Ifrs 10

IFRS 10: CONSOLIDATED FINANCIAL STATEMENTS
✓ IAS 27: Separate Financial Statements

✓ IFRS 3: Business Combinations – Acquisition method of accounting
✓ IAS 28: Investments in Associates and Joint ventures – Equity method of accounting
✓ IFRS 11: Joint Arrangements (Joint Operations and Joint Ventures)
✓ IAS 24: Related Party Disclosures
OBJECTIVE
• To establish principles for the presentation and preparation of consolidated financial
statements when an entity controls one or more other entities. To meet the objective,
IFRS 10:
(a) Requires an entity (the parent) that controls one or more other entities (subsidiaries)
to present consolidated financial statements.
(b) Defines the principle of control and establishes control as the basis for consolidation.
(c) Sets out how to apply the principle of control to identify whether an investor controls
an investee and therefore must consolidate the investee.
(d) Sets out the accounting requirements for the preparation of consolidated financial
statements.
(e) Defines an investment entity and sets out an exception to consolidating particular
subsidiaries of an investment entity.
• IFRS 10 does not deal with the accounting requirements for business combinations
and their effect on consolidation, including goodwill arising on a business combination
(IFRS 3: Business Combinations).
SCOPE
• An entity that is a parent shall present consolidated financial statements. IFRS 10
applies to all entities, except a parent need not present consolidated financial
statements if it meets all the following conditions:
(i) It is a wholly owned subsidiary or is a partially owned subsidiary of another entity
and all its other owners, including those not otherwise entitled to vote, have been
informed about, and do not object to, the parent not presenting consolidated financial
statements
XYZ LTD
100%
PQR LTD
80%
ABC LTD
(ii) Its debt or equity instruments (Treasury Bills, Treasury Bonds, ordinary and
irredeemable preference shares) are not traded in a public market (a domestic or
foreign stock exchange or an over-the-counter market, including local and regional
markets)
(iii) It did not file, nor is it in the process of filing, its financial statements with a
securities commission or other regulatory organisation for the purpose of issuing any
class of instruments in a public market.
(iv) Its ultimate or any intermediate parent produces financial statements that are
available for public use and comply with IFRSs, in which subsidiaries are consolidated
or are measured at fair value through profit or loss in accordance with IFRS 10.
• IFRS 10 does not apply to post-employment benefit plans or other long-term employee
benefit plans to which IAS 19: Employee Benefits applies.
• A parent that is an investment entity shall not present consolidated financial
statements if it is required in accordance with IFRS 10 to measure all of its
subsidiaries at fair value through profit or loss.
KEY DEFINITIONS
Group. A parent and all its subsidiaries.
Parent. An entity that controls one or more subsidiaries.
Subsidiary. An entity that is controlled by another entity.
Non-controlling interest. The equity in a subsidiary not attributable directly or indirectly

to a parent.
ABC LTD - UGX
(Parent )
70% 30%
4XYZ LTD- UGX 40% MNO LTD - USD

(Subsidiary) (Sub subsidiary)
Non-controlling interest’s shareholding in XYZ LTD = 30% (100% - 70%)

Non-controlling interest in MNO LTD
NCI’s direct shareholding (100% - 40% - 30%) 30%
NCI’s indirect shareholding (30% * 40%) 12%
NCI’s total effective share holding 42%
ABC LTD’s total effective shareholding (100% - 42%) 58%
ABC LTD’s direct shareholding in MNO LTD 30%
ABC LTD’s indirect shareholding in MNO LTD (70% * 40%) 28%
Total effective shareholding 58%
Control. An investor controls an investee when the investor is exposed or has rights to
variable returns like Dividends from its involvement with the investee and has the ability
to affect those returns through power over the investee. An investor controls the investee
if it has the following:
• Power over the investee as evidenced by an equity holding of more than 50%
• Exposure to or rights to variable returns like dividends from its involvement with the
investee.
• The ability to use its power over the investee to affect the amount of the investee’s
returns.
Note:
The existence and effect of potential voting rights which may be inform of share warrants
or options held by another entity should be considered when assessing whether an entity
has control over another entity.
Power. These are existing rights that give the investor current ability to direct the relevant
activities of the investee (IFRS 10). Power can be obtained directly from ownership of
voting rights and can be derived from other rights such as ;
• Rights to appoint, re assign or remove key management personnel who can direct the
relevant activities of the investee.
• Right to appoint or remove another entity that directs the relevant activities of the
investee like Board of Directors.
• Rights to direct the investee to enter into transactions for the benefit of the investor.
Consolidated financial statements. The financial statements of a group in which the

assets, liabilities, equity, incomes, expenses and cash flows of the parent and its
subsidiaries are presented as those of a single economic entity.
Consolidation is the process of adjusting and combining financial information from the
individual financial statements of a parent undertaking and its subsidiary undertakings
to prepare consolidated financial statements that present financial information for the
group as a single economic entity.
Note:
When a parent publishes consolidated financial statements, it should consolidate all
foreign and domestic subsidiaries – IAS 21: The effects of changes in foreign exchange
rates .
Investment entity. This is an entity that:

• Obtains funds from one or more investors for the purpose of providing those
investor(s) with investment management services.
• Commits to its investor(s) that its business purpose is to invest funds solely for returns
from capital appreciation, investment income, or both, and
• Measures and evaluates the performance of its investments on a fair value basis.
EXCLUSION OF A SUBSIDIARY FROM CONSOLIDATION

• IAS 27(Revised) requires that a subsidiary can only be excluded from consolidation
only when the parent has lost control over the subsidiary.
• It should be noted that in the previous version of IAS 27 subsidiaries could be excluded
from consolidation where control is intended to be temporary, but this was removed,
and IAS 27(Revised) requires that all subsidiaries that are classified as held for sale
should be accounted for in accordance with IFRS 5: Non-current assets held for sale
and discontinued operations.
• In addition, subsidiaries could be excluded from consolidation if they were operating
under severe long term restrictions like Debt Covenants since these could significantly
impair its ability to transfer funds to the parent but this was removed in the new
version of IAS 27.
Note:
A subsidiary cannot be excluded from consolidation on the basis of providing services
that are different from those provided by the parent.
DATE OF INCLUSION / EXCLUSION
The results of the subsidiaries under takings are included in consolidated financial
statements from the date of acquisition (date when control is gained by the parent) to the
date of disposal (date when control is lost by the parent).
Note:
Once an investment is no longer a subsidiary it should be accounted for as an associate
under IAS 28 – Equity Method of Accounting or as an investment under IFRS 9 – Fair
value through profit or loss.
DIFFERENT REPORTING DATES

• Group companies will prepare accounts to the same reporting date. However, if one
or more subsidiaries prepare financial statements for a different reporting date from
the parent, the subsidiary may prepare additional statements to the reporting date of
the rest of the group for consolidation purposes. If this is not possible, the subsidiaries
financial statements may still be used for consolidation provided the gap between the
reporting date is 3 months or less.
• Where a subsidiaries financial statements are prepared up to a different reporting
date, adjustments should be made for the effects of significant transactions or other
events that occur between that date and the parent’s reporting date.
USE OF UNIFORM ACCOUNTING POLICIES – IAS 8: Accounting policies, changes

in accounting estimates and Errors
Consolidated financial statements should be prepared using the same accounting policies
for similar transactions and other events in similar circumstances. Adjustments must be
made where one or more group companies use different accounting policies so that their
financial statements are suitable for consolidation.
RELATED PARTY ISSUES IN PREPARATION OF GROUP ACCOUNTS

IAS 24: Related party disclosures emphasizes the significance of related party
transactions since they may not be at arm’s length and the users of financial statements
should be made aware of this since it may affect their view on the financial statements.
Some of the related party transactions that may need to be disclosed or recognised in the
separate and consolidated financial statements include;
• Sell of goods by the subsidiary to the parent at artificially low prices (upstream
transactions).
• Sell of goods by the parent to the subsidiary at artificially low prices (Downstream
transactions).
• Extension of a loan by the subsidiary to the parent at artificially low interest rates
(upstream transaction)
• Extension of a loan by the parent to the subsidiary at artificially low interest rates
(Downstream)
• Sell of an asset by the parent to the subsidiary at an amount in excess of its carrying
amount (Downstream).
• Sell of an asset by the subsidiary to the parent at an amount in excess of its carrying
amount (Upstream).
• Dividends declared or paid by the subsidiary to the parent (Upstream).
PREPARATION OF A CONSOLIDATED STATEMENT OF FINANCIAL POSITION
The consolidated statement of financial position reflects the assets and liabilities within
the control of the parent, and how they are owned. The following procedures should be
followed by the parent company so as to prepare a consolidated statement of financial
position:
a) Establish the group structure – IFRS 3.

The parent must ascertain its direct and indirect proportion of its equity interest in each
of the subsidiary which forms a basis of evaluating the extent of control held by the parent
over each subsidiary. The proportion of equity interest can be ascertained using the
formula below:
Number of ordinary shares acquired X100
Number of ordinary shares issued
b) Ascertain the fair value of the net assets of the subsidiary acquired by the parent at
acquisition and Reporting date – IFRS 3 – Net Assets = Equity = Total Assets – Total
Liabilities .
• According to IFRS 13: Fair value measurement, fair value is the price that would be
received to sell an asset or paid to transfer a liability in an orderly transaction between
market participants at the measurement date.
• A parent should ascertain the value of the net assets acquired in the subsidiary by
aggregating the different components of net assets/ equity in the subsidiary at the
acquisition and making necessary adjustments in case the fair value of some assets at
that date exceeded their carrying amounts as illustrated below:
Details At Acquisition Date At Reporting Date
Shs. ‘000’ Shs. ‘000’
Ordinary share capital XX XX
Preference share capital XX XX
Retained earnings XX XX
Revaluation Reserves XX XX
Fair value Adjustment XX XX
Total Net Assets XX XX
Note:
The difference between the fair value of the net assets at reporting and acquisition date
represents post acquisition earnings which increases the parent’s consolidated retained
earnings and the value of Non-controlling interest at reporting date.
c) Determination of Purchase consideration – IFRS 3 – Cash, share for share exchange,

Deferred and Contingent Consideration.
• The consideration paid by the parent for the shares in the subsidiary can be inform
of cash, contingent consideration, deferred consideration or share for share exchange.
• IFRS 3 requires the fair value of the contingent and deferred consideration to be
recognised as part of the consideration for the acquiree. The fair value can be
determined by discounting the future value of the contingent or deferred
consideration using the parent company’s cost of capital / required rate of return /
discount rate / hurdle rate / Incremental borrowing rate.
d) Determine the Goodwill arising on acquisition.
• According to IFRS 3: Business combination, goodwill is the excess of the consideration
transferred over the acquirer’s interest in the fair value of the identifiable assets and
liabilities acquired at the date of the exchange transaction. Goodwill can be
determined by the parent by using either the proportionate or full goodwill method.
• Under the proportionate/ proportional / Partial good will method, Non-controlling
interest is measured at its share of the subsidiaries net assets at acquisition and
reporting date. This implies that goodwill determined and tested for possible
impairment will be attributable to only the parent as illustrated below;
Details Amounts Shs. million
Purchase consideration – 80% XX 5,000
Parent’s proportionate share of the subsidiary’s net assets (XX) (3,600)
at acquisition date (80% * 4,500)
Goodwill at acquisition date XX 1,400
Impairment (if any) (XX) (300)
Carrying amount of good will at reporting date XX 1,100
• Under the full goodwill method, NCI is valued at the fair value of its equity interest in
the subsidiary at acquisition date. The goodwill computed and tested for impairment
should be shared between the parent and NCI as illustrated below.
Details Amounts Shs. Million
Purchase Consideration – 80% XX 5,000
Fair value of NCI – 20% XX 1,000
Fair value of Net Assets at acquisition date (XX) (4,500)
Good will at acquisition date XX 1,500
Impairment (if any) (XX) (400)
Carrying amount of Goodwill at reporting date XX 1,100
Note:
• IFRS 3 requires that goodwill arising on consolidation should be capitalised in the
consolidated statement of financial position and annually reviewed for impairment –
IAS 38: Intangible Assets and IAS 36: Impairment of Assets. If the fair value of the
net assets of the subsidiary acquired exceeds the purchase consideration paid by the
parent, the difference is a gain on Bargain purchase and IFRS 3 requires that;
✓ An entity should first re assess the amounts at which it has measured both purchase
consideration and the acquiree’s identifiable assets so as to identify any errors made.
✓ Any excess remaining should be recognised immediately in profit or loss.
• Expenses and costs for combination such as lawyers and accountants’ fees are written
off as incurred. However, IFRS 3 requires that the costs of issuing equity are treated
as a deduction from the proceeds of equity issue thus shares issue costs are debited to
the share premium account. Issue costs of financial instruments are deducted from
the proceeds of the financial instrument.
e) Intra group transactions.

