Revision of basic

groups
• Topic list
• 1 IFRS 3 (revised): Main points
• 2 IFRS 10 Consolidated financial statements
• 3 IFRS 3 (revised), IFRS 13 and fair values
• 4 IAS 28 Investments in associates and joint ventures
• 5 IFRS 12 Disclosure of interests in other entities
 Introduction
• Basic groups were covered in your earlier studies. The emphasis is on the more
complex aspects of consolidation. We will revise briefly the main principles of
consolidation. If you have problems, then you should go back to your earlier study
material and revise this topic more thoroughly. IFRS 3 and IAS 27 were revised in
2008. In June 2011, IFRSs 10 to 13 made further significant changes. IAS 28
requires that consolidated accounts should be extended so that they include the
share of earnings or losses of companies which are associated companies or joint
ventures. You have covered associates in your earlier studies, but it is an important
standard and so we cover it in full here.
 IFRS 3 (revised): Main points

• In traditional accounting terminology, a group of companies consists of a parent

company and one or more subsidiary companies which are controlled by the
parent company. We will be looking at six accounting standards in this session
• In May 2011 the IASB issued a set of five new or revised standards, IAS 28 and
IFRSs 10, 11, 12 and 13. These amend and clarify definitions and concepts but do
not make changes to the accounting processes involved in group accounting.
 Objective of IFRS 3 — Business
Combinations(revised)
• The objective of IFRS 3 (revised) is to improve the relevance, reliability and
comparability of the information that a reporting entity provides in its financial
statements about a business combination and its effects. To accomplish that, IFRS
3 (revised) establishes principles and requirements of how the acquirer:
• (a) Recognises and measures in its financial statements the identifiable assets
acquired, the liabilities assumed and any non-controlling interest in the acquiree
• (b) Recognises and measures the goodwill acquired in the business combination or
a gain from a bargain purchase

• (c) Determines what information to disclose to enable users of the financial

statements to evaluate the nature and financial effects of the business combination
 Definitions
• All the definitions relating to group accounts are extremely important. You must
learn them and understand their meaning and application.
• Control. The power to govern the financial and operating policies of an entity so
as to obtain benefits from its activities. (IFRS 3 (revised), IFRS 10,) Subsidiary.
An entity that is controlled by another entity (known as the parent). (IFRS 10)
Parent. An entity that has one or more subsidiaries. (IFRS 10)
• Group. A parent and all its subsidiaries. (IFRS 10)
• Associate. An entity, including an unincorporated entity such as a partnership, in
which an investor has significant influence and which is neither a subsidiary nor
an interest in a joint venture. (IAS 28)
• Significant influence is the power to participate in the financial and operating
policy decisions of the investee but is not control or joint control over those
policies. (IAS 28)
• Joint arrangement. An arrangement of which two or more parties have joint
control. (IAS 28)
• Joint control. The contractually agreed sharing of control of an arrangement,
which exists only when decisions about the relevant activities require the
unanimous consent of the parties sharing control. (IAS 28)
• Joint venture. A joint arrangement whereby the parties that have joint control
(the joint venturers) of the arrangement have rights to the net assets of the
arrangement. (IAS 28, IFRS 11)
• Acquiree. The business or businesses that the acquirer obtains control of in a
business combination (IFRS 3 (revised))
• Acquirer. The entity that obtains control of the acquiree (IFRS 3 (revised))
• Business combination. A transaction or other event in which an acquirer obtains
control of one or more businesses. (IFRS 3 (revised))
• Contingent consideration. Usually, an obligation of the acquirer to transfer
additional assets or equity (IFRS 3 (revised)) interests to the former owners of an
acquiree as part of the exchange for control of the acquiree if specified future
events occur or conditions are met. (IFRS 3 (revised))
• Equity interests. Broadly used in IFRS 3 (revised) to mean ownership interests.
• Fair value. The price that would be received to sell an asset or paid to transfer a
liability in an orderly transaction between market participants at the measurement
date. (IFRS 13)
• Non-controlling interest. The equity in a subsidiary not attributable, directly or
indirectly, to a parent. (IFRS 3 (revised))
• Before discussing IFRS 3 (revised) in detail, we can summarise the
different types of investment and the required accounting for them as
follows.
 Identifying a business combination
• IFRS 3 (revised) requires entities to determine whether a transaction or other
event is a business combination by applying the definition in the IFRS.
 The acquisition method
• Entities must account for each business combination by applying the acquisition
method. This requires:
• (a) Identifying the acquirer. This is generally the party that obtains control.

