Learning Unit 9 Treatment of Preference Shares During Consolidation

FAC2602
Open Rubric
LEARNING OUTCOME
You should be able to account for any preference dividends in the consolidated annual
financial statements of companies in accordance with International Financial Reporting
Standards (IFRS).
OVERVIEW
9.1 INTRODUCTION ........................................................................................................ 2

9.2 CONSOLIDATION PROCEDURES IF THE SUBSIDIARY'S CAPITAL INCLUDES
PREFERENCE SHARES ........................................................................................... 3
9.3 TREATMENT OF PREFERENCE DIVIDENDS OF THE SUBSIDIARY ................... 10
9.4 EXERCISES ............................................................................................................. 31
SELF-ASSESSMENT ............................................................................................................ 56
KEY CONCEPTS
• Preferential rights
• Cumulative and non-cumulative preference shares
• Participating and non-participating preference Shares
• Arrear preference dividends
• Allocation of dividend to NCI
• Pro forma consolidation entries
ASSESSMENT CRITERIA
After studying this learning unit, you should be able to:
• calculate the parent's percentage interest in the preference share
capital of the subsidiary
• record any preference dividends paid or declared by a subsidiary in the
consolidated annual financial statements in accordance with IFRS
• record arrear cumulative preference dividends payable or paid by a
subsidiary in the consolidated annual financial statements in
accordance with IFRS
• allocate the dividend to non-controlling interests
• do the pro forma consolidation journal entries
1
9.1 INTRODUCTION
In learning unit 8, we discussed the treatment of dividends where the subsidiary's share capital
consists of ordinary share capital only. In this learning unit, we deal with the treatment of
preference share capital and preference dividends. Preference shares carry a fixed dividend
percentage. When adequate profits are available, these shares have a preference right to
dividends.
Preference shares can only exist when another class of shares (generally ordinary shares)
exists so the preference shares can enjoy certain preferential rights in comparison to the other
shares.
The preferential rights in respect of dividends are probably the most important right attached
to preference shares. This right is normally expressed as a percentage of the value of the
share, for example 9% preference shares with an issued value of R400 000 would receive a
dividend of R36 000 (9% x R400 000). If the subsidiary is liquidated, the preference owners will
therefore receive a maximum amount of R400 000.
Where a subsidiary has issued preference shares, these shares have a preferential claim to
the profit of the company, whereas the balance is attributable to the ordinary owners. As in the
case of ordinary shares, preference owners cannot legally lay claim to their share of the profit
before a company has declared a preference dividend. If the preference shares are cumulative,
ordinary owners may receive no dividend in the current reporting period, unless a preference
dividend is declared.
We can classify preference shares as follows with regard to dividends:
• Non-cumulative
These owners are not entitled to payment of arrear dividends.
• Cumulative
If no dividend is declared in a specific reporting period, there is a cumulative preferential
right, which is a right to have preference to the arrear and current preference dividends
before a dividend may be declared on any other class of shares on the first subsequent
dividend declaration. Even if the company does not declare a formal dividend to the
preference owners, a dividend will accrue and become payable based on the terms of the
preference shares.
Normally, cumulative preferential rights to dividends are specifically prescribed in the

designation of the shares, for example 8% cumulative preference shares. Where it is
not specifically stipulated, it is assumed that preference shares are cumulative.
Participating preference shares share in the profits of a company after the payment of
the preference dividend, whereas convertible preference shares are convertible to
ordinary shares at a specific date in future. Although a company may not buy its own
shares, it may buy back (redeem) redeemable preference shares at a predetermined
price after a specific period.
2
Where preference shares are held in a subsidiary, this affects the calculation of the non-
controlling interests in the consolidated statement of profit or loss and other comprehensive
income and the statement of financial position. By the time you have completed this learning
unit, you should have a clear understanding of this concept.
Liability versus equity
When the issuer of preference shares has a contractual obligation to deliver cash or a financial
instrument to the holder of the preference shares, or does not have an unconditional right to
avoid delivering cash or a financial asset to settle the contractual obligation, the obligation
meets the definition of a financial liability (IAS 32.19). Likewise, if the issuer of preference
shares does have an unconditional right to avoid delivering cash or a financial asset to settle
the contractual obligation, the obligation meets the definition of an equity instrument. An equity
instrument is any contract that evidences a residual interest in the assets of an entity after
deducting the liabilities.
In FAC2602 we do not classify financial instruments. It is therefore assumed that preference

shares that provide for the mandatory redemption by the issuer of the shares, for a fixed amount
at a fixed future date, and where the payment of the dividends is compulsory, are classified as
financial liabilities. Such an investment is not consolidated. In all other instances preference
shares are assumed to be non-redeemable and therefore regarded as equity instruments. In
FAC2602 we will assume all preference shares are classified as equity and therefore
consolidate them where applicable.
9.2 CONSOLIDATION PROCEDURES IF THE SUBSIDIARY'S CAPITAL

INCLUDES PREFERENCE SHARES
Since the parent's percentage interest in the ordinary share capital of the subsidiary is not
necessarily the same as its percentage interest in the preference share capital, we recommend
that you always draw up two separate analyses of owner’s equity, namely one for ordinary
share capital and one for preference share capital.
Carefully work through the following example:
3
EXAMPLE 1
The following are the condensed financial statements of P Ltd and its subsidiary, S Ltd:
STATEMENTS OF FINANCIAL POSITION AS AT 31 DECEMBER 20.7
P Ltd S Ltd
R R
ASSETS
Property, plant and equipment
Land at cost price 100 000 80 000
Plant at carrying amount 40 000 20 000
Investment in S Ltd at fair value
75 000 ordinary shares (cost price: R120 000) 120 000 -
20 000 preference shares (cost price: R25 000) 25 000 -
Current account in S Ltd 8 000 -
Inventories 25 000 60 000
Trade and other receivables 20 000 48 000
338 000 208 000
EQUITY AND LIABILITIES

Share capital – ordinary shares (200 000/100 000 shares) 200 000 100 000
Share capital – 10% preference shares (50 000 shares) - 50 000
Retained earnings 54 000 37 000
Current account in P Ltd - 5 000
Current liabilities 84 000 16 000
338 000 208 000
STATEMENTS OF PROFIT OR LOSS AND OTHER COMPREHENSIVE INCOME FOR THE

YEAR ENDED 31 DECEMBER 20.7
P Ltd S Ltd
R R
Gross profit 60 500 58 000
Income received from S Ltd
Ordinary dividend 7 500 -
Preference dividend 2 000 -
Profit before tax 70 000 58 000
Income tax expense (25 000) (20 000)
PROFIT FOR THE YEAR 45 000 38 000
Other comprehensive income for the year - -
TOTAL COMPREHENSIVE INCOME FOR THE YEAR 45 000 38 000
4
STATEMENTS OF CHANGES IN EQUITY FOR THE YEAR ENDED 31 DECEMBER 20.7
Ordinary share 10% preference Retained

capital share capital earnings Total
P Ltd S Ltd P Ltd S Ltd P Ltd S Ltd P Ltd S Ltd
R R R R R R R R
Balance at 1 January 20.7 200 000 100 000 - 50 000 24 000 14 000 224 000 164 000
Changes in equity for 20.7
Total comprehensive income
for the year
Profit for the year 45 000 38 000 45 000 38 000
Dividend paid: preference - (5 000) - (5 000)
Dividend paid: ordinary (15 000) (10 000) (15 000) (10 000)
Balance at 31 December
200 000 100 000 - 50 000 54 000 37 000 254 000 187 000
20.7
Additional information
1. P Ltd acquired its shareholding in S Ltd on 1 January 20.5, on which date S Ltd's retained
earnings was R9 000.
Consider the carrying amount of the assets and liabilities of S Ltd to be equal to the fair value
thereof at the date of acquisition, except for the land of S Ltd, which is valued at R120 000.
No entries have been made in the books of the subsidiary. No purchases or sales of land
has taken place subsequently.
2. Since 1 April 20.7, S Ltd has been buying some of its inventories from P Ltd at cost price
plus 25%. On 31 December 20.7, the inventories of S Ltd included inventories to the value
of R10 000 that had been purchased from P Ltd. Inventories that P Ltd invoiced at R3 000
were in transit to S Ltd at 31 December 20.7.
REQUIRED
Draft the consolidated annual financial statements of the P Ltd Group for the
year ended 31 December 20.7 in compliance with the requirements of IFRS.
Ignore taxation on unrealised profits and/or losses.
5
SOLUTION
P LTD GROUP
CONSOLIDATED STATEMENT OF FINANCIAL POSITION AS AT 31 DECEMBER 20.7
R
ASSETS
Non-current assets
Property, plant and equipment [100 000 + 80 000 + 280 000
40 000 (revaluation) + 40 000 + 20 000]
Goodwill (8 250(4) + 5 000(4)) 13 250
293 250
Current assets
Inventories [25 000 + 60 000 + 3 000 (in transit) − (13 000 x125
25
)] 85 400
Trade and other receivables (20 000 + 48 000) 68 000
153 400
Total assets 446 650