• A parent must evaluate the financial impact of intra group transactions which may be
involving sale of goods and services or non-current assets between the parent and
subsidiary.
• In case of intra group sale of goods or services any outstanding payables or receivables
between companies should be cancelled at consolidation.
Dr. Payables XX
Cr. Receivables XX
• There is no further problem if intra group transactions are undertaken at cost but if goods,
or services are sold or transferred at a mark-up or margin, the parent should computed the
un realised profit on the goods or services.
• It’s very important to note that if the goods or services are sold by the parent to the
subsidiary, the unrealised profit computed reduces the value of closing inventory as well as
the consolidated retained earnings.
Dr. Consolidated Retained Earnings XX
Cr. Closing inventory XX
• However, if the goods or services are sold by the subsidiary to the parent, the unrealised
profits reduces the value of closing inventory, consolidated retained earnings and non-
controlling interest.
Dr. Consolidated Retained Earnings XX
Dr. Non-controlling Interest XX
Cr. Closing inventory XX
Question One
S is 75% controlled by P. During the year ended 31 December 2022, S sold goods to P for Shs.
20,000,000 at a 25% mark up. At as the end of the year, P still had a quarter of these goods still
in inventory.
Required:
Advice on the treatment of the unrealized profit in the consolidated financial statements (4
marks)
Solution
Since the goods or services were sold by the subsidiary to the parent, the unrealised profits
reduces the value of closing inventory, consolidated retained earnings and non-controlling
interest as illustrated below.
Shs. ‘000’
Dr. Retained Earnings {(25/125 × 20,000,000) × ¼} × 75% 750
Dr. Non-controlling Interest {(25/125 × 20,000,000) × ¼}× 25% 250
Cr. Closing Inventory {(25/125 × 20,000,000) × ¼} × 100% 1,000
Transfer of non-current assets

• The transfer of non-current assets at a profit within the group gives rise to the same kind of
issues as the transfer of inventory i.e. the non-current assets should be stated at cost to the
group and the profit on the sale is unrealised.
• An additional problem is that the non-current asset will subsequently be depreciated based
on the new carrying value, but the group depreciation charge should be based on original
cost. The adjustment for unrealised profit should be made in the records of the entity which
has recognised the profit i.e. the selling entity.
• The adjustment for unrealised profits and depreciation should also be made in the records
of the selling and buying entity respectively using the following journal entries.
Dr. Retained earnings XX
Cr. Non-current assets XX with the provision for unrealised profit in the
financial statements of the entity selling the asset.
Dr. Non-current assets XX
Cr. Retained earnings XX with the excess depreciation in the financial
statements of the entity buying the asset.
Question Two
P owns 60% of S and on 1 January 2022, S sold plant costing Shs. 10,000,000 to P for Shs.
12,500,000. These companies prepare their accounts to 31 December 2022 and their balances
on their retained earnings at that date are;
P after charging depreciation of 10% on plant Shs. 27,000,000
S including the profit on sale of plant Shs. 18,000,000
Required:
Determine the Group retained earnings (4 marks)
Solution
Determination of the Group retained earnings.
S’s Adjusted Retained Earnings
Shs. ‘000’
Retained Earnings including the profit on sale of plant 18,000
Unrealised Profit on sale of Plant (12,500 – 10,000) (2,500)
S’s Adjusted Retained Earnings 15,500
P’s Adjusted Retained Earnings
Shs. ‘000’
Retained Earnings after charging depreciation of 10% on plant 27,000
Excess Depreciation on Plant (12,500 – 10,000) × 10% 250
P’s Adjusted Retained Earnings 27,250
Group Retained Earnings
Shs. ‘000’
Share of S’s Retained Earnings (60% × 15,500) 9,300
DIVIDENDS DECLARED (PAYABLE) OR PAID.

• Dividends are appropriations of profit and the parent, as a shareholder of the subsidiary,
will be entitled to a share of the subsidiary’s dividends. Any inter-entity payable or
receivable should be eliminated from the consolidated statement of financial position so
only the liability to third parties will be disclosed, i.e. the dividend payable to the non-
controlling interest.
• IAS 10 (Revised) – Events after reporting period states that only dividends proposed before
the statement of financial position date should be accounted for. On consolidation, the
dividend receivable in the records of the parent entity will cancel against the dividend
payable in the records of the subsidiary to leave the amount payable to the non-controlling
interest as a liability in the consolidated statement of financial position.
Dr. Dividends Payable XX
Cr. Dividends Receivable XX
• If a subsidiary pays a dividend to the parent during the year, the dividend paid should be
cancelled on consolidation and the remaining balance on the reserves of the subsidiary is
credited to the consolidated retained earnings and NCI.
f) Determination of the value of Non-controlling interest at reporting date.

• According to IFRS 3: Business combination, NCI can be valued at either fair value or at its
proportionate share of the subsidiaries net assets. IFRS 3 suggests that the closest
approximation of fair value will be the market price of the shares held by non-controlling
shareholders just before acquisition of the parent.
• If the fair value option is adopted the value of NCI can be determined as illustrated below:
Details Amounts
Fair Value of NCI At Acquisition Date XX
NCI’s share of post-acquisition earnings of the subsidiary XX
NCI’s share of Goodwill impairment in the subsidiary (XX)
NCI’s Share of unrealised Profits on closing inventory (XX)
NCI’s share of cost of investment in a sub subsidiary (XX)
Fair value of NCI at reporting date XX
• If the proportionate method is adopted, the value of non-controlling interest at reporting
date will be ascertained as illustrated below.
Details Amounts
NCI’s share of subsidiary’s net assets at acquisition date XX
NCI’s share of post-acquisition earnings of the subsidiary XX
NCI’s share of unrealised profits on closing inventory (XX)
NCI’s share of cost of investment in a sub subsidiary (XX)
NCI’s value at reporting date XX
g) Determination of consolidated (Group) Retained Earnings.

• If NCI is valued at fair value, the consolidated retained earnings can be determined as
illustrated below:
Details Amounts
All retained earnings of the parent XX
Parents share of the post-acquisition earnings of the subsidiary XX
Share of associate’s post acquisition earnings XX
Parent’s share of unrealised profits on closing inventory (XX)
Parent’s share of unrealised profits on Transferred plant (XX)
Parent’s share of goodwill impairment in the subsidiary (XX)
Impairment of investment in associate (XX)
Consolidated retained earnings XX
• If NCI is valued at its proportionate share of the subsidiary’s net assets the consolidated
retained earnings can be determined as illustrated below:
Details Amounts
All retained earnings of the parent XX
Parents share of the post-acquisition earnings of the subsidiary XX
Share of associate’s post acquisition earnings XX
Goodwill impairment in the subsidiary (XX)
Un realised Profits on closing inventory (XX)
Impairment of investment in associate (XX)
Consolidated retained earnings XX
h) Add together the uncancellable assets and liabilities of both the parent and subsidiaries on
a line-by-line basis which should be recognised on the face of the statement of financial
position.
Question Three
The following draft financial statements for the year ended 31 March, 2022 were prepared by
Wanok Manufacturing Ltd (WML), which was incorporated in Uganda many years ago.
Besides manufacturing, the company also has a wide portfolio of investments in other entities
operating in the Great Lakes region of East Africa.
Statements of profit or loss and other comprehensive income
WML Muna Ltd Batong Ltd
Shs ‘000’ Shs ‘000’ Shs ‘000’
Revenue 6,523,400 2,443,800 846,800
Cost of sales (4,419,000) (1,942,800) (488,800)
Gross profit 2,104,400 501,000 358,000
Other income 100,000 – –
Selling & distribution expenses (712,400) (99,600) –
Administrative expenses (288,400) (152,200) (35,200)
Other expenses (365,000) (69,800) (24,800)
Finance costs (45,000) (3,600) (7,200)
Profit before tax 793,600 175,800 290,800
Tax expense (179,800) (45,800) (24,600)
Profit for the year 613,800 130,000 266,200
Total comprehensive income for the year 613,800 130,000 266,200
Statements of financial position as at 31 March 2022
WML Muna Ltd Batong Ltd
Shs ‘000’ Shs ‘000’ Shs ‘000’
Assets:
Non-current assets:
Property plant & equipment 6,643,200 857,800 1,235,400
Investment in Muna Ltd 2,050,000 – –
Investment in Batong Ltd 800,000 – –
9,493,200 857,800 1,235,400
Current assets:
Inventories 739,200 176,200 5,400
Trade receivables 2,018,200 680,200 112,800
Prepayments 600 1,400 –
Cash 740,400 36,800 35,000
3,498,400 894,600 153,200
Total assets 12,991,600 1,752,400 1,388,600
Equity & liabilities:
Issued share capital 1,680,000 1,091,000 600,000
Share premium 380,000 – –
Share option reserve 40,000 – –
Retained earnings 6,947,400 508,800 384,600
3% cumulative irredeemable preference shares 400,000 – –
Revaluation surplus 1,712,000 – –
Total equity 11,159,400 1,599,800 984,600
Non-current liabilities:
‘Provisions greater than 1 year 100,000 – –
Other non-current liabilities 343,000 62,200 312,600
443,000 62,200 312,600
Current liabilities:
Provisions less than 1 year 80,000 – –
Other current liabilities 1,309,200 90,400 91,400
1,389,200 90,400 91,400
Total equity & liabilities 12,991,600 1,752,400 1,388,600
Notes:
1. WML purchased all of the ordinary share capital in Muna Ltd on 1 April, 2019 for Shs
2,050 million. At this time Muna Ltd had retained earnings of Shs 545,400,000. The fair
value of Muna Ltd’s identifiable net assets on the date of acquisition was the same as their
book value. An impairment review was carried out on 31 March, 2022 and it was agreed
that the goodwill on acquisition of Muna Ltd be impaired by 20%.
2. WML acquired 40% of the ordinary share capital of Batong Ltd on 30 June, 2021. The fair
values of Batong Ltd’s identifiable net assets on this date were the same as their book value.
An impairment review was carried out on 31 March, 2022 and it was agreed that the
goodwill on acquisition of Batong Ltd be impaired by 10%.
3. On 1 March, 2022 WML agreed to a sale of its finished products for Shs 560 million to
Goma City Council (GCC). This was a forward purchase agreement by GCC and the goods
would not be delivered until 1 May, 2022. The agreement also allowed GCC the right to
cancel the order at any time up to 15 April, 2022 with no penalty. However, this would
only happen if WML’s sales price fell by 15 April, 2022. The sale was recorded in sales
and accounts receivable but no adjustment was made to inventory.
4. During the year an employee was injured while operating a machine and has taken legal
action against WML. The case is currently outstanding, but it is expected to be settled
within a few weeks following the year end. Discussions with lawyers indicated that the
employee was likely to be successful. The damages payable were estimated at Shs 60
million based on related cases in the past.
5. During the year ended 31 March, 2022 WML sold goods to Muna Ltd for Shs 400 million.
WML makes a profit of 25% on the selling price. At year end Muna Ltd had sold all the
goods to third parties.
6. In March, 2022 the directors of Muna Ltd proposed a dividend of Shs 8 million, which the
shareholders were expected to approve. No account was taken of this dividend in the
financial statements of WML and Muna Ltd.
7. The Directors of WML were considering an overseas investment in the near future. They
were, however, not fully aware of the regulatory reporting requirements in relation to
exchange rate differences.
Required:
(a) With reference to relevant financial reporting standards, advise the management of WML
whether there is need to consolidate the financial statements above. (5 marks)
(b) Prepare a memorandum for the directors of WML advising them on the required
accounting treatment in regard to issues identified in notes 3, 4, 5, and 6) and their impact on
the consolidated financial statements of WML for the year ended 31 March, 2022. (7 marks)
(c) Prepare the consolidated statements of profit or loss and other comprehensive income and
of financial position of WML for the year ended 31 March, 2022. Include all the workings as
far as the information allows. (35 marks)
(d) Prepare a memo for the directors of WML which advising them on the correct accounting
treatment of the issues raised in note 7 above. (3 marks)
Solution
(a) Whether there is need to consolidate the financial statements
• According to IFRS 10: Consolidated financial statements, consolidated financial statements
are group financial reports presented like those of a single accounting entity. IFRS 10
requires that the financial statements of separate legal entities that are wholly or partially
owned subsidiaries of the parent company be consolidated.
• Accordingly, Muna Ltd is a wholly owned subsidiary of WML and its financial statements
should be consolidated in the financial statements of WML. However, Batong Ltd is an
associate to WML implying that it should not be consolidated but accounted for using the
equity method of accounting in accordance with IAS 28: Investments in Associates.
• A parent entity (WML) need not present consolidated financial statements if it meets any
of the following conditions:
✓ It is a wholly owned subsidiary or is a partially owned subsidiary of another entity and its
other owners, including those not otherwise entitled to vote, have been informed about, and
do not object to, the parent not presenting consolidated financial statements.
✓ Its debt or equity instruments are not traded in a public market (a domestic or foreign stock
exchange or an over the counter market, including local and regional markets).
✓ It did not file, nor is it in the process of filing, its financial statements with a securities
commission or other regulatory organization for the purpose of issuing any class of
instruments in a public market.
✓ It’s ultimate or any intermediate parent of the parent produces financial statements
available for public use that comply with IFRSs.
(b) A memorandum for the directors of WML advising them on the required accounting
treatment in regard to issues identified in notes 3, 4, 5, and 6.
To : The Directors of WML
From: Financial Reporting Consultant
Date : Exam Date
Subject: Accounting Treatment in regard to the Issues Identified in Notes 3, 4, 5, and 6.
This memorandum is meant to highlight to accounting treatment in regard to issues identified
in notes 3, 4, 5, and 6) and their impact on the consolidated financial statements of WML for
the year ended 31 March, 2022.
Note 3: Revenue from the forward purchase agreement.
• According to IFRS 15: Revenue from contracts with customers, a reporting entity should
recognize revenue from a contract with the customer when it satisfies its performance
obligations.
• Therefore, WML should not have recognized revenue in respect of the forward purchase
agreement since the finished products had not yet been transferred to GCC by the end of
the year. The following journal entries should be made to derecognize the amounts
recognized in sales and receivables:
Shs. ‘000’
Dr. Revenue 560,000
Cr. Trade Receivables 560,000
Note 4: Provision for damages payable.

