ACF301 – Financial

AccountingI
Week 1 – complex entities and the consolidated statement of financial
position
Office hours and contact details

Course lecturer: Remi Rzepka

E-mail: TBD
Office: TBD
Office hours: TBD
About me:

Educated in Ireland, Denmark, China and UK

Owner of a business in Poland

Lived abroad for 18 Years

Managed similar institution such as BJTU-LUC

(Lecturer, Academic Director and Coordinator and Deputy Dean)

Worked in Consulting analysing mergers, most notably Halliburton and

Baker Hughes (abandoned merger)

Background in Business and Employment Law

Course objectives
By the end of this course you will be able to:
 understand the concepts underpinning the main areas in accounting for leases, provisions and contingencies,
financial instruments, group accounting and other complex areas of financial accounting and reporting;
 have an overview of the relevant UK and international accounting standards, and an overall perspective of
developments in and changes caused by international standards;
 be able to carry out basic technical procedures relating to accounting for leases, provisions and contingencies,
financial instruments, group accounting and other complex areas of financial accounting and reporting;
 be able to interpret the meaning and composition of accounting numbers in consolidated financial statements
and analyse the effects of changes in underlying data on them;
 understand how underlying financial and business objectives can affect accounting choices;
 identify and apply relevant technical knowledge and skills to analyse a specific reporting or accounting issue;
 perform relevant, accurate calculations in a logically structured way; and
 apply technical knowledge to support reasoning and conclusions.
Course structure
Lectures:
 Monday 4.20-6.10pm
Course approach

ACF212 ACF301 ACF311

Assessment
 Week 9 test (25%)
Duration: 60 minutes
Date & Time: TBA
Where: TBA

 Final exam (75%)

Ground rules
 Attendance is compulsory
 Turn up on time
 Follow the material and make notes
 Participate in questions and activities
 Ask questions
 Do not chat to each other
 No texting, social media or internet etc during sessions
 Join in discussions in workshops
What you can expect from me
 Materials
 Questions and answers
 Interactive sessions where you can work with fellow students
 Support via e-mail, Moodle, office hours
Course learning resources
 Lecture slides
 Workshop questions and answers
 Multiple choice quizzes
 Assessment for learning
 Resource list
 Additional worked examples
 Additional reading documents
Resources
 ICAEW, (2017) Financial Accounting and Reporting – IFRS Study Manual 2020. 8th ed.
London: Gillards Worldwide
 Melville, A. (2017) International Financial Reporting. 6th ed. Harlow: Pearson
 Elliot, B. and Elliot, J. (2019) Financial Accounting and Reporting. 19th ed. Harlow:
Pearson
 Moodle
Why does one business acquire another?

vs
The effect of consolidation
 To present results and net assets of group members as a single economic unit
 Showing the economic substance rather than the legal form – individual companies

Parent – investor

Subsidiary - investee
Under the control of parent
Key differences between group accounts and individual
accounts

Investmen Assets /
Liabilities
t Profit
Dividends
What are group accounts and why do we need them?

Why we need group accounts

Off balance
Economic Qualitative Use by Use by other
sheet
substance characteristics shareholders parties
financing
Control and ownership

Normally > 50% of the voting rights. However……

Power over Exposure or rights Ability to affect

investee to variable returns
returns
Other factors indicating control

Minority voting
Contractual Potential voting
rights small and
arrangement rights
dispersed
s
Control example
Which company(ies) should consolidate Company S?:

 Company R holds 51% of the voting rights of Company S.

 The other 49% of Company S’s voting rights is held by two shareholders (Company P holds 27% and
Company Q holds 22%).