Equity attributable to owners of the parent
Share capital 200 000
Retained earnings (5) 72 400
272 400
Non-controlling interests (44 250(3) + 30 000(3)) (d)
74 250
Total equity 346 650
Current liabilities (84 000 + 16 000) 100 000
Total equity and liabilities 446 650
CONSOLIDATED STATEMENT OF PROFIT OR LOSS AND OTHER COMPREHENSIVE

INCOME FOR THE YEAR ENDED 31 DECEMBER 20.7
R
Profit before tax (calculation 2) 115 900
Income tax expense (25 000 + 20 000) (45 000)
PROFIT FOR THE YEAR 70 900
Other comprehensive income for the year -
TOTAL COMPREHENSIVE INCOME FOR THE YEAR 70 900
Total comprehensive income attributable to:

Owners of the parent (70 900 − 11 250) 59 650
Non-controlling interest (9 500 − 1 250 + 3 000)(1)/(b) 11 250
70 900
6
P LTD GROUP
CONSOLIDATED STATEMENT OF CHANGES IN EQUITY FOR THE YEAR ENDED
31 DECEMBER 20.7
Non-
Share Retained Total
Total controlling
capital earnings equity
interests
R R R R R
Balance at 1 January 20.7 200 000 27 750* 227 750 68 500(a) 296 250
Changes in equity for
20.7
Total comprehensive
income for the year
Profit for the year 59 650 59 650 11 250(b) 70 900
Dividend paid: ordinary (15 000) (15 000) (5 500)(c) (20 500)
Balance at 31 December
200 000 72 400 272 400 74 250(d) 346 650
20.7
* (24 000 + 3 750(2))
Calculations
1. Analysis of owner's equity of S Ltd

Ordinary shares P Ltd 75%* NCI
Total At Since 25%
R R R R
At acquisition
Share capital 100 000 75 000 25 000
Retained earnings 9 000 6 750 2 250
Revaluation surplus
(120 000 - 80 000) 40 000 30 000 10 000
Equity represented by goodwill - 149 000 111 750 37 250

parent
8 250 8 250(4) -
Consideration and NCI 157 250 120 000 37 250
Since acquisition
• To beginning of current year
(2)
1 250
(14 000 - 9 000)
• Current year
(1)
Profit for the year 38 000 28 500 9 500
(1)
Preference dividend# (5 000) (3 750) (1 250)
Ordinary dividend (10 000) (7 500) (2 500)
(3)
185 250 21 000 44 250
# Refer to the comments at the end of the solution for an explanation.
* 75 000/100 000 shares x 100% = 75%
7
Preference shares P Ltd 40 %* NCI
Total At Since 60%
R R R R
At acquisition 50 000 20 000 30 000
Share capital
Equity attributable to goodwill -
parent 5 000 5 000(4) -
Since acquisition
• Current year
(1)
Attributable profit# 5 000 2 000 3 000
Preference dividend (5 000) (2 000) (3 000)
(3)
55 000 - 30 000
# Refer to the comments at the end of the solution for an explanation.
* 20 000/50 000 shares x 100% = 40%
2. Profit before tax

R
P Ltd 70 000
S Ltd 58 000
Ordinary dividend received from S Ltd (7 500)
Preference dividend received from S Ltd (2 000)
Unrealised profit in closing inventories (2 600)
[(10 000 + 3 000) x 25/125]
115 900
8
3. Entries in the financial records of S Ltd
Dr Cr NCI
R R R
Land 40 000
Revaluation surplus 40 000
Valuation of land at acquisition
Inventory 3 000
Current account in P Ltd 3 000
Inventory in transit at 31 December 20.7
4. Pro forma consolidated journal entries

Retained earnings 9 000
Goodwill 8 250
Investment in B Ltd 120 000
Non-controlling interests 37 250 37 250
Elimination of owner's equity of S Ltd at acquisition
Recording of non-controlling interests in
S Ltd for the period ended 31 December 20.6
Preference share capital 50 000
Goodwill 5 000
Investment in S Ltd 25 000
Elimination of owner's equity of S Ltd at acquisition
68 500(a)
Non-controlling interests (SCI) [(38 000 - 5 000) x 8 250

25%]
Non-controlling interests (SFP) 8 250 8 250(b)
Recording of non-controlling interests in profit after tax of S Ltd,
after provision for preference dividends for current year ended 31
December 20.7
Dividends received – P Ltd 7 500
Non-controlling interests (SFP) 2 500 (2 500)(c)
Dividend paid – S Ltd 10 000
Elimination of intragroup dividend and recording of non-
controlling interests in the dividend
Non-controlling interests (SCI) 3 000
Recording of non-controlling interests in profit after tax for
the current year ended 31 December 20.7 in S Ltd
9
Dr Cr NCI
R R R
Dividends received (preference shares) – P Ltd 2 000
Dividend paid (preference shares) – S Ltd 5 000
Elimination of intragroup dividend and recording
of non-controlling interests in the dividend
Gross profit/Profit before tax – P Ltd 2 600

Inventory – S Ltd 2 600
Elimination of unrealised profit in closing
inventory
Current account in P Ltd – S Ltd 8 000

Current account in S Ltd – P Ltd 8 000
Elimination of intragroup loans 74 250(d)
COMMENTS
Note that if the parent pays more for its investment in the subsidiary's preference shares than
the actual value of the shares, it will result in ‘goodwill’.
Don’t be confused: we do not take the preference dividend* into account twice in the two
analyses of owner's equity. We merely transfer the pro rata portion (10% x 50 000) of the
preference owners' interest in the profit from the ordinary owners analysis to the preference
owners analysis so that it can be distributed as dividends according to that percentage
interest (40:60).
To calculate the goodwill and NCI amounts in the statement of financial position, we need to
add together the amounts obtained from the ordinary and preference analyses.
9.3 TREATMENT OF PREFERENCE DIVIDENDS OF THE SUBSIDIARY

You often come across situations where there are arrear preference dividends. Since we are
dealing with cumulative preference shares here, we need to make provision for any arrear
preference dividends. A company must pay all arrear preference dividends before it may pay
an ordinary dividend.
10
EXAMPLE 2
Preference dividend for 1 year outstanding at accounting date – declared

dividend must still be provided for
The following represent the abridged financial statements of A Ltd and its subsidiary, B Ltd:
STATEMENTS OF FINANCIAL POSITION AS AT 31 DECEMBER 20.9
A Ltd B Ltd
ASSETS R R
Plant 50 000 120 000
Investment in B Ltd at fair value
- 75 000 ordinary shares (cost price: R86 250) 86 250 –
- 4 000 preference shares (cost price: R4 000) 4 000 –
167 000 168 000
Share capital – ordinary shares (100 000 shares) 100 000 100 000
– 12% preference shares (20 000/10 000 shares) 20 000 10 000
Trade and other payables 12 000 18 000
167 000 168 000

