COMPLEX GROUPS AND

JOINT ARRANGEMENTS
• In questions of this nature, it is very helpful to sketch a diagram of the group
structure. Always sketch the group structure as your first working and double
check it against the information in the question.
 Complex groups
• When a holding company has several subsidiaries, the consolidated statement
of financial position shows a single figure for non-controlling interests and for
goodwill arising on consolidation. In cases where there are several subsidiary
companies the technique is to open up a single non-controlling interest working
and a single goodwill working.
• We shall consider how the principles of statement of financial position
consolidation may be applied to more complex structures of companies within a
group.
Several subsidiary companies
• You have already seen this type of structure in your previous studies
Sub-subsidiaries
• P holds a controlling interest in S which in turn holds a controlling interest in SS.
SS is therefore a subsidiary of a subsidiary of P, in other words, a sub-subsidiary
of P.
Direct holdings in sub-subsidiaries: 'D' shaped groups
• In this example, SS is a sub-subsidiary of P with additional shares held directly
by P. In practice, groups are usually larger, and therefore more complex, but the
procedures for consolidation of large groups will not differ from those we shall
now describe for smaller ones.
 A parent company which has several
subsidiaries
• Where a company P has several subsidiaries S1, S2, S3 and so on, the technique
for consolidation is exactly as previously described. Cancellation is from the
holding company, which has assets of investments in subsidiaries S1, S2, S3, to
each of the several subsidiaries.
The consolidated statement of financial position will show:
(a) A single figure for non-controlling interest, and
(b) A single figure for goodwill arising
• A single working should be used for each of the constituents of the consolidated
statement of financial position: one working for goodwill, one for non-
controlling interest, one for retained earnings (reserves), and so on.
 Sub-subsidiaries
• A slightly different problem arises when there are sub-subsidiaries in the group,
which is how should we identify the non-controlling interest in the retained
earnings of the group? Suppose P owns 80% of the equity of S, and that S in turn
owns 60% of the equity of SS.
It would appear that in this situation:
 (a) P owns 80% of 60% = 48% of SS
(b) The non-controlling interest in S owns 20% of 60% = 12% of SS
(c) The non-controlling interest in SS itself owns the remaining 40% of
the SS equity
• SS is nevertheless a sub-subsidiary of P, because it is a subsidiary of S which in
turn is a subsidiary of P. The chain of control thus makes SS a sub-subsidiary of P
which owns only 48% of its equity.
• The total non-controlling interest in SS may be checked by considering a
dividend of $100 paid by SS where S then distributes its share of this dividend in
full to its own shareholders.
 Question Effective interest

• Top owns 60% of the equity of Middle Co, which owns 75% of the equity of
Bottom Co. What is Top Co's effective holding in Bottom Co?
 Answer
• Top owns 60% of 75% of Bottom Co = 45%.
 Date of effective control
• The date the sub-subsidiary comes under the control of the holding company is
either:
(a) The date P acquired S if S already holds shares in SS, or
(b) If S acquires shares in SS later, then that later date
• You need to think about the dates of acquisition and the order in which the group
is built up when you identify which balances to select as the pre-acquisition
reserves of the sub-subsidiary.
 Consolidating sub-subsidiaries

• When dealing with sub-subsidiaries, you will need to calculate effective interest
owned by the group and by the non-controlling interest. The date of acquisition is
important when dealing with sub-subsidiaries. Remember that it is the post-
acquisition reserves from a group perspective which are important.
The basic consolidation method is as follows.
(a) Net assets: show what the group controls.
(b) Equity (capital and reserves): show who owns the net assets included
elsewhere in the statement of financial position. Reserves (retained earnings),
therefore, are based on effective holdings.
• The basic steps are exactly as you have seen in simpler group structures. As you
will see in the examples in this session, there are some new complications to be
aware of in the workings for goodwill and non-controlling interests.
Example: Subsidiary acquired first
• P Co acquired its shares in S Co on 1 July 20X4 when the reserves of S Co stood at
$40,000; and S Co acquired its shares in SS Co on 1 July 20X5 when the reserves of
SS Co stood at $50,000.
• It is the group's policy to measure the non-controlling interest at acquisition at its
proportionate share of the fair value of the subsidiary's net assets.
Required
Prepare the draft consolidated statement of financial position of P Group at 30 June
20X7. Note. Assume no impairment of goodwill.
 Solution
• This is two acquisitions from the point of view of the P group. In 20X4, the
group buys 80% of S. Then in 20X5 S (which is now part of the P group) buys
60% of SS. P buys 80% of S, then S (80% of S from the group's point of view)
buys 60% of SS. Having calculated the non-controlling interest and the P group
interest (see working 1 below), the workings can be constructed. You should,
however, note the following.
 (a) Group structure working (see working 1).
(b) Goodwill working: compare the costs of investments with the effective group interests acquired (80%
of S Co and 48% of SS Co).
(c) Retained earnings working: bring in the share of S Co's and SS Co's post-acquisition retained
earnings in the normal way.
(d) Non-controlling interest working: calculate non-controlling interests in the usual way, using a
20% NCI in S Co's post-acquisition retained earnings and a 52% non- controlling interests in SS Co’s
post acquisition retained earnings (52%). You will need to adjust this for the NCI share of S Co’s cost
of investment in SS Co.