• (b) Determining the acquisition date. This is generally the date the
consideration is legally transferred, but it may be another date if control is
obtained on that date.
• (c) Recognising and measuring the identifiable assets acquired, the liabilities
assumed and any non-controlling interest in the acquiree. (See below.)

• (d) Recognising and measuring goodwill or a gain from a bargain purchase.

• The recognition and measurement of identifiable assets acquired and liabilities
assumed other than non-controlling interest is dealt with later. Below we deal
with the cost of the acquisition, the consideration transferred, the goodwill and the
non-controlling interest.
 Acquisition-related costs
• Under IFRS 3 (revised) costs relating to the acquisition must be recognised
as an expense at the time of the acquisition. They are not regarded as an asset.
(Costs of issuing debt or equity are to be accounted for under the rules of IFRS
9.)
 Contingent consideration
• IFRS 3 (revised) requires recognition of contingent consideration, measured
at fair value, at the acquisition date.
IFRS 3 (revised) defines contingent consideration as:
Usually, an obligation of the acquirer to transfer additional assets or equity interests
to the former owners of an acquiree as part of the exchange for control of the
acquiree if specified future events occur or conditions are met. However, contingent
consideration also may give the acquirer the right to the return of previously
transferred consideration if specified conditions are met.
 IFRS 3
• IFRS 3 (revised) recognises that, by entering into an acquisition, the acquirer
becomes obliged to make additional payments. Not recognising that obligation
means that the consideration recognised at the acquisition date is not fairly stated.
• IFRS 3 (revised) requires recognition of contingent consideration, measured
at fair value, at the acquisition date. This is, arguably, consistent with how
other forms of consideration are fair valued. The acquirer may be required to pay
contingent consideration in the form of equity or of a debt instrument or cash.
• Debt instruments are presented in accordance with IAS 32. Contingent
consideration may occasionally be an asset, for example if the consideration has
already been transferred and the acquirer has the right to the return of part of it, an
asset may occasionally be recognised in respect of that right.
 Post-acquisition changes in the fair value of
the contingent consideration
• The treatment depends on the circumstances:
• (a) If the change in fair value is due to additional information obtained that
affects the position at the acquisition date, goodwill should be re-measured.
• (b) If the change is due to events which took place after the acquisition date, for example, meeting
earnings targets:

• (i) Account for under IFRS 9 if the consideration is in the form of a financial instrument, for example
loan notes.

• (ii) Account for under IAS 37 if the consideration is in the form of cash.

• (iii) An equity instrument is not re-measured.

 Goodwill and the non-controlling interest

• IFRS 3 (revised) methods – an introduction

• IFRS 3 (revised) views the group as an economic entity. This means that it
treats all providers of equity – including non-controlling interests – as
shareholders in the group, even if they are not shareholders of the parent. Thus
goodwill will arise on the non-controlling interest. We now need to consider
how IFRS 3 (revised) sets out the calculation for goodwill.
 IFRS 3 (revised) goodwill calculation
• In words, IFRS 3 (revised) states: Consideration paid by parent + fair value of
non-controlling interest – fair value of the subsidiary's net identifiable assets =
consolidated goodwill
proforma goodwill calculation
 Valuing non-controlling interest at acquisition