12% preference share
Ordinary share capital capital Retained earnings Total
A Ltd B Ltd A Ltd B Ltd A Ltd B Ltd A Ltd B Ltd
R R R R R R R R
Balance at 1 January 20.9 100 000 100 000 20 000 10 000 14 000 28 000 134 000 138 000
Total comprehensive income for
the year
Balance at 31 December 20.9 100 000 100 000 20 000 10 000 35 000 40 000 155 000 150 000
A Ltd acquired its interest in B Ltd on 1 January 20.6, on which date the retained earnings of
B Ltd amounted to R15 000. On 1 January 20.6, no preference dividends were in arrears.
Provision must still be made for the 20.9 preference dividend declared, by both companies.
Consider the carrying amount of the assets and liabilities of B Ltd to be equal to the fair value
thereof on the date of acquisition.
11
SOLUTION 2
Before we can draft the consolidated financial statements we must first do the two analyses of
owner's equity.
Calculations
1. Analysis of owner's equity in B Ltd
Ordinary shares A Ltd 75%* NCI
Total At Since 25%
R R R R
At acquisition
Share capital 100 000 75 000 25 000
115 000 86 250 28 750
Purchase difference - - -
Consideration and NCI 115 000 86 250 28 750(a)
Since acquisition
Retained earnings
(28 000 - 15 000) 13 000 9 750(3) 3 250(a)
• Current year
Profit for the year 12 000 9 000 3 000(2)
Preference dividend (12% x (1 200) (900) (300)(2)
10 000)
138 800 1 7 850 34 700(4)
* 75 000/100 000 shares x 100% = 75%
12
Preference shares Total A Ltd 40 %* NCI
At Since 60%
R R R R
At acquisition
Share capital 10 000 4 000 6 000
Purchase difference - - -
(a)
Since acquisition
• Current year
Profit attributable to
preference owners 1 200 480 720(2)
Preference dividend (1 200) (480) (720)
(1)
10 000 - 6 000(4)
* 4 000/10 000 shares x 100% = 40%

Dr Cr NCI
R R R
Share capital – ordinary shares 100 000
Goodwill NIL
Elimination of owner's equity of B Ltd at acquisition
Recording of non-controlling interests in B Ltd
for the period ended 31 December 20.8
Share capital – preference shares 10 000
Goodwill NIL
Elimination of owner's equity of B Ltd at acquisition
38 000(a)
Non-controlling interests (SCI) [(12 000 − 1 200) x
2 700
25%)]
Recording of non-controlling interests in profit after
tax of B Ltd for the current year ended 31
December 20.9 – ordinary shares
13
Dr Cr NCI
R R R
Non-controlling interests (SCI) 720
Non-controlling interests (SFP) 720 720(b)
Recording of non-controlling interests in profit
after tax of B Ltd for the current year ended 31
December 20.9 – preference shares
Non-controlling interests (SFP) 720 (720)(c)

Dividends payable 720
Transfer of preference dividends proposed and
due to non-controlling owners
40 700(d)
A LTD GROUP
CONSOLIDATED STATEMENT OF FINANCIAL POSITION AS AT 31 DECEMBER 20.9
R
ASSETS
Non-current assets
Property, plant and equipment (50 000 + 120 000) 170 000
Current assets

Share capital (100 000 + 20 000) 120 000
170 930
Non-controlling interests (34 700(4) + 6 000(4)) (d) 40 700
Current liabilities
Dividends payable [(20 000 x 12%) + 720(1)] 3 120
Trade and other payables (12 000 + 18 000) 30 000
Total liabilities 33 120
A LTD GROUP
INCOME FOR THE YEAR ENDED 31 DECEMBER 20.9
R
PROFIT FOR THE YEAR (21 000 + 12 000) 33 000

Owners of the parent (33 000 − 3 420) (5)
29 580
Non-controlling interests (3 000 − 300 + 720) (2)/(b)
3 420
33 000
14
A LTD GROUP
31 DECEMBER 20.9
12%
Ordinary prefe- Non-
Retained Total
share rence control-
earnings equity
capital share ling
capital Total interests
R R R R R
Balance at 1 January 20.9 100 000 20 000 23 750* 143 750 38 000(a) 181 750
the year
(5)
Dividend declared: preference (20
000 x 12%) (2 400) (2 400) (720)(c) (3 120)
Balance at 31 December 20.9 100 000 20 000 50 930 170 930 40 700(d) 211 630
* (14 000 + 9 750(3))
15
EXAMPLE 3
Arrear preference dividend – still in arrears; that is, it has not been declared
The following represent the condensed annual financial statements of F Ltd and G Ltd for the
year ended 28 February 20.7:
STATEMENTS OF FINANCIAL POSITION AS AT 28 FEBRUARY 20.7
F Ltd G Ltd
R R
ASSETS
Land and buildings 475 990 308 700
Investment in G Ltd at fair value
70 000 ordinary shares (cost price: R156 800) 156 800 -
10 000 12% cumulative preference shares
(cost price: R12 500) 12 500 -
10% debentures (cost price: R4 000) 4 000 -
Loan account – F Ltd - 21 000
685 900 387 780
F Ltd G Ltd
R R
Share capital
- Ordinary shares (250 000/100 000 shares) 500 000 200 000
- 100 000 12% cumulative preference shares - 100 000
Revaluation surplus 20 000 15 000
Bank overdraft 27 690 3 280
10% debentures - 10 000
Loan account – G Ltd 21 000 -
685 900 387 780

YEAR ENDED 28 FEBRUARY 20.7
F Ltd G Ltd
R R
16
STATEMENTS OF CHANGES IN EQUITY FOR THE YEAR ENDED 28 FEBRUARY 20.7
Ordinary 12% cumulative Revaluation Retained earnings Total
share capital preference share surplus
capital
F Ltd G Ltd F Ltd G Ltd F Ltd G Ltd F Ltd G Ltd F Ltd G Ltd
Balance at 1 March 20.6 500 000 200 000 – 100 000 20 000 15 000 93 400 17 800 613 400 332 800

the year
Profit for the year – – 19 200 10 600 19 200 10 600
Balance at 28 February 20.7 500 000 200 000 – 100 000 20 000 15 000 112 600 28 400 632 600 343 400
1. F Ltd acquired its interest in G Ltd on 1 March 20.5, on which date the other components of equity were as follows:
F Ltd G Ltd
R R
Revaluation surplus 20 000 -
Each share carries one vote.

Consider the carrying amount of the assets and liabilities of G Ltd to be equal to the fair value thereof on the date of acquisition.
2. No preference dividends were in arrears at 1 March 20.5. No dividends have been declared or paid since.
3. Land of G Ltd was revalued on 31 January 20.6.
4. On 28 February 20.7, there was no arrear interest on debentures.
17
REQUIRED
Draft the consolidated annual financial statements of the F Ltd Group
at 28 February 20.7 according to the requirements of IFRS.
SOLUTION 3
F LTD GROUP
CONSOLIDATED STATEMENT OF FINANCIAL POSITION AS AT 28 FEBRUARY 20.7
R
ASSETS
Non-current assets
Goodwill (10 780 + 2 500)(5) 13 280
797 970
Current assets
Inventories (15 510 + 45 280) 60 790
94 690

Other components of equity 30 500
642 560
(4)/(c)
Non-controlling interests (65 820 + 111 600) 177 420
Non-current liabilities
Long-term borrowing – 10% debentures (10 000 – 4 000) 6 000
6 000
Current liabilities
Bank overdraft (27 690 + 3 280) 30 970
66 680
18
F LTD GROUP
INCOME FOR THE YEAR ENDED 28 FEBRUARY 20.7
R
Non-controlling interests (3 180 − 3 600 + 10 800)(1)/(b) 10 380
29 800
F LTD GROUP
CONSOLIDATED STATEMENT OF CHANGES IN EQUITY FOR THE YEAR ENDED 28
FEBRUARY 20.7
Revalua- Non-
Share tion Retained controlling Total
capital surplus earnings Total interest equity
R R R R R R
Balance at 1 March 20.6 500 000 30 500* 92 640# 623 140 167 040(a) 790 180
Total comprehensive income
for the year
Balance at 28 February 20.7 500 000 30 500 112 060 642 560 177 420(c) 819 980
* (20 000 + 10 500(3))

