000
NCI as at 31 Dec 20×5 $2,476,000
25
Illustration 2:
Amortization of Fair Value Differentials
2nd step: reconcile the balance to the three components that NCI have -
Non-controlling
interests
Share of
Share of book value Unamortized Share of
of net assets unimpaired goodwill
FV adjustment
$5,700,000 × 20%
+ ($1,000,000 × 19/20
× 80% × 20%) +
+ $896,000 = $2,476,000
= $1,140,000
($2,000,000 × 9/10 ×
80% × 20%) =
$440,000
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Content
1. Introduction
2. Elimination of Investment in a Subsidiary
3. Effects of Amortization, Depreciation and Disposal of Undervalued
or Overvalued Assets and Liabilities Subsequent to Acquisition
4. Accounting for non-controlling
Non-controlling interests under IFRS
Interest under IFRS 33
5. Goodwill Impairment Tests
6. Conclusion
27
Non-controlling Interest
28
Analysis of Non-Controlling Interests
Share of book
Balance of Share of
value of
non- book value of Unimpaired
remaining (FV
controlling = subsidiary’s + + goodwill
– BV) of
interests at equity at attributable
identifiable
reporting reporting to NCI
net assets at
date date
reporting date
29
Reconstructing NCI on Statement of
Financial Position
30
Reconstructing NCI on Statement of
Financial Position
• At each reporting date, group will re-create NCI account in the
consolidated financial statement by recognizing the sequential build
up:
– As of acquisition date
– From acquisition date to beginning of the current period
– During the current period
31
Accounting for NCI under IFRS 3
• NCI is an equity item and must be separately shown from the equity
of the owners of the parent company
32
Non-Controlling Interests’ Share of Goodwill
Non-controlling interests
33
Non-Controlling Interests’ Share of Goodwill
Non-controlling
interests
Share of
Share of book value unamortized Goodwill attributable to
of net assets FV adjustment NCI
(FV – BV)
34
Non-Controlling Interests’ Share of Goodwill
35
Non-Controlling Interests’ Share of Goodwill
Non-controlling
interests
Share of
Share of book value unamortized
of identifiable net assets of FV adjustments
(FV – BV)
36
Non-Controlling Interests’ Share of Goodwill
37
Non-Controlling Interests’ Share of Goodwill
NCI measured as a
NCI measured at FV proportion of the
acquiree’s identifiable
net assets
Goodwill
38
Illustration 3:
Non-Controlling Interests’ Share of Goodwill
The FV of NCI that owned 10% of Subsidiary A as at 31 Dec
20×1(Acquisition date) was $25,000. The financial statements of
Subsidiary A as at acquisition date are as shown below. Subsidiary A
had unrecognized intangible assets with fair value of $40,000. Tax rate
is 20%. Determine NCI’s good will as at acquisition date.
Equity 140,000
Share Capital 20,000
Retained Earnings 160,000
39
Illustration 3:
Non-Controlling Interests’ Share of Goodwill
Fair value of NCI 25,000
Fair value of identifiable net assets
Book value of equity 160,000
Fair value of intangible assets 40,000
Deferred tax on intangible assets (8,000) 192,000
40
Allocation to Non-controlling Interests
1. Allocation of the change in equity from date of acquisition to the
beginning of the current period
41
Allocation to Non-controlling Interests
2. Allocation of current profit after tax to NCI
Dr Income to NCI
Cr NCI
• Attribution of profit to NCI is not expense item and should not be shown
above the profit after tax line
42
Allocation to Non-controlling Interests
3. Allocation of dividends to NCI
• Reverses the profit and loss effects of dividends in consolidated
income statement
• A repayment of profits by a subsidiary
• Reduces the NCI’s residual stake in the net assets of the subsidiary
Dr Dividend income (Parent)
Dr NCI (Equity)
Cr Dividends declared (Subsidiary)
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Content
1. Introduction
2. Elimination of Investment in a Subsidiary
3. Effects of Amortization, Depreciation and Disposal of Undervalued
or Overvalued Assets and Liabilities Subsequent to Acquisition
4. Accounting for Non-controlling Interest under IFRS 3
5. Goodwill Impairment
Goodwill impairment Tests
tests
6. Conclusion
44
Goodwill Impairment Test
• CGU is the lowest level at which the goodwill is monitored for internal
CGUs
45
Goodwill Impairment Test
1. Carrying amount:
– Net assets of the cash-generating unit
– It includes entity goodwill attribute to parent and NCI
2. Recoverable amount:
– IAS 36 allows the higher of the below two metrics to determine
recoverable amount:
− Higher of FV less cost to sell (an arms-length measure)
− Uses market based inputs or market participants’ assumptions in the
valuation process
− Value-in-use (VIU)
− Present value of future net cash flows
− Uses internal or entity-specific input to determine the future cash flows
− VIU likely to be more discretionary as assumptions about future cash flows
are required
46
Goodwill Impairment Test
47
Goodwill Impairment Test
Steps for impairment test
49
Illustration 4:
Goodwill Impairment Test
Company × has 80% ownership in a CGU with identifiable net assets of
$6 million as at 31 Dec 20×1. The recoverable amount of the CGU as
an entity was $5 million as at that date. Determine the impairment loss
of goodwill in the CGU under two alternative measurement basis:
50
Illustration 4:
Goodwill Impairment Test
Question (a)
Explanatory notes:
• Goodwill allocated to a CGU to enable comparison between carrying
amount of all assets of the unit and recoverable amount
• Goodwill attributable to NCI is included under recognized goodwill (no
further adjustment is required)
51
Illustration 4:
Goodwill Impairment Test
Question (b)
Goodwill Identifiable net assets Total
Carrying amount 1,000,000 6,000,000 7,000,000
Explanatory notes:
• Since comparison is done against the carrying amount of assets of a CGU,
goodwill is regrossed under alternative (b) to show theoretical goodwill as at
date of acquisition
• NCI unrecognized share of goodwill is included
52
Conclusion
53
Conclusion
54
Conclusion
55