Consolidations

Chapter 1: Business Combinations

• IAS 27- Separate fin statements; regula1on of investment in subsidiary from parent (fair value vs
cost)
• IFRS 3 Business Combina1ons- control over another en1ty’s business; entries as acquisi1on date
(acquisi1on method)
• IFRS 10- Consolidated financial statements- defines control; since acquisi1on, intra group
transac1ons.

Introduction
• Invest in shares of other companies because:
1. Short-term capital gains
2. Earning of dividend income
3. Gain control over net assets of another en?ty
• Faithful representa1on dependant on underlying economic principles:
1. Expected holding period- >12 months- non-current asset; < 12 months- current asset
2. Purpose of investment- type of investment
Type of investments
• Majority ac?ve investor effec1vely gains
control over the en1re business ac1vi1es
of the investee.
• Thus, the investor stands to influence and
benefit from the broader economic
returns generated by the underlying net
assets

Business combinations
• Def.: Business combina?on “A transac1on
or other event in which an acquirer
obtains control of one or more businesses”
• Def: Business: “An integrated set of ac1vi1es and assets that is capable of being conducted and
managed for the purpose of providing a return in the form of dividends, lower costs or other economic
benefits directly to investors or other owners, members or par1cipants “
• If transac1on does not meet def. of a business
- Iden1fy and recognise individual iden1fiable assets acquired and liabili1es assumed
- Allocate costs of assets based on their individual fair values.
• Why obtain control?
1. Expansion
2. Diversifica1on
3. Reducing legal and opera1ng risks
4. Reducing the cost of jurisdic1on-specific corporate and tax laws.
• Acquirer-parent- en1ty that obtains control
• Acquiree-subsidiary- en1ty that is controlled by another en1ty
Control
• Def: A situa1on in which “an investor is exposed,
or has rights, to variable returns from its
involvement with the investee and has the ability
to affect those returns through its power over the
investee” (IFRS 3 & 10)
• “The power to govern the financial and opera?ng
policies of an en1ty so as to obtain benefits from
its ac1vi1es”
• Opera?ng policies: Commonly viewed as being those business policies such as sales, marke1ng, HR
• Financial policies: Declara1on of dividends, budget approvals, capital expenditures
• IFRS 10.11 suggests that should an en1ty own (directly or indirectly) more than half of vo?ng power
of another en1ty we can presume that control will exist.
• Power
- Exis1ng rights that give investor the ability to direct the relevant ac1vi1es of the investee
- Power even with less that 50% of the vo1ng rights if investor has the power to do one of the
following:
1. Govern financial or opera?ng policies through a statute or agreement
2. Hire and fire majority of members of the board of directors or government body
3. Cast more than 50% of the vo?ng rights at a mee1ng of the BOD, where the BOD controls the
en1ty
• Returns
- Must have exposure to variable returns to have control
- May encompass a much broader range of returns than only financial benefits such as dividends and
capital gains.
- Must be a link between power and returns- investor must have the ability to use its powers to affect
the returns

Acquisition method of accounting (IFRS 3.4)

1. Identifying the acquirer
• The acquirer (parent) is the en1ty that obtains control of the acquiree (subsidiary).
• If control is vague then the acquirer may be
- The en1ty that transfers cash or other assets or incurs liabili1es
- The en1ty that issues shares to finance the combina1on
- The en1ty whose rela1ve size (measured in, for example, assets, revenues or profits) is significantly
greater than that of the other combining en1ty
- The en1ty that ini1ated the combina1on
2. Determining the acquisition date
• Def: “the date on which the acquirer obtains control of acquiree.”
• That’s the date that the subsidiary’s assets and liabili?es will be included in the group SFP.
• That’s the date that we can also start including the income and expenses of the subsidiary into the
group SPLOCI.
• If considera1on is deferred, the following could determine the date:
1. Date that the uncondi1onal offer is accepted
2. Date when the acquirer commences direc1on of the financial and opera1ng policies of acquire.
3. Date when flow of economic benefits of the acquiree changes
 4. Date from when the board of directors of the acquiree represents interests of acquirer
5. Date that the compe11on commission provides clearance for an acquisi1on
3. Recognising and measuring the identifiable assets acquired, liabilities assumed and non-
controlling interest
• Recogni1on criteria from the combined en?ty perspec1ve (to qualify as an iden1fiable asset or
liability):
1. Meet the defini1on of an asset or liability in Conceptual Framework at acquisi1on date (can possibly
now include a patent, brand name ie internally generated intangible asset)
2. Be part of the business acquired (the acquiree) rather than the result of a separate transac1on
• All assets and liabili1es must be measured at their acquisi1on date fair values (only for group
statements, not in the separate statements), because when purchasing the equity of another en1ty we
assume the purchase price is taking into account the fair value of all assets and liabili1es.
• Non-Controlling interest
- The NCI is the por1on of the acquiree’s shares together with other equity items (e.g. retained
earnings and revalua1on surplus) not purchased by acquirer,
- NCI is measured at either at Fair value or NCI interests propor?onate share of acquiree’s net
iden1fiable assets