#
(93 400 - 1 960(2) + 1 200(2))
19
Calculations
1. Analysis of owner's equity of G Ltd
Ordinary shares F Ltd 70 % NCI
Total At Since 30 %
R R R R
At acquisition
Share capital 200 000 140 000 60 000
208 600 146 020 62 580
Equity represented by goodwill (5)
- parent 10 780 10 780 -
Since acquisition
Retained earnings/(loss) (2 800) (2)
(1 960) RE (840)
Given (17 800 - 8 600) 9 200
Arrear preference dividends
(12% x 100 000 x 1 year) (12 000)
Revaluation surplus 15 000 (3)
10 500 OCE 4 500
• Current year (1)
Profit for the year 10 600 7 420 RE 3 180
(1)
Preference dividends (12 000) (8 400) RE (3 600)
(2 940) RE
(4)
230 180 10 500 OCE 65 820
* 70 000/100 000 shares x 100% = 70%
20
Preference shares F Ltd 10 %* NCI
Total At Since 90%
R R R R
At acquisition
Share capital 100 000 10 000 90 000
parent
2 500 2 500(5) -
Consideration and NCI
102 500 12 500 90 000
Since acquisition
Preference dividends (2)
12 000 1 200 10 800
• Current year
Preference dividends (1)
12 000 1 200 10 800
(4)
126 500 2 400 111 600
* 10 000/100 000 shares x 100% = 10%

R
F Ltd 29 600
G Ltd 16 300
Interest received on debentures (400)
Interest paid on debentures 400
45 900

Dr Cr NCI
R R R
Goodwill 10 780
Investment in G Ltd 156 800
Elimination of owner's equity of G Ltd at acquisition
840 (840)
Non-controlling interests (SFP)
Retained earnings/(loss) 840
profit/(loss) since acquisition to beginning of current
year
21
Dr Cr NCI
R R R
revaluation of assets for the period ended 29
February 20.6
Goodwill 2 500
Investment in G Ltd 12 500
Elimination of owner's equity of G Ltd at acquisition
– preference shares
10 800
Retained earnings – preference shares
attributable to preference shares for the period
ended 29 February 20.6
167 040(a)
Non-controlling interests (SFP) [(10 600 - 12 000) x 420
(420)(b)
30%]
Non-controlling interests (SCI) 420
tax for the current year ended 28 February 20.7
attributable to preference shares for the current
year ended 28 February 20.7
10% debentures – G Ltd 4 000
10% debentures – F Ltd 4 000
Elimination of intragroup debentures
Loan account G Ltd – F Ltd 21 000
Loan account F Ltd – G Ltd 21 000
Elimination of intragroup loans
Interest received from G Ltd – F Ltd 400
Interest paid to F Ltd – G Ltd 400
Elimination of intragroup transactions
177 420(c)
22
COMMENTS
Remember that we need to eliminate all intragroup transactions. Always scrutinise the
balances provided in the question carefully. We must also eliminate debentures and the
related interest issued within the group.
There is no journal entry for the preference dividends, since they have not even been
declared yet.
EXAMPLE 4
Arrear preference dividend - paid since then
The following represent the condensed annual financial statements of W Ltd and V Ltd for the
year ended 28 February 20.7:
STATEMENTS OF FINANCIAL POSITION AS AT 28 FEBRUARY 20.7
W Ltd V Ltd
R R
ASSETS
Land and buildings 475 990 308 700
Investment in V Ltd at fair value
- 70 000 ordinary shares (cost price: R150 000) 150 000 -
- 10 000 12% cumulative preference shares (cost price:
12 500 -
R12 500)
- 10% debentures (cost price: R4 000) 4 000 -
Bank - 20 720
Loan account – W Ltd - 28 000
679 100 408 500

Share capital
- Ordinary shares (250 000/100 000 shares) 500 000 200 000
- 100 000 12% cumulative preference shares - 100 000
Revaluation surplus 20 000 15 000
Bank overdraft 20 890 -
Loan account – V Ltd 21 000 -
Dividends payable - 10 000
679 100 408 500
23
YEAR ENDED 28 FEBRUARY 20.7
W Ltd V Ltd
R R
24
STATEMENTS OF CHANGES IN EQUITY FOR THE YEAR ENDED 28 FEBRUARY 20.7
12% cumulative
Ordinary share capital Revaluation surplus Retained earnings Total
preference share capital
W Ltd V Ltd W Ltd V Ltd W Ltd V Ltd W Ltd V Ltd W Ltd V Ltd
R R R R R R R R R R
Balance at 1 March 20.6 500 000 200 000 - 100 000 20 000 15 000 93 400 17 800 613 400 332 800
Changes in equity for
20.7
Total comprehensive
income for the year
- -
- -
Dividend declared:
- (10 000) - (10 000)
ordinary
Dividend paid: preference - (24 000) - (24 000)
Balance at 28 February
500 000 200 000 - 100 000 20 000 15 000 112 600 52 400 632 600 367 400
20.7
1. W Ltd acquired its interest in V Ltd on 1 March 20.5, at which date the other components of equity were as follows:
W Ltd V Ltd
R R
Revaluation surplus 20 000 -
Each share carries one vote.

Consider the carrying amount of the assets and liabilities of V Ltd to be equal to the fair value thereof on the date of
acquisition.
2. On 1 March 20.5, no preference dividends were in arrears. All preference dividends since 1 March 20.5 were paid on 28 February 20.7.
3. The land of V Ltd was revalued on 31 January 20.6.
4. On 28 February 20.7, V Ltd declared a dividend of 10 cents per ordinary share. W Ltd recorded this receivable dividend.
5. On 28 February 20.7, there was no arrear interest on debentures.
25
REQUIRED
Draft the consolidated annual financial statements of the W Ltd Group at 28
February 20.7 according to the requirements of IFRS.
SOLUTION 4
W LTD GROUP
CONSOLIDATED STATEMENT OF FINANCIAL POSITION AS AT 28 FEBRUARY 20.7
R
ASSETS
Non-current assets
Goodwill (3 980 + 2 500)(6) 6 480
791 170
Current assets
Inventories (15 510 + 38 280) 53 790
Cash and cash equivalents 20 720
108 410

Other components of equity 30 500
673 760
(4)/(e)
Non-controlling interests (80 220 + 90 000) 170 220
Long-term borrowing – 10% debentures (10 000 − 4 000) 6 000
6 000
Current liabilities
Bank overdraft 20 890
Dividends payable (5) 3 000
49 600
26
W LTD GROUP
INCOME FOR THE YEAR ENDED 28 FEBRUARY 20.7
R
Non-controlling interests (20 580 − 3 600 + 10 800) (1)/(b) 27 780
78 400
W LTD GROUP
28 FEBRUARY 20.7
Revalua- Non-
Share Retained Total
tion controlling
capital earnings equity
surplus Total interest
R R R R R R
Balance at 1 March 20.6 500 000 30 500* 92 640# 623 140 167 040(a) 790 180
the year
Dividend declared: ordinary – – (3 000)(c) (3 000)
Dividend paid: preference – – (21 600)(d) (21 600)
Balance at 28 February 20.7 500 000 30 500 143 260 673 760 170 220(e) 843 980
* (20 000 + 10 500(3))
# (93 400 – 1 960(2) + 1 200(2))
27
Calculations
1. Analysis of owner's equity of V Ltd
Ordinary shares W Ltd 70 %* NCI
Total At Since 30%
R R R R
At acquisition
Share capital 200 000 140 000 60 000
6 020 2 580
208 600 146 020 62 580
(6)
Equity represented by goodwill 3 980 3 980 -
- parent
212 580 150 000 62 580
Consideration and NCI
Since acquisition
(2)
Retained earnings/(loss) Given (2 800) (1 960) RE (840)
(17 800 - 8 600) 9 200
Arrear preference dividends