• The non-controlling interest may be valued either at fair value or at the

non-controlling interest's proportionate share of the acquiree's
identifiable net assets.
• The non-controlling interest now forms part of the calculation of
goodwill. The question now arises as to how it should be valued.
• The 'economic entity' principle suggests that the non-controlling interest
should be valued at fair value. In fact, IFRS 3 (revised) gives a choice: For
each business combination, the acquirer shall measure any non-controlling
interest in the acquiree either at fair value or at the non-controlling
interest's proportionate share of the acquiree's identifiable net assets.
(IFRS 3 (revised))
• IFRS 3 (revised) revised suggests that the closest approximation to fair value
will be the market price of the shares held by the non-controlling shareholders
just before the acquisition by the parent. Non-controlling interest at fair value
will be different from non-controlling interest at proportionate share of the
acquiree's net assets. The difference is goodwill attributable to non-
controlling interest, which may be, but often is not, proportionate to goodwill
attributable to the parent.
• We may refer to valuation at the non-controlling interest's proportionate share
of the acquiree's identifiable net assets as the ‘partial goodwill’ method and to
valuation at (full) fair value as the 'full goodwill' method.
 Goodwill calculation: simple examples
• Now we will look at two simple goodwill calculations: the revised IFRS 3
(revised) proportion of net assets method (proportion of net assets) and the
revised IFRS 3 (revised) fair (or full) value method.
 Revised IFRS 3 (revised) proportion of net assets method

• On 31 December 20X8, Penn acquired four million of the five million $1

ordinary shares of Sylvania, paying $10m in cash. On that date, the fair value
of Sylvania's net assets was $7.5m. It is the group's policy to value the non-
controlling interest at its proportionate share of the fair value of the
subsidiary's identifiable net assets.
• Calculate goodwill on the acquisition
 Revised IFRS 3 (revised) fair value method

• On 31 December 20X8, Penn acquired four million of the five million $1

ordinary shares of Sylvania, paying $10m in cash. On that date, the fair value
of Sylvania's net assets was $7.5m. It is the group's policy to value the non-
controlling interest at fair value. The market price of the shares held by the
non-controlling shareholders just before the acquisition was $2.00 Calculate
goodwill on the acquisition.
Answer
 Non-controlling interest at the year end
(fair value method)
• Where the option is used to value non-controlling interest at fair value, this
applies only to non-controlling interest at acquisition. At the year end, the
non-controlling interest will have increased by its share of the subsidiary's
post-acquisition retained earnings. The non-controlling interest is measured at
its fair value, measured on the basis of a quoted price in an active market for
equity shares not held by the acquirer or, if this is not available, by using
another valuation technique.
• The workings will be the same as for the proportionate method. This is
illustrated in the following worked example.
 Example: Goodwill and non-controlling
interest
• P acquired 75% of the shares in S on 1 January 2007 when S had retained
earnings of $15,000. The market price of S’s shares at the date of acquisition
was $1.60. P values non-controlling interest at fair value at the date of
acquisition. Goodwill is not impaired.
Solution
 Effect on non-controlling interest of fair
value
• You can see from the above example that the use of the fair value option increases
goodwill and non-controlling interest by the same amount. That amount
represents goodwill attributable to the shares held by non-controlling
shareholders. It is not necessarily proportionate to the goodwill attributed to the
parent. The parent may have paid more to acquire a controlling interest. If non-
controlling interest was valued under the proportionate method (share of net
assets), goodwill and non-controlling interest in the example above would be as
follows.
• Compare these with goodwill and non-controlling interest in the solution above
and you will see that both have been reduced by $3,750 – the goodwill
attributable to the non-controlling interest. So whether non-controlling interest is
valued at share of net assets or at fair value, the statement of financial position
will still balance.
• Students are required to know both methods. The wording is as follows: Full
goodwill 'It is the group policy to value the non-controlling interest at full (or
fair) value.' Partial goodwill 'It is the group policy to value the non-controlling
interest at its proportionate share of the (fair value of the) subsidiary's
identifiable net assets.'
• There are a number of ways of presenting the information to test the new method:

• i) As above, the subsidiary's share price just before the acquisition could be given
and then used to value the non-controlling interest. It would then be a matter of
multiplying the share price by the number of shares held by the non-controlling
interests. (Note: the parent is likely to have paid more than the subsidiary's pre
acquisition share price in order to gain control.)
• ii) The question could simply state that the directors valued the non-controlling
interest at the date of acquisition at $2 million
• (iii) An alternative approach would be to give (in the question) the value of the
goodwill attributable to the non-controlling interest. In this case the NCI's
goodwill would be added to the parent's goodwill (calculated by the traditional
method) and to the carrying amount of the non-controlling interest itself.
 Other aspects of group accounting
• Note. Much of this will be revision from your earlier studies, but there are some
significant changes to concepts and definitions introduced by IFRSs 10 and 11
and the revised IAS 28.
 Investment in subsidiaries
• The important point here is control. In most cases, this will involve the parent
company 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.
• IFRS 10 Consolidated financial statements, issued in 2011, retains control as the
key concept underlying the parent/subsidiary relationship but it has broadened the
definition and clarified its application. This will be covered in more detail in the
Section below.
• IFRS 10 states that an investor controls an investee if and only if it has all of the
following:

• (i) Power over the investee

• (ii) Exposure, or rights, to variable returns from its involvement with the
investee (see Section below), and
• (iii) The ability to use its power over the investee to affect the amount of the
investor’s returns (see Section 2).
 Accounting treatment in group accounts
• IFRS 10 requires a parent to present consolidated financial statements, in which
the accounts of the parent and subsidiary (or subsidiaries) are combined and
presented as a single entity.
 Investments in associates
• This type of investment is something less than a subsidiary, but more than a
simple investment (nor is it a joint venture). The key criterion here is significant
influence. This is defined as the 'power to participate', but not to 'control' (which
would make the investment a subsidiary). Significant influence can be determined
by the holding of voting rights (usually attached to shares) in the entity. IAS 28
states that if an investor holds 20% or more of the voting power of the investee,
it can be presumed that the investor has significant influence over the investee,
unless it can be clearly shown that this is not the case.
• Significant influence can be presumed not to exist if the investor holds less
than 20% of the voting power of the investee, unless it can be demonstrated
otherwise. The existence of significant influence is evidenced in one or more
of the following ways.
• (a) Representation on the board of directors (or equivalent) of the investee

• (b) Participation in the policy making process

 Accounting treatment in group accounts
• IAS 28 requires the use of the equity method of accounting for investments
in associates. This method will be explained in detail in Sections below.
 Accounting for investments in joint
arrangements
• IFRS 11 classes joint arrangements as either joint operations or joint
ventures. The classification of a joint arrangement as a joint operation or a
joint venture depends upon the rights and obligations of the parties to the
arrangement.
• The detail of how to distinguish between joint operations and joint
ventures will be considered in Section below.
Accounting treatment in group accounts
• IFRS 11 requires that a joint operator recognises line-by-line the following in
relation to its interest in a joint operation:
• Its assets, including its share of any jointly held assets
• Its liabilities, including its share of any jointly incurred liabilities 
• Its revenue from the sale of its share of the output arising from the joint
operation
• Its share of the revenue from the sale of the output by the joint operation, and
• Its expenses, including its share of any expenses incurred jointly
• This treatment is applicable in both the separate and consolidated financial
statements of the joint operator.
• In its consolidated financial statements, IFRS 11 requires that a joint venturer
recognises its interest in a joint venture as an investment and accounts for that
investment using the equity method in accordance with IAS 28 Investments in
associates and joint ventures unless the entity is exempted from applying the
equity method (see Section below which is also applicable to joint ventures). In
its separate financial statements, a joint venturer should account for its interest in
a joint venture
• in accordance with IAS 27 (2011, revised 2014) Separate financial statements,
namely:
• At cost, or
• In accordance with IFRS 9 Financial instruments, or
• Using the equity method as described in IAS 28 Investments in associates and
joint ventures*
*Note. This was an amendment to IAS 27 introduced in 2014.
• Other investments
• Investments which do not meet the definitions of any of the above should be
accounted for according to IFRS 9 Financial instruments.