4. Recognising and measuring goodwill or gain from a bargain purchase

• Goodwill
- Asset
- Represents future economic benefits arising from other assets acquired in a business combina1on
that are not individually iden1fied and separately recognised.
- Could be reputa1on, profitability, market monopoly that the subsidiary has.
- Thus, considera1on transferred+ NCI exceeds at acquisi1on fair values of Net Assets
• Gain from a bargain purchase
- Income
- Could be due to a forced sale of shares by previous shareholder or incorrectly valued Net Assets of
subsidiary
• E.g. if you own 70% of the Equity, you own 70% of the net assets, which comprises 70% of the assets
and 70% of the liabili1es, but if you own 70% of the Equity, you can control the en1ty and therefore
control 100% of the assets and assume 100% of the liabili1es.

Consolidated financial statements

• According to IFRS 10.4 a parent is obliged to present financial statements in which it consolidates its
investments in its subsidiaries unless:
1. A parent itself is a wholly owned subsidiary of another en1ty, OR the parent is itself a par1ally
owned subsidiary where other owners of parent have been informed that consolidated financial
statements will not be presented and they have not objected AND
2. The parent’s debt or equity instruments are not publicly traded AND
3. The parent does not file its financial statements with a regulatory body for purpose of issuing any
class of instruments in a public market AND
4. The ul?mate or any intermediate parent produces consolidated financial statements

Chapter 2: Wholly owned subsidiary

At acquisition date
• Before consolida?ng the annual financial statements of two en11es, certain adjustments may be
necessary to either one of the individual en11es’ financial statements:
1. Differing repor1ng dates:
- Subsidiary should prepare financial statements at same date as Parent; or
- If deemed imprac1cal, the subsidiary should adjust financial statements for significant
transac1ons and events
- Repor1ng dates may not exceed 3 months
2. Similar transac1ons applying differing accoun1ng policies
- Adjustments necessary to ensure uniformity.
• Adjus?ng consolida?on journal entries (these entries are not made in the accoun1ng records of either
the parent or the subsidiary, but are taken into account in the consolida1on calcula1ons).
• Consolida1on journal entries may be due to the following:
1. Business combina1on valua1on entries;
- Iden1fiable assets and liabili1es at fair value.
2. At-acquisi1on entries
- Investment eliminated.
- Goodwill or gain from a bargain purchase recognised.
3. Intragroup transac1ons.
- Eliminate intragroup income, expenses and unrealised profits, loans between parent and
subsidiary
Consolidation steps
1. Obtain the financial statements (or trial balances) of the parent and its subsidiary
2. Consider if the repor?ng dates are the same and if uniform accoun1ng policies have been applied and
adjust where necessary
3. Add the balances and totals of the parent and subsidiary together
4. Consider if the iden?fiable assets and liabili?es of the subsidiary are fairly valued at the acquisi1on
date and adjust where necessary
5. Eliminate the parent’s investment in the subsidiary against the ‘at acquisi1on’ equity of the subsidiary
aiributable to the parent and recognise the goodwill or gain from a bargain purchase, if any
6. Eliminate common intragroup items arising subsequent to the acquisi?on date
Interest acquire d at more than the net asset value- goodwill
• Reasons (IFRS 3. BC 313):
1. The collec1on of net assets acquired in the subsidiary
may be able to earn a higher rate of return for the
acquirer than had those assets been acquired
separately; and/or
2. The combining of the net assets of the acquirer with those of the acquiree may enable the acquirer
to earn a higher rate of return in future due to the expected benefits and synergies as a result of this
combina1on.
Interest acquired at less than the net asset value- gain from bargain purchase
• Reasons
1. The seller is ac1ng under the compulsion of a forced
sale; or
2. There were measurement errors in determining the
fair value of the iden1fiable assets and liabili1es.
• This ‘profit’ made on a bargain purchase should be recognised immediately in the profit or loss sec1on
of the consolidated SPLOCI in the line item “other income” (IFRS 3.34) in the year of acquisi1on of
subsidiary