(12% x 100 000 x 1 year) (12 000)
(3)
15 000 10 500 OCE
• Current year
68 600 48 020 RE
Profit for the year (1)
(8 400) RE 20 580
(12 000) (1)
Preference dividends (7 000) RE (3 600)
(5)
(10 000) (3 000)
Ordinary dividends
30 660 RE (4)
271 380 10 500 OCE 80 220
* 70 000/100 000 shares x 100% = 70%
28
Preference shares W Ltd 10 %* NCI
Total At Since 90%
R R R R
At acquisition
Share capital 100 000 10 000 90 000
Equity represented by goodwill - parent 2 500 2 500(6) -

Since acquisition
Preference dividends 12 000 1 200(2) 10 800
• Current year
Profit attributable to preference owners 12 000 1 200(5) 10 800(1)
Arrear preference dividends paid (24 000) (2 400) (21 600)
102 500 - 90 000(4)
* 10 000/100 000 shares x 100% = 10%

R
W Ltd 29 600
V Ltd 106 000
Ordinary dividend declared by V Ltd (7 000)
Preference dividend paid by V Ltd [(10 000 x 12%) x 2] (2 400)
Interest received on debentures (400)
Interest paid on debentures 400
126 200

Dr Cr NCI
R R R
200 000
Share capital – ordinary shares
Goodwill 3 980
Investment in V Ltd 150 000
Elimination of owner's equity of V Ltd at acquisition
Non-controlling interests (SFP) 840 (840)

Retained earnings/(loss) 840
profit/(loss) since acquisition to beginning of current
year
29
Dr Cr NCI
R R R
4 500
Revaluation surplus
Recording of non-controlling interest in revaluation
surplus for the period ended 29 February 20.6
Goodwill 2 500
Investment in V Ltd 12 500
Elimination of owner's equity of V Ltd at acquisition
Retained earnings – preference shares 10 800
Recording of non-controlling interests in profit for
the period ended 29 February 20.6 – preference
shares
167 040(a)
[(68 600 − 12 000) x 30%]
the year ended 28 February 20.7
Dividends received – W Ltd 7 000
Ordinary dividends declared – V Ltd 10 000
Elimination of intragroup dividends and recording
of non-controlling interests in ordinary dividends
the year ended 28 February 20.7 - preference
shares
*Dividends received – W Ltd 2 400
Non-controlling interests (SFP) 21 600 (21 600)(d)
Preference dividends paid – V Ltd 24 000
of non-controlling interests in preference dividends
10% debentures – V Ltd 4 000
10% debentures – W Ltd 4 000
30
Dr Cr NCI
R R R
Dividends payable – V Ltd (10 000 x 70%) 7 000
Loan account in W Ltd – V Ltd 7 000
Transfer of dividends payable to loan account
Loan account V Ltd – W Ltd 21 000
Loan account W Ltd – V Ltd 21 000
Elimination of intragroup loans
(Note: the two loan accounts of the parent and the
subsidiary balance on R21 000.)
Interest received on debentures – W Ltd 400
Interest paid on debentures – V Ltd 400
Elimination of intragroup interest on debentures
(4 000 x 10%)
170 220(e)
COMMENTS
The only difference between examples 3 and 4 is that the dividends have been declared and
paid in example 4. There is an additional journal entry (*) to eliminate the intragroup dividend.
Remember that we must subtract the dividend of R2 400 that the parent received (income)
from the profit before tax in the statement of profit or loss and other comprehensive income
to eliminate it there.
9.4 EXERCISES
Now that you have studied group statements, you can work through the following exercises.
Your e-tutor can guide you in answering these questions.
31
QUESTION 1
The following represent the condensed statements of financial position of K Ltd and its
subsidiary, L Ltd, as at 28 February 20.2:
K Ltd L Ltd
R R
ASSETS
Property, plant and equipment
Land and buildings at cost 80 000 75 000
Investment in L Ltd at fair value 130 000 -
– 32 000 ordinary shares (cost price: R117 000) 117 000 -
– 8 000 8% cumulative preference shares
(cost price: R13 000) 13 000 -
Loan – K Ltd - 20 000
Current assets 45 000 72 000
– Trade and other receivables 30 000 53 000
– Inventories 15 000 19 000
255 000 167 000
Share capital 140 000 120 000
– Ordinary shares (50 000/40 000 shares) 100 000 100 000
– 8% cumulative preference shares (40 000/20 000 shares) 40 000 20 000
Loan – L Ltd 16 000 -
Current liabilities – trade and other payables 54 000 13 000
255 000 167 000
1. K Ltd acquired its total interest in L Ltd on 1 March 20.1, on which date the retained
earnings of L Ltd was R20 000.
2. On the date of acquisition, it was decided to revalue L Ltd's land upwards by R20 000.
Consider the carrying amount of all the other assets and liabilities of L Ltd to be equal to
the fair value thereof.
3. L Ltd's preference dividends are in arrears for the 20.2 financial year.
4. With effect from 1 March 20.1, K Ltd purchased some of its inventories from L Ltd. L
Ltd sold its inventories to K Ltd at cost plus 331/3%. On 28 February 20.2, K Ltd had
inventories to the value of R5 000 on hand, which it had purchased from L Ltd.
5. On 2 January 20.2, K Ltd sold a non-depreciable asset with a cost price of R10 000 to L
Ltd at cost plus 25%.
6. Cash to the value of R4 000 in respect of the last consignment of inventories that K Ltd
purchased from L Ltd was still in transit on 28 February 20.2.
7. Each share carries one vote.
32
REQUIRED
Draft the consolidated statement of financial position of the K Ltd Group as at
28 February 20.2 in compliance with the requirements of IFRS. Notes are
not required. (Show all your calculations.)
QUESTION 2
The following balances were taken from the records of P Ltd and D Ltd for the year ended
30 June 20.9:
P Ltd D Ltd
Debits R R
Property at cost 600 000 160 000
Equipment at cost 300 000 180 000
Investment in D Ltd at fair value
– 30 000 ordinary shares (cost price: R204 000) 204 000 -
Bank – O Bank 1 200 12 000
Income tax expense 190 000 170 000
Provisional tax payments 100 000 90 000
Loan to parent (interest-free) - 140 000
Dividends paid – ordinary shares 40 000 30 000
– preference shares 12 000 7 500
1 671 600 1 276 300
Credits
Share capital
– Ordinary shares (100 000/50 000 shares) 240 000 120 000
– 15% cumulative preference shares 80 000 50 000
(80 000/50 000 shares)
Retained earnings at beginning of the year 150 000 118 000
Accumulated depreciation
– equipment 128 000 94 000
Bank overdraft – B Bank 48 000 -
Taxation payable 190 000 170 000
Loan from subsidiary 120 000 -
1 671 600 1 276 300
33
1. P Ltd acquired its interest in D Ltd on 1 July 20.5. At that date, D Ltd's retained earnings
amounted to R35 000. P Ltd paid R204 000, R75 000 of which was for goodwill. The
balance was attributable to the revaluation of D Ltd's property. The carrying amount of all
the other assets and liabilities was equal to the fair value thereof. At the date of
acquisition, there was no arrear preference dividend. Each share carries one vote.
2. P Ltd has bought all its inventories from D Ltd since 1 July 20.8. D Ltd made a profit of 25%
on the cost price of inventories sold to P Ltd.
3. D Ltd paid no preference dividends for the period 1 July 20.5 to 30 June 20.7. On 30 June
20.8, D Ltd paid a preference dividend of R22 500.
4. On 29 June 20.9, D Ltd sent goods to the value of R20 000 to P Ltd, which P Ltd only
received on 3 July 20.9.
5. On 2 January 20.8, P Ltd sold a machine to D Ltd at a profit of R40 000. It is group policy
to provide for depreciation at 25% per annum according to the reducing balance method.
REQUIRED
Draft the consolidated annual financial statements of the P Ltd Group for the
year ended 30 June 20.9 in accordance with the requirements of IFRS. No
notes are required. Ignore taxation on unrealised profits and/or losses as
well as capital gains tax.
34
QUESTION 3
The following balances were extracted from the records of J Ltd and T Ltd at 31 December
20.3:
J Ltd T Ltd
Debits R R
Land at cost 150 000 180 000
Machinery
- Cost price 128 400 180 000
- Accumulated depreciation (59 600) (95 900)
Patents at carrying amount 7 600 9 500
Investment in T Ltd
- 70 000 ordinary shares at fair value
(cost price: R125 000) 125 000 -
- 40 000 6% cumulative preference shares
at fair value (cost price: R40 000) 40 000 -
- 20 000 debentures at fair value (cost price: R20 000) 20 000 -
Loan account T Ltd 53 400 -
Provisional tax payments 14 000 17 000
Cash in bank 79 000 -
691 800 452 600
J Ltd T Ltd
Credits R R
Ordinary shares (320 000/100 000 shares) 352 000 100 000
6% cumulative preference shares (10 000/80 000 shares) 10 000 80 000
Loan account J Ltd - 50 000
Bank overdraft - 40 000
Tax payable 25 000 16 000
691 800 452 600
35
YEAR ENDED 31 DECEMBER 20.3
J Ltd T Ltd
R R
Gross profit 106 300 97 900
Expenses (36 800) (29 000)
Auditors' remuneration 2 000 1 000
Depreciation 19 800 10 400
Staff costs 15 000 13 000
Interest on debentures - 3 000
Interest on bank overdraft - 1 600
69 500 68 900
Other income 10 600 -
Interest received on debentures 1 200 -
Preference dividends received 2 400 -
Ordinary dividends received 7 000 -
36
6% cumulative
preference share
Ordinary share capital capital Retained earnings Total
J Ltd T Ltd J Ltd T Ltd J Ltd T Ltd J Ltd T Ltd
R R R R R R R R
Balance at 1 January 20.3 352 000 100 000 10 000 80 000 95 950 42 000 457 950 222 000
Total comprehensive income for the year
Dividend paid: ordinary (20 000) (10 000) (20 000) (10 000)
Dividend paid: preference (600) (4 800) (600) (4 800)
Balance at 31 December 20.3 352 000 100 000 10 000 80 000 130 450 80 100 492 450 260 100
1. On 1 January 20.1, J Ltd acquired 70 000 ordinary shares and 40 000 6% cumulative preference shares in T Ltd. All the assets and
liabilities were considered to be reasonably valued, with the exception of the land, which was valued at R250 000. No purchases or
sales of land has taken place since then. No adjustment has been made in respect of this yet.
2. At the date of acquisition, the subsidiary had retained earnings of R8 000. No preference dividends were in arrears at acquisition.
3. J Ltd supplied goods to its subsidiary at cost plus 20%. Particulars of goods supplied to T Ltd by J Ltd during the year ended
31 December 20.3 were as follows:
R
Inventories 1 January 20.3 12 000
Purchases during the year 120 000
Inventories at 31 December 20.3 4 800
On 27 December 20.3, J Ltd sent goods to T Ltd which were invoiced at R1 800. However, T Ltd only received these goods on 5
January 20.4, and therefore the goods were not taken into inventories at 31 December 20.3.
4. T Ltd sent R1 600 to J Ltd on 28 December 20.3. J Ltd only received and banked this amount on 4 January 20.4.
37
5. J Ltd sold certain machinery to T Ltd at a price of R10 000 above the carrying amount after the date of acquisition of its interest in T Ltd.
T Ltd provides for depreciation on machinery at 20% per annum on cost price, based on the assumption that the machine will still have
five years of service left as from the date of purchase, namely 1 January 20.2.
6. Each ordinary share carries one vote.
7. The retained earnings to the amount of R42 000 as at 1 January 20.3 includes the preference dividends paid for the year ended
31 December 20.2.
REQUIRED
Draft the consolidated annual financial statements of the J Ltd Group for the year ended 31 December 20.3 in
compliance with the requirements of IFRS. Ignore taxation on unrealised profits and/or losses as well as capital
gains tax.
38
SOLUTIONS
QUESTION 1
K LTD GROUP
CONSOLIDATED STATEMENT OF FINANCIAL POSITION AS AT 28 FEBRUARY
20.2
R
ASSETS
Non-current assets
Property, plant and equipment [80 000 + 75 000 + 20 000 (revaluation) 172 500
– 2 500(5)]
Goodwill (5 000 + 5 000)(1) 10 000
182 500
Current assets
Inventories (15 000 + 19 000 − 1 250(4)) 32 750
Cash and cash equivalents 4 000
119 750

