GROUP ACCOUNT

A group of companies consists of a parent company together with one or more

subsidiary companies which are controlled by the parent company. Control over a
subsidiary is usually achieved by acquiring over 50% of its ordinary shares.
Accordingly, parent companies are required to prepare and present accounts for the
group as a whole, in recognition of the fact that a parent company and its subsidiaries
are, in effect, a single economic unit. It is important to note that these group accounts
are intended for the shareholders of the parent company only.
The purpose of consolidated accounts is to:
 Present financial information about a parent and its subsidiary as a single
economic unit.
 Show the economic resources controlled by the group.
 Show the obligations of the group.
 Show the results the group achieves with its resources.

The following standards relate to the accounting for investments:

 IFRS 10 Consolidated financial statements
 IAS 27 Separate financial statements
 IAS 28 Investments in associates and joint ventures
 IFRS 11 Joint arrangements
 IFRS 3 Business combinations

Definitions
1. Control. An investor controls and investee when the investor is exposed, or has
rights, to variable returns from its involvement with the investee and has the ability to
affect those returns through power over the investee. (IFRS 10)
2. Power. Existing rights that give the current ability to direct the relevant activities of
the investee. (IFRS 10)
3. Subsidiary. An entity that is controlled by another entity. (IFRS 10)
4. Parent. An entity that controls one or more subsidiaries. (IFRS 10)
5. Group. A parent and all its subsidiaries. (IFRS 10)
6. Associate. An entity over which an investor has significant influence and which is
neither a subsidiary nor an interest in a joint venture. (IFRS 10)
7. Significant influence is the power to participate in the financial and operating
policy decisions of an investee but is not control or joint control over those policies.
(IAS 28)

IFRS 3 defines business combination as a transaction or other event in which the

acquirer obtains control/acquires equity interest in another entity. The standard also
differentiates between types of investments based on the percentage of shares
acquired by the acquirer.
The types of investments as specified by IFRS 3 are as follows:
% of ownwership Type of investment Method of accounting
2-19 Ordinary investment IFRS 9
20-49 associate IAS 28
50 Joint interest IFRS 11
51 above subsidiary IFRS 3, IFRS 10
IFRS 3 requires that all business combinations be accounted for using the
ACQUISITION METHOD. This involves:
a. Identify the acquirer.
b. Determine the acquisition date.
c. Recognize and measure identifiable assets, liabilities and non-controlling interests.
d. Recognize and measure goodwill or gain on bargain purchase.

The important point here is control. In most cases, this will involve the holding
company or parent owning a majority of the ordinary shares in the subsidiary (to
which normal voting rights are attached). There are circumstances, however, when the
parent may own only a minority of the voting power in the subsidiary, but the parent
still has control.
An investor controls an investee if, and only if, it has all of the following:
(a) Power over the investee
(b) Exposure to, or rights to, variable returns from its involvement with the investee;
and
(c) The ability to use its power over the investee to affect the amount of the investor’s
returns
If there are changes to one or more of these three elements of control, then an investor
should reassess whether it controls an investee.

CONSOLIDATED FINANCIAL STATEMENTS

Consolidated financial statement

The consolidated financial statements are the financial statements of a group in which
the assets, liabilities, equity, income, expenses and cash flows of the parent and its
subsidiaries are presented as those of a single economic entity. When a parent issues
consolidated financial statements, it should consolidate all subsidiaries, both foreign
and domestic. In simple terms a set of consolidated accounts is prepared by adding
together the assets and liabilities of the parent company and each subsidiary.
The whole of the assets and liabilities of each company are included, even though
some subsidiaries may be only partly owned. The 'equity and liabilities' section of the
statement of financial position will indicate how much of the net assets are
attributable to the group and how much to outside investors in partly owned
subsidiaries. These outside investors are known as the non-controlling interest.
Exemptions from Preparing Consolidated Financial Statements
A parent need not prepare consolidated financial statements if and only if:
 The parent company itself is either a wholly or partly owned subsidiary, and its
owners who have been duly informed do not object to the parent not preparing
consolidated financial statements.
 The parent’s shares or securities are not publicly traded.
 The ultimate parent company produces consolidated financial statements that
comply with IFRS and are available for public use.

When exemption from the preparation of consolidated financial statements is

permitted,
IAS 27 ‘separate financial statements’ requires that the following disclosures be
made:
 The fact that consolidated financial statements have not been presented.
 A list of all significant investments (subsidiaries, associates), including
percentage of shareholding, principal place of business and country of
incorporation.
 The bases on which those investments listed above have been accounted for in its
separate financial statements.
Components of Consolidated Financial Statements
Consolidated statement of financial position
Consolidated statement of profit or loss
 Consolidated statement of cash flows
 Consolidated statement of changes in equity
 Notes

Non-controlling interests (NCI)

In some situations, a parent may not own all of the shares in the subsidiary, e.g. if P
owns only 80% of the ordinary shares of S, there is a non-controlling interest of 20%.
NCI is the portion of the subsidiary that is not owned by the parent company directly
or indirectly. Non-controlling interest should be presented in the consolidated
statement of financial position within equity, separately from the parent shareholders'
equity.