 Company S has signed a ten year non-cancellable contractual arrangement with Company P which
enables Company P to control all of Company S’s manufacturing activities and to set the selling price
of Company S’s products, and which entitles Company P to 60% of Company S’s profits.
Key concepts
 Goodwill
 Pre and post acquisition reserves
 Non controlling interest
 Goodwill
• Intangible asset (non-current asset)
• Premium – pay more than an investment is worth
– Brands
– Reputation
– Customer list, copyrights
• Cost saving / synergies
• Impairment exercise every year
Pre and post acquisition reserves
• Pre: reserves before acquisition
• Post: reserves after acquisition
• Acquisition date is important: our shares of post acquisition reserves
Non controlling interest
• Include all the net assets of subsidiary company
• Give back the net asset of subsidiary company which belong to the NCI within the
capital and reserves section of the consolidated SoFP
IFRS 3
All business combinations should be accounted for using the acquisition method. This
involves 5 steps:
 Identify the acquirer
 Determine the acquisition date
 Measure the consideration transferred (how much was paid)
 Recognise the assets acquired, the liabilities assumed and any non controlling
interest in the acquire
 Recognise and measure any goodwill arising on the transaction
The mechanics of consolidation
• The best approach to use is a set of workings:

• (W1) Group structure

• (W2) Net assets of the subsidiary
• (W3) Goodwill
• (W4) Non controlling interest
• (W5) Group retained earnings
Full example
Statements of Financial Position at 31 December 2017
Dickens Jones Consolidated
Non-current assets Non-current assets
Property, Plant and Equipment 85,000 18,000 Goodwill
Investments: shares in Reed
jonesLtd 60,000 0 Property, Plant
145,000 18,000 and Equipment
Current assets 160,000 84,000 Current assets
Total assets 305,000 102,000 Total assets

Equity Equity
Called up share capital (£1 ordinary shares) 65,000 20,000 Called up share capital
Share premium 35,000 10,000 Share premium
Retained earnings 70,000 25,000 Retained earnings
Total equity 170,000 55,000 Non controlling interest
Liabilities 135,000 47,000 Total equity
Total equity and liabilities 305,000 102,000 Liabilities
Total equity and liabilities

Dickens acquied 16,000 ordinary £1 shares in Jones on 1 January 2017, when Jones' retained earnings stood at £20,000.
On this date, the fair value of the 20% non controlling shareholder in Jones was £12,500. The Group uses the fair value method to value the non controlling interest

Required

Prepare the consolidated statement of financial position at 31 December 2017

 Working
•sW1 – structure
Dickens (parents)
Jones (Subsidiary)
Nominal shares:
20,000/1=20,000
Percentage of shares
controlled:
At acquisition At reporting Post acquisition reserves
16,000/20,000=80% date
• W2 – net SC 20,000 20,000 -
assets of S SP 10,000 10,000 -
At acquisition: goodwill (W3), NCI (W4) RE 20,000 25,000 5,000
At reporting date: 50,000 55,000 5,000
Post acquisition: retained earnings
(W5), NCI (W4)
Workings (cont’d)
• W3 – goodwill
Cost of investment: 60,000
% of shares of net assets at acquisition: 80%*50,000=40,000
Difference between the two is goodwill: 60,000-40,000=20,000
• W4 – NCI
% shares of net assets at acquisition: 20%*50,000=10,000
% shares of post acquisition reserves: 20%*5,000=1,000
Add-up is NCI: 10,000+1,000=11,000
• W5 – retained earnings
RE of parent: 70,000
% share of post acquisition RE of subsidiary: 80%*5,000=4,000
Add-up is the new RE: 70,000+4,000=74,000
Full example
Statements of Financial Position at 31 December 2017
Dickens Jones Consolidated
Non-current assets Non-current assets
Property, Plant and Equipment 85,000 18,000 Goodwill
Investments: shares in Reed
jonesLtd 60,000 0 Property, Plant
145,000 18,000 and Equipment
Current assets 160,000 84,000 Current assets
Total assets 305,000 102,000 Total assets

Equity Equity
Called up share capital (£1 ordinary shares) 65,000 20,000 Called up share capital
Share premium 35,000 10,000 Share premium
Retained earnings 70,000 25,000 Retained earnings
Total equity 170,000 55,000 Non controlling interest
Liabilities 135,000 47,000 Total equity
Total equity and liabilities 305,000 102,000 Liabilities
Total equity and liabilities

Dickens acquied 16,000 ordinary £1 shares in Jones on 1 January 2017, when Jones' retained earnings stood at £20,000.
On this date, the fair value of the 20% non controlling shareholder in Jones was £12,500. The Group uses the fair value method to value the non controlling interest

Required

Prepare the consolidated statement of financial position at 31 December 2017