Equity attributable to the owners of the parent
Share capital (100 000 + 40 000) 140 000
(45 000 − 2 500(5) + 8 920(2) + 640(2))
192 060
Non-controlling interests (30 230 + 12 960)(3)/(a) 43 190
Current liabilities
39
Calculations
1. Analysis of owner's equity of L Ltd
Ordinary shares K Ltd 80 %* NCI

Total At Since 20%
At acquisition R R R R
Ordinary share capital 100 000 80 000 20 000
Revaluation surplus 20 000 16 000 4 000
140 000 112 000 28 000
Equity represented by goodwill -
parent 5 000 5 000(1) -
Since acquisition
• To end of current year
Given 34 000
At acquisition (20 000)
Arrear preference dividends 20.2 (1 600)
Unrealised profit in closing (1 250)(4)
inventories (33.3/133.3 x 5 000)
156 150 8 920(2) 30 230(3)
*: 32 000/40 000 x 100% = 80%
Preference shares K Ltd 40 %* NCI

Total At Since 60%
R R R R
At acquisition
Preference share capital 20 000 8 000 12 000
parent 5 000 5 000(1) -
Since acquisition
• To end of current year
Arrear preference dividend 20.2 1 600 640 960
26 600 640(2) 12 960(3)
*: 8 000/20 000x 100% = 40%
40
2. Profit on sale of non-depreciable asset
Cost price R10 000
Profit 25%
Profit to be eliminated 10 000 x 25% = R2 500(5)
3. Entries in the financial records of L Ltd
Dr Cr NCI
R R R
Land 20 000
Recording of the revaluation of land in L Ltd
Bank (cash in transit) 4 000

Loan K Ltd 4 000
Recording of cash in transit from K Ltd to L Ltd
Dr Cr NCI
R R R
Goodwill 5 000
Investment in L Ltd 117 000
Elimination of owner's equity of L Ltd at acquisition
Cost of sales – L Ltd 1 250
Inventories – K Ltd 1 250
Elimination of unrealised profit on closing inventory
2 500
Profit on sale of property – K Ltd
Property – L Ltd 2 500
Elimination of unrealised profit included in L Ltd's
property
Loan L Ltd – K Ltd 16 000
Loan K Ltd – L Ltd 16 000
Elimination of intragroup loan accounts
41
Dr Cr NCI
R R R
Non-controlling interests (SFP) 2 230 2 230
profit/(loss)

Goodwill 5 000
Investment in L Ltd 13 000
Elimination of owner's equity of L Ltd at
acquisition – preference shares
Retained earnings – preference shares 960
Non-controlling interests 960 960
the period ended 28 February 20.2 - preference
shares
43 190(a)
COMMENTS
On consolidation, we add the parent's retained earnings (100%) to the subsidiary's
retained earnings, but limited to the parent's share in the subsidiary's equity. We will
disclose the NCI portion separately under non-controlling interests in the statement of
changes in equity. We will include only the "since acquisition date" portion of the
subsidiary's retained earnings which we obtained from the analysis. We eliminated the
"at acquisition date" portion against the investment in the subsidiary. We have already
taken the unrealised profits the subsidiary made into account in the analysis. However,
we must account for the unrealised profit of R2 500 that the parent made on the sale of
the property additionally in retained earnings.
42
QUESTION 2
P LTD GROUP
CONSOLIDATED STATEMENT OF FINANCIAL POSITION AS AT 30 JUNE 20.9
R
ASSETS
Non-current assets
Property, plant and equipment [(600 000 + 160 000 + 60 000) + 1 051 750
(300 000 + 180 000 − 40 000) − (128 000 + 94 000 − 5 000(4) − 8 750(5))]
(6)
Goodwill 75 000
1 126 750
Current assets
Inventories (100 000 + 80 000 + 20 000 − 24 000) 176 000
Cash and cash equivalents (1 200 + 12 000) 13 200
720 400
Total assets 1 847 150