On acquisition, NCI can either be valued at fair value or at the proportionate share of
net assets acquired.
If fair value method is adopted,
NCI value would be given, or
NCI value = number of shares NCI own x subsidiary share price at acquisition
If proportionate share of net assets is adopted,
NCI value = NCI% x fair value of net assets at acquisition

Goodwill
Goodwill is an asset representing the future economic benefits arising from other
assets acquired in a business combination that are not individually identified and
separately recognized' (IFRS 3).
Goodwill is calculated as the excess of the consideration transferred and amount of
any non-controlling interest over the net of the identifiable assets acquired and
liabilities assumed.

There are 2 methods in which goodwill may be calculated:

1. Proportion of net assets/partial goodwill method
2. Fair value/full goodwill method
The proportion of net assets method calculates the portion of goodwill attributable to
the parent only, while the fair value method calculates the goodwill attributable to the
group. This is known as the gross goodwill i.e. goodwill is shown in full as this is the
asset that the
group controls.
Treatment of goodwill
a. Positive goodwill:
 Capitalised as an intangible non-current asset.
 Tested annually for possible impairments.
b. Negative goodwill:
 Arises where the cost of the investment is less than the value of net assets
purchased.
 IFRS 3 does not refer to this as negative goodwill (instead it is referred to as
bargain purchase)
 Any negative goodwill is credited directly to the statement of profit or loss and
shared between the parent and the NCI contingent on the policy adopted for
valuing NCI.
Impairment of goodwill
If goodwill is considered to have been impaired during the post-acquisition period it
must be reflected in the group financial statements. Accounting for the impairment
differs according to the policy followed to value the non-controlling interests.
▪ Proportion of net assets method: the impairment would be borne by the parent
alone.
Dr Consolidated retained earning
Cr Goodwill
▪ Fair value method: the impairment would be shared between the parent and the
NCI.
Dr Consolidated retained earning (% of impairment attributable to the parent)
Dr NCI (% of impairment attributable to NCI)
Cr Goodwill

Cost of investment/purchase consideration

Purchase consideration is the cash paid or the fair value of other consideration
payable to
acquire equity interest in the investee.
The forms of purchase consideration include:
 Cash consideration
 Deferred consideration
 Share exchange
 Contingent consideration
Deferred consideration
This is when part or all the purchase consideration is deferred/postponed until a later
date. Deferred consideration should be measured at fair value at the date of the
acquisition (i.e.,a promise to pay an agreed sum on a predetermined date in the future
considering the time value of money). The fair value of any deferred consideration is
calculated by discounting the amounts payable to present value at acquisition.
Discount unwound on deferred consideration.
Each year, the discount on deferred consideration will be unwound; this represents an
increase in the present value of the deferred consideration. The discount is treated as a
finance cost.
NB: The deferred consideration will be shown as a liability in the consolidated
statement of financial position.
Contingent consideration
This is an agreement to settle in the future provided certain conditions attached to the
agreement are met. These conditions vary depending on the terms of the settlement.
Any contingent consideration should be included at fair value, which will be given in
the exam.
The discount on contingent consideration will also be unwound, as the fair value
given will be at present value.
As it is based on uncertain events, the fair value of the contingent consideration at
acquisition could be different to the actual consideration transferred. Any differences
are normally treated as a change in accounting estimate and adjusted prospectively in
accordance with IAS 8. Therefore, the liability will be increased or decreased at the
year end, with the movement being shown in retained earnings.
NB: The contingent consideration will be shown as a liability in the consolidated
statement of financial position.
Share exchange
The is when the parent company issues shares in its own company, in order to finance
the acquisition of the shares acquired in the subsidiary. The consideration will be
recorded at fair value. The fair value will be based on the share price of the parent
company at acquisition.
NB: The new shares issued will increase the share capital and share premium
balances in the consolidated statement of financial position.

Steps in consolidating financial statement

1. Identify the date of acquisition and consolidation.
2. Determine the percentage of holding if it is not stated in the question.
3. Draw the group structure.
4. Calculate goodwill, consolidated retained earnings(CRE) and non controlling
interest(NCI).
5. Consolidate the financial statement.

PRACTICE QUESTIONS ON CONSOLIDATED STATEMENT OF FINANCIAL

POSITION
Goodwill (1-7)
Question 1
Poland acquired 100% of Sweden at a cost of ₦300,000. On the date of acquisition,
the fair value of the net assets of Sweden was ₦250,000. Calculate the goodwill on
acquisition.

Question 2
H bought 60% of the ordinary shares in S on 1st August 2008 for ₦170,000. At tha
fair value of the net assets of S was ₦185,000. And the fair value of the non-
controlling interest of 40% was ₦105,000. Calculate the goodwill using both methods,
and assuming that:
i. NCI is measured at the proportionate share of net assets acquired.
ii. NCI is measured at fair value.

