Accounting 3

2022
Study guide

Consolidated financial statements

(Revision)
Unit 14
(Updated – July 2022)

TABLE OF CONTENTS
1. Learning outcomes
2. Prescribed reading material
3. Introduction
4. Tutorial information

1. Learning outcomes:

The purpose of this unit is to revise the following issues covered in Accounting 2 and
prepare the student to tackle the additional, more complex issues in Accounting 3.

a) Identify when an entity controls another entity in accordance with IFRS 10. (chapter 1)
b) Identify when a company is, and is not, required to prepare consolidated financial
statements. (chapter 1)
c) Account for an investment in subsidiary correctly in the parent’s separate financial
statements in accordance with IAS 27. (chapter 1)
d) The accounting requirements of IFRS 3 pertaining to the accounting for a business
combination. (chapter 3)
e) Prepare a consolidated statement of financial position at and after the date of
acquisition (wholly owned and partly owned subsidiary). (chapters 3,4,5)
f) Prepare a consolidated statement of profit or loss and other comprehensive income
(chapter 6)
g) Eliminate inter-company transactions (including the effects of deferred tax) (chapter 7)
2. Prescribed reading material:
The prescribed literature for this unit is as follows:
(i) Notes on Group Financial Statements
• Chapters 1 to 7 – all relevant aspects in line with previous studies.

(ii) IFRS 3 Business combinations

(iii) IFRS 10 Consolidated financial statements

(iv) IAS 27 Separate financial statements

Excluding Investment entities (para 8A, 11A, 11B, 16A) and para 13-14.

3. Introduction:
This unit will assist you in revising the work covered in Accounting 2 that is needed
as a base for the work to be covered in Accounting 3.

We use a horizontal analysis of equity worksheet at UFH. This format is used

throughout the textbook and tutorial questions. It is important to remember that
the Analysis of equity worksheet is only a tool to be used in getting to the final
consolidated results – it is seldom, if ever, a specific requirement of a question.

You should make sure that you grasp all of these concepts fully NOW as they all
have an impact on the units that follow. This unit provides the foundation for the work
that will be covered in Units 13-19. These units will also draw heavily on the unit on
Business Combinations and will be integrated with the unit on Financial Instruments.

How to revise: We suggest you work through the chapters in the textbook in order
from 1 to 7. Then attempt the tutorial questions to ensure you have revised properly!!

4. Tutorial information
Notes on Group Financial Statements – Chapter 7
7.1 Inter-company interest, impairment of goodwill (NCI % of NA) Self-study
7.2 I/co interest and dividends , impairment of goodwill (NCI at FV) Practice example
– prepare a PPE note (suggested Sol provided)
7.3 Revaluation reserve at acqn, i/co sale of inventory Self-study
7.4 Sub invests in parents debentures, guarantee of o/d, i/co admin Self-study
fees and sale of inventory, FV adj to land at acqn.– use PFJEs
7.5 I/co sale of inventory Self-study
7.6 Land overvalued at acquisition, subsequently sold, i/co sales of Tutorial
inventory and PPE, guarantees – use AOE+PFJE methods as
practice

2
QUESTION 7 : 2 SUGGESTED SOLUTIONS
HOBIE LIMITED AND SUBSIDIARY COMPANY
CONSOLIDATED STATEMENT OF PROFIT OR LOSS AND OTHER
COMPREHENSIVE INCOME FOR THE YER ENDED 31 DECEMBER 20.4 R
Sales 44 000
Cost of sales (22 900)
Gross profit 21 100
Operating expenses (6 100)
Goodwill impairment (680)
Profit before taxation 14 320
Taxation 5 000
Profit and total income for the year 9 320
Attributable to:
Non-controlling interests(A) 1 728
Parent’s shareholders 7 592
9 320
CONSOLIDATED STATEMENT OF CHANGES IN EQUITY
FOR THE YEAR ENDED 31 DECEMBER 20.4
Share General Retained Total Non- Total
Capital Reserve Earnings Parent Controlling Equity
Equity Interests
R R R R R R
Balances 1 January 20.4 25 000 12 000(2) 3 000# 40 000 7 500 47 500
Total comprehensive income
for the year 7 592 7 592 1 728 9 320
Dividends paid (2 000)* (2 000) (200) (2 200)
Transfer to GR 4 200 (4 200)(1) –
Balances 31 December 20.4 25 000 16 200 4 392(3) 45 592 9 028 54 620
(1)
3 000 + 1 200 = 4 200
(2)
15 000 – 3 000 = 12 000
(3)
3 300 + 1 092 = 4 392
* Holding company dividends only.
# Holding company only, as no post acquisition profit from subsidiary at this point.

HOBIE LIMITED
CONSOLIDATED STATEMENT OF FINANCIAL POSITION AT 31 DECEMBER 20.4
ASSETS R
Non current assets (Note 12) 33 720
Current assets 23 100
Inventory 11 000
Accounts receivable 6 500
Bank 5 600

56 820
EQUITY AND LIABILITIES
Share capital 25 000
General reserve (15 000 + 1 200(C)) 16 200
Retained earnings (3 300 + 1 092(F)) 4 392
Total parent equity 45 592
Non-controlling interests(D) 9 028
Total equity 54 620
Current liabilities
Accounts payable _2 200
56 820

3
Note 12

Non current assets Cost/Valuation Acc. Depr./Imp. Net

R R R
Goodwill (E) 3 400 680 2 720
Freehold land & buildings 15 000 – 15 000
Plant 18 700(a) 2 700(b) 16 000
37 100 3 380 33 720
(a)
12 000 + 7 000 – 300* = 18 700
(b)
2 000 + 1 000 – 300* = 2 700

* At acquisition accumulated depreciation (1 000 – 700).

WORKINGS:

(True) Equity of Sprog Ltd Since

S Cap GR RE Total NCI Inv. G/Will RE GR

31/12/20.3 Purchased 60% 10 000 4 000 2 000 16 000 7 500 11 900 (3 400)

31/12/20.4 Profit 5 000 5 000 2 000(A) 3 000

Gwill imp. – (272)(A) 680 (408)

Dividend (500) (500) (200) (300)

Transfer 2 000 (2 000) – – (1 200)(B) 1 200

10 000 6 000 4 500 20 500 9 028 11 900 (2 720) 1 092 1 200

(D) (E) (F) (C)

Inter company ‘eliminations’:

• Dividends received/paid R300.

The remaining R200 div. paid by sub is debited (eliminated) against NCI.
• Interest on loan received/paid R200.
• Inter company loan asset/liability R5 000.

End Product Method Workings:

(a) Goodwill = 11 900 + 75 00 – (10 000 + 4 000 + 2 000) = 3 400

(b) Goodwill impaired 20.4 = 1/5 x 3 400 = 680 (shared 40% NCI, 60% Hobie)
(c) Non-controlling interests (P/L) = 40% x (5 000 – 680) = 1 728
(d) Non-controlling interests (SOFP) = 7 500 + 40% (5 000 – 680 – 500) = 9 028
(e) RE (end of year) = 3 300 (parent) + 60% (4 500 – 2 000 at acqu. – 680) = 4 392 (check)
(f) Transfer to GR = 3 000 + (60% x 2 000) = 4 200
(g) GR (end of year) = 15 000 + 60% (6 000 – 4 000) = 16 200 (check)