Share capital (240 000 + 80 000) 320 000
(8)
944 250
Non-controlling interests (221 000 + 50 000)(7)/(e) 271 000
Total equity 1 215 250
Current liabilities
Tax payable (190 000 + 170 000 - 100 000 - 90 000) 170 000
Total equity and liabilities 1 847 150
43
P LTD GROUP
CONSOLIDATED STATEMENT OF PROFIT OR LOSS AND OTHER
COMPREHENSIVE INCOME FOR THE YEAR ENDED 30 JUNE 20.9
R

Non-controlling interests (113 800 + 7 500)(2)/(b) 121 300
632 750

30 JUNE 20.9
15% cum.
Non-
Ordinary prefe-
Retained control- Total
share rence Total
earnings ling equity
capital share
interests
capital
R R R R R R
Balance at 1 July 20.8 240 000 80 000 164 800* 484 800 169 200(a) 654 000
Total comprehensive income for the
year
Dividend paid: ordinary (40 000) (40 000) (12 000)(c) (52 000)
Dividend paid: preference (12 000) (12 000) (7 500)(d) (19 500)
Balance at 30 June 2 .9 240 000 80 000 (8) 944 250 271 000(e) 1 215 250
624 250
* (150 000 + 49 800(1) – 40 000(3) + 5 000(4))
44
Calculations
1. Analysis of owner's equity of D Ltd

Ordinary shares P Ltd 60 %* NCI
Total At Since 40%
At acquisition R R R R
Share capital 120 000 72 000 48 000
Revaluation surplus 60 000* 36 000 24 000
215 000 129 000 86 000
Equity represented by goodwill - parent 75 000 75 000 (6) -

290 000 204 000
Consideration and NCI# 86 000
Since acquisition
Retained earnings (118 000 - 35 000) 83 000 49 800 (1) 33 200
• Current year
Profit for the year 284 500 170 700 113 800(2)
Profit after tax 316 000

(486 000 -170 000)
Unrealised profit in inventories (24 000)
(120 000 x 25/125)
Preference dividend (7 500)
Ordinary dividends paid (30 000)

(18 000) (12 000)
627 500 202 500 221 000(7)
* 30 000/50 000 shares x 100% = 60%
R
# P Ltd paid 204 000
Goodwill (75 000)
60% investment 129 000
129 000 − (72 000 + 21 000) = 36 000 (60%)
36 000/60 x 100 = 60 000
45
Preference shares P Ltd 0 % NCI
Total At Since 10%
R R R R
At acquisition
Preference share capital 50 000 - - 50 000
Since acquisition
• Current year
Profit attributable to preference owners 7 500 7 500(2)
Preference dividend paid (7 500) (7 500)
50 000 - - 50 000(7)
2 Profit before tax R

Profit – P Ltd 540 000
Dividends received from D Ltd (30 000 x 60%) (18 000)
Adjustment for depreciation (calculation 3) 8 750
Profit – D Ltd 486 000
Unrealised profit in closing inventories (24 000)
992 750
3 Depreciation
Profit – 2 January 20.8 40 000(3)
Depreciation adjustment in 20.8 (40 000 x 6/12 x
(5 000)(4)
25%)
35 000
Depreciation adjustment in 20.9 (35 000 x 25%) (8 750)(5)
4 Entry in D Ltd's financial records
Property, plant and equipment/ Land 60 000
Recording of the revaluation of land in D Ltd
5 Entry in P Ltd's financial records
Inventories 20 000
Loan account D Ltd 20 000
Recording of inventories sent to P Ltd
46
6 Pro forma consolidated journal entries Dr Cr NCI
R R R

Goodwill 75 000
Investment in D Ltd 204 000
Elimination of owner's equity of D Ltd at
acquisition
Recording of non-controlling interests in retained
earnings for the period ended 30 June 20.8
Elimination of owner's equity of D Ltd at
acquisition – preference shares
169 200(a)
Cost of sales – D Ltd 24 000
Inventories – P Ltd 24 000
Elimination of unrealised profit on closing
inventory
Retained earnings – P Ltd 40 000
Machinery – D Ltd 40 000
Elimination of unrealised profit included in
D Ltd's machinery
Accumulated depreciation – D Ltd 13 750

Retained earnings – P Ltd 5 000
Depreciation – P Ltd 8 750
Elimination of the depreciation associated with
the profit on sale of machinery
Loan D Ltd – P Ltd 140 000
Loan P Ltd – D Ltd 140 000
47
Dr Cr NCI
R R R
after tax
Dividends received – P Ltd 18 000
Ordinary dividends paid – D Ltd 30 000
Dividends received – P Ltd NIL
Preference dividends paid – D Ltd 7 500
of non-controlling interests in preference
dividends
Non-controlling interests (SFP) 7 500 (7 500)(b)
Recording of non-controlling interests share in
profit attributable to preference shares for the
period ended 30 June 20.9
271 000(e)
COMMENTS
It is still advisable to do the analysis of preference equity, even though the parent does
not hold any preference shares of the subsidiary, because we should still need to
allocate the preference share capital of R50 000 to the non-controlling interests. We
also need to allocate to the non-controlling interests their share of profit of R7 500 in
the statement of profit or loss and other comprehensive income.
48
QUESTION 3
J LTD GROUP
CONSOLIDATED STATEMENT OF FINANCIAL POSITION AS AT 31 DECEMBER
20.3
R
ASSETS
Non-current assets
Property, plant and equipment [(150 000 + 250 000) + 564 000
298 400 (calculation 4) − 151 500 (calculation 4) + (7 600 + 9 500)]
Goodwill (400(2)) 400
564 400
Current assets
Inventories [62 000 + 62 000 + 1 800 (in transit) − 1 100 (unrealised profit)] 124 700
Cash and cash equivalents [79 000 + 1 600 (in transit)] 80 600
377 300

Share capital (352 000 + 10 000) 362 000
535 820
Non-controlling interests (75 030 + 40 000)(4)/(e) 115 030
Long-term borrowing – 6% debentures (50 000 − 20 000) 30 000
30 000
Current liabilities
Tax payable (25 000 + 16 000 − 14 000 − 17 000) 10 000
260 850
49
J LTD GROUP
CONSOLIDATED STATEMENT OF PROFIT OR LOSS AND OTHER
COMPREHENSIVE INCOME FOR THE YEAR ENDED 31 DECEMBER 20.3
Note R
Gross profit (calculation 2) 205 100
Administrative expenses [2 000 + 1 000 + 19 800 + 10 400 − (59 200)
(10 000 x 20%) + 15 000 + 13 000]
Finance costs [3 000 + 1 600 − (3 000 x 40%)] (3 400)
Profit before tax 1 142 500
Total comprehensive income attributable to: R

Non-controlling interest (14 430 + 2 400)(1)/(b) 16 830
101 500
J LTD GROUP
NOTES FOR THE YEAR ENDED 31 DECEMBER 20.3
1.lllProfit before tax

R
Profit before tax is arrived at after taking into account the following:
Expenses
Auditors' remuneration (2 000 + 1 000) 3 000
Depreciation 28 200
[19 800 + 10 400 − (10 000 x 20%)]
Staff costs (15 000 + 13 000) 28 000
50
J LTD GROUP
31 DECEMBER 20.3
15% cum
preference Non-
Share share Retained controlling Total
capital capital earnings Total interests equity
R R R R R R
Balance at 1 January 20.3 352 000 10 000 109 750* 471 750 103 600(a) 575 350
the year
Dividends paid: ordinary (20 000) (20 000) (3 000)(c) (23 000)
Dividend paid: preference (600) (600) (2 400)(d) (3 000)
Balance at 31 December 20.3 352 000 10 000 173 820 535 820 115 030(e) 650 850
* calculation 3
Calculations
1. Analysis of owner's equity of T Ltd