Question 3
A parent acquired 600,000 equity shares in a subsidiary three years ago for
₦1,200,000. The subsidiary’s issued equity share capital on that date was ₦250,000
denominated at 25 kobo per share. Other components of the subsidiary’s net asset at
the acquisition date were share premium ₦550,000 and retained earnings of ₦680,000.
The subsidiary’s shares were quoted at the stock exchange at ₦1.80k per share at the
date the parent took control.
Required:
Calculate the goodwill on acquisition if it is the policy of the parent to measure non-
controlling interest at its fair value.

Question 4
P bought 75% of the shares in S on 1 January 2008 for ₦150,000. At the date of
acquisition, S had retained earnings of ₦130,000. The statements of financial position
of the two companies as at 31st December, 2008 were as follows:
P S
₦
₦
Non-current asset 342,900 201,400
Investment 150,000
Current asset 75,600 41,600
Total asset 568,500 243,000
Share capital 120,000 70,000
Retained earnings 379,500 145,000
Liabilities 69,000 28,000
568,500 243,000
Required; prepare a consolidated statement of financial position as at 31 December,
2008 assuming that non-controlling interest is measured at proportionate share of net
assets acquired.

Question 5
On 31 May 2014, A Ltd paid $35,000 to acquire all the shares of B Ltd. The
statements of financial position of the two companies just after this transaction are as
follows:
A Ltd B Ltd
$ $
ASSETS
Non-current assets
Property, plant and equipment 200,000 27,000
Investment in B Ltd 35,000
235,000
Current assets 109,000 12,000
344,000 39,000
Equity
Ordinary share capital 250,000 30,000
Retained earnings 58,000 5,000
308,000 35,000
Liabilities
Current liabilities 36,000 4,000
344,000 39,000
Prepare a consolidated statement of financial position as at 31 May 2014.

Question 6
Statements of financial position as at 31 December 2010
 P S
₦ ₦
ASSETS
Investment in S 65,000
Sundry net assets 115,000 55,000
180,000 55,000
Equity
Ordinary share capital 140,000 30,000
Retained earnings 40,000 25,000
180,000 55,000
P acquired the whole of the issued share capital of S for ₦65,000 on 31 December
2010.
Required; Prepare the consolidated statement of financial position as 31 December
2010.

Question 7
Statements of financial position as at 31 December 20x8
Avalanche Malibu
$ $
Non-current assets;
Property, plant and equipment 85,000 18,000
Investments; Shares in Malibu 60,000
Current assets 160,000 84,000
305,000 102,000
Equity:
Ordinary $1 share 65,000 20,000
Share premium 35,000 10,000
Retained earnings 70,000 25,000
170,000 55,000
Current liabilities 135,000 47,000
305,000 102,000
Avalanche acquired $16,000 ordinary shares in Malibu on 1 January 20x8, when
Malibu’s retained earnings stood at $20,000 and share premium was $10,000. On this
date, the fair value of the 20% non-controlling shareholding in Malibu was $12,500.
The Avalanche group uses fair value method to value the non-controlling interest.
Required; prepare the consolidated statement of financial position for the Avalanche
group
as at 31 December 20x8.

Purchase Consideration (8-12)

Question 8
A acquired 12,000 ₦1 ordinary shares in B the subsidiary by issuing 5 new shares of
its own ₦1 ordinary shares to pay for every 4 shares acquired. The market value of
the parent shares is ₦6. Required; Show the necessary accounting entries to reflect
this transaction.
Question 9
P has a share capital account with ordinary shares of ₦100,000 ₦1 shares each and a
share premium of ₦52,000. If P acquires 12,225 shares in S, by a share exchange of 2
of its own shares for every 1 of S shares acquired. The market values of the shares of
P & S are ₦20 and ₦15 respectively.
Required;
a. Show all the necessary accounting entries.
b. Show P’s new share capital and share premium balance.

Question 10
H acquired 75% of S’s 80 million ₦1 ordinary shares on 1st January 2006. H will pay
₦3.50k per share immediately and agrees to pay a further ₦8 million on 1st January
2007. H’s cost of capital is 8% and S’s cost of capital is 6%.
Required; calculate the total purchase consideration.
Question 11
Jane acquired 80% of Doe’s ₦250,000 ₦0.60 ordinary shares on 1 November 2017.
Jane agreed to pay ₦100,000 immediately, also issued 3 new shares for every 2 shares
acquired, and Jane will pay ₦0.90k each for every share acquired on 1 November
2019. The market values of the shares of Jane & Doe are ₦2 & ₦1, and their cost of
capital 10% & 11% respectively.
Required; Show the necessary accounting entries to account for the cost of investment
in Doe.
Question 12
Picasso acquires 24 million $1 shares (80%) of the ordinary shares of Maya by
offering a share-for-share exchange of two shares for every three shares acquired in
Maya and a cash payment of $1 per share payable three years later. Picasso's shares
have a nominal value of $1 and a current market value of $2. The cost of capital is
10% and $1 receivable in 3 years can be taken as $0.75.
Required:
i. Calculate the cost of investment and show the journals to record it in Picasso's
accounts.
ii. Show how the discount would be unwound.