• According to IAS 37: Provisions, contingent assets and contingent liabilities, a reporting
entity should recognize a provision when and only when;
✓ There is a present obligation (legal or constructive) as a result of past events.
✓ An outflow of future economic benefits is probable.
✓ The amount to be provided for can be estimated reliably.
• Therefore, WML should recognize a provision for damages payable to the injured
employee since the company lawyers advised that the employee would be successful.
• The following journal entries should be made to recognize the provision for damages
payable;
Shs. ‘000’
Dr. Other Expense (damages) 60,000
Cr. Other Current Liabilities (provision for damages payable) 60,000
Note 5: Intra group sale of goods
• According to IFRS 10: Consolidated financial statements, a parent entity should eliminate
all the unrealized profits arising on intragroup transactions when preparing the consolidated
financial statements.
• Since all the goods sold by WML to Muna Ltd had been subsequently sold to third parties,
there are no unrealized profits to be adjusted for in the consolidated financial statements.
Note 6: Proposed Dividends

• According to IAS 37: Provisions, contingent assets and contingent liabilities, a reporting
entity should recognize a provision when and only when;
✓ An outflow of future economic benefits is probable
✓ The amount to be provided for can be estimated reliably.
• Since the dividends proposed by Muna had not yet been approved by the shareholders, there
is therefore no legal obligation to pay the dividend thus they should not be recognised in
the financial statements of either Muna Ltd or WML.
(c) The consolidated statements of profit or loss and other comprehensive income and of
financial position of WML for the year ended 31 March, 2022.
WANOK MANUFACTURING LTD’S CONSOLIDATED STATEMENT OF PROFIT
OR LOSS AND OTHER COMPREHENSIVE INCOME AND FOR THE YEAR ENDED
31 MARCH 2022
Note Shs. ‘000’
Revenue (6,523,400 + 2,443,800 – 560,000) 8,407,200
Cost of sales (4,419,000 + 1,942,800) (6,361,800)
Gross profit 2,045,400
Share of Associates Profit 5 31,258
Other income (100,000 + 0) 100,000
Selling & distribution expenses (712,400 + 99,600) (812,000)
Administrative expenses (288,400 + 152,200) (440,600)
Other expenses (365,000 + 69,800 + 60,000) (494,800)
Finance costs (45,000 + 3,600) (48,600)
Profit before tax 380,658
Tax expense (179,800 + 45,800) (225,600)
Profit for the year 155,058
Other comprehensive income -
Total comprehensive income for the year 155,058
WANOK MANUFACTURING LTD’S CONSOLIDATED STATEMENT OF

FINANCIAL POSITION AS AT 31 MARCH 2022
Note Shs. ‘000’
Assets:
Non-current assets:
Property plant & equipment (6,643,200 + 857,800) 7,501,000
Goodwill 4 330,880
Investment in Associate (Batong) 5 831,258
Current Assets
Inventories (739,200 + 176,200) 915,400
Trade receivables (2,018,200 + 680,200 - 560,000) 2,138,400
Prepayments (600 + 1,400) 2,000
Cash (740,400 + 36,800) 777,200
Total assets 12,496,138
Equity and liabilities
Issued Share Capital 1,680,000
Share premium 380,000
Share option reserve 40,000
Retained earnings 6 6,239,338
3% cumulative irredeemable preference shares 400,000
Revaluation surplus 1,712,000
Total Equity 10,451,338
Liabilities
Non-current Liabilities
Provisions greater than 1 year (100,000 + 0) 100,000
Other non-current liabilities (343,000 + 62,200) 405,200
Current liabilities
Provision less than 1 year (80,000 + 0) 80,000
Other current liabilities (1,309,200 + 90,400 + 60,000) 1,459,600
Total equity and liabilities 12,496,138
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

Note 1: Group Structure
WML’s shareholding in Muna Ltd (01 April 2019) = 100%
WML’s shareholding in Batong Ltd (30 June 2021) = 40%
Note 2: Fair value of Muna Ltd’s and Batong Ltd’s Net Assets at Acquisition and
Reporting Date
Muna Ltd Batong Ltd
At Acquisition At Reporting At Acquisition At Reporting
Date Date Date Date
Shs ‘000’ Shs ‘000’ Shs ‘000’ Shs ‘000’
Issued share capital 1,091,000 1,091,000 600,000 600,000
Retained earnings 545,400 508,800 184,950 384,600
Total 1,636,400 1,599,800 784,950 984,600
Post-Acquisition = (1,599,800 - 1,636,400) = (984,600 - 784,950)

Earnings = (36,600) = 199,650
Note 3: Purchase Consideration
Consideration paid by WML for the 100% shareholding in Muna Ltd = Shs. 2,050,000,000
Consideration paid by WML for the 40% shareholding in Batong Ltd = Shs. 800,000,000
Note 4: Good will arising on Acquisition of Muna Ltd and Batong Ltd
Muna Ltd Batong Ltd
Shs ‘000’ Shs ‘000’
Purchase Consideration 2,050,000 800,000
Share of Net Assets at Acquisition Date
(100% × 1,636,400 / 40% × 784,950) (1,636,400) (313,980)
Good will Arising on Acquisition 413,600 486,020
Impairment (20% × 413,600 / 10% ×486,020) (82,720) (48,602)
Carrying Amount of Good will 330,880 437,418
Note 5: Carrying amount of the Investment in Associate (Batong Ltd)

Shs ‘000’
Initial Cost of Investment 800,000
Share of Post-Acquisition Earnings (40% × 199,650) 79,860
Good will Impairment (10% ×486,020) (48,602)
Carrying Amount of the Investment in Associate 831,258
Note 6: Consolidated Retained Earnings

Shs ‘000’
All Retained Earnings of WML 6,947,400
Share of Post-acquisition Earnings
WML (100% × - 36,600) (36,600)
Batong Ltd (40% × 199,650) 79,860
Good will Impairment
WML (20% × 413,600) (82,720)
Batong Ltd (10% × 486,020) (48,602)
Revenue Recognized - Forward Purchase Agreement (560,000)
Damages (60,000)
Total 6,239,338
(d) Memo for the directors of WML advising them on the correct accounting treatment
of the issues raised in note 7.
To : The Directors of WML
Date : Exam Date
Subject: Regulatory Reporting Requirements in relation to Exchange Rate Differences

