CHAPTER 10

Group accounts: basic

principles
Introduction
Examination context
Topic List
1 Context for group accounts
2 The single entity concept
3 Control and ownership
4 IFRS 3 Business Combinations
5 Measuring the consideration transferred
6 Recognising and measuring the net assets acquired
7 Goodwill
8 Measurement of non-controlling interest
9 IFRS 10 Consolidated Financial Statements
10 IFRS 12 Disclosure of Interests in Other Entities
11 IAS 27 Separate Financial Statements
Summary and Self-test
Technical reference
Answers to Interactive questions
Answers to Self-test

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 Introduction
Tick
Learning objectives off
• Identify the financial effects of group accounting in the context of the IASB Conceptual
Framework
• Explain and demonstrate the concepts and principles surrounding the consolidation of
financial statements including:
– The single entity concept
– Substance over form
– The distinction between control and ownership
• Identify and describe the circumstances in which an entity is required to prepare and
present consolidated financial statements
• Identify the laws, regulations and accounting standards applicable to the consolidated
financial statements of an entity
• Identify whether an entity should be treated as a subsidiary of a parent entity
• Calculate goodwill including the measurement of identifiable assets and liabilities in
relation to the acquisition of a subsidiary
• Explain the accounting treatment of goodwill in consolidated financial statements
• Explain the accounting treatment of subsidiaries in consolidated financial statements
• Illustrate the application of the concepts and principles of consolidation through the
preparation of simple consolidated statements of financial position and consolidated
statements of profit or loss
Specific syllabus references for this chapter are: 1d,1h, 3a,3b,3c, 3f.

Syllabus links
Group accounts is a key part of the Financial Accounting and Reporting syllabus with a syllabus
weighting of 30%. The syllabus covers:
• Consolidated statement of financial position (Chapter 11)
• Consolidated statements of financial performance (Chapter 12)
• Associates and joint ventures(Chapter 13)
• Disposals (Chapter 14)
• Consolidated statement of cash flows (Chapter 15).
More complex issues are covered at the Advanced Stage including control gained in stages, disposals
of associates, partial disposals of subsidiaries and overseas subsidiaries, and the analysis and
interpretation of group financial statements.

Examination context
Because the preparation of consolidated financial statements makes up 30% of the syllabus, each paper
will feature questions requiring either a consolidated statement of financial position or a consolidated
statement of profit or loss. Some papers may also include questions requiring a consolidated statement
of cash flows.
In the examination candidates may be required to:
• Explain and demonstrate the concepts and principles surrounding the consolidation of financial
statements including
• Prepare the consolidated statement of financial position or statement of profit or loss (or extracts)
including the results of the parent entity and one or more subsidiaries from individual financial
statements or draft consolidated financial statements

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 1 Context for group accounts

Section overview
• A group includes a parent and one or more subsidiaries.
• A subsidiary is an entity controlled by the parent.
• Forming a group is a means of organising a business.
• Group accounts ‘consolidate' the results of the individual companies.

1.1 What is a group?

In simple terms a group is created where one company, the parent (P) buys shares in another company,
the subsidiary (S), such that the parent company controls the subsidiary. A group may include one or
many subsidiaries.
Shareholders

P plc

S1 Ltd S2 Ltd S3 Ltd

The shareholders (owners) of P Ltd may be individuals and/or institutions such as pension funds.

1.2 What is a subsidiary?

Definition
A subsidiary is an entity, including an unincorporated entity such as a partnership, that is controlled by
another entity (known as the parent).

Control is defined by IFRS 3 as the power to govern the financial and operating policies of an entity
so as to obtain benefits from its activities. This definition has now been expanded by IFRS 10 and will
be covered further in Section 3.
Control is presumed where the parent acquires more than 50% of the other entity's voting rights,
unless it can be demonstrated otherwise.
In certain circumstances control may be achieved by other means. We will look at these circumstances
in Section 5. For now we will assume that if a parent holds more than 50% of the ordinary shares in
another entity this constitutes control. (Voting rights are normally attached to ordinary shares.)

1.3 Why form a group?

A business may operate in several different markets with different characteristics. These different
markets will present different issues for management to address in terms of operations and finance and
so on.
It would be possible for different activities to be carried out within a single limited company, where
separate divisions could be established for each activity. The owners would then receive one set of
accounts for that company, reflecting all its activities.
Alternatively, each activity could be carried out within a separate company (the subsidiaries), each of
which is controlled by the parent.
There are a number of reasons why the business might be structured in this way:
• Accountability of each group of managers can be made more precise, as they can be identified
more easily with the activities of the subsidiary which employs them.

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 • Financing may be made easier, as lenders can see audited financial statements for the individual
company for which they are providing finance.
• The assets of one subsidiary can be pledged as security for its borrowings, leaving the assets
of other subsidiaries unpledged.
• Disposal of a business may be made easier.

1.4 Why prepare group accounts?

This is best illustrated by the following worked example.
Worked example: Why prepare group accounts?
P Ltd (the parent) does not trade on its own account. Its only major asset is the ownership of all the
shares in S Ltd (the subsidiary) and its only income is dividends from S Ltd.
Statements of profit or loss for the last 12 months (ignoring tax):
P Ltd S Ltd
CUm CUm
Revenue – 100
Cost of sales – (85)
Gross profit – 15
Other costs (1) (40)
Loss from operations (1) (25)
Dividends received 11 –
Profit/(loss) for the year 10 (25)
Statement of changes in equity (extract) for the last 12 months:
Retained earnings
P Ltd S Ltd
CUm CUm
Brought forward 1 45
Dividends (6) (11)
Total comprehensive income for the year 10 (25)
Carried forward 5 9

Without provisions requiring the preparation of group accounts (which put together, ie 'consolidate', the
activities of the parent and subsidiaries), the owners would only legally be entitled to receive the financial
statements of the parent company as an individual company.
In this case, they could well think that things were going well, because the dividend income for the period
covers the expenses of P Ltd and provides for a CU6m dividend. They would not be aware that:
• The CU11m dividend income all came from profits earned by S Ltd in previous years.
• The trading activity controlled by P Ltd's management is currently loss-making.
As will be demonstrated later in this chapter, the effect of consolidation is to produce a fair picture of P
Ltd and S Ltd taken together, which is that on revenue of CU100m (S Ltd only), there is a loss for the
year of CU26m (S Ltd's net loss of CU25m plus P Ltd's other costs of CU1m).

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1.5 Accounting principles
The key issue underlying group accounts is therefore the need to reflect the economic substance (see
Chapter 1) of the relationship between companies where one (a parent) has control over another (a
subsidiary), which together comprise a group.
Producing consolidated accounts that present the group as though it were a single economic entity
reflects this economic substance.
As we will see in section 3, the consolidated accounts also reflect another key principle (dealt with in the
IASB Conceptual Framework – see Chapter 1), that of the distinction between:
• The resources controlled and the results they produce; and
• The ownership of those resources and results.
Point to note:
The terms ‘group accounts', 'consolidated accounts', ‘group financial statements' and ‘consolidated
financial statements' can be thought of as meaning the same thing and are used interchangeably in the
Accounting profession.

1.6 Composition of group accounts

Group accounts comprise:
• Consolidated statement of financial position (CSFP)
• Consolidated statement of profit or loss ( CSPL)
• Consolidated statement of profit or loss and other comprehensive income (CSCI)
• Consolidated statement of changes in equity (CSCE)
• Consolidated statement of cash flows
• Notes to the accounts and comparative figures
Points to note:
1 The consolidated statement of financial position is presented in addition to the parent's own
individual statement of financial position.
2 The consolidated statement of profit or loss is usually presented instead of the parent's own
individual statement of profit or loss.
3 The parent's own statement of financial position shows its investment in subsidiaries in non-
current asset investments (usually at cost).
4 The parent's own individual statement of profit or loss shows the dividend income received and
receivable from subsidiaries.

1.7 Summary of investments

A parent may hold other investments apart from subsidiaries. These can be summarised as follows:

Investment Criterion Treatment in group accounts

Subsidiary Control (>50%) Consolidation
Associate (Chapter 13) Significant influence (20%+) Equity method
Joint venture Joint control Equity method
(Chapter 13)
Investment Asset held for accretion of wealth Usually at cost

This chapter and Chapters 11–15 deal with the underlying principles and techniques involved in the
preparation of group accounts.

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 2 The single entity concept
Section overview
• Group accounts are prepared on the basis that the parent and subsidiaries are a single entity.
• This reflects the economic substance of the group arrangement.
• The investment in a subsidiary's shares shown in the parent's own statement of financial position
is replaced in the consolidated statement of financial position by the net assets of the subsidiary.
• The dividend income from the subsidiary recognised in the parent's own statement of profit or
loss is replaced in the consolidated statement of profit or loss by the subsidiary's revenues and
costs.

