Introduction to group

statements

FAC2602

Learning unit
1 to 3
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 Topics covered in this session

• Introduction to groups
• - Learning unit 1
Consolidation of the financial statements of the
parent and subsidiary
• - Learning unit 2 : 100% control
• - Learning unit 3 : Partial control e.g. 70%
 What will be discussed

• Learning unit 1
• Key learning outcomes of the session:
– Determine the date of acquisition
– Identify the acquirer (parent) and acquiree
(subsidiary)
– Criteria’s for obtaining control
– The consolidation process and why the need?
 Why do companies form a group?
• Business combine resources of 2 or more
companies
• 1. To achieve a wider business exposure and
create value
• 2. To manage the resources efficiently for better
profit
• Which entities do we know that have formed a
group?
• Retailability Group consisting of Edgars, Legit,
Beaver Canoe and Style
 Identify the acquirer and determine control

- The date of acquisition is the date the

acquirer obtained control of the acquiree entity.
The acquirer becomes the parent company
✓Parent: an entity that controls one or more
other entities (subsidiaries.)
✓Subsidiary: is a entity controlled by another,
the parent.
 Criteria for control by the parent company?
• An investor (parent) controls an investee
(subsidiary) only when all of the following is true
for the investor:
o It has power over the investee (subsidiary).
o It has exposure or rights to variable returns from
its involvement with the investee.
o It has the ability to use its power over the sub to
affect the amount of the returns.

o In FAC2602 we assume control when the acquirer holds more than

50% of shares and voting rights in the acquired company.
 The consolidation process and why the
need?
- The core principle for consolidation: Present a
fair reflection of the financial state of all the
NB! Entities are
companies within the group. viewed as one
economic unit
- How?
✓Combine the financial statements = A plus B
Adjustments:
✓Eliminate profits or losses that have arisen as a
result of transactions within the group and that
have not been realised outside the group.(LU7)
 The consolidation process and why the
need?
✓Eliminate all intragroup balances when
determining the total of assets and liabilities of
the group
✓Eliminate the carrying amount of the parent’s
investment in the subsidiary and the equity of
the subsidiary acquired.
✓Each year, both A Ltd and B Ltd will prepare
their individual financial statements however
when consolidating, they are not yet amended
… so the adjustments are made afresh every
year!
 Continued discussion
Consolidation of the financial statements of the
parent and subsidiary
• Learning unit 2: 100% control
Introduction of Goodwill.
Parent wholly owns the subsidiary
• Learning unit 3 : Partial control e.g. 70%
Parent owns 70% and others own 30% equity of
the subsidiary
The accounting terms for ‘other owners’? Non-
New account is
controlling interests (Abbr. NCI) created: NCI
 Continued discussion
Consolidation of the financial statements of the
parent and subsidiary
• Important tools: Analysis is a tool to calculate goodwill and
distribute equity of subsidiary between
✓The analysis of equity parent and NCI

✓Pro-forma consolidation journal entries

Pro-forma journal entries, may not
take the normal form to record a So, remember to indicate the
transaction in a journal for the name of the entity for each
accounts. The process of elimination account you are reversing
would require some of the journal where applicable.
entries to reverse the original entry in
the individual financial statements of
the entities.
 Example to work through some concepts
Statement of financial position as at 28 February 2020
A Ltd B Ltd
Assets R R
Property, plant and equipment 70 000 120 000
Loan to B Ltd 60 000 0
Investment in B Ltd - at fair value (cost price: R80 000)
(17 500 shares in B Ltd) 80 000 0
Trade and other receivables 42 000 28 000
Cash and cash equivalents 22 000 11 000
274 000 159 000
Equity and liabilities
Share capital - Ordinary shares (40 000/ 25 000 shares) 160 000 50 000
Retained earnings 59 000 38 000
Other components of equity (Revaluation surplus) 20 000 5 000

Long-term loan from A Ltd 0 60 000

Trade and other payables 35 000 6 000
274 000 159 000
 Determining the percentage of ownership?
Example: Information from the statement
A Ltd invested 17 500 shares in B Ltd for
R80 000
B Ltd ‘s share capital consist of R50 000
(represented by 25 000 shares)
In this example we assume that A Ltd acquired B Ltd on
28 February 2020
Not Rand value!