This memorandum is meant to highlight the regulatory reporting requirements in relation to
exchange rate differences in accordance with IAS 21: The effects of changes in foreign
exchange rates.
• Exchange differences occur when there is a change in the exchange rate between the
transaction date and the date of settlement of monetary items (assets and liabilities) arising
from a foreign currency transaction.
• Exchange differences arising when monetary items such as receivables, payables, loans,
cash in foreign currency are translated at rates different from those at which they were
translated when initially translated or recognized in previous financial statements are
reported in profit or loss in the period in which they arise.
• For exchange differences arising on transactions settled in the same period as that in which
it occurred, they are recognised in that period. Exchange differences arising from
transactions settled in the subsequent accounting period, they are recognised in each
intervening period up to the period of settlement using the change in exchange rates during
that period. Where a monetary item has not been settled at the end of the period it will be
restated using the closing exchange rate and any gains or losses recognised in profit or loss.
• Exchange differences arising on monetary items that form part of the reporting entity's net
investment in a foreign operation are reported in the consolidated financial statements that
include the foreign operation, in a separate component of net assets/equity and will be
recognized in profit or loss only on disposal of the net investment.
Question Four
(a) Musota Company Ltd. (MCL) is a listed company with interests in other companies. The
statements of financial position of MCL and the other companies that it has interests in for
the year ended 30 June, 2022 are as follows:
MCL SCL MEL
Shs 'million' Shs 'million' Shs 'million'
Assets
Non-currents:
Plant, Property & Equipment 11,000 5,000 3,500
Intangible assets 2,000 3,500 1,500
Investment in SCL 8,000 - -
Investment in MEL 2,000 1,500 -
Investment property 3,000 2,000 1,800
26,000 12,000 6,800
Current assets:
Inventories 1,500 900 700
Trade and other receivables 1,200 1,250 650
Cash and cash equivalent 500 420 250
3,200 2,570 1,600
Total assets 29,200 14,570 8,400
Equity and reserves:
Share capital of Shs 100,000 each 5,000 3,000 2,000
Retained earnings 17,500 8,550 4,340
Revaluation reserves 100 - -
22,600 11,550 6,340
Non-current Liabilities:
Long-term loans 4,000 2,000 1,000
4,000 2,000 1,000
Trade and other payables 11,700 600 500
Taxation 880 420 560
Deferred tax 20 - -
2,600 1,020 1,060
Total equity and liabilities 29,200 14,570 8,400
Additional information:
1. MCL acquired 70% of shares in Siti Company Ltd (SCL) on 1 July, 2018 when the balance
on retained earnings account of SCL was Shs 700 million. MCL used the services of a law
firm to acquire the shares. The consideration comprised of cash Shs 8 billion, of which Shs
200 million was for legal fees and 1,000 shares which were issued two months later to the
shareholders of SCL. The market price per share of MCL at the date of acquisition and
issue of shares to the shareholders of SCL were Shs 110,000 and Shs 120,000 respectively.
The market price per share of SCL at the date of acquisition was Shs 105,000. The fair
values of the net assets of SCL as at 1 July, 2018 were not materially different from their
carrying values. The shares issued to the shareholders of SCL have not been accounted for
in MCL's financial statements above.
2. MCL and SCL acquired 45% and 30% of shares respectively in Mugende Enterprises Ltd
(MEL) on 1 January, 2022 for Shs 2 billion and Shs 1.5 billion respectively when the
balance on the retained earnings account of MEL was Shs 250 million and market price per
share was Shs 102,000. At the time of acquisition, the value of the vehicles of the company
was understated by Shs 100 million.
3. During the year ended 30 June 2022, MEL sold goods to MCL worth Shs 300 million
making a profit of 25% on cost. 40% of the goods remained in stock at the end of the year.
4. On 1 July 2021, MCL entered into a 20-year lease of specialized equipment. The expected
useful life of the equipment is 23 years. The company is required to make lease payments
of Shs 320 million payable in arrears. The company hired a legal firm to negotiate the deal
and paid Shs 100 million. The present value of the lease payment on 1 July, 2021 was Shs
3.668 billion. The interest rate implicit in the lease is 6% per year. The company expensed
the legal fees and lease payments during the year. The equipment is to be depreciated on a
straight-line basis over the lease period.
5. SCL owns a factory in Jinja whose carrying amount in the financial statements for the year
ended 30 June, 2022 was Shs 1.6 billion. The factory produces different types of soap.
However, due to fall in demand, the company believes the sales of the products from the
factory in the next five years will be as follows:
Year ending Shs 'million'
30 June, 2023 400
30 June, 2024 300
30 June, 2025 250
30 June, 2026 200
30 June, 2027 189
At the end of the fifth year, the company expects to sell the factory at Shs 50 million but
will also incur the cost of renovation Shs 27 million. The company has received an offer of
Shs 1.25 billion from one of the new entrants in the industry for immediate sale. The
company is expected to pay another firm Shs 20 million to transport the factory equipment.
The risk-free interest rate is 12%.
6. MCL purchased a piece of equipment on 1 July, 2020 at a cost Shs 500 million and it is
depreciated at 10% and 20% per year on a straight-line basis for accounting and tax
purposes respectively. The equipment was revalued at the end of the year ended on 30 June,
2022 to Shs 550 million. Management did not compute deferred tax for the year ended 30
June, 2022. The deferred tax liability in the financial statement is in relation to deferred tax
determined at 30 June, 2021 in respect of the same equipment. The company pays
corporation tax at the rate of 40%. Please note that deferred tax is limited to this equipment.
7. It is MCL policy to review goodwill for impairment annually. The impairment test
conducted at the end of year revealed that goodwill in SCL and MEL had been impaired
by 15% and 20% respectively.
8. It is the group policy to value the non-controlling interest at acquisition at fair value.
Required:
Draft the group's consolidated statement of financial position as at 30 June, 2022. (40 marks)
(b) IFRS 11: Joint Arrangements deals with joint operations and joint ventures. The method of
accounting for interests in joint arrangements depends on whether they are interests in joint
operations or joint ventures.
Required:
Discuss how the operators and venturers account for their interests in the respective financial
statements. (5 marks)
(c) During the review of the draft consolidated financial statements by the Finance committee
of MCL, members raised issues on some transactions which they suspected were not carried
out at arm's length because they were carried out with other firms that are being run by
relatives of senior managers of the company.
Required:
Discuss any five conditions that indicate that an entity is a related party. (5 marks)
Solution
(a) MUSOTA COMPANY LTD’S CONSOLIDATED STATEMENT OF FINANCIAL
POSITION AS AT 30 JUNE 2022.
Note Shs 'million'
Assets
Non-currents Assets;
Plant, Property & Equipment (11,000 + 5,000 + 3,500 + 100 + 2, 6 & 7 22,810
3,580 – 370)
Intangible assets (2,000 + 3,500 + 1,500) 7,000
Goodwill 4 5,497
Investment property (3,000 + 2,000 + 1,800) 6,800
Current assets:
Inventories (1,500 + 900 + 700 – 24) 3,076
Trade and other receivables (1,200 + 1,250 + 650) 3,100
Cash and cash equivalents (500 + 420 + 250) 1,170
Total Assets 49,453
Equity and reserves:
Share capital (5,000 + 100) 5,100
Share Premium 3 10
Retained earnings 10 24,426
Revaluation reserves 100
Non – controlling Interest 9 4,489
Non-current Liabilities:
Long-term loans (4,000 + 2,000 + 1,000) 7,000
Lease Obligation 6 3,462
Trade and other payables (1,700 + 600 + 500) 2,800
Taxation (880 + 420 + 560) 1,860
Deferred tax (20 + 80) 8 100
Lease Obligation 6 106
Total equity and liabilities 49,453
NOTES TO THE CONSOLIDATED STATEMENT OF FINANCIAL POSITION
MCL’s Shareholding in SCL
Shareholding acquired in SCL 70%
Non-controlling interest’s shareholding in SCL 30%
Total Shareholding 100%
MCL’s Effective Shareholding in MEL
Direct Shareholding acquired in MEL 45%
Indirect Shareholding acquired in MEL (70% × 30%) 21%
Total Effective Shareholding Acquired 66%
Non-controlling interest’s effective shareholding in MEL 34%
Note 2: Fair value of SCL and MEL’s Net Assets at Acquisition and Reporting Date
SCL MEL
At At At
At Reporting
Acquistion Reporting Acquisition
Date
Date Date Date
Shs 'million' Shs 'million' Shs 'million' Shs 'million'
Share capital 3,000 3,000 2,000 2,000
Retained earnings 700 8,550 250 4,340
Fair value Adjustment –
- - 100 100
Vehicles
Total 3,700 11,550 2,350 6,440
Post-Acquisition
Earnings = (11,550 – 3, 700) = 7,850 = (6,440 – 2,350) = 4,090

Consideration paid by MCL for the 70% shareholding in SCL
Shs 'million'
Cash (8,000 – 200) 7,800
Share for share exchange
- Share capital (1,000 shares × 100,000) 100
- Share Premium (1,000 shares × 10,000) 10
Total Purchase Consideration 7,910
Consideration paid by MCL for the 66% effective shareholding in MEL
Shs 'million'
Direct 45% share holding 2,000
Indirect 21% shareholding (70% × 1,500) 1,050
Total Purchase Consideration 3,050
Note 4: Goodwill arising on Acquisition of SCL and MEL

SCL MEL
Shs 'million' Shs 'million'
Purchase Consideration (Note 3) 7,910 3,050
Fair value on Non-controlling interest at 945 694
Acquisition date - (30% × 30,000 Shares
×105,000) / 34% × 20,000 shares ×
102,000)
Net Assets at Acquisition Date (Note 2) (3,700) (2,350)
Goodwill arising on Acquisition 5,155 1,394
Impairment Loss (15% × 5,155 / 20%× (773) (279)
1,394)
Carrying amount of Goodwill 4,382 1,115
Consolidated Goodwill = 4,382 + 1,115
= Shs. 5,497 million
Note 5: Intra group Sale of Good by MEL to MCL
Elimination of Unrealized Profits on closing inventory
Shs. ‘million’
Dr. Retained Earnings (25/125 × 300 × 40% × 66%) 16
Dr. Non-controlling Interest (25/125 × 300 × 40% × 34%) 8
Cr. Closing Inventory (25/125 × 300 × 40% × 100%) 24
Note 6: Recognition of the Leased Asset and Lease Obligation

• In accordance with IFRS 16: Leases and IAS 16: Property, Plant and Equipment, MCL
should recognize the leased asset (specialized equipment) and the Lease obligation at the
carrying amounts computed below;
• Initial cost of the Leased Asset
Shs. ‘million’
Present value of the lease payment on 1 July, 2021 3,668
Direct costs paid 100
Total Initial Cost 3,768
• Carrying Amount of the Leased Asset
Shs. ‘million’
Total Initial Cost (1 July 2021) 3,768
Accumulated Depreciation ( 3,768 / 20 years) (188)
Carrying Amount (30 June 2022) 3,580
• Carrying Amount of the Lease Obligation
Year ended 30 June 2022 2023
Shs. ‘million’ Shs. ‘million’
Obligation at the Beginning 3,668 3,568
Interest Expense (6% ) 220 214
Lease Payment (320) (320)
Obligation at the End 3,568 3,462
Non-current Lease Obligation as at 30 June 2022 = Shs. 3,462 million
Current Lease Obligation as at 30 June 2022 = (3,568 – 3,462) = Shs. 106 million
Note 7: Impairment of the Factory.

• According to IAS 36: Impairment of Assets, an asset or a cash generating unit is impaired
if its carrying amount exceeds the recoverable amount i.e. higher of fair value less cost to
sell and value in use. Therefore, SCL should recognize the amount computed below as the
impairment loss on its factory for the year ended 30 June 2022.
• Carrying Amount of the Factory = Shs 1,600 million
• Value in use of the Factory
Year ending 30 June Cash flows PVIF (12%) Present values
2023 400 0.893 357
2024 300 0.797 239
2025 250 0.712 178
2026 200 0.636 127
2027 212 (189 + 50 - 27) 0.567 120
Value in use 1,021
• Fair value less cost to sell of the Factory.
Shs. ‘million’
Selling Price 1,250
Cost to sell (20)
Fair value less cost to sell 1,230
• Impairment loss on the Factory
Shs. ‘million’
Carrying Amount 1,600
Recoverable amount 1,230
Impairment Loss 370
• The following journal entries should be made by SCL to recognize the impairment loss;
Shs. ‘million’
Dr. Retained Earnings 370
Cr. Property, Plant and Equipment 370
Note 8: Deferred tax Provisions.

• According to IAS 12: Income Taxes, a reporting entity should recognize a provision for
deferred tax in respect of temporary differences between the carrying amounts and tax bases
of its assets and liabilities.
• Therefore, MCL should recognize the amounts computed below as the deferred tax charge
and deferred tax liability in the statement of profit or loss and statement of financial position
as at 30 June 2022.
Carrying amount of the machinery Shs. ‘ million’
Cost (1 July, 2020) 500
Accumulated Depreciation (10% × 500 × 2 years) (100)
Carrying Amount (30 June 2022) 400
Revaluation gain 150
Revalued Amount (30 June 2022) 550
Tax base of the Asset
Cost (1 July, 2020) 500
Tax allowable Depreciation (20% × 500 × 2 years)) (200)
Tax base (30 June 2022) 300
Taxable Temporary Difference (550 – 300) 250
Deferred tax liability (30 June 2022) (40% × 250) 100
Deferred tax liability (30 June 2021) 20
Deferred tax charge for the year ended 30 June 2022 80
• The following Journal entries should be made by MCL to recognize the deferred tax charge
for the year;
Shs. ‘million’
Dr. Profit/ Loss (Retained Earnings) 80
Cr. Deferred tax liability 80
Note 9: Fair value of Non-Controlling Interest at Reporting Date
SCL MEL
Fair value on non-controlling interest at Acquisition date 945 694
(Note 4)
Share of Post-Acquisition Earnings
- SCL {30% × (7,850 – 370)} 2,244
- MEL (34% × 4,090) 1,391
Share of unrealized profits on closing inventory (Note 5) (8)
Share of Good will impairment
- SCL (30% × 773) (232)
- MEL (34% × 279) (95)
Share of cost of investment in MEL (30% × 1,500) (450)
Fair value on Non-controlling interest at Reporting date 2,507 1,982
Consolidated NCI = 2,507 + 1,982
= Shs. 4,489 million

Shs. ‘million’
All Retained Earnings of MCL 17,500
Share of Post-Acquisition Earnings
- SCL {70% × (7,850 – 370)} 5,236
- MEL (66% × 4,090) 2,699
Share of Good will impairment
- SCL (70% × 773) (541)
- MEL (66% × 279) (184)
Share of unrealized profits on closing inventory (Note 5) (16)
Pre-acquisition legal costs paid (Note 3) (200)
Direct costs paid at Inception of the Lease (Note 6) 100
Depreciation on the Leased Equipment (Note 6) (188)
Interest Expense on the Lease Obligation (Note 6) (220)
Lease payments expensed (Note 6) 320
Deferred tax charge (Note 8) (80)
Total 24,426
a) How the operators and venturers account for their interests in the respective financial
statements.
• IFRS 11: Joint Arrangements classifies joint arrangements as either joint operations or joint
ventures depending on the rights and obligations of the parties to the arrangement. A joint
operation is an arrangement whereby the parties that have joint control of the arrangement
have rights to the assets and obligations of the liabilities relating to the arrangement. Under
joint operations, joint arrangements are not structured through a separate entity.
• IFRS 11: Joint Arrangements requires a joint operator to recognise on a line by line basis
the following in relation to its interest in the joint operation;
✓ Its assets including its share of any jointly held assets.
✓ Its liabilities including its share of the jointly incurred liabilities.
✓ Its revenues from the sale of its share of the output arising from the joint operation.
✓ Its share of the revenue from the sale of the output by the joint operation.
✓ Its expenses including its share of any expenses incurred jointly.
• A joint venture is an arrangement whereby the parties that have joint control of the
arrangement have rights to the net assets of the arrangement. Under joint ventures, joint
arrangements are structured through a separate entity.
• IFRS 11: Joint Arrangements requires that joint ventures should be accounted for using the
equity method. The statement of financial position prepared by the joint venturer should
include:
✓ Interest of the joint operator in the joint venture at cost plus share of post-acquisition total
comprehensive income.
✓ Group share of the post-acquisition total comprehensive income in the group reserves.
• The statement of profit or loss and other comprehensive income prepared by the joint
venturer will include:
✓ The group’s share of the joint venture’s profit or loss.
✓ The group’s share of the joint venture’s other comprehensive income.
b) Conditions that indicate that an entity is a related party.