Chapter 3: Partially owned subsidiary

Additions to consolidation process:
1. Iden1fy the non-controlling interest in the profit or loss and other comprehensive income of the
subsidiary for the repor1ng period
2. Iden1fy the non-controlling interest in the net assets of the subsidiary, which consists of:
- the amount of the non-controlling interest at the acquisi1on date; and
- the amount of the non-controlling interest in the changes in equity (net assets) since the acquisi1on
date.
• The non-controlling interest in a subsidiary at the acquisi1on date is measured at either (IFRS 3.19):
- the fair value of the non-controlling interest;
- the non-controlling interest’s propor?onate share of the subsidiary’s iden1fiable net assets (e.g.
20%).
• The choice of measurement basis is only available at the acquisi?on date:
• The fair value op?on is not available for subsequent changes in non-controlling interest (ie. Non-
controlling shareholders purchase some shares from parent company and interest goes from 20% to
say 30%, we cannot change the measurement basis at 1me of this purchase).
• The selec1on of the measurement basis by the parent is not an accoun?ng policy choice: – the choice
is available in respect of each individual subsidiary and may differ from subsidiary to subsidiary.
• If NCI holds ordinary shares-this en1tles them to a propor1onate share of the subsidiaries net assets
in the event of liquida1on.
• But there could be some extra synergy that NCI has that parent wants to take into considera1on with
NCI value.
• Fair value can be determined using ac?ve market prices for the shares not held by the parent,
otherwise any other allowable technique for valuing these shares
Notes
* If P controls business of S, it means it controls the assets and liabili1es, and thus 100% of S
* Thus: Financial Statements for assets and liabili1es, SPLOCI- 100% of S +100% of P
* However, when P does not own 100% interest, there are other equity par1cipants who must share in
the equity- Aiributable to Owners of parent vs NCI
* Journal: since to opening balance:
RE (S)-opening balance XXXXXX
NCI-Opening balance (SCE) XXXXXX

* Journal- current year

Profit a^ributable to NCI (SPLOCI) XXXXXX
NCI movement (SCE) XXXXXX

Chapter 4: General intragroup transactions

Dividends
• Addressed in IAS 1, IAS 10, IAS 37
• Differen1ate between proposal, declara?on and payment of dividend
Consolidation journals; (R10000, 8000 to parent, 2000 to NCI- already paid)
NCI (SCE) 2000
 Other income(P) 8000
Dividends paid (SCE) 10 000
If not paid yet, an additional entry is needed
Shareholders for dividends (S) *only the por?on owed to P, not NCI 8000
Dividends receivable (P)
8000

• In Consolidated SCE- NCI part of dividend declared is shown in NCI column

• Consolida1on journals are not recogni1on journals, but only changing journals
* Dividends declared- influences other income in SPLOCI- for parent
* Thus- dividends change group profit, but only that of P- does not influence profit a^ributable to
NCI
* Only change profit aiributable to NCI if intragroup transac1ons change group profit and profit of S
* Remember to eliminate investments in S at cost (IAS 27 allows investment in subsidiary to be
measured at cost)

Chapter 8: Preference share capital

General
• Total preference share must be subtracted from profit of S before airibu1ng profit to NCI
• When cumula1ve preference shares are in arrears, it is not a current liability, as a liability only
arises when dividends are declared
• However, cumula?ve preference shares must be subtracted each year from group profit, even they
are not declared
• Thus, when a^ribu?ng profit for the year, only eliminate the current year’s preference dividend,
not all the dividends in arrears
• Preference shares aiributable to NCI, goes directly to NCI
• Eliminate all dividend income a^ributable to P, decrease Other income in SPLOCI
• Calculate goodwill/ gain from bargain purchase for preference shares and ordinary shares
respec1vely (must be offset against each other)
• At liquida?on- preference shareholders only en1tled to capital that was invested and dividend in
arrears- thus not en?tled to pro rate share of profits
• Thus preference shares are always at fair value (market price of share investment)
• Profit is always only propor?onately a^ributable to ordinary shareholders- Preference
shareholders only en1tled to fixed preference shares
• IF NCI is measured at propor?onate share at acquisi?on, calculate using the equity a^ributable to
the ordinary shareholders, thus excluding preference dividends in arrears
• Thus, if the dividend is not in arrears, the profit made since acquisi1on (RE opening balance minus
RE at acquisi?on) is only a^ributable to ordinary shareholders
• If dividends are in arrears, first airibute the dividend that preference shareholders are en?tled to,
and then give ordinary NCI their propor1onate share
• Dividends declared in previous years do not have an impact on RE, as the journal entries cancel
each other out
• If dividends already in arrears at acquisi?on- at ordinary share elimina?on, only eliminate part of
RE that does not contain the dividends in arrears
• Separately eliminate the dividends in arrears at the preference share @ acquisi?on journal
 • If dividends are non-cumula?ve, and in arrears at acquisi1on- only aiributable to ordinary shares-
NCI balance does not change

Steps
Journals
1. Ordinary share capital elimina?on, calcula1on of goodwill/GFBP- (only eliminate part that does not
include dividends in arrears)
Ordinary share capital
RE-opening balance (excluding preference dividends in arrears)
Investment S- ordinary shares
NCI Opening balance (fair value at acquisi1on)
GFBP RE opening balance (or Goodwill)
2. Elimina?on of preference shares, calcula1on of Goodwill/GFBP (eliminate preference shares in
arrears here)
Preference share capital
RE-opening balance (dividends in arrears)
Investment S- preference shares
NCI Opening balance (fair value)
GFBP RE opening balance (Or Goodwill)