Investment in sub = 17 500 shares = 70%

Issued shares 25 000 shares
 Some theory about Goodwill
Where the parent paid more than the net asset
value of equity acquired in the subsidiary, which
means that a premium was paid at acquisition,
the premium is referred to as Goodwill

Goodwill is regarded as an intangible asset

- Disclosed as a non-current asset in the
consolidated statement of financial position
New account is
Goodwill measured at COST created: Goodwill
 Some practical on Goodwill
Using the figures in the financial statement above, lets
determine goodwill.
Analysis – at acquisition R
Share capital 50 000
Retained earnings 38 000
Other components of equity 5 000
100% of B Ltd 93 000
What is 70% of A Ltd in B Ltd?
93 000 x 70% 65 100
Goodwill (80 000 – 65 100) 14 900
Consideration (Investment) 80 000
 Example of adjusting entries
Reference to theory, Eliminate the carrying amount of the parent’s investment in
the subsidiary and the equity of the subsidiary acquired. These amounts should
be eliminated from the group statements.
We also record new accounts for the group.
Dr Cr
Details R R Share capital
in
Share capital (B Ltd) 50 000
consolidation
Retained earnings (B Ltd) 38 000 statements:
Other components of equity (B Ltd) 5 000 Parent only
Goodwill 14 900
Investment in B Ltd 80 000
Non-controlling interests 27 900
Elimination of owner’s equity of B Ltd at
acquisition

Share capital of B Ltd will not appear in consolidation statements! Journal done
each year.
 Example of adjusting entries
Reference to theory, Eliminate intragroup balances to determine the
assets and liabilities.

Dr Cr
Details R R

Loan from A Ltd 60 000

Loan to B Ltd 60 000

Elimination of intragroup loans.

 2. Analysis
Calculation tool! To work out NCI portion of equity and to
determine goodwill
Analysis
Total At(70%) NCI (30%)
Share capital 50 000 35 000 15 000
Other components of equity 5 000 3 500 1 500
Retained earnings 38 000 26 600 11 400
93 000 65 100 27 900
Goodwill 14 900
Investment in Subsidiary 80 000
 Group statement of financial position
Assets R
Non-current assets
Property, plant and equipment (70 000 + 120 000) 190 000
Goodwill at cost 14 900
Investment in subsidiary (80 000 – 80 000) -
Loan to B Ltd ( 60 000 – 60 000) -
Current assets
Trade and other receivables (42 000 + 28 000) 70 000
Cash and cash equivalents (22 000 + 11 000) 33 000
Total assets 307 900
Equity and liabilities
Share capital (160 000 + 50 000 – 50 000) 160 000
Other components of equity (20 000 + 5 000 – 5 000) 20 000
Retained earnings (59 000 + 38 000 – 38 000) 59 000
Non controlling interests 27 900
Trade and other payables (35 000 + 6 000) 41 000
Loan from A Ltd (60 000 – 60 000) -
Total equity and liabilities 307 900
 Group statement of financial position
• Assets R
Non-current assets
Property, plant and equipment (70 000 + 120 000) 190 000
Goodwill at cost 14 900
• Current assets
Trade and other receivables (42 000 + 28 000) 70 000
Cash and cash equivalents (22 000 + 11 000) 33 000
Total assets 307 900

Equity and liabilities

Share capital (160 000 + 50 000 – 50 000) 160 000
Other components of equity (20 000 + 5 000 – 5 000) 20 000
Retained earnings (59 000 + 38 000 – 38 000) 59 000

Non controlling interests 27 900

Trade and other payables (35 000 + 6 000) 41 000

Total equity and liabilities 307 900