IAS 24: Related party disclosures defines a related party as a person or entity that is related to
the entity that is preparing its financial statements (the reporting entity).
An entity is related to a reporting entity if any of the following conditions applies:
• The entity is a subsidiary and fellow subsidiary of the reporting entity.
• One entity is an associate or joint venture of the reporting entity.
• Both entities are joint ventures of the same third party.
• One entity is a joint venture of a third entity and the other entity is an associate of the third
entity.
• The entity is a post-employment benefit plan established for the benefit of employees of
either the reporting entity or an entity related to the reporting entity.
• A person is a key management personnel of the reporting entity.
• A person is a close family member of the key management personnel of the reporting entity.
PIECEMEAL (STEP) ACQUISITIONS.

• These are business combinations in which a parent acquires a controlling interest in the
shares of the subsidiary as a result of successive share purchases. These business
combinations can take the following forms;
✓ A previously held interest say 10% with no significant influence (accounted for under
IFRS9) is increased to a controlling interest of 50% or more.
✓ A Previously held equity interest say 35% accounted for as an associate under IAS 28 is
increased to a controlling interest of 50% or more.
✓ A controlling interest in a subsidiary is increased say from 60% to 80%.
• Under IFRS 3, a business combination occurs when one entity obtains control over
another. Therefore, when a parent increases its equity holding in the investment or associate
to 50% or more, it’s a requirement that the investment or associate is treated as if it were
disposed of at fair value and re acquired at fair value. Thus the fair value of the previously
held interest is added to the fair value of any consideration paid for the additional
shareholding for purposes of computing good will at the date when the parent attains control
as illustrated below;
DETAILS AMOUNTS
Consideration transferred or paid for additional equity holding XX
Fair value of the previous equity interest in the associate or investment XX
Fair value of the net assets at acquisition date (XX)
Goodwill arising on acquisition XX
• Whenever the 50% boundary is crossed there is a need to revalue the previous investment,
determine goodwill arising on acquisition but if the 50% boundary is not crossed, an
adjustment will be made on the parent’s equity to be reported in other comprehensive
income.
• In case a parent’s interest in the subsidiary is increased from say 60% to 80%, goodwill
should not be recomputed and the increase is treated as a transaction between owners thus
an increase or decrease in the parent’s equity should be computed as illustrated below;
DETAILS AMOUNTS
Consideration transferred or paid XX
Fair value of the net assets transferred to NCI (XX)
Increase or Decrease in Parent’s equity XX
Question Five
Tanga Ltd operates in the telecommunication sector and has been in operation for the last five
years. The company has investments in Maga Ltd and Dango Ltd and prepares financial
statements to 30 June each year. The following draft statements of financial position relate to
the three companies as at 30 June, 2022:
Tanga Ltd Maga Ltd Dango Ltd
Assets:
Non-current assets: Shs ‘000’ Shs ‘000’ Shs ‘000’
Property, plant & equipment 50,400,000 11,728,000 7,000,000
Investment properties 20,056,200 10,405,000
Intangible assets 14,172,560 9,235,000
Investment in Maga Ltd 9,100,000
Investment in Dango Ltd 17,920,000
Other financial assets 2,045,000 - 1,620,000
113,693,760 31,368,000 8,620,000
Current assets:
Inventory 17,470,000 4,480,000 6,420,000
Trade & other receivables 15,940,000 20,400,000 3,380,000
Cash & short term-deposits 22,530,000 1,400,000 10,440,000
55,940,000 26,280,000 20,240,000
Total assets 169,633,760 57,648,000 28,860,000
Equity:
Share capital (Shs 50,000 each) 16,000,000 8,400,000 5,800,000
Share premium 9,400,000 1,800,000 1,400,000
Retained earnings 77,240,000 15,292,000 12,060,000
Revaluation reserve 1,325,000 - -
103,965,000 25,492,000 19,260,000
Loan & borrowings 20,640,000 10,640,000 820,000
Employee benefit liabilities 19,645,000 15,206,000 623,000
Provisions greater than 1 year 1,400,760 2,002,000 514,000
41,685,760 27,848,000 1,957,000
Trade & other payables 16,240,000 1,780,000 1,400,000
Provisions less than 1 year 7,743,000 2,528,000 6,243,000
23,983,000 4,308,000 7,643,000
Total equity & liabilities 169,633,760 57,648,000 28,860,000
1. Tanga Ltd purchased all of the ordinary share capital in Maga Ltd on 1 July, 2019 for a
cash consideration of Shs 9,100 million and agreed to pay a further Shs 10,500 million on
1 July, 2020. Tanga Ltd’s cost of capital stands at 5%. On that date, Maga Ltd had retained
earnings Shs 1,109 million and the fair value of Maga Ltd’s identifiable net assets was Shs
14,309 million. The difference between the fair value of the identifiable assets and
liabilities and their book value relates to a copyright included in Maga Ltd’s property, plant
& equipment. It had a remaining useful life of 10 years at that date. This has not been
adjusted in the carrying amount of the property, plant & equipment by 30 June, 2022.
2. Tanga Ltd acquired 30% of the ordinary share capital of Dango Ltd on 1 July, 2019 for a
cash consideration of Shs 1,080 million and exercised significant influence over the
financial and operating policy decisions of Dango Ltd. At this time, Dango Ltd had retained
earnings Shs 700 million and the fair value of Dango Ltd’s identifiable net assets at that
date was Shs 10,900 million. The difference between the fair value of the identifiable assets
and liabilities of Dango Ltd and their book value relates to Dango Ltd’s brands. The brands
were estimated to have an average remaining useful life of 5 years.
3. On 1 October, 2021 Tanga Ltd acquired a further 45% of the ordinary shares of Dango Ltd
for a cash consideration of Shs 16,840 million and gained control of the company. The fair
value of its identifiable assets and liabilities were the same as their book value. Dango
Ltd’s profits for the year ended 30 June, 2022 were Shs 3,650 million and profits accrue
evenly throughout the year. It is the group’s policy to value the non-controlling interest at
fair value. The market price of a share of Shs 45,000 represents the fair value of the shares
held by the non-controlling interest.
4. All goodwill arising on acquisitions has been tested for impairment. An impairment review
was carried out on 30 June, 2022 and it was agreed that the goodwill on acquisition of Maga
Ltd and Dango Ltd be impaired by 15% and 20% respectively.
5. During the year ended 30 June, 2022 Maga Ltd sold goods to Tanga Ltd for Shs 60 million
at a mark-up of 25%. All these goods were unsold to third parties at the reporting date.
Maga Ltd also sold goods to Dango Ltd during the year at a profit of Shs 6 million. One
third of these goods were still in the inventory of Dango Ltd as at 30 June, 2022.
6. Tanga Ltd secured a license to operate 4G services. Under the terms of the agreement, the
company was to operate 4G mobile phone services for a period of 10 years from the
commencement of the license on 1 July, 2021. During the period, Tanga Ltd can sell to
another operator who meets the criteria put in place by the Government and agrees to equal
sharing of profits with it. Tanga Ltd paid Shs 687.2 million for the license on 1 July, 2021.
However, due to lower than expected uptake of 4G mobile phone services, the market value
of the license at the yearend on 30 June, 2022 according to Crane Professional Services
was Shs 760 million though there was no active market for the 4G services.
7. On 30 June, 2022 Tanga Ltd’s building that was acquired 1 July, 2012 at a cost of Shs 350
million, had a recoverable amount of 185 million. Depreciation is chargeable on a straight-
line basis over a 35 year period. The tax base and carrying amounts of the non-current
assets before the impairment write down were identical. The impairment of the non-current
assets is not allowable for tax purposes. Tanga Ltd has not made any impairment or
deferred tax adjustment for the above and expects to make profits for the foreseeable future
and the tax rate is 30%.
8. Dango Ltd had purchased goods on credit from Weshire Ltd, a foreign supplier for United
States dollars (USD) 80,000 on 28 April, 2021. On the same date, Dango Ltd sold the
goods to a foreign customer for USD 100,000. On 30 June, 2022 payment for the goods
was received in USD but the amount owing to Weshire Ltd was still outstanding. Exchange
rates were as follows:
Date USD 1 = Shs
28 April, 2021 3,650
1 June, 2021 3,640
30 June, 2022 3,620
Average for the year 3,625
Required:
a) Demonstrate, with suitable computations, how the additional acquisition of 45% of the
ordinary shares in Dango Ltd by Tanga Ltd should be dealt with in the group statement of
financial position as at 30 June, 2022. (5 marks)
b) Prepare a memo to the directors of Tanga Ltd, advising them on the required accounting
treatment in regard to issues identified in notes 5, 6, 7 and 8 above and their impact on the
consolidated financial statements of Tanga Ltd for the year ended 30 June, 2022.
(10 marks)
c) Prepare a consolidated statement of financial position of the Tanga Ltd group as at 30 June,
2022. Show all the workings. (35 marks)
Solution
a) How the additional acquisition of 45% of the ordinary shares in Dango Ltd by Tanga
Ltd should be dealt with in the group statement of financial position as at 30 June,
2022.
• Under the revised IFRS 3: Business Combinations, a business combination occurs only
when one entity obtains control over another, which is generally when 50% or more has
been acquired. The acquisition of additional 45% shareholding in Dango Ltd by Tanga Ltd
has the following implications.
✓ Tanga Ltd gained control over Dango Ltd on 01 October 2021 with a controlling interest
of 75% (30% + 45%). Non-controlling interest’s shareholding in Dango Ltd is 25%.
✓ Since control was gained by Tanga Ltd over Dango Ltd, there is a need to determine the
goodwill arising on acquisition date. The Purchase consideration to be used in determining
goodwill will be the fair value of the initial 30% shareholding as at 01 October 2021 and
the consideration paid for the additional 45% shareholding which is determined as
illustrated below;
Shs ‘000’
Fair value of initial 30% shareholding as at 01 October 2021 (30% x 116,000 1,566,000
shares x 45,000)
Consideration paid for the additional 45% shareholding 16,840,000
Total Purchase Consideration 18,406,000
b) Memo to the Directors of Tanga Ltd.

To: Directors Tanga Ltd
Date: Exam Date
Subject: Accounting Treatment in regard to Notes 5, 6, 7, and 8 and their impact on the
Consolidated Financial Statements of Tanga Ltd for the year ended 30 June 2022.
This memo is meant to highlight the accounting treatment in regard to notes 5, 6, 7, and 8 and
their impact on the consolidated financial statements of Tanga ltd for the year ended 30 June
2018.
Note 5: Intragroup sale of goods.
• In accordance with IFRS 10: Consolidated Financial Statements, Tanga Ltd should
eliminate the unrealized profits on closing inventory sold by Maga Ltd sold goods to Tanga
Ltd and Dango Ltd from the consolidated financial statements using the following Journal
entries.
• Elimination of Unrealized profits on goods sold by Maga Ltd to Tanga Ltd.
Shs. ‘000’
Dr. Retained Earnings (25/125 × 60,000) 12,000
Cr. Closing Inventory (25/125 × 60,000) 12,000
• Elimination of Unrealized profits on goods sold by Maga Ltd to Dango Ltd.
Shs. ‘000’
Dr. Retained Earnings (6,000 × 1/3) 2,000
Cr. Closing Inventory (6,000 × 1/3) 2,000
Note 6: License secured to operate 4G services.

• In accordance with IAS 38: Intangible assets, Tanga Ltd should recognise the License
secured to operate 4G services as an intangible asset in its financial statements. Initially the
license will be recognized at cost and subsequently accounted for using the cost model.
• Therefore, the amount computed below should be recognized as the carrying amount of the
license in the statement of financial position as at 30 June 2022.
Shs. ‘000’
Cost (1 July, 2021) 687,200
Accumulated Amortization ( 687,200 / 10 years) (68,720)
• Since the recoverable amount of the license as at 30 June 2022 of Shs. Shs 760 million
exceeds the carrying amount of Shs. 618.48 million, the license is not impaired. The license
cannot be revalued upwards to Shs 760 million because IAS 38 requires an active market
to exist for revaluation of intangible assets.
Note 7: Impairment of the Building and Deferred tax Provisions.