3. Offsedng of goodwill/GFBP
4. Eliminate ordinary dividends
Div income
NCI movement
Ordinary dividends declared and paid

5. Eliminate preference dividends (work with actual dividend declared, thus all the dividends
declared, including those that were in arrears)
Div income
NCI movements
Preference div declared and paid

6. Elimina?on of dividends declared but not paid (Only a^ributable to P)

Shareholders for dividends (S)
Dividends receivable (P)

7. Elimina1on of other intra group transac?ons

8. Airibute the RE opening balance to NCI (Twice, if preference dividends are in arrears (and are
cumula1ve)- first subtract preference dividend of years since acquisi1on and then allocate
propor?onately)

RE-opening bal. (Opening balance minus at acquisi1on (including dividends in arrears at

acquisi?on- take actual RE amount, regardless of dividends in arrears)- div in arrears* 0,3)
NCI opening bal.
RE-opening bal. (dividend in arrears appor1oned to NCI)
NCI opening bal.
 E.g. (Also look at 8.2)
70% ordinary, 40 % preference
@: RE =100 000; 20 000 dividends in arrears (10 000 per year)
Opening balance (1 year later): RE= 200 000; all dividends s1ll in arrears
Thus: RE aiributable to NCI = (200 000-100 000-10 000)* 0,4 = 36 000
And 10 000* 0,6 = 6 000
9. Profit aiributable to NCI for the current year- calculate by subtrac1ng preference dividends (only
the part that is a^ributable for the year, not all the dividends in arrears) from profit of S, and
then propor?oning the profit to S and P
10. Profit aiributable to NCI- Preference shares a^ributable to NCI

SCE
Retained earnings (SCE)
1. Opening balance
1. (P) RE Opening balance
2. (S) RE opening balance
3. (RE of S at acquisi1on)
4. (Profit aiributable to NCI since acquisi1on)
5. (Preference dividends in arrears (only that of NCI, as that aiributable to P not included in
profit))
6. Gain from bargain purchase at acquisi1on
2. Profit for the year
1. Profit of P
2. Profit of S
3. (Profit aiributable to NCI for the year)
4. (All Dividend income of P declared by S (All cumula1ve preference shares))

3. Dividends
1. (Dividends that P declared)
NCI (SCE)
1. Opening balance
1. Value at acquisi1on- ordinary shares elimina1on journal
2. Fair value at acquisi1on- preference shares elimina1on journal
3. RE aiributable to NCI since acquisi?on (first eliminate preference dividends in arrears)
4. Preference dividends in arrears
2. Profit for the year
1. Preference dividends (always if cumula1ve)
2. Profit aiributable to NCI (calculated aver preference shares were deducted)
3. Dividends
1. Ordinary and preference dividends aiributable to NCI

SPLOCI
Profit for the year
1. P profit
2. Profit of S
3. (Minus income from dividends from S)
 Attribute profit to NCI
1. Preference dividends
2. Propor1onate profit to NCI

Chapter 9: Interim acquisition

Introduction
• Control is obtained during the accoun1ng period

At acquisition
Steps of process affected
• Elimina1on of parent’s investment
• Calcula1on of NCI in SPLOCI
Calculation of equity at acquisition date- two ways
Entity prepares financial statements at acq. date
No financial statements, SPLOCI and SCE divided into pre and post-acquisition
• Determine equity at acquisi1on date
• Profit aiributable to NCI only from acq. date
Journals
• Eliminate all income and expenses separately in the at acquisi1on elimina1on journals
• Intragroup transac1ons- only eliminate since acquisi?on
• Income tax expense-
- First calculate income tax rate (expense/profit at end of the year)
- Calculate profit for the year before acquisi?on
- Apply tax rate to profit
• Preference dividend- when elimina1ng it for the calcula1on of profit aiributable to NCI only
eliminate the part of the dividend since acquisi?on
• Eliminate profit a^ributable to preference shareholders (dividend of months before acquisi1on)
from ordinary shares at acquisi1on journal, and move it to the preference share acquisi1on journal
(like dividends in arrears)
• Full dividends must be eliminated if it is only declared any ?me ager acquisi?on date
• En1ty that holds the preference dividend is en?tled to the full year’s dividend if it is declared, even
if it acquired the dividend during the year
SFP Assets and Liabilities
• Not affected, as it is prepared at a certain date
• Shareholders for dividends- 100%P+ 100% S – Intra group dividends owed
SPLOCI
• For revenue, COS etc. 100%P+100%S – profit before acquisi1on (apply journal entry to statement)