Ordinary shares J Ltd 70 %* NCI
Total At Since 30%
R R R R
At acquisition
Share capital 100 000 70 000 30 000
Revaluation surplus 70 000 49 000 21 000
178 000 124 600 53 400
parent 400 400(2) -
Since acquisition
Retained earnings 34 000 23 800(3) 10 200
Given (42 000 – 8 000)
• Current year
Profit after tax and preference 48 100 33 670 14 430(1)
dividend (52 900 - 4 800)
Ordinary dividend paid (10 000) (7 000) (3 000)
250 500 50 470 75 030(4)
* 70 000/100 000 shares x 100% = 70%
51
Cumulative preference shares J Ltd 50 %* NCI
Total
At Since 50%
R R R R
At acquisition
Share capital 80 000 40 000 40 000
parent - - -
Since acquisition
• Current year
Profit attributable to preference 4 800 2 400 2 400(1)
owners
Preference dividend paid (4 800) (2 400) (2 400)
80 000 - 40 000(4)
* 40 000/80 000 shares x 100% = 50%
2. Gross profit
R
Profit – J Ltd 106 300
– T Ltd 97 900
Unrealised profit in opening inventories (12 000 x 20/120) 2 000
Unrealised profit in closing inventories [(4 800 + 1 800) x 20/120] (1 100)
205 100
3. Retained earnings at the beginning of the year

R
Retained earnings – J Ltd 95 950
– T Ltd(3) 23 800
Profit on sale of machinery (10 000)
Depreciation adjustment on machinery sold 2 000
(10 000 x 20% x 1 year)
Unrealised profit in opening inventories (2 000)
109 750
52
4. Machinery
R
Cost price – J Ltd 128 400
– T Ltd 180 000
– profit on sale (10 000)
298 400
Accumulated depreciation – J Ltd 59 600
– T Ltd 95 900
– depreciation on machinery sold
– 20.2 (2 000)
– 20.3 (2 000)
151 500
5. Entries in T Ltd's financial records

Dr Cr NCI
R R R
Land 70 000
Recording of the revaluation of land in D Ltd
Inventories 1 800
Loan account J Ltd 1 800
Recording of inventories sent to T Ltd
6. Entries J Ltd's financial records
Bank – cash in transit 1 600

Loan account T Ltd 1 600
Recording of cash sent by T Ltd to J Ltd

Goodwill 400
Investment in T Ltd 125 000
Elimination of owner's equity of T Ltd at acquisition
53
Dr Cr NCI
R R R
Recording of non-controlling interests in retained
earnings for the period ended 31 December 20.2
Investment in T Ltd 40 000
Elimination of owner's equity of T Ltd at acquisition
103 600(a)
Income – sales – J Ltd 120 000
Cost of sales – T Ltd 120 000
Elimination of intragroup sales
Cost of sales – J Ltd 1 100
Inventories – T Ltd 1 100
Elimination of unrealised profit on closing inventory
Cost of sales – J Ltd 2 000
Elimination of unrealised profit on opening inventory
Machinery – T Ltd 10 000
Elimination of unrealised profit included in T Ltd's
machinery
Accumulated depreciation – T Ltd 4 000
Depreciation – J Ltd 2 000
Elimination of the depreciation associated with the
profit on sale of machinery
Loan J Ltd – T Ltd 51 800
Loan T Ltd – J Ltd 51 800
54
Dr Cr NCI
R R R
6% debentures – T Ltd 20 000
6% debentures – J Ltd 20 000
Interest on debentures received – J Ltd 1 200
Interest on debentures paid – T Ltd 1 200
Elimination of intragroup interests on debentures
tax
Dividends received – J Ltd 7 000
Ordinary dividends paid – T Ltd 10 000
Dividends received – J Ltd 2 400
Preference dividends paid – T Ltd 4 800
of non-controlling interests in preference dividends
Recording of non-controlling interests share in
profit attributable to preference shares
115 030(e)
55
SELF-ASSESSMENT
After studying this learning unit, are you able to:
• calculate the parent's percentage interest in the preference share
capital of the subsidiary?
• record any preference dividends paid or declared by a subsidiary
in the consolidated annual financial statements in accordance with
IFRS?
• record arrear cumulative preference dividends payable or paid by
a subsidiary in the consolidated annual financial statements in
accordance with IFRS?
• allocate the dividend to non-controlling interests?
• do the pro forma consolidation journal entries?
56

Learning Unit 9 Treatment of Preference Shares During Consolidation

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Learning Unit 9 Treatment of Preference Shares During Consolidation

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FAC2602

9.1 INTRODUCTION ........................................................................................................ 2

We can classify preference shares as follows with regard to dividends:

Normally, cumulative preferential rights to dividends are specifically prescribed in the

Liability versus equity

In FAC2602 we do not classify financial instruments. It is therefore assumed that preference

9.2 CONSOLIDATION PROCEDURES IF THE SUBSIDIARY'S CAPITAL

Carefully work through the following example:

STATEMENTS OF FINANCIAL POSITION AS AT 31 DECEMBER 20.7

EQUITY AND LIABILITIES

STATEMENTS OF PROFIT OR LOSS AND OTHER COMPREHENSIVE INCOME FOR THE

Ordinary share 10% preference Retained

EQUITY AND LIABILITIES

CONSOLIDATED STATEMENT OF PROFIT OR LOSS AND OTHER COMPREHENSIVE

Total comprehensive income attributable to:

* (24 000 + 3 750(2))

1. Analysis of owner's equity of S Ltd

Equity represented by goodwill - 149 000 111 750 37 250

2. Profit before tax

4. Pro forma consolidated journal entries

Non-controlling interests (SCI) [(38 000 - 5 000) x 8 250

Gross profit/Profit before tax – P Ltd 2 600

Current account in P Ltd – S Ltd 8 000

9.3 TREATMENT OF PREFERENCE DIVIDENDS OF THE SUBSIDIARY

Preference dividend for 1 year outstanding at accounting date – declared

STATEMENTS OF FINANCIAL POSITION AS AT 31 DECEMBER 20.9

STATEMENTS OF CHANGES IN EQUITY FOR THE YEAR ENDED 31 DECEMBER 20.9

* 75 000/100 000 shares x 100% = 75%

* 4 000/10 000 shares x 100% = 40%

2. Pro forma consolidated journal entries

Non-controlling interests (SFP) 720 (720)(c)

EQUITY AND LIABILITIES

Total comprehensive income attributable to:

STATEMENTS OF FINANCIAL POSITION AS AT 28 FEBRUARY 20.7

STATEMENTS OF PROFIT OR LOSS AND OTHER COMPREHENSIVE INCOME FOR THE

Changes in equity for 20.7

Each share carries one vote.

EQUITY AND LIABILITIES

* (20 000 + 10 500(3))

* 70 000/100 000 shares x 100% = 70%

* 10 000/100 000 shares x 100% = 10%

2. Profit before tax

3. Pro forma consolidated journal entries

Arrear preference dividend - paid since then

STATEMENTS OF FINANCIAL POSITION AS AT 28 FEBRUARY 20.7

EQUITY AND LIABILITIES

Each share carries one vote.

EQUITY AND LIABILITIES

* (20 000 + 10 500(3))

# (93 400 – 1 960(2) + 1 200(2))

(17 800 - 8 600) 9 200

Arrear preference dividends

* 70 000/100 000 shares x 100% = 70%

Equity represented by goodwill - parent 2 500 2 500(6) -

* 10 000/100 000 shares x 100% = 10%

2. Profit before tax

3. Pro forma consolidated journal entries

Non-controlling interests (SFP) 840 (840)

EQUITY AND LIABILITIES

Ordinary shares K Ltd 80 %* NCI

Preference shares K Ltd 40 %* NCI

3. Entries in the financial records of L Ltd

Bank (cash in transit) 4 000

4. Pro forma consolidated journal entries