• According to IAS 36: Impairment of Assets, an asset or cash generating unit is impaired if
its carrying amount exceeds its recoverable amount. Any impairment loss arising on an
asset or cash generating unit should be recognized in the profit or loss.
• Therefore, Tanga Ltd should recognise the amount computed below as the impairment loss
on its building for the year ended 30 June 2022.
Shs. ‘000’
Cost (1 July, 2012) 350,000
Accumulated Depreciation (350,000 / 35 years × 10 years) (100,000)
Recoverable amount (30 June 2022) 185,000
Impairment Loss 65,000
• The following journal entries should be made to recognise the impairment loss;
Shs. ‘000’
Dr. Profit/ Loss 65,000
Cr. Property, Plant and Equipment 65,000
• According to IAS 12: Income Taxes, a reporting entity should recognise a provision for
deferred tax in respect of temporary difference between the carrying amounts of its assets
and liabilities and their tax bases. Therefore, Tanga Ltd should recognise the amount
computed below as the deferred tax asset on its buildings as at 30 June 2022.
Shs. ‘000’
Carrying Amount of the Building 185,000
Tax Base of the Building 250,000
Deductible Temporary Difference 65,000
Deferred Tax Asset (30% × 65,000) 19,500
• The following journal entries should be made to recognise the deferred tax asset;
Shs. ‘000’
Dr. Deferred tax asset 19,500
Cr. Profit/Loss 19,500
Note 8: Foreign Currency Transactions

• According to IAS 21: The effects of changes in foreign exchange rates, a reporting entity
should initially recognise foreign currency transactions using the spot rate. Subsequently,
monetary items such as payables and receivables should be recognized using the closing
rate. Any Foreign exchange gains or loss arising on restatement of monetary items at
closing rate should be recognized in profit/loss.
• Therefore, Dango Ltd should recognise the amounts computed blow as the Foreign
exchange gains or losses on its payable and receivables for the year ended 30 June 2022.
• Foreign exchange Gain on Payables
Shs. ‘000’
Payables (28 April, 2021) ($80,000 × 3,650) 292,000
Payables (30 June, 2022) ($80,000 × 3,620) 289,600
Un realized Foreign Exchange Gain (292,000 – 289,600) 2,400
• The following Journal entries should be made to recognise the foreign exchange gain on
payables:
Shs. ‘000’
Dr. Profit/ loss 2,400
Cr. Payables 2,400
• Foreign exchange Loss on Receivables
Shs. ‘000’
Payables (28 April, 2021) ($100,000× 3,650) 365,000
Payables (30 June, 2022) ($100,000× 3,620) 362,000
Realized Foreign Exchange Loss (365,000 – 362,000) 3,000
• The following Journal entries should be made to recognise the foreign exchange loss on
receivables;
Shs. ‘000’
Dr. Profit/ loss 3,000
Dr. Cash/ Bank 362,000
Cr. Receivables 365,000
c) Consolidated statement of financial position of the Tanga Ltd group as at 30 June,

2022.
TANGA LTD’s CONSOLIDATED STATEMENT OF FINANCIAL POSITION AS AT
30 JUNE 2022.
Note Shs. ‘000’
Assets;
Non-Current Assets
Property, Plant and Equipment (50,400,000 + 11,728,000 + 71,163,000
7,000,000 + 2,100,000 – 65,000)
Investment properties (20,056,200 + 10,405,000 + 0) 30,461,200
Intangible assets (14,172,560 +9,235,000 + 1,200,000 – 68,720) 24,538,840
Other financial assets (2,045,000 + 1,620,000) 3,665,000
Goodwill 4 5,303,150
Deferred Tax Asset 19,500
Current assets:
Inventory (17,470,000 + 4,480,000 + 6,420,000 - 2,000 – 12,000) 28,356,000
Trade and other receivables (15,940,000 + 20,400,000 + 3,380,000 – 39,717,000
3,000)
Cash and short-term deposits (22,530,000 + 1,400,000 + 10,440,000) 34,370,000
Total Assets 237,593,690
Equity:
Share capital 16,000,000
Share premium 9,400,000
Revaluation reserve 1,325,000
Group retained earnings 7 91,146,380
Non-controlling Interest 5 1,799,950
Loan and borrowings (20,640,000 + 10,640,000 + 820,000) 32,100,000
Employee benefit liabilities (19,645,000 + 15,206,000 + 623,000) 35,474,000
Provisions greater than 1 year (1,400,760 + 2,002,000 + 514,000) 3,916,760
Deferred consideration 3 10,500,000
Trade & other payables (16,240,000 + 1,780,000 + 1,400,000 – 19,417,600
2,400)
Provisions less than 1 year (7,743,000 + 2,528,000 + 6,243,000) 16,514,000
Total equity & liabilities 237,593,690
• Tanga Ltd’s Shareholding in Maga Ltd = 100%
• Tanga Ltd’s Shareholding in Dango Ltd
Initial shareholding acquired on 1 July, 2019 30%
Additional shareholding acquired on 1 October, 2021 45%
Total shareholding acquired 75%
Non-controlling interest’s shareholding 25%
Total shareholding 100%
Note 2: Fair value of Maga Ltd’s and Dango Ltd’s Net Assets at Acquisition and
Reporting Date
Maga Ltd Dango Ltd
At At At Acquisition At
Acquisition Reporting At Acquisition Date Reporting
Date Date Date (01/07/2019) (01/10/2021) Date
Shs. '000' Shs. '000' Shs. '000' Shs. '000' Shs. '000'
Share capital 8,400,000 8,400,000 5,800,000 5,800,000 5,800,000
Share premium 1,800,000 1,800,000 1,400,000 1,400,000 1,400,000
Retained
earnings 1,109,000 15,292,000 700,000 9,322,500 12,060,000
Fair value
Adjustment 3,000,000 2,100,000 3,000,000 1,650,000 1,200,000
Total 14,309,000 27,592,000 10,900,000 18,172,500 20,460,000
Post-
Acquisition
Earnings 13,283,000 7,272,500 2,287,500
• Consideration paid by Tanga Ltd’s for the 100% shareholding in Maga Ltd.
Shs. '000'
Cash 9,100,000
Deferred Consideration {10,500,000 × 1/ (1 + 0.05) ^1} 10,000,000
• Consideration paid by Tanga Ltd’s for the 75% shareholding in Dango Ltd.
Shs ‘000’
Fair value of initial 30% shareholding as at 01 October 2021 (30% x 116,000 1,566,000
shares x 45,000)
Consideration paid for the additional 45% shareholding 16,840,000
Note 4: Goodwill arising on Acquisition of Maga Ltd and Dango Ltd
Maga Ltd Dango Ltd
Shs. '000' Shs. '000'
Purchase Consideration (Note 3) 19,100,000 18,406,000
Fair value of NCI at Acquisition Date (25% x 116,000
shares x 45,000) 0 1,305,000
Fair value of Net Assets at acquisition Date (14,309,000) (18,172,500)
Good will Arising on Acquisition Date 4,791,000 1,538,500
Impairment Loss (718,650) (307,700)
Carrying Amount of Good will 4,072,350 1,230,800
Consolidated Good will 5,303,150
Note 5: Fair value of Non-controlling Interest in Dango Ltd at Reporting Date
Shs. '000'
Fair value of NCI at Acquisition Date (25% x 116,000 shares x 45,000) 1,305,000
Share of Post-acquisition Earnings (25% × 2,287,500) 571,875
Share of Goodwill impairment (25% × 307,700) (76,925)
Fair value of Non-controlling Interest at Reporting Date 1,799,950
Note 6: Loss on De recognition of the Initial 30% shareholding in Dango Ltd
Shs. '000'
Fair value of initial 30% shareholding as at 01 October 2021 (30% x 1,566,000
116,000 shares x 45,000)
Carrying Amount of the 30% Investment as at 01 October 2021 (3,261,750)
(1,080,000 + 30% × 7,272,500) – Note 2
Loss on De recognition (1,695,750)

Shs ‘000’
All Tanga Ltd’s Retained earnings 77,240,000
Share of post-acquisition earnings: 13,283,000
• Maga Ltd (100% x 13,283,000) 2,181,750
• Dango Ltd: 1,715,625
- (30% × 7,272,500)
- (75% × 2,287,500)
Unrealized profits on closing inventory - Maga Ltd (12,000 + 2,000) (14,000)
Amortization of the License (68,720)
Impairment Loss on the Building (65,000)
Deferred Tax Credit 19,500
Foreign exchange Gain on Payables 2,400
Foreign exchange Loss on Receivables (3,000)
Interest on Deferred Consideration (10,500,000 - 10,000,000) (500,000)
Impairment loss on Goodwill (Note 4)
- Maga Ltd (100% × 718,650) (718,650)
- Dango Ltd (75% × 307,700) (230,775)
Loss on de-recognition of 30% interest in Dango Ltd (Note 6) (1,695,750)
Total 91,146,380
DISPOSAL OF EQUITY INTEREST BY THE PARENT.

• In case a parent makes a full disposal of a subsidiary during the reporting period, there will
be no NCI and no consolidation as there is no subsidiary at the date the statement of
financial position is prepared.
• In case of a partial disposal of the subsidiary during the reporting period and the parent
loses control for instance to an associate, no consolidation will be done, the remaining
investment should be recognised at its fair value at the disposal date and then equity
accounting is applied using the fair value as the new cost on which post acquisition earnings
are added to derive the value of the investment at the reporting date.
loses control for instance to an investment, no consolidation will be done, the remaining
investment should be recognised at its fair value at the disposal date and then investment
in equity instruments is treated as financial instrument under IFRS 9.
retains control, the subsidiary will be consolidated, NCI in the statement of financial
position is based on the equity holding at the end of the reporting period, the increase in
NCI will be used to adjust the parent’s equity but goodwill on acquisition remains
unchanged in the consolidated statement of financial position.
Question Six
Rock Ltd operates in the manufacturing sector. The draft statements of financial position of the
group companies are as follows at 31 May 2022:
Rock Ltd Mines Ltd
Shs billion Shs billion
Assets:
Non-current assets
Property, plant and equipment 350 200
Investments in subsidiaries:
Mines Ltd 250
Build Ltd 200
800 200
Current assets 350 100
Total assets 1,150 300
Equity and liabilities:
Share capital 400 75
Retained earnings 400 125
Total equity 800 200
Non-current liabilities 100 50
Current liabilities 250 50
Total equity and liabilities 1,150 300
The following information is relevant to the preparation of the group financial statements:
1. On 1 February 2021, Rock Ltd acquired 60% of the equity interest of Mines Ltd. The
purchase consideration was cash of Shs 200 billion. The fair value of the identifiable net
assets was Shs 250 billion. The excess of the fair value of the net assets is due to an increase
in the value of non-depreciable land.
2. Rock Ltd wishes to use the "full goodwill" method for all acquisitions. The fair value of
the non-controlling interest in Mines Ltd was Shs 125 billion on 1 February 2021 and the
retained earnings of Mines Ltd on 1 February 2021 were Shs 55 billion.
3. Rock Ltd acquired a further 20% interest from the non-controlling interests in Mines Ltd
on 31 May 2022 for a cash consideration of Shs 50 billion.
4. On 1 February 2021, Rock Ltd acquired 100% of the equity interest in Build Ltd, for a cash
consideration of Shs 400 billion. Build Ltd's identifiable net assets were fair valued at Shs
380 billion.
5. On 31 May 2022, Rock Ltd disposed of 60% of the equity of Build Ltd when the identifiable
net assets were Shs 350 billion. The sale proceeds were Shs 200 billion and the remaining
equity interest was fair valued at Shs 134 billion. Rock Ltd could still exert significant
influence after the disposal of the interest. The only accounting entry made in Rock Ltd's
financial statements was to increase cash and reduce the cost of investment in Build Ltd.
Required:
(a) Calculate the gain or loss arising on the disposal of the equity interest in Build Ltd.
(5 marks)
(b) Prepare a consolidated statement of financial position of the Rock Group as at 31 May 2022
in accordance with International Financial Reporting Standards. (10 marks)
Solution
a) Gain or loss arising on the disposal of the equity interest in Build Ltd.
Shs. ‘billion’ Shs. ‘billion’
Disposal Proceeds 200
Fair value of Remaining Equity Interest 134
Net Assets Derecognised;
Net Assets at Disposal Date 350
Goodwill arising on Acquisition of Build Ltd (400 – 380) 20 (370)
Loss on Disposal (36)
b) Consolidated statement of financial position of the Rock Group

