GROUPS

Goodwill calculation:
FV of consideration paid xx

Book value
+ FVA
= FV of Co’S Net assets
- NCI Share of FVNA
= Parent’s share of Net Assets (xx)

= Goodwill/BPG

Pro formas must be done every year. But, accounts that went to P/L need to be
adjusted through RE in following years

Goodwill must be amortised over 10 years with a PFJE:

Dr Amortisation expense
Cr Acc Amortisation

Initial pro-forma
Dr Share capital
Dr Retained Earnings
Dr PPE
Dr Goodwill/Cr BPG
Cr NCI
Cr Investment

PPE – FAIR VALUE ADJUSTMENT

Example: PPE is sitting in co. S at cost = R250000 and acc dep=50000. Undervalued
by R100 000 and RUL of 5 years.

Any fair value adjustment at acquisition is not recognised at a separate company level.
Therefore, it is not in your starting point and must be adjusted for every year.
Dr PPE 100 000

When a group is acquired, no accumulated depreciation can be recognised. As this

new entity, the group has not used any of the asset. Therefore, every year the
following adjustment must be made:
Dr Acc Dep 50 000
Cr PPE 50 000

However, if there has been a fair value adjustment, the depreciation recognised by the
group would be different to the depreciation recognised by the subsidiary. This gives
rise to an additional pro forma:
Dr Depreciation (P/L) 20 000
Cr Acc dep 20 000

In following years, this becomes:

Dr RE (previous years dep adjustments) 20 000
Dr Depreciation (current year) 20 000
Cr Acc Dep 40 000

When this asset is subsequently sold…

3 years later, co. S sells the PPE to an outside party for R600 000.
Co. S would have realised a profit according to: Proceeds – Carrying amount = profit
on disposal.
Therefore: co. S profit: 400 000 – 80 000 = 320 000
Therefore, the group’s profit would be different because of the different carrying
amount.
Group profit: 400 000 – 120 000 = 280 000
In our first pro-forma, when we originally said Dr Investment 100 000, we no longer
need to do that as it is not in our books. This is replaced with:
Dr Dep Expense 20 000
Dr Retained Earnings 40 000
Dr Profit on disposal 40 000

What would be recognised next year?

Simply Dr Retained Earnings 100 000

Intercompany sale of PPE

The group cannot recognise any profit. ALL profit from Co. S must be eliminated.

Co. P will now recognise PPE at a cost which it was bought for, and no acc dep will
be recognised in the group.

Depreciation adjustments must still be made.

SP ADJ EP
Profit on sale 320000 (320000) -
PPE 400 000 -100 000 300 000
Acc Dep - (180 000) (180 000)
Depreciation 40000 (20000) 60000
RE (40000)

But…there is already a +100 000 in the first PFJE. Therefore need to make it -200
000 to get it to -100 000
Dr profit on sale 320000
Dr depreciation 20000
Dr RE 40 000
Cr Acc Dep 180000
Cr PPE 200 000

NCI (Not buying 100% of the company)

EQUITY. Not an asset or liability to the group. Shares in 20% of profits OF S. DOES
NOT SHARE IN ANY OF P’s PROFITS.

NCI share of group profit: [S’s profits + any profit adjustment to S (not amm)]*%
Share in group profits PFJE:
Dr NCI (P/L)
Cr NCI (Equity)
Previous years NCI:
Dr RE
Cr NCI (Equity)

NCI share in S’s dividends:

Dr NCI (E)
Cr Dividends (E)

INTERCOMPANY DIVIDENDS
(draw picture…)

The parent’s dividends go outside the group and therefore do not need to be adjusted.
However, with the subsidiary’s dividend, some are intercompany, and the rest is
going to NCI.

Parent’s Share: SP EP
Div income 35 -
Div declared 35 -

Dr Div Income 35
Cr Div declared 35

NCI Share: Must reduce NCI share in equity

Dr NCI (E) 15
Cr Div Declared 15

INTERCOMPANY INVENTORY
Any sales recognised within the group must be taken out. Sales made to outside
parties are correct. The cost of inventory recognised in the group must be that cost
that the group initially recognised it at when it first acquired co. S

Example: Parent acquires from a sub at a 20% discount. Usually achieves a gross
profit % of 50%.
In 2002: Co. S sold to co. P for R2400. Inventory on hand at end of year = 2400.
In 2003: Co. S sold to co. P for R3200. Inventory on hand at end of year = 1600.

Make selling price = 100

Therefore TP = 80.
Gross profit % = Profit/Sales. Therefore, ?/100 = 50. Therefore, profit = 50, therefore
CP= 50.
CP + Profit = Transfer Price + Profit = Selling Price
50 + 30 = 80 + 20 = 100.

x*what you want/what you have

Therefore, inventory in the group is overstated by 30%. (Want 50% have 80%).

2002: SP adj EP
O/B -
+ Purchases (sales) 2400 (2400) -
- C/B (2400) +900 2400*50/80 = (1500)
= COS (1500)

2002 PFJE:

Dr sales 2400
Cr Inventory 900
Cr COS 1500

2003: SP adj EP
O/B (900)
+ Purchases (sales) 3200 (3200) -
- C/B (1600) +600 1600*50/80 = (1000)
= COS (3500)

Dr RE 900
Dr Sales 3200
Cr Inventory 600
Cr COS 3500
Statement of Changes in Equity

Ordinary Retained Rev Total NCI Total

share earnings Surplus Equity
capital
Balance
Profit XX XX
OCI XX XX
= TCI
Share Issue XX
Share issue (XX)
costs
Dividends (XX) (XX)
Balance at
end

NCI Amount in Equity

Previous Balance
+ NCI share in group profit
- Dividends going to NCI
= Closing Balance

*Note: With an Associate – NO NCI!

NCI Share in Group Profit?

(S’s Profit + Any profit adjustments (NOT amortisation)) x %

Retained Earnings:
OB
+ Profit after tax to PEH
- Dividends (declared by parents)
= CB

Revaluation Surplus
All Reval’s of P + %PEH of POST ACQUISTION of S.
Inventory
Assets:
- Held for sale in the ordinary course of business, (FG) or
- In the process of production, (WIP) or
- Materials to be consumed in production process (Raw Materials)

Therefore, the balance of inventory = FG + WIP + Raw Materials

Measurement:
Lower of:
- Cost
- SP – costs to complete and sell
Dr COS
Cr Inventory

Costs of Inventories:
Costs to Purchase + Cost of Conversion + Other costs to bring to location and
condition

1. Costs to Purchase
- EXCLUDE discounts
- INCLUDE non-recoverable taxes
2. Cost of conversion
- Direct Labour (goes directly to WIP i.e allocated directly)
- VOH (Allocated based on actual production)
- FOH absorbed (Allocate using NORMAL capacity – whatever is not allocated
goes to COS).
3. Other costs

What is FOH?
- supervisor salary
-

Costs EXCLUDED from Inventory:

- Refundable taxes
- abnormal wastage
- storage costs after entire production process
- admin overheads
- selling costs
- discounts
 Statement of Comprehensive Income
BY NATURE
Decrease in Inventory (FG, WIP) ( )
Expense all production costs (everything that goes into WIP)
- depreciation of factory (FULL amount, not allocated amount)
- ALL wages and salaries
- Raw Materials USED

*Put COS in your note disclosure

BY FUNCTION
Do not expense WIP costs explicitly. These will reflect automatically via COS.

Disclosure