2.1 The effect of consolidation

Group accounts consolidate the results and net assets of group members to present the group to the
parent's shareholders as a single economic entity. This reflects the economic substance and
contrasts with the legal form, where each company is a separate legal person.

Parent

Controls GROUP – Single Entity

(>50%)

Subsidiary

The effect of consolidation can be illustrated by comparing buying an unincorporated business from its
existing proprietor with buying a controlling interest in a company from its existing shareholders.
2.2 Buying an unincorporated business
When a company invests in an unincorporated business, it pays cash to the proprietor and in exchange
acquires legal title to all the assets and all the liabilities (ie the net assets) of the business.
Worked example: Buying an unincorporated business
Draft statements of financial position of Panther Ltd and Seal, a sole trader, at 31 December 20X1 are
as follows:
Panther Ltd Seal
CU CU
Cash 4,000 –
Sundry other assets 13,000 6,000
17,000 6,000
Share capital/Capital 2,000 4,000
Retained earnings 12,000 –
Equity 14,000 4,000
Liabilities 3,000 2,000
17,000 6,000
Panther Ltd then buys the net assets and business of Seal on 31 December 20X1 for CU4,000 in cash.
In 20X2 Panther Ltd itself made sales of CU6,000 with costs of CU4,500. Panther Ltd also carried on
Seal's trade, which made sales of CU3,000 with costs of CU1,000. There are no other changes in net
assets in 20X2.

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 You are required to prepare the statement of profit or loss of Panther Ltd for the year ended 31 December
20X2 and the statement of financial position as at that date, reflecting the above information.

Solution

Panther Ltd
Statement of profit or loss for the year ended 31 December 20X2

CU
Revenue (6,000 + 3,000) 9,000
Costs (4,500 + 1,000) (5,500)
Profit 3,500

Statements of financial position as at 31 December

20X1 20X2
CU CU
Sundry other assets (20X1: 13,000 + 6,000) 19,000 22,500
(20X2: P (13,000 + 6,000 – 4,500 = 14,500) +
S (6,000 + 3,000 – 1,000 = 8,000))
Share capital (P only) 2,000 2,000
Retained earnings (20X1: P only) 12,000 15,500
(20X2: P (12,000 + 6,000 – 4,500 = 13,500) +
S post-acq (3,000 – 1,000))
Equity 14,000 17,500
Liabilities (3,000 + 2,000) 5,000 5,000
Total equity and liabilities 19,000 22,500

Points to note:
1 Seal's net assets at the date of acquisition are incorporated into Panther Ltd's books and Panther
Ltd's cash is reduced by the cost of the acquisition.
2 All Seal's trading in 20X2 (and the increase in net assets attributable to it) is recorded in Panther
Ltd's books.

2.3 Buying a company

When a company (A Ltd) invests in another company (B Ltd) the legal position is very different.
Companies have their own legal identity separate from that of their owners. The investing company
therefore pays cash to B Ltd's shareholders to buy their shares. It does not acquire legal title to the net
assets of B Ltd; this remains with B Ltd.
Worked example: Buying a company
Draft statements of financial position of Panther Ltd and Seal Ltd at 31 December 20X1 are as follows:
Panther Ltd Seal Ltd
CU CU
Cash 4,000 –
Sundry other assets 13,000 6,000
17,000 6,000
Share capital 2,000 1,000
Retained earnings 12,000 3,000
Equity 14,000 4,000
Liabilities 3,000 2,000
17,000 6,000

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 Panther Ltd then buys all the shares of Seal Ltd on 31 December 20X1 for CU4,000 in cash. In 20X2
Panther Ltd itself made sales of CU6,000 with costs of CU4,500. Seal Ltd continued to trade and made
sales of CU3,000 with costs of CU1,000. There are no other changes to net assets in 20X2.
You are required to:
(a) Prepare the statements of financial position as at 31 December 20X1 and 20X2 for Panther Ltd,
Seal Ltd and the Panther Ltd group, reflecting the above information.
(b) Prepare the statements of profit or loss for the year ended 31 December 20X2 for Panther Ltd,
Seal Ltd and the Panther Ltd group, reflecting the above information.
Solution
(a) Statements of financial position as at
31 December 20X1 31 December 20X2
Panther Seal Consoli- Panther Seal Consoli-
Ltd Ltd dated Ltd Ltd dated
CU CU CU CU CU CU
Investment in Seal Ltd 4,000 – – 4,000 – –
Sundry other assets 13,000 6,000 19,000 14,500 8,000 22,500
17,000 6,000 19,000 18,500 8,000 22,500
Share capital 2,000 1,000 2,000 2,000 1,000 2,000
Retained earnings 12,000 3,000 12,000 13,500 5,000 15,500
Equity 14,000 4,000 14,000 15,500 6,000 17,500
Liabilities 3,000 2,000 5,000 3,000 2,000 5,000
Total equity and liabilities 17,000 6,000 19,000 18,500 8,000 22,500

(b) Statements of profit or loss for the year ended 31 December 20X2
Panther Ltd Seal Ltd Consolidated
CU CU CU
Revenue 6,000 3,000 9,000
Costs (4,500) (1,000) (5,500)
Profit 1,500 2,000 3,500
Points to note:
1 The investment in the shares of Seal Ltd in Panther Ltd's books has been replaced by the
underlying net assets of Seal Ltd. The net assets of Seal Ltd at the date of acquisition
(represented by its share capital and reserves at that date) are cancelled out against the
investment in Panther Ltd's books. (Note that the situation where the net assets of a subsidiary at
acquisition do not equal the cost of investment is covered in Chapter 11.)
2 As the net assets of Seal Ltd increase post-acquisition (an increase attributable to Panther Ltd's
control of Seal Ltd) this increase has been reflected in net assets and retained earnings.
3 The profits of Seal Ltd are combined with those of Panther Ltd in the consolidated accounts from
the date of acquisition, as post-acquisition profits of the subsidiary are earned under the parent's
control. This is also reflected in the consolidated statement of financial position, where group
retained earnings include Seal Ltd's post-acquisition retained earnings.
4 Consolidated statements of financial position and statements of profit or loss have been produced.
5 These are the same as those produced when Seal Ltd was unincorporated. This is because Panther
Ltd and Seal Ltd have been treated, not as two separate legal entities, but as a single entity.
6 The two companies can be viewed as a single entity because Panther Ltd (the parent) controls
Seal Ltd, its subsidiary. Together the companies form a group.

2.4 Summary
So far we have looked at the following key points:
• Group = parent (P) + subsidiary(ies) (S)
• Subsidiary(ies) = undertaking(s) under P's control

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 • The objective of group accounts is to present a true and fair view of the group to P's shareholders
• Mechanics of consolidation:
– The investment in S shown in P's own statement of financial position is replaced in the
consolidated statement of financial position (CSFP) by the line-by-line addition of S's net
assets to P's to show the group's resources.
– Dividend income in P's own statement of profit or loss is replaced in the consolidated
statement of profit or loss (CSPL) by the line-by-line addition of S's revenue and costs to P's
to show the group's performance.
– The investment in S in P's statement of financial position is cancelled out against S's share
capital and reserves at acquisition.

3 Control and ownership

Section overview
• Group accounts reflect both control and ownership.
• Ownership of more than 50% of the ordinary shares in a subsidiary normally gives control to
the parent.
• The net assets and results not owned by the parent are reflected in the non-controlling interest.

3.1 Control
Usually a holding of over 50% of the ordinary shares in S will give P control of S.
As we saw in Section 1, control means the ability to govern financial and operating policies of S
with a view to gaining economic benefits from its activities. This is an extension of the basic concept of
control, introduced in Chapter 1 in the context of the definition of assets.
IFRS 10 Consolidated Financial Statements defines control as consisting of three elements:
• Power
• Exposure to variable returns
• An investor’s ability to use power to affect its amount of variable returns
In an individual company, the assets are under the direct control of the company. In a group, the
subsidiary's assets are under indirect control through the parent's control of the subsidiary.
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; and
(iii) The ability to use its power over the investee to affect the amount of the investors returns.
Power is defined as existing rights that give the current ability to direct the relevant activities of
the investee. There is no requirement for that power to have been exercised.
In some cases assessing power is straightforward, for example where power is obtained directly and
solely from having the majority of voting rights or potential voting rights, and as a result the ability to
direct relevant activities.
Relevant activities include:
• Selling and purchasing goods or services
• Managing financial assets
• Determining a funding structure or obtaining funding
In other cases, the assessment of power is more complex. IFRS 10 gives the following examples of
rights, other than voting rights or potential voting rights which can give an investor power:

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 • Rights to appoint, reassign or remove key management personnel who can direct the relevant
activities.
• Rights to appoint or remove another entity that directs the relevant activities.
• Rights to direct the investee to enter into, or veto changes to, transactions for the benefit of the
investor.
• Other rights, such as those specified in a management contract.
Variable returns have the potential to vary as a result of the investee’s performance. Examples are
dividends, potential losses from loan guarantees given on behalf of the investee, residual interests on
liquidation.