ROCK LTD’S CONSOLIDATED STATEMENT OF FINANCIAL POSITION AS AT
31 MAY 2022
Assets: Note Shs. ‘billion’
Non-current assets
Property, plant and equipment (350 + 200 +120) 670
Investment in Associate (Note 7) 134
Goodwill 4 75
Current assets (350 + 100) 450
Total Assets 1,329
Equity and liabilities:
Share capital 400
Non-controlling interest 6 75
Non-current liabilities (100 + 50) 150
Current liabilities (250 + 50) 300
Total Equity and liabilities 1,329

Rock Ltd’s Shareholding in Build Ltd
Initial shareholding (1 February 2021) 100%
Shareholding disposed of (31 May 2022) (60%)
Remaining shareholding (31 May 2022) 40%
Rock Ltd’s Shareholding in Mines Ltd
Initial shareholding (1 February 2021) 60%
Additional shareholding (31 May 2022) 20%
Total shareholding acquired (31 May 2022) 80%
Non-controlling interest’s shareholding 20%
Total shareholding 100%
Note 2: Fair value of Mines Ltd’s Net Assets at Acquisition and Reporting Date
Acquisition Date Reporting Date
Shs. ‘billion’ Shs. ‘billion’
Share capital 75 75
Fair value Adjustment - Land 120 120
Total 250 320
Post-Acquisition Earnings = 320 – 250
= Shs. 70 billion
Consideration paid by Rock Ltd for the 60% shareholding in Build Ltd = Shs.200 billion
Note 4: Goodwill Arising on Acquisition of Mines Ltd

Shs. ‘billion’
Purchase Consideration 200
Fair value of the non-controlling interest at acquisition date 125
Fair value of net assets at acquisition date (Note 2) (250)
Goodwill Arising on Acquisition 75
Note 5: Fair value of Non-controlling interest at Reporting Date

Shs. ‘billion’
Fair value of the non-controlling interest at acquisition date 125
Share of post-acquisition earnings (20% × 70) 14
Net assets transferred to the parent (20% × 320) (64)
Fair value of non-controlling interest at Reporting Date 75
Note 6: Increase in Equity
Shs. ‘billion’
Consideration paid for additional 20% shareholding (50)
Net assets transferred from NCI (20% × 320) 64
Increase in Equity 14
Note 7: Investment in Associate (Build Ltd)

Shs. ‘billion’
Initial cost of investment 134
Share of post-acquisition earnings {40% × (350 – 350)} 0
Investment in Associate 134

Shs. ‘billion’
All retained earnings of Rock Ltd 400
Share of post-acquisition earnings
- Mines Ltd (80% × 70) 56
- Build Ltd {40% × (350 – 350)} 0
Increase in equity (Note 7) 14
Loss on disposal of Build Ltd (36)
Decrease in Build Ltd’s net assets (380 – 350) (30)
Consolidated retained earnings 404
PREPARATION OF A CONSOLIDATED STATEMENT OF PROFIT OR LOSS AND

OTHER COMPREHENSIVE INCOME
The following procedures should be followed by a parent to prepare a consolidated statement
of profit or loss and other comprehensive income:
(a) Establish the Group structure and acquisition/ disposal date. This enables a parent to
ascertain its proportion of equity interest in the subsidiaries whose information needs to be
consolidated. Only subsidiaries are consolidated but associates are accounted for using the
equity method under IAS 28. It’s also very crucial to determine the date when the parent
acquired or disposed of its equity holding in the subsidiary because mid-year acquisitions
and disposals of a subsidiary require time apportionment of a subsidiary’s incomes and
expenses bearing in mind that only post acquisition and predisposal revenue, expenses and
profits should be consolidated.
(b) Add the incomes and expenses of the parent and its subsidiaries while applying time
apportionment basing on the acquisition or disposal date.
(c) In case of intra group sales between the parent and the subsidiaries, the total value of the
sold goods should be deducted from sales and cost of sales. The unrealised profit on closing
inventory should be used to increase cost of sales so that the overstated gross profit as a
result of recognising these profits is adjusted.
(d) If a parent has an associate, determine its share of profit or loss from this associate which
should be recognised in the statement of profit or loss. If the parent didn’t have significant
influence over the associate during the whole financial year, its share of profits from the
associate should be time apportioned only to cover the period when the parent had
significant influence over the associate. The income tax that also accrues in respect of the
parent’s share of profit from the associate should be recognised.
(e) In case a parent made a partial or full disposal of a subsidiary and lost control over the
subsidiary, a gain or loss on disposal should be determined and recognised in the statement
of profit or loss as illustrated below;
DETAILS AMOUNTS AMOUNTS
Fair value of the consideration received XX
Fair value of any remaining equity interest XX
Assets Derecognised
Carrying amount of the Subsidiary’s Net assets at disposal XX
date
Good will recognised in respect of the subsidiary XX
NCI’s value recognised up to disposal date (XX) (XX)
Gains/ losses previously recognised in OCI XX / (XX)
Gain or Loss on Disposal XX / (XX)
• In case of full disposal of the subsidiary, the parent should consolidate the results of the
subsidiary and non-controlling interest up to the date of disposal and also show the profit
or loss on disposal.
• In case of partial disposal of a subsidiary to associate, the parent should treat the
undertaking as a subsidiary up to the disposal date, recognise the profit/ loss on disposal
and treat it as an associate thereafter.
• In case of partial disposal of a subsidiary to an investment, the parent should treat the
undertaking as a subsidiary up to the disposal date, recognise the profit/ loss on disposal
and recognise only the dividend from the investment thereafter.
(f) In case a parent made a partial disposal of the subsidiary and retained control, the subsidiary
should be consolidated in full for the whole reporting period, the non-controlling interest
in the statement of profit or loss will be based on percentage before and after disposal i.e.
time apportion, there will be no gain or loss on disposal recognised but an increase or
decrease in equity will be computed and recognised in OCI as illustrated below;
DETAILS AMOUNTS
Fair value of the consideration received XX
Fair value of the net assets transferred to (XX)
NCI
Increase or Decrease in Parent’s equity XX
(g) Determine NCI and Parent’s share of profits for the year and total comprehensive income
basing on the parent’s equity holding in its subsidiaries.
Question Seven
Chandara Holdings Ltd (Chandara), a listed company, is a major manufacturer of laundry and
toiletry products in the country. The following statements of profit or loss for the year ended
30 June, 2022 relate to Chandara, Agara Ltd (Agara) and Bagara Ltd (Bagara):
Chandara Agara Bagara
Shs ‘million’ Shs ‘million’ Shs ‘million’
Revenue 156,700 90,000 54,000
Cost of sales (109,000) (72,000) (45,000)
Gross profit 47,700 18,000 9,000
Other income 17,000 6,000 3,000
Distribution costs (25,000) (5,400) (3,000)
Administrative expenses (8,000) (6,000) (2,400)
Other expenses (2,000) (1,500) (1,800)
Finance costs (6,000) (4,500) (900)
Profit before tax 23,700 6,600 3,900
Income tax (5,600) (2,400) (300)
Profit for the year 18,100 4,200 3,600
1. On 1 July, 2021 Chandara acquired 20% of the shares for Shs 2,700 million. Agara supplies
materials which are vital for the manufacture of laundry and toiletry products. The market
price per share of Agara before the date of acquisition was Shs 300,000.
2. On 1 January, 2022 Chandara acquired an additional 45% of the shares in Agara and paid
Shs 6,500 million. The market price Agara’s shares before the date of acquisition were Shs
310,000 per share.
3. On 1 October, 2021 Chandara acquired 70% of the shares of Bagara for Shs 9.6 billion.
The market price of Baraga’s shares before the date of acquisition was Shs 320,000 per
share.
4. Government of Uganda, in appreciation of efforts by Agara to use environmentally friendly
production technologies, contributed 70% of the cost of purchase of a production unit
which was imported from Germany in April 2022. This unit cost Agara Shs 2.4 billion.
Agara recognised the entire grant in profit or loss as other comprehensive income for the
year ended 30 June, 2022. The expected useful life of the unit is 20 years with nil residual
value. The group uses the income approach to treat such contributions.
5. Agara sold equipment to Chandara for Shs 1.8 billion on 1 January, 2022. This equipment
cost Agara 2 billion on 1 July, 2020. The group depreciates such equipment at 20% on
reducing balance basis. Each company charged depreciation on the equipment based on the
time period they owned the equipment during the year. Any gain or loss on disposal is
recognised in other income while depreciation is charged to administrative expenses.
6. Bagara sells electronic goods with warranty which guarantees repair of the goods should
they develop defects within one year. The company’s past experience and future projections
reveal the following:
Number of units sold Defects Cost of repairs incurred
Shs ‘million’
405 None –
35 Moderate 15
45 Minor 20
15 Major 17
Any effect of the warranty is to be recognised in administrative expenses.
7. The equity of the three companies as at 30 June, 2022 was as follows.

Chandara Agara Bagara
Shs ‘million’ Shs ‘million’ Shs ‘million’
Share capital Shs 100,000 each 10,000 5,000 3,000
Retained earnings 19,870 7,895 6,250
29,870 12,895 9,250
The equity of the companies represented the fair values of their net assets through the year.
8. Chandara values non-controlling interest at fair value.
9. The group carried out impairment tests on goodwill and confirmed losses of 20% and 10%
of the goodwill from Agara and Bagara respectively, which is to be recognised in
administrative expenses.
Required:
(a) Prepare Chandara group’s consolidated statement of profit or loss for the year ended 30
June, 2022. (Show all your workings). (40 marks)
(b) In a bid to improve its performance, the Board of Directors of Chandara decided to enter
into a joint operation with Aguu Ltd to exploit their respective competences in production
and marketing of a unique product, ‘Cleanex’ and a joint venture with Kampala Ltd to enter
a market which hitherto had been difficult to access. The Board has asked the head of
finance to advise them on the relevant accounting treatment with regard to the group and
Chandara.
Required:
Prepare to the board discussing the accounting treatment of the interests in the joint
arrangements in Chandara’s separate financial statements and group consolidated financial
statements. (10 marks)
Solution
(a) Consolidated Statement of Profit or Loss for the year ended 30 June, 2022.
CHANDARA HOLDINGS LTD’S CONSOLIDATED STATEMENT OF PROFIT OR
LOSS FOR THE YEAR ENDED 30 JUNE, 2022.
Note Shs.
‘million’
Revenue (156,700 + 90,000 × 6/12 + 54,000 × 9/12) 242,200
Cost of sales (109,000 + 72,000 × 6/12 + 45,000 × 9/12) (178,750)
Gross profit 63,450
Other income (17,000 + 4,341 × 6/12 + 3,000 × 9/12 - 360 + 254.1 3&8
+ 145.9) 21,460.5
Distribution costs (25,000 + 5,400 × 6/12 + 3,000 × 9/12) (29,950)
Administrative expenses (8,000 + 6,000 × 6/12 + 2,403.36 × 9/12 + 3 & 7
680.10 + 592.75 - 20) (14,055.37)
Other expenses (2,000 + 1,500 × 6/12 +1,800 × 9/12) (4,100)
Finance costs (6,000 + 4,500 × 6/12 + 900 × 9/12) (8,925)
Profit before tax 27,880.13
Income tax (5,600 +2,400 × 6/12 + 300 × 9/12) (7,025)
Profit for the year 20,855.13
Profit Attributable to;
Parent 20,143.07
Non-controlling Interest 712.06
NOTES TO THE CONSOLIDATED STATEMENT OF PROFIT OR LOSS

Chandara Ltd’s shareholding in Agara Ltd
Initial shareholding (1 July, 2021) 20%
Additional shareholding (1 January, 2022) 45%
Total shareholding acquired 65%
Non-controlling interest’s share holding 35%
Chandara Ltd’s shareholding in Bagara Ltd
Shareholding acquired (1 October, 2021) 70%
Non-controlling interest’s share holding 30%
Note 2: Recognition of the Government Grant
• According to IAS 20: Accounting for government grants and disclosure of government
assistance, a reporting entity that adopts the income approach should initially recognize
government grants as deferred income. Subsequently, revenue is recognized in respect of
the government grant received basing on the estimated useful life of the acquired asset.
• Therefore, Agara should not have recognized the government grant received in Profit or
loss but rather as deferred income.
• The following journal entries should be made to recognize the grant received as deferred
income.
Shs. ‘million’
Dr. Other income (70% ×2,400) 1,680
Cr. Deferred income (70% ×2,400) 1,680
• Agara Ltd should recognize the amounts computed below as the revenue earned from the
government grant for the year ended 30 June 2022;
Shs. ‘million’
Dr. Deferred income (1,680 / 20 years × 3/12) 21
Cr. Other income (1,680 / 20 years × 3/12) 21
Agara Ltd’s adjusted other income
Shs. ‘million’
As per the question 6,000
De recognition of the government grant (1,680)
Recognition of grant revenue 21
Adjusted other income 4,341
Agara Ltd’s adjusted profit for the year
Shs. ‘million’
De recognition of the government grant (1,680)
Recognition of grant revenue 21
Adjusted profit for the year 2,541
Note 3: Intra group sale of plant

• In accordance with IFRS 10: consolidated financial statements, Chandara Ltd should
derecognize the unrealized profits and excess depreciation charged on transferred plant
using the following journal entries
• Unrealized profits on transferred plant

Carrying Amount of Plant Shs. ‘million’
Cost (1 July, 2020) 2,000
Depreciation (20% ×2,000) (400)
Depreciation (20%×1,600 ×6/12) (160)
Carrying Amount (01 January 2022) 1,440
Disposal Proceeds 1,800
Unrealized profits 360
• The following journal entries should be made to de recognize the unrealized profits on
transferred plant;
Shs. ‘million’
Dr. Retained Earnings 360
Cr. Property, Plant and Equipment 360
• Excess Depreciation on transferred plant
Shs. ‘million’
Depreciation based on initial carrying amount (20%×1,600 ×6/12) 160
Depreciation based on new carrying amount (20%×1,800 ×6/12) 180
Excess Depreciation 20
• The following journal entries should be made to de recognize the excess depreciation
charged on transferred plant;
Shs. ‘million’
Dr. Property, Plant and Equipment 20
Cr. Retained Earnings 20
Note 4: Recognition of the Provision for Repair costs
• According to IAS 37: provisions, contingent assets and contingent liabilities, a provision is
recognized by a reporting when and only when;
✓ An outflow of future economic benefits is probable.
✓ The amount of the obligation can be estimated reliably.
• Therefore, Bagara Ltd should recognize a provision for repair costs since there is a legal
obligation to repair the goods sold in case they develop defects within one year. The amount
to be recognized as the provision for repair costs is computed as illustrated below;
Number of Cost of repairs incurred Estimated Repair costs
Defects Proportion
units sold Shs. ‘million’ Shs. ‘million’
None 405 0.81 0 0
Moderate 35 0.07 15 1.05
Minor 45 0.09 20 1.8

Major 15 0.03 17 0.51
Total 500 1.00 52 3.36
The following journal entries should be made to recognize the provision for repair costs;
Shs. ‘million’
Dr. Repair costs (Administrative expenses) 3.36
Cr. Provision for repair costs 3.36
Bagara Ltd’s adjusted Administrative expenses.

Shs. ‘million’
Repair costs 3.36
Adjusted Administrative expenses 2,403.36
Bagara Ltd’s adjusted profit for the year
Shs. ‘million’
Repair costs (3.36)
Adjusted Administrative expenses 3,596.64
Note 5: Fair value on Agara Ltd’s and Bagara Ltd’s Net Assets at Acquisition and
Reporting Date
Agara Ltd Bagara Ltd
Acquisition Acquisition Reporting Acquisition Reporting
Date Date Date Date Date
(01/07/2021) (01/01/2022) (30/06/2022) (01/10/2021) (30/06/2022)
Shs ‘million’ Shs ‘million’ Shs ‘million’ Shs ‘million’ Shs ‘million’
Share capital 5,000 5,000 5,000 3,000 3,000
Retained
earnings 5,354 6,624.5 7,895 3,552.52 6,250
Total 10,354 11,624.5 12,895 6,552.52 9,250
Post-acquisition
Earnings 1,270.5 1,270.50 2,697.48

Consideration paid by Chandara Ltd for the 65% shareholding in Agara Ltd
Shs ‘million’
Fair value of initial 20% shareholding ( 20% × 50,000 shares × 3,100
310,000)
Consideration paid for additional 45% shareholding 6,500
Total Purchase consideration 9,600
Consideration paid by Chandara Ltd for the 70% shareholding in Bagara Ltd = Shs. 9,600
million
Note 7: Good will arising on acquisition of Agara Ltd and Bagara Ltd
Shs ‘million’ Shs ‘million’
Purchase Consideration 9,600 9,600
Fair value of NCI at Acquisition Date (35% × 50,000
shares × 310,000 / 30% × 30,000 shares × 320000) 5,425 2,880
Fair value of Net Assets at Acquisition Date (Note 4) (11,624.5) (6,552.52)
Good will arising on Acquisition 3,400.50 5,927.48
Impairment (20% × 3,400.5 / 10% × 5,927.48) (680.10) (592.75)
Carrying Amount of Good will 2,720.40 5,334.73
Note 8: Gain or Loss on the De recognition of the 20% shareholding in Agara Ltd
Shs ‘million’
Fair value of initial 20% shareholding (20% × 50,000 shares × 310,000) 3,100
Carrying Amount of the 20% shareholding
Initial cost of investment 2,700
Share of post-acquisition earnings (20% × 1,270.5) 254.1 (2,954.1)
Gain on De recognition 145.9
Note 9: Profit for the year attributable to Non-Controlling Interest
Shs Shs
‘million’ ‘million’
Profit for the year (2,541 × 6/12 / 3,596.64 × 9/12) 1,270.50 2,697.48
Good will Impairment (680.1) (592.75)
Unrealized profits on transferred plant (360) -
Adjusted profit for the year 230.4 2,104.73
Non-controlling interest’s share (35% × 230.4 / 30% ×
80.64 631.42
2,104.73)
Consolidated Non-controlling interest’s share = 80.64 + 631.42 = 712.06
(b) Accounting treatment of the interests in the joint arrangements in Chandara’s

separate financial statements and group consolidated financial statements.
Report to the Directors of Chandara Ltd.
To: Directors Chandara Ltd
Date: Exam Date
Subject: Accounting treatment of the interests in the joint arrangements.
This report is meant to highlight the accounting treatment of the interests in the joint
arrangements in Chandara Ltd’s separate financial statements and group consolidated financial
statements.
IFRS 11: Joint Arrangements classifies joint arrangements as either joint operations or joint
ventures depending on the rights and obligations of the parties to the arrangement. A joint
operation is an arrangement whereby the parties that have joint control of the arrangement have
rights to the assets and obligations of the liabilities relating to the arrangement. Under joint
operations, joint arrangements are not structured through a separate entity.
IFRS 11: Joint Arrangements requires a joint operator to recognise on a line by line basis the
following in relation to its interest in the joint operation;
• Its assets including its share of any jointly held assets.
• Its liabilities including its share of the jointly incurred liabilities.
• Its revenues from the sale of its share of the output arising from the joint operation.
• Its share of the revenue from the sale of the output by the joint operation.
• Its expenses including its share of any expenses incurred jointly.
A joint venture is an arrangement whereby the parties that have joint control of the arrangement
have rights to the net assets of the arrangement. Under joint ventures, joint arrangements are
structured through a separate entity.
IFRS 11: Joint Arrangements requires that joint ventures should be accounted for using the
equity method.
The statement of financial position prepared by the joint venturer should include;
• Interest of the joint operator in the joint venture at cost plus share of post-acquisition total
comprehensive income.
• Group share of the post-acquisition total comprehensive income in the group reserves.
The statement of profit or loss and other comprehensive income prepared by the joint venturer
will include;
• The group’s share of the joint venture’s profit or loss.
• The group’s share of the joint venture’s other comprehensive income.
In the separate financial statements of Chandara holdings Ltd, a joint venturer should account
for its interest in a joint venture in accordance with IAS 27: Separate financial statements at
cost, or in accordance with IFRS 9 Financial instruments, or using the equity method as
described in IAS 28:Investments in associates and joint ventures.
In accordance with IFRS 12: Disclosure of interests in other entities, the following disclosers
should be made in the financial statements about interest in joint arrangements;
(a) Nature, extent and financial effects of an entity’s interests in associates or joint
arrangements, including name of the investee, principal place of business, the investor’s
interest in the investee, method of accounting for the investee and restrictions on the
investee’s ability to transfer funds to the investor.
(b) Risks associated with an interest in an associate or joint venture.
(c) Summarized financial information, with more detail required for joint ventures than for
associates.
In conclusion, the accounting treatments of joint arrangements and their disclosures are guided
by IAS 27, IAS 28, IFRS 11 and IFRS 12. Although the accounting treatment of joint
operations and joint ventures is different, their disclosures in the financial statements are
similar as guided by the IFRS 12.

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IFRS 10: CONSOLIDATED FINANCIAL STATEMENTS

✓ IAS 27: Separate Financial Statements

Parent. An entity that controls one or more subsidiaries.

Subsidiary. An entity that is controlled by another entity.

Non-controlling interest. The equity in a subsidiary not attributable directly or indirectly

4XYZ LTD- UGX 40% MNO LTD - USD

Non-controlling interest’s shareholding in XYZ LTD = 30% (100% - 70%)

Consolidated financial statements. The financial statements of a group in which the

Investment entity. This is an entity that:

EXCLUSION OF A SUBSIDIARY FROM CONSOLIDATION

DIFFERENT REPORTING DATES

USE OF UNIFORM ACCOUNTING POLICIES – IAS 8: Accounting policies, changes

RELATED PARTY ISSUES IN PREPARATION OF GROUP ACCOUNTS

a) Establish the group structure – IFRS 3.

c) Determination of Purchase consideration – IFRS 3 – Cash, share for share exchange,

e) Intra group transactions.

Transfer of non-current assets

DIVIDENDS DECLARED (PAYABLE) OR PAID.

f) Determination of the value of Non-controlling interest at reporting date.

g) Determination of consolidated (Group) Retained Earnings.

Note 4: Provision for damages payable.

Note 6: Proposed Dividends

WANOK MANUFACTURING LTD’S CONSOLIDATED STATEMENT OF

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

Retained earnings 545,400 508,800 184,950 384,600

Total 1,636,400 1,599,800 784,950 984,600

Post-Acquisition = (1,599,800 - 1,636,400) = (984,600 - 784,950)

Note 5: Carrying amount of the Investment in Associate (Batong Ltd)

Note 6: Consolidated Retained Earnings

Subject: Regulatory Reporting Requirements in relation to Exchange Rate Differences

Note 3: Purchase Consideration

Note 4: Goodwill arising on Acquisition of SCL and MEL

Note 6: Recognition of the Leased Asset and Lease Obligation

Note 7: Impairment of the Factory.

Note 8: Deferred tax Provisions.

Note 10: Consolidated Retained Earnings

b) Conditions that indicate that an entity is a related party.

PIECEMEAL (STEP) ACQUISITIONS.

b) Memo to the Directors of Tanga Ltd.

Note 6: License secured to operate 4G services.

Note 7: Impairment of the Building and Deferred tax Provisions.

Note 8: Foreign Currency Transactions

c) Consolidated statement of financial position of the Tanga Ltd group as at 30 June,

Note 7: Consolidated Retained Earnings

DISPOSAL OF EQUITY INTEREST BY THE PARENT.

b) Consolidated statement of financial position of the Rock Group

NOTES TO THE CONSOLIDATED STATEMENT OF FINANCIAL POSITION

Note 4: Goodwill Arising on Acquisition of Mines Ltd

Note 5: Fair value of Non-controlling interest at Reporting Date

Note 7: Investment in Associate (Build Ltd)

Note 8: Consolidated Retained Earnings

PREPARATION OF A CONSOLIDATED STATEMENT OF PROFIT OR LOSS AND

7. The equity of the three companies as at 30 June, 2022 was as follows.

NOTES TO THE CONSOLIDATED STATEMENT OF PROFIT OR LOSS

Note 3: Intra group sale of plant

• Unrealized profits on transferred plant

Moderate 35 0.07 15 1.05

Minor 45 0.09 20 1.8

Bagara Ltd’s adjusted Administrative expenses.

Note 6: Purchase Consideration

(b) Accounting treatment of the interests in the joint arrangements in Chandara’s

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