3.2 Ownership
Equity, as defined in Chapter 1, is the residual amount found by deducting all of the entity's liabilities
from all of the entity's assets. It is also described as the ownership interest.
In an individual company's accounts, there is only one ownership interest, ie that of the shareholders in
that individual company, represented by the capital and reserves (which equal net assets).
In a group, it is possible for the parent to have control of a subsidiary without owning 100% of it.
That part of S's net assets and results included in the consolidation which is not owned by P is owned
by the non-controlling interest (NCI).
Worked example: Ownership
P Ltd owns 75% of the ordinary shares of S Ltd.
In this case, P Ltd controls 100% of S Ltd as it owns more than 50% of the ordinary shares.
However, P Ltd only owns 75%. The NCI owns the remaining 25%.

In group accounts, the ownership interest of both P's shareholders and the NCI needs to be reflected,
and the part of the group net assets in which P's shareholders do not have the ownership interest needs
to be distinguished from that in which they do.
As both P's shareholders and the NCI own equity (in (P + S) and S, respectively), the sum of their
respective ownership interests is described as equity in the consolidated statement of financial position.

3.3 Reflecting control and ownership in group accounts

When preparing the consolidated accounts, P's control of S and the ownership interest of P and NCI in
S need to be reflected.
Group accounts reflect both control and ownership. CSFP
Consolidated statement of financial position (CSFP)
CU
Assets X
(P + S (100%) – intra-group items) Shows resources under
group's control as a
single entity; and
Control X
Ownership
Equity attributable to owners of P
Share capital (P only) X Shows ownership split
Reserves between
(P + (P% × S post-acquisition)) X
Attributable to owners of P X
Non-controlling interest X
Parent co's share Non-controlling
(NCI% × S's net assets)
Total equity X interest share
Liabilities X
X

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 (Ownership: P% = P's share; NCI% = NCI share)
CSPL
Consolidated statement of profit or loss (CSPL)
CU
Revenue X Shows revenue and
(P + S (100%) – intra-group items)
expenses under group's
control as a single
Profit after tax (PAT) (Control) X entity; and

Ownership
Attributable to:
Owners of P (ß) X Shows PAT split
Non-controlling interest (NCI% × S's X between
PAT)
X
(Ownership: P% = P's share; NCI% = NCI share)

Parent co's share Non-controlling

interest share

3.4 Reserves
The CSFP includes P's reserves plus P's share of S's post acquisition reserves, as these reserves
are generated under P's control. S's reserves at acquisition (pre-acquisition reserves), along with its
share capital, are cancelled against P's cost of investment in S.
The same basic calculation is used for each reserve separately (eg revaluation surplus, retained
earnings).
The following interactive question brings together the points we have made so far.

Interactive question 1: Control and ownership [Difficulty level: Easy]

The statements of financial position of two companies at 31 December 20X7 are as follows:

Austin Ltd Reed Ltd

CU CU
Non-current assets
Property, plant and equipment 80,000 8,000
Investments: Shares in Reed Ltd 12,000 –
92,000 8,000
Current assets 58,000 13,000
Total assets 150,000 21,000

Equity
Called up share capital 100,000 10,000
Retained earnings 30,000 5,000
Total equity 130,000 15,000
Liabilities 20,000 6,000
Total equity and liabilities 150,000 21,000
Austin Ltd acquired 80% of Reed Ltd on 31 December 20X7.
Requirement
Prepare the consolidated statement of financial position of Austin Ltd as at 31 December 20X7.
Fill in the proforma below.

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 Austin Ltd: Consolidated statement of financial position as at 31 December 20X7

CU
Non-current assets
Property, plant and equipment
Current assets
Total assets
Equity attributable to owners of the parent
Called up share capital (Austin Ltd only)
Retained earnings
Non-controlling interest
Total equity
Liabilities
Total equity and liabilities
Points to note:
1 Austin Ltd controls the assets and liabilities of Reed Ltd. The CSFP reflects this.
2 The equity section of the CSFP reflects ownership (80% by Austin Ltd and 20% by the non-
controlling interest).
3 Austin Ltd's investment is cancelled against the net assets (ie assets less liabilities) of Reed Ltd at
acquisition (12,000 – (80% × (10,000 + 5,000))).
4 The remaining net assets are owned by the non-controlling interest.
5 Retained earnings are Austin Ltd's only, because Reed Ltd has, as yet, earned nothing under Austin
Ltd's control. All of Reed Ltd's retained earnings are pre-acquisition.
See Answer at the end of this chapter.

Interactive question 2: Control and ownership [Difficulty level: Easy]

Continuing from the facts in Interactive question 1, in the year ended 31 December 20X8 the two
companies traded as follows.
Austin Ltd Reed Ltd
CU CU
Revenue 20,000 5,000
Costs (15,000) (3,000)
Profit 5,000 2,000

The statements of financial position as at 31 December 20X8 are as follows.

Austin Ltd Reed Ltd
CU CU
Non-current assets
Property, plant and equipment 82,000 9,000
Investments: Shares in Reed 12,000 –
Ltd
94,000 9,000
Current assets 81,000 20,000
Total assets 175,000 29,000
Equity
Called up share capital 100,000 10,000
Retained earnings 35,000 7,000
Total equity 135,000 17,000
Liabilities 40,000 12,000
Total equity and liabilities 175,000 29,000

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Requirement
Prepare the consolidated statement of profit or loss of Austin Ltd for the year ended 31 December 20X8
and the consolidated statement of financial position at that date.
Fill in the proforma below.
Austin Ltd
Consolidated statement of profit or loss for the year ended 31 December 20X8
CU
Revenue
Costs
Profit
Attributable to:
Owners of Austin Ltd
Non-controlling interest

Consolidated statement of financial position as at 31 December 20X8

CU
Non-current assets
Property, plant and equipment
Current assets
Total assets

Equity attributable to owners of the parent

Share capital
Retained earnings

Non-controlling interest
Total equity
Liabilities
Total equity and liabilities

Points to note:
Consolidated statement of profit or loss
1 Down to 'Profit after tax' this reflects control.
2 To reflect ownership, this profit is then allocated between the non-controlling interest (in Reed Ltd)
and the owners of Austin Ltd (Austin Ltd's profit plus that part of Reed Ltd's profit (80%) owned by
Austin Ltd).
Consolidated statement of financial position
1 The assets and liabilities in the statement of financial position represent control.
2 The equity part of the CSFP represents ownership. This time the retained earnings are Austin Ltd's
plus that part of Reed Ltd's (80%) that has arisen since acquisition, ie post-acquisition earnings.
The non-controlling interest owns their share of Reed Ltd's equity at the end of the reporting period.
See Answer at the end of this chapter.

Finally, let us look at how the movement during the year would be reflected in the consolidated statement
of changes in equity (CSCE). The consolidated statement of changes in equity is dealt with in Chapter
12. Here we will just look at the group retained earnings and non-controlling interest columns.

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 The retained earnings column shows group retained earnings and the non-controlling interest column
shows the non-controlling share of the subsidiary's total comprehensive income (which will usually be
net profit).
For Austin and Reed, these columns would be as follows:
Retained Non-controlling
earnings interest
CU CU
At 1 January 20X8 / (15,000 × 20%) 30,000 3,000
Total comprehensive income for the year
(5,000 + (2,000 × 80%)) / (2,000 × 20%) 6,600 400
At 31 December 20X8 36,600 3,400
You can see that the carried forward totals correspond to the totals in the consolidated statement of
financial position at 31 December 20X8.
Note that this is the first year of consolidation, so the opening retained earnings are simply the retained
earnings of the parent. For subsequent years the opening retained earnings will include the parent's
share of the subsidiary's post-acquisition retained earnings.
Now that we have looked at the mechanics of consolidation it is time to look in more detail at the
requirements of the relevant standards, most importantly IFRS 3 Business Combinations.

4 IFRS 3 Business Combinations

Section overview
• All business combinations should be accounted for using the acquisition method.
• The acquirer should be identified for all business combinations.

4.1 Objective
The objective of IFRS 3 is to set out the accounting and disclosure requirements for a business
combination. In practice business combinations can be structured in all sorts of different ways, usually
for reasons which are peculiar to the parties to the combination and/or to suit the legal and tax
environments in which they operate.
In an area of such potential complexity IFRS 3 looks beyond the legal form of the transaction to the
underlying substance. This can be seen in the definitions below.

Definitions
Business combination: A transaction or other event in which an acquirer obtains control of one or
more businesses.
Business: An integrated set of activities and assets capable of being conducted and managed for the
purpose of providing:
(a) A return in the form of dividends; or
(b) Lower costs or other economic benefits directly to investors or other owners.
A business generally consists of inputs, processes applied to those inputs, and resulting outputs that
are, or will be, used to generate revenues. If goodwill is present in a transferred set of activities and
assets, the transferred set is presumed to be a business.

All business combinations result in one entity, the acquirer, obtaining control of one or more other
businesses. We will look at the issue of control in section 5.
The type of business combination with which you need to be familiar is the acquisition of one company
by another resulting in a parent-subsidiary relationship.

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 Point to note:
If assets alone are purchased, such as a fleet of motor vehicles, these will be accounted for underIAS
16 Property, Plant and Equipment not IFRS 3.

Definitions
Parent: An entity that has one or more subsidiaries (IAS 27 Consolidated and Separate Financial
Statements).
Subsidiary: An entity, including an unincorporated entity such as a partnership, that is controlled by
another entity (known as the parent) (IAS 27).

4.2 Scope
IFRS 3 applies to all business combinations except those for which there are or will be separate
IFRSs. None of these excluded combinations fall within the syllabus.

4.3 Acquisition method of accounting

All business combinations should be accounted for by applying the acquisition method. This involves
five key steps:
• Identifying the acquirer.
• Determining the acquisition date.
• Measuring the consideration transferred.
• Recognising and measuring the identifiable assets acquired, the liabilities assumed and any
non-controlling interest in the acquiree.
• Recognising and measuring goodwill or a gain from a bargain purchase.
We will look at these steps in more detail in the rest of this chapter.

4.4 Identifying the acquirer

IFRS 3 states that the acquirer should be identified for all business combinations.

Definitions
Acquiree: The business or businesses that the acquirer obtains control of in a business combination.
Acquirer: The entity that obtains control of the acquiree.
Control: The power to govern the financial and operating policies of an entity or business so as to obtain
benefits from its activities.

In practical terms the simplest way in which control can be achieved is for the acquirer (P) to gain more
than half of the voting rights in the acquiree (S) ie rights relating to votes of the shareholders in general
meeting. These rights are normally attached to the ordinary shares. IFRS 3 states that in this case
control should be assumed unless it can be demonstrated otherwise.
In most business combinations it should be relatively straightforward to identify that a business
combination has taken place. Where this is not the case the Application Guidance in IFRS 3 provides a
number of examples of ways in which a business combination could be structured as follows:
• One or more businesses become subsidiaries of an acquirer or the net assets of one or more
businesses are legally merged into the acquirer.
• One combining entity transfers its net assets to another combining entity.
• All the combining entities transfer their net assets to a newly formed entity.
• A group of former owners of one of the combining entities obtains control of the combined entity.

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 4.5 Determining the acquisition date
Definition
Acquisition date: The date on which the acquirer obtains control of the acquiree.

General rule
The date on which the acquirer obtains control of the acquiree is normally the closing date of the
transaction. This is the date on which the acquirer legally:
(a) Transfers the consideration;
(b) Acquires the assets; and
(c) Assumes the liabilities of the acquiree.

5 Measuring the consideration transferred

Section overview
• The consideration transferred comprises the fair values at the acquisition date of assets given,
liabilities incurred or assumed and equity instruments issued by the acquirer.
• The amount of the consideration may not be fixed at the acquisition date; some may be
contingent on future events.
• Quoted equity investments should be valued at their market price.
• Deferred consideration should be discounted.
• Acquisition-related costs should be expensed in the period in which they are incurred.

5.1 General rule

The cost of the business combination is:
• The total of the fair values of the consideration transferred.

5.2 Fair value of consideration

IFRS 3 (revised) requires that consideration given should be measured at fair value at the acquisition
date.

Definition
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.

The Financial Accounting and Reporting syllabus includes only combinations achieved through a single
exchange transaction (not a gradual build up of control through successive transactions to acquire shares
in the acquiree).
The acquisition date should be used to split pre and post-acquisition profits.
Points to note:
1 Consideration given may be in the form of cash or other assets, liabilities assumed or incurred and
equity instruments (eg shares) issued by the acquirer.

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 2 The fair value of any quoted equity investments (marketable securities) forming part of the
purchase consideration should be the market price at the acquisition date, except in extremely
rare circumstances.
3 Future losses or other costs expected to be incurred as a result of the combination should not be
included as part of the cost of the combination.

5.3 Deferred consideration

Part of the consideration for an acquisition may not pass to the acquiree’s shareholders at the acquisition
date but be deferred until a later date.
Deferred consideration should be measured at its fair value at the acquisition date. The fair value
depends on the form of the deferred consideration.
Where the deferred consideration is in the form of equity shares:
• Its fair value should be measured at the acquisition date market price.
• The deferred amount should be recognised as part of equity, under a separate heading such as
'shares to be issued'.
Where the deferred consideration is payable in cash:
A liability should be recognised at the present value of the amount payable.
Points to note:
1 The market price of shares at the date the consideration is recognised is regarded as the present
value of all the future benefits arising from those shares, so no adjustment should subsequently be
made for any change in the market price over the period until any deferred consideration in the form
of equity shares is issued.
2 As with other present value remeasurements, the increase in a liability for deferred consideration
over the period until it is issued should be recognised in profit or loss as a finance cost.

Worked example: Deferred consideration

The acquisition date for Winter Ltd’s purchase of the whole of the share capital in Summer Ltd was 1
July 20X5. The consideration comprised 1,000,000 shares in Winter Ltd to be issued on 1 July 20X5,
CU10 million in cash payable on 1 July 20X5, 200,000 shares in Winter Ltd to be issued on 1 January
20X6 and CU5 million in cash payable on 1 July 20X6.
The market price of one Winter Ltd share was 450p on 1 July 20X5, 475p on 1 January 20X6 and 480p
on 1 July 20X6. A discount rate of 7% was appropriate.
What is the total consideration for this acquisition?
Solution
CUm
1,000,000 shares issued on 1 July 20X5 at 450p 4.50
200,000 shares to be issued on 1 January 20X6 at 450p 0.90
Cash payable on 1 July 20X5 10.00
Cash payable on 1 July 20X6 – CU5m/1.07 4.67
20.07

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 5.4 Contingent consideration
Definition
Contingent consideration is an obligation of the acquirer to transfer additional consideration to the
former owners of the acquiree if specified future events occur or conditions are met.

The acquiree’s shareholders may have a different view from the acquirer as to the value of the acquiree.

• The acquiree may be the subject of a legal action which the acquiree’s shareholders believe will be
settled at no cost, but is believed by the acquirer to be likely to result in an expensive settlement

• The two parties may have different views about the likely future profitability of the acquiree’s
business

In such cases it is often agreed that additional consideration may become due, depending on how the
future turns out (the settlement of the legal actions at a cost lower than that expected by the acquirer
and future earnings being higher than the acquirer expected). Such consideration is ‘contingent’ on
those future events/conditions.

Contingent consideration agreements result in the acquirer being under a legal obligation at the
acquisition date to transfer additional consideration, should the future turn out in specified ways. IFRS
3 therefore requires contingent consideration to be recognised as part of the consideration transferred
and measured at its fair value at the acquisition date.
Point to note:

Estimates of the amount of additional consideration and of the likelihood of it being issued are both taken
into account in estimating this fair value.

As with deferred consideration

• If the contingent consideration is to be in shares, the amount should be measured by reference to

the market price at the acquisition date.

• If the contingent consideration is to be in cash, the amount should be discounted to its present
value at the acquisition date.

It may turn out that the amount of the contingent consideration actually transferred is different from the
original estimate of fair value. In terms of the examples given above, the legal action may be settled at
no cost to the acquiree and the acquiree’s profits may be higher than the acquirer expected.

IFRS 3 treats such subsequent adjustments to the quantity of the contingent consideration in ways
familiar from IAS 10 Events after the Reporting Period:

• If (and this will be very rare) the adjustments result from additional information becoming available
about conditions at the acquisition date, they should be related back to the acquisition date,
provided the adjustments are made within the measurement period (however, adjustments made
within the measurement period are outside of the Financial Accounting and Reporting syllabus).

• If (and this will be common) the adjustments result from events occurring after the acquisition date,
they are treated as changes in accounting estimates; they should be accounted for prospectively
and the effect usually recognised in profit or loss. This will be the treatment required for the
additional consideration due after the legal action was settled/the earnings being higher than
expected.

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Worked example: Contingent consideration
On 1 January 20X7 A acquired 100% of the shares of B when the fair value of B’s net assets was CU25
million. The consideration was 4 million shares in A issued at 1 January 20X7 when their market value
was CU6 per share and a cash payment of CU6 million on 1 January 20X9 if the cumulative profits of B
exceeded a certain amount by that date. At 1 January 20X7 the probability of B hitting that earnings
target was such that the fair value of the possible cash payment was CU2 million. A discount rate of 8%
was used in measuring this fair value.

At 31 December 20X7 the probability that B would exceed the required profit level was the same as at
the acquisition date. At 31 December 20X8 it was clear that B had exceeded that profit target.

Show calculations of the amounts to be recognised in the statements of financial position and in profit or
loss for the two years ended 31 December 20X8.

Solution
The contingent consideration should be recognised at the acquisition date. It should be increased each
year by the unwinding of the discount at 8% and any increase in ultimate settlement recognised in profit
or loss.
CU’000
Statement of financial position at 31 December 20X7
Non-current assets – goodwill
Consideration transferred – current 4 million shares × CU6 24,000
– contingent at fair value 2,000
26,000
Net assets acquired (25,000)
Goodwill 1,000
Non-current liabilities – deferred consideration – CU2 million × 1.08 2,160
Profit or loss for year ended 31 December 20X7
Finance cost – unwinding of discount – CU2 million × 8% 160
Statement of financial position at 31 December 20X8
Non-current assets – goodwill (unchanged) 1,000
Current liabilities – deferred consideration – amount payable on 1 January 20X9 6,000
Profit or loss for year ended 31 December 20X8
Finance cost – unwinding of discount – CU2.16 million × 8% 172.8
Additional consideration for acquisition – CU6 million – (2.16 + 0.1728 million) 3,667.2

Interactive question 3: Contingent consideration [Difficulty level: Exam standard]

Autumn Ltd acquired 100% of Spring Ltd on 1 January 20X5 when the fair value of Spring Ltd’s
identifiable assets net of liabilities assumed was 320 million. The consideration was:
• Eight million shares in Autumn Ltd issued on 1 January 20X5 when the market price of Autumn
Ltd’s shares was 350p.
• A further payment of cash on 31 December 20X6:
– CU700,000 if Spring Ltd's profits for the year then ended were no less than CU2 million or
– CU1,750,000 if Spring Ltd’s profits for the year then ended were no less than CU3 million.
At 1 January 20X5 the fair value of the contingent consideration was CU100,000.
At 31 December 20X5 the fair value of the contingent consideration was CU1.2 million.

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 A discount rate of 10% was used in measuring these fair values.
At 31 December 20X6 Spring Ltd’s 20X6 profits per draft financial statements were CU3.5 million.
Requirement
Show calculations of the amounts to be recognised in the statements of financial position and in profit or
loss for the two years ended 31 December 20X6.
See Answer at the end of this chapter.

5.5 Acquisition-related costs

Acquisition-related costs such as professional and other fees relating specifically to the individual
transaction eg accountants’ fees and legal costs are required to be recognised as expenses in the
period in which they are incurred.
Exception: The costs of arranging financial liabilities (eg loans) and issuing equity are deducted
from the liability/equity.

6 Recognising and measuring the net assets acquired

Section overview
• The acquiree's identifiable assets and liabilities should be recognised at fair value at the date of
acquisition.
• Where certain criteria are met the acquiree's assets and liabilities should be recognised
separately.
• Provisions for future reorganisation plans and future losses should not be recognised as liabilities
at the acquisition date.
• Contingent liabilities which can be measured reliably and for which there is a present obligation
as a result of a past event should be recognised as liabilities at the acquisition date.
• An intangible asset should only be recognised if it is separable or arises from contractual or other
legal rights and can be measured reliably.
• IFRS 3 provides guidance on the measurement at fair value of specific assets and liabilities.
• Any non-controlling interest in the acquiree is recognised separately.

6.1 Basic principle

IFRS 3 requires that the acquiree's identifiable assets and liabilities should be recognised at fair
value at the date of acquisition.
The exception to this is non-current assets that are classified as held for sale in accordance with IFRS 5
Non-current Assets Held for Sale and Discontinued Operations. These are recognised at fair value less
costs to sell.
What constitutes the acquiree's identifiable assets and liabilities is important as the difference between
the consideration transferred in the business combination plus the value of any non-controlling interest
and the net assets acquired represents goodwill. The higher the total value of net assets, the lower the
total value of goodwill and vice versa.

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6.2 Identification of net assets acquired
Separate recognition of the acquiree's assets and liabilities is required where they meet specific criteria
at the acquisition date. The criteria are based on the IASB Conceptual Framework definitions of an asset
and a liability, covered in Chapter 1. These are as follows:

Assets other than intangible assets Where it is probable that any associated future economic
benefits will flow to the acquirer, and their fair value can
be measured reliably.
Liabilities other than contingent Where it is probable that an outflow of resources
liabilities embodying economic benefits will be required to settle the
obligation, and its fair value can be measured reliably.

Intangible assets Where they meet the definition of an intangible asset in

accordance with IAS 38 Intangible assets and their fair
value can be measured reliably.
Contingent liabilities Where there is a present obligation as a result of a past
event and their fair value can be measured reliably.

6.3 Recognition of liabilities

An acquirer may only recognise an acquiree's liabilities if they exist at the acquisition date. This
application of the normal IASB Conceptual Framework definition of a liability prohibits any account being
taken at that time of two factors which may have depressed the price the acquirer is prepared to pay for
the acquiree:

• Reorganisation plans devised by • Acquirers often plan to create value by changing the
the acquirer which will only be put cost structure of the acquiree so that the post-
into effect once control over the acquisition cost base is less than the sum of the
acquiree is gained. acquirer's and acquiree's existing cost bases. The
acquirer will evaluate the one-off costs of making these
changes when deciding what lower price to offer for the
acquiree, but as these costs are neither a liability nor
a contingent liability of the acquiree prior to the date
control is gained, they cannot be set up as provisions
at the time of acquisition.
• Future losses to be incurred as a • An acquirer will often target a loss-making business, in
result of the business combination the expectation that after reorganisation and with new
(this covers future losses to be management it will become profitable. But it often takes
incurred by the acquirer as well as some time for the benefits of such changes to emerge,
by the acquiree). during which time further trading losses will be incurred.
The reorganisation process may also cause short-term
losses within the acquirer. The total of such losses will
depress the price to be offered by the acquirer. But no
account can be taken of them, because future losses
relate to future, not past, events.

Point to note:
Contrast the first of these situations with contractual obligations put in place by the acquiree (not the
acquirer) prior to the acquisition date and conditional on being taken over. (Such contractual obligations
are sometimes put together on a large scale by the acquiree's management, precisely to deter acquirers.
In these cases they are often described as 'poison pill' defences.) Prior to the acquisition date these are
present obligations arising from past events but outflows of resources are not probable. So they will
be dealt with as contingent liabilities by the acquiree up to the moment when a business combination
becomes probable. At that point they meet the recognition criteria for a liability and must be recognised
as one of the acquiree's liabilities.

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 6.4 Recognition of intangible assets
As already noted above, intangible assets should be recognised when they can be reliably measured.
But even before that test, they must meet the definition of an intangible asset under IAS 38 Intangible
Assets. This IAS was dealt with in detail in Chapter 5, but the following points are relevant here:
• An intangible asset is a non-monetary asset without physical substance. It must be separable or
arise from contractual or other legal rights. 'Separable' means that the asset can be sold
separately from the entity owning the asset, while 'contractual or other legal rights' provides
evidence of the existence of the asset.
• The illustrative examples which accompany IFRS 3 (but which are not an integral part of it) list the
following examples of intangible assets which could be recognised on a business combination:
– Separable assets:
• Customer lists
• Non-contractual customer relationships
• Databases
Customer lists are often leased (ie used for a period without ownership being gained) for
mailing purposes by entities wanting to try to acquire new customers. Customer relationships
are details of customers together with their past buying profiles which can be sold, on the basis
that even though these customers have no outstanding commitments to make purchases, the
probability is that a number of them will place future orders. A value can then be put on this
probability.
– Assets arising from contractual or other legal rights:
• Trademarks
• Internet domain names
• Newspaper mastheads
• Non-competition agreements
• Unfulfilled contracts with customers
• Copyrights over plays
• Books, music, videos, etc
• Leases
• Licences to broadcast television and/or radio programmes
• Licences to fish in certain waters
• Licences to provide taxi services
• Patented technology
• Computer software
• The definition also covers research and development projects which are in process at the
acquisition date. These will often not be recognised in the acquiree's statement of financial position.

6.5 Contingent liabilities

IFRS 3 requires an acquirer to recognise an acquiree's contingent liabilities where their amount
can be measured reliably. This is in spite of the fact that they will not have been recognised in the
statement of financial position of the acquiree (underIAS 37 Provisions, Contingent Liabilities and
Contingent Assets).
Once recognised, contingent liabilities should be carried at the higher of the amount underIAS 37
(which will be nil until they become liabilities) and their value at the acquisition date, less any
subsequent amortisation.

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 Points to note:
1 If these cannot be measured reliably, their value, whatever it is, will be subsumed within goodwill
or gain on bargain purchase on acquisition. But full disclosure must still be made.
2 Even if recognised, the normalIAS 37 disclosures re contingent liabilities should be made.

6.6 Consequences of recognition at fair value

The consequences of the recognition of the acquiree's assets and liabilities at the acquisition date are
that:
• The acquirer's consolidated statement of profit or loss should include the acquiree's profits and
losses from the same date.
• The fair values of the acquiree's net assets form the basis of all the subsequent accounting in the
consolidated financial statements even where fair values are not incorporated into the acquiree's
single entity financial statements. For example, depreciation should be based on the fair values of
property, plant and equipment which may not be the same as the carrying amount in the acquiree's
statement of financial position.
• Any non-controlling interest in the acquiree is based on the non-controlling interest share of the
net assets at their fair values.

7 Goodwill

Section overview
• Goodwill is calculated as the excess of the fair value of the consideration transferred plus any
non-controlling interest over the fair value of the net assets acquired.
• Goodwill acquired in a business combination should be recognised as an intangible asset in the
consolidated statement of financial position.
• Goodwill should be tested for impairment at least annually.
• If a bargain purchase arises the measurement of the fair value of net assets acquired should be
checked.
• If the bargain purchase remains the gain should be recognised in profit or loss in the accounting
period in which the acquisition is made.

7.1 Calculation
When consolidation is carried out, the investment in the parent's statement of financial position is
cancelled against the net assets of the subsidiary at acquisition.

Worked example: Cancellation

Using the facts from Interactive question 1, we had the following information:
CU
Consideration transferred to acquire an 80% investment in Reed Ltd (in Austin Ltd's
statement of financial position) 12,000
Non-controlling interest (15,000 × 20%) 3,000
Net assets of Reed Ltd at acquisition 15,000

If you compare the consideration transferred (CU12,000) plus the value of the non-controlling interest
with the net assets acquired you can see that this cancels exactly. Austin Ltd has paid an amount which
is equal to its share of the assets and liabilities of Reed Ltd at acquisition.

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 In practice this is not likely to be the case. The parent company will often pay more for the subsidiary
than the value of its net assets, recognising that the subsidiary has attributes that are not reflected in its
statement of financial position. The extra amount paid by the parent is goodwill.

7.2 Goodwill at acquisition

In accordance with IFRS 3 any excess of the consideration transferred plus the value of any non-
controlling interest over the fair value of the net assets acquired should be:
• Described as goodwill; and
• Recognised as an asset (as it meets the recognition criteria).
Definition
Goodwill: An asset representing the future economic benefits arising from other assets acquired in a
business combination that are not individually identified and separately recognised.

Point to note:
Any goodwill carried in the acquiree's statement of financial position becomes subsumed in the
goodwill arising on acquisition, because:
• It is excluded from identifiable assets (see section 8.4 above)
• This reduces the net assets at acquisition; and
• Must therefore increase the goodwill arising on consolidation.

Interactive question 4: Goodwill [Difficulty level: Easy]

P Ltd pays CU10,000 to buy 75% of the share capital of S Ltd. The statement of financial position of S
Ltd at the date of acquisition shows the following.
CU
Assets 16,000

Share capital 1,000

Retained earnings 11,000
Equity 12,000
Liabilities 4,000
16,000
Requirement
Calculate the goodwill arising on P Ltd's acquisition of S Ltd.
Fill in the proforma below.
CU
Consideration transferred
Plus: Non-controlling interest at acquisition
Less: Net assets at acquisition
Goodwill

Point to note:
For the purposes of calculating goodwill net assets at acquisition are normally calculated as share capital
plus retained earnings (and other reserves, if any) at the acquisition date.
See Answer at the end of this chapter.

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Interactive question 5: Measuring fair value [Difficulty level: Exam standard]
Kelly Ltd acquired 75% of Eclipse Ltd on 1 July 20X7. The consideration comprised:
• 5 million 25p ordinary shares of Kelly Ltd (market value 60p) to be issued on 1 July 20X7 (issue
costs of CU10,000 were paid to a merchant bank)
• CU1 million cash payable on 1 July 20X7
• A further 1 million 25p ordinary shares of Kelly Ltd to be issued on 1 July 20X8.
The fair value of the identifiable assets and liabilities recognised by Eclipse Ltd at 1 July 20X7 is
CU3,628,000. The financial statements of Eclipse Ltd have for some years disclosed a contingent liability
with a potential amount of CU2 million. The fair value of this contingent liability at 1 July 20X7 has been
reliably estimated at CU200,000.

Requirement
Show the entries in Kelly Ltd's books to record the investment in Eclipse Ltd, and calculate goodwill
acquired in the business combination.
Fill in the proforma below.

CU'000 CU'000
Recording investment in Eclipse Ltd
Shares to be issued 1 July 20X7
DR
CR
CR
CR
Cash
DR
CR
Shares to be issued 1 July 20X8
DR
CR
Goodwill on consolidation of Eclipse Ltd

CU'000 CU'000
Consideration transferred
Shares
Cash
Shares to be issued
Non-controlling interest
Identifiable assets and liabilities acquired
Per books of Eclipse Ltd
Contingent liability

Goodwill

See Answer at the end of this chapter.

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 7.3 Summary
Goodwill arising from a business combination is calculated as follows:
CU CU
Fair value of consideration transferred X
Non-controlling interest at acquisition X
Less: Fair value of tangible assets X
Fair value of intangible assets X
Fair value of assets X
Fair value of liabilities (X)
Fair value of contingent liabilities (X)
Fair value of net assets (X)
Goodwill/(Gain from a bargain purchase) X/(X)

7.4 Goodwill subsequent to acquisition

After initial recognition, goodwill should be:
• Carried in the statement of financial position at cost less accumulated impairment losses;
• Tested for impairment at least annually in accordance with IAS 36 Impairment of Assets.
If goodwill has suffered an impairment the loss will be recognised in the consolidated statement of
profit or loss. Retained earnings in the consolidated statement of financial position will also be
reduced.
Point to note:
Retained earnings will be reduced by the total impairments recognised to date, not just the fall in value
which relates to the current year.
This is because goodwill is a consolidation adjustment, ie it only affects the group accounts. The single
entity accounts which are used as the basis of the consolidated statement of financial position will not
reflect any impairments in goodwill arising on consolidation.

7.5 Bargain purchases

In certain circumstances the parent entity may pay less to acquire a subsidiary than represented by its
share of the subsidiary's net assets.
These circumstances might include the following:
• The subsidiary has a poor reputation.
• It suffers from inherent weaknesses not reflected in its assets and liabilities.
• The parent company has negotiated a good deal.
A gain on a bargain purchase arises if the fair value of the net assets acquired exceeds the total of
the consideration transferred and the value of any non-controlling interest, ie there is 'negative goodwill'.
IFRS 3 is based on the assumption that this usually arises because of errors in the measurement of
the acquiree's net assets and/or the consideration transferred. So the first action is always to reassess
the identification and measurement of the net assets and the measurement of the consideration
transferred, checking in particular whether the fair values of the net assets acquired correctly reflect
future costs arising in respect of the acquiree.
If the gain still remains once these reassessments have been made, then it is attributable to a bargain
purchase, ie the acquirer has managed to get away with paying less than the full value for the acquiree.
This gain does not meet the Conceptual Framework's definition of a liability, so it must be part of equity.
It should therefore be recognised in profit or loss in the same accounting period as the acquisition is
made.

7.6 Initial accounting

Initial accounting for goodwill is the process of identifying and determining the fair values of:
• The acquiree's identifiable assets and liabilities;

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 • The consideration transferred, i.e. the assets given, liabilities assumed and equity instruments
issued; and
• Any non-controlling interest at acquisition.
Note:
IFRS 3 allows the option to measure the non-controlling interest at acquisition at either the NCI share of
the subsidiary’s net assets or at fair value. We will be looking at the issue of non-controlling interest
measured at fair value in the next section.
Whilst every effort should be made to complete this initial process by the end of the accounting period in
which the combination is effected, it may be that in some cases only provisional values can be
established by that time. This is often true of the valuation of non-current assets, including intangibles.
In such cases:
• Provisional values should initially be used.
• Adjustments to the values of the net assets and/or the consideration transferred made within one
year of the acquisition date, known as the measurement period, should be backdated to the
acquisition date. Changes in these values may therefore lead to a restatement of the provisional
values for goodwill or the gain on bargain purchase on acquisition.
• Comparative figures for the previous period (the one in which the combination was effected)
should be restated as if these adjustments had been made as part of the initial accounting. So
depreciation charges in the previous period in respect of PPE may have to be restated.
Point to note:
This one year period can only be used to reassess fair values. It cannot be used to backdate the
recognition of acquired assets and liabilities which did not meet the recognition criteria at the
acquisition date but do so during this period, because this would involve taking account of events after
the acquisition date. As an example, major pollution damage resulting from an accident taking place
within the one year period may result in new types of liabilities being identified, types which were
unknown at the acquisition date. No such liabilities should be recognised at the acquisition date as they
were not known at that time.

7.7 Subsequent adjustments

The need for further adjustments may emerge later but to allow them to be backdated to the acquisition
date might result in continual changes to previously published data in a way which is not helpful to users
of financial statements. For example, a large group might make several acquisitions every year;
adjustments to fair values at the date of each acquisition might result in annual adjustments to
comparative figures and not just for acquisitions in the immediate prior period. So fair value adjustments
made after the end of the one year period are to be treated as follows:
• In limited circumstances, they are backdated to the acquisition date with restatement of goodwill
or gain on bargain purchase on acquisition and all comparative figures. These circumstances are if
they arise as a result of an error, as defined by IAS 8 Accounting Policies, Changes in Accounting
Estimates and Errors (dealt with in Chapter 4). But such errors will be very rare.
• In all other circumstances, such adjustments are to be treated as changes in accounting
estimates, as defined in IAS 8. There is no backdating to the acquisition date and no restatement
of comparative figures. These adjustments are recognised as income or expenses in the
accounting period in which they arise. So if a trade receivable which had a fair value of nil at the
acquisition date (ie it had been recognised as an expense in profit or loss) is recovered in full two
years afterwards, it is treated as income, not as a reduction in goodwill.

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 8 Measurement of non-controlling interest
Section overview
• IFRS 3 allows two methods of measuring the non-controlling interest (NCI) at the acquisition date:
– At the NCI’s share of the acquiree’s net assets (proportionate basis).
– At its fair value.
• The fair value method results in the NCI’s share of goodwill being recognised.

8.1 Measurement of non-controlling interest at acquisition date

• The traditional method of measuring the NCI at the acquisition date is to measure it at the NCI’s
share of the acquiree’s net assets, known as the proportionate basis throughout the Financial
Accounting and Reporting materials.
This method results in goodwill being in effect the difference between the cost of the parent’s
investment and its share of the net assets acquired. The rationale is that the market transaction
which is the business combination has only provided evidence of the amount of the parent entity’s
goodwill; there has been no market transaction to provide evidence of the amount of goodwill
attributable to the NCI. Hence only the acquirer’s share of the goodwill is recognised.
This method is the one adopted by international standards prior to 2007.
• The alternative approach works on the basis that the goodwill attributable to the NCI can be
calculated from the estimate of the fair value of the NCI itself. It is an approach which is consistent
with the rest of IFRS 3 which requires the consideration transferred, the assets acquired and the
liabilities acquired all to be measured at fair value.
This method was the one adopted in the US by the FASB.
The fair value method usually results in a higher amount for the NCI; the difference between this
and the amount as traditionally measured is added to the goodwill acquired in the business
combination and is the goodwill attributable to the NCI at the acquisition date.
Note: The choice of method is available for each business combination separately. The choice in respect
of one combination is not binding for subsequent combinations.

Worked example: Measurement of NCI (1)

The consideration transferred by National Ltd when it acquired 800,000 of the 1,000,000 CU1 equity
shares of Locale Ltd was CU25 million. At the acquisition date Locale Ltd’s retained earnings were CU20
million and the fair value of the 200,000 equity shares in Locale Ltd not acquired was CU5 million.
Calculate the goodwill acquired in the business combination on the basis that the NCI in Locale Ltd is
measured using:
(a) Proportionate basis
(b) Fair value
Solution
NCI on proportionate NCI at
basis fair value
CU’000 CU’000
Consideration transferred 25,000 25,000
NCI – 20% × CU21 million/fair value 4,200 5,000
29,200 30,000
Net assets acquired (CU1 million + CU20 million) (21,000) (21,000)
Goodwill acquired in business combination 8,200 9,000

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 The only difference between the results of the two methods at the acquisition date is that the NCI and
goodwill are higher by CU0.8 million, the amount by which the fair value of the NCI exceeds its share of
the acquired net assets.
Point to note:
There is always likely to be a difference between the fair values per share of an equity holding which
provides control over another entity and a holding which does not, because buyers are prepared to pay
a higher price per share if they end up gaining control of the other entity. This higher price is sometimes
referred to as the ‘control premium’. In the above example:
• The controlling interest is valued at CU31.25 per share (25,000/800)
• The NCI is valued at CU25.00 per share (5,000/200)

8.2 Subsequent measurement of NCI in statement of financial position

If NCI was measured at the acquisition date at fair value, then the carrying amount at the end of each
subsequent period should take that fair value into account. This is best achieved by adapting the
standard consolidation working 4 along the lines of equity accounting for associates, as follows
Consolidation working (4) – Non-controlling interest
CU
Fair value of NCI at acquisition date X
Share of post acquisition profits and other reserves
(NCI% × post acquisition (W2)) X
X
Point to note:
Where NCI has been measured at fair value and there is an impairment of goodwill, part of that
impairment will be charged to the NCI at the end of the reporting period, based on the NCI %.
For instance, if the goodwill in the worked example in Section 8.1 above was impaired by CU1,000, the
impairment would be charged as follows:
Proportionate basis
CU CU
DR Group retained earnings 1,000
CR Goodwill 1,000
Fair value basis
CU CU
DR Group retained earnings (1,000 × 80%) 800
DR Non-controlling interest (1,000 × 20%) 200
CR Goodwill 1,000

Worked example: Measurement of NCI (2)

Continuing with the immediately preceding worked example, Locale Ltd’s retained earnings three years
later were CU23 million.
Calculate the carrying amount of the non-controlling interest three years later on the basis that at
acquisition it was measured using:
(a) Proportionate basis
(b) Fair value
Solution
Consolidation working (2) – Net assets of Locale Ltd
At period At Post-
end acquisition acquisition
CU'000 CU'000 CU'000
Share capital 1,000 1,000 –
Retained earnings 23,000 20,000 3,000
24,000 21,000 3,000

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 Consolidation working (4) – Non-controlling interest
NCI on NCI at
proportionate fair value
basis
CU'000 CU'000
NCI at acquisition date – share of net assets
(20% × Column 2(W2))/fair value 4,200 5,000
Share of post acquisition profits – (20% × post acquisition
Column 3(W2)) 600 600
4,800 5,600

Interactive question 6: Subsequent measurement of NCI

[Difficulty level: Exam standard]
On 1 January 20X8 Foot Ltd acquired 75,000 equity shares in Belt Ltd for CU750,000. Belt Ltd’s issued
equity share capital was 100,000 CU1 shares and at 1 January 20X8 the fair value and the carrying
amount of its net assets was CU600,000. On the same date the fair value of the equity shares in Belt
Ltd not acquired by Foot Ltd was estimated at CU175,000.
On 31 December 20X8 the summarised statements of financial position of the two entities were as
follows:
Foot Ltd Belt Ltd
CU CU
ASSETS
Non-current assets
Property, plant and equipment 150,000 500,000
Investments 750,000 –
900,000 500,000
Current assets 1,700,000 680,000
Total assets 2,600,000 1,180,000
EQUITY AND LIABILITIES
Equity
Ordinary share capital (CU1 shares) 500,000 100,000
Retained earnings 1,500,000 880,000
2,000,000 980,000
Current liabilities 600,000 200,000
Total equity and liabilities 2,600,000 1,180,000
Requirement
Prepare the consolidated statement of financial position of Foot Ltd and its subsidiary Belt Ltd as at 31
December 20X8 on the basis that at acquisition the non-controlling interest was measured using:
(a) Proportionate basis;
(b) Fair value.
See Answer at the end of this chapter.

9 IFRS 10 Consolidated Financial Statements

Section overview

• With limited exceptions, all parent entities must present consolidated financial statements.
• Consolidated financial statements must include the parent and all the entities under its control.
• The IAS 27 provisions relating to consolidated financial statements have been replaced by IFRS
10.
• The investment in the subsidiary is carried at cost in the parent's statement of financial position.

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9.1 Scope
IFRS 10 is to be applied in the preparation of the consolidated financial statements (CFS) of the
group.

Definitions
A group: A parent and all its subsidiaries.
Consolidated financial statements: The financial statements of a group in which the assets, liabilities,
equity, income, expenses and cash flows of the parent and its subsidiaries are presented as those of a
single economic entity.
Non-controlling interest: The equity in a subsidiary not attributable, directly or indirectly, to a parent.

9.2 Background
IFRS 10 Consolidated Financial Statements was published in May 2011 and replaced the consolidation
provisions of IAS 27 Consolidated and Separate Financial Statements. The IASB stressed that the
purpose of IFRS 10 was to build upon rather than replace the IAS 27 requirements and concepts but the
new provisions are clearly designed to eliminate the divergent practices which had been possible under
IAS 27.
Like IAS 27, IFRS 10 bases its consolidation model on control, but it seeks to define control in a way
which can be applied to all investees. IAS 27 defined control as ‘the power to govern the financial
operating policies of an entity so as to obtain benefits from its activities’. In practice, this had focussed
attention on size of shareholding. IFRS 10 gives a more detailed definition of control and seeks in that
way to reduce the opportunities for reporting entities to avoid consolidation. It expands upon the limited
guidance in IAS 27 regarding the possibility of control without the majority of voting rights.
The IFRS 10 definition of control was explained in Section 3.1.

9.3 Presentation of CFS

With one exception, a parent must present CFS.
A parent need not prepare CFS if and only if all of the following hold:
• The parent is itself a wholly-owned subsidiary or it is a partially owned subsidiary of another entity
and its other owners, including those not otherwise entitled to vote, have been informed about, and
do not object to, the parent not presenting consolidated financial statements
• Its securities are neither publicly traded nor in the process of being issued to the public; and
• IFRS-compliant CFS are prepared by the immediate or ultimate parent company.

9.4 Scope of CFS

The CFS must include the parent and all subsidiaries, both foreign and domestic, other than:
• Those held for sale in accordance with IFS 5
• Those held under such long-term restrictions that control cannot be operated
IFRS 10 is clear that a subsidiary should not be excluded from consolidation simply because it is loss
making or its business activities are dissimilar to those of the group as a whole.

9.5 Consolidation procedures

The following consolidation procedures are necessary to present the group as a single economic entity.
These were explained in earlier sections of this chapter, ie:
• Eliminating the carrying amount of the parent's investment against its share of the equity in
its subsidiaries, with goodwill being the resultant figure.

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 • Calculating the non-controlling interest and presenting it as a separate figure:
– In the statement of financial position, within total equity but separately from the parent
shareholders' equity.
– In the statement of profit or loss.
In addition intra-group balances, transactions, profits and losses should be eliminated in full (ie
not just the parent’s share).
Point to note:
Under IFRS 10 total comprehensive income is attributed to the parent and the non-controlling interests
even if this results in the non-controlling interests having a deficit balance. This is consistent with the
idea that the non-controlling interests are part of the equity of the group. If there is a non-controlling
interest in cumulative preference shares which are classified as equity, the non-controlling interest must
be allocated their share of the relevant dividends even if they have not been declared.
There are additional requirements that:
• Where the parent and subsidiary have different reporting dates, that difference should be not
more than three months (remember that, because it has control, the parent can dictate a reporting
date to the subsidiary) and adjustments must be made for major transactions between the two
dates. An example of such an adjustment would be if the subsidiary with cash appearing in its
statement of financial position at an earlier date lent it to the parent so that the same cash was in
the parent's statement of financial position at the later date. An adjustment must be made to
eliminate this double-counting.
• Uniform accounting policies must be applied to all companies in preparing the CFS. If they are
not adopted in the subsidiaries' own financial statements, then adjustments should be made as
part of the consolidation. It might be the case that certain group companies take advantage of
the alternative accounting treatments allowed in some areas by IFRSs, but these should be made
uniform on consolidation.
Changes in the composition of the group are accounted for as follows:
• Acquisitions are accounted for under IFRS 3, by bringing into the consolidated statement of
profit or loss the new subsidiary's income and expenses from the date of acquisition.
• In the case of disposals, the income and expenses to the date of disposal (ie the date control is
lost) are included in the CFS, as is the difference between the proceeds of sale and the carrying
amount in the consolidated statement of financial position at that date (which will be the
parent's share of the subsidiary's net assets at the date of disposal plus any remaining goodwill
relating to that subsidiary – this is dealt with in Chapter 14).

10 IFRS 12 Disclosure of Interests in Other Entities

Section overview
• IFRS 12 sets out the required disclosures for group accounting.

10.1 Overview
IFRS 12 Disclosure of Interests in Other Entities was issued in May 2011 as part of a package of five
standards relating to consolidation. It provides comprehensive disclosure requirements regarding a
reporting entity’s interests in other entities. The disclosure requirements in IAS 27 had been criticised
as being too limited. The information required by IFRS 12 is intended to help users to evaluate the nature
of, and risks associated with, a reporting entity’s interest in other entities and the effects of those interests
on its financial position, financial performance and cash flows. It replaces the disclosure requirements
of all other standards relating to group accounting. The standard requires disclosure of:
• The significant judgements and assumptions made in determining the nature of an interest in
another entity or arrangement, and in determining the type of joint arrangement in which an interest
is held.

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 • Information about interests in subsidiaries, associates, joint arrangements and structured entities
that are not controlled by an investor.

10.2 Interests in subsidiaries

The following disclosures are required in respect of subsidiaries:
• The interest that non-controlling interests have in the group’s activities and cash flows, including
the name of relevant subsidiaries, their principal place of business and the interest and voting rights
of the non-controlling interests.
• The nature and extent of significant restrictions on an investors ability to use group assets and
liabilities.
• The nature of the risks associated with an entity’s interests in consolidated structured entities.
• The consequences of changes in ownership interest in subsidiaries (possible loss of control).
IFRS 12 also requires specific disclosures in respect of associates and joint arrangements. These are
explained in Chapter 13.

11 IAS 27 Separate Financial Statements

Section overview
• IAS 27 has been reissued covering just the requirements for a parent’s separate financial
statements.

IAS 27 Separate Financial Statements was reissued in May 2011 dealing only with the single entity
financial statements of the parent, the consolidation provisions having been transferred to IFRS 10.
It outlines the accounting and disclosure requirements for the separate financial statements of the parent
or the investor, in which the relevant investments will be accounted for either at cost or in accordance
with IFRS 9 (IAS 39).
The exception to this is investments held for sale which will be accounted for in accordance with IFRS 5
Non-Current Assets held For sale and Discontinued Operations.
In its separate financial statements an entity will recognise dividends from other entities, rather than
recognising a share of their profits. An entity recognises a dividend from a subsidiary, joint venture or
associate when its right to receive the dividend is established.

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 Summary and Self-test

Summary

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Self-test
Answer the following questions
1 Vaynor Ltd acquired 100,000 ordinary shares in Weeton Ltd and 40,000 ordinary shares in Yarlet
Ltd some years ago.
Extracts from the statements of financial position of the three companies as on 30 September 20X7
were as follows.
Vaynor Ltd Weeton Ltd Yarlet Ltd
CU'000 CU'000 CU'000
Ordinary shares of CU1 each 500 100 50
Retained earnings 90 40 70
At acquisition Weeton Ltd had retained losses of CU10,000 and Yarlet Ltd had retained earnings of
CU30,000.
What were the consolidated retained earnings of Vaynor Ltd on 30 September 20X7?

2 The summarised statements of financial position of Peep Ltd and Pitti Ltd at 31 December 20X6
are as follows.
Peep Ltd Pitti Ltd
CU CU
Net assets 300,000 160,000
Share capital (CU1 shares) 100,000 100,000
Retained earnings 200,000 60,000
300,000 160,000
On 31 December 20X6 Yum Ltd purchased for cash 90% of Peep Ltd's shares for CU360,000 and
75% of Pitti Ltd's shares for CU100,000. The carrying amounts of the assets in both companies are
considered to be fair values and non-controlling interest is valued on the proportionate basis.
What amounts in respect of goodwill/gain on a bargain purchase will arise from these acquisitions?

3 Wolf Ltd acquired 80,000 CU1 ordinary shares in Fox Ltd on 1 April 20X5 at a cost of CU77,000.
Fox Ltd's retained earnings at that date were CU50,000 and its issued ordinary share capital was
CU100,000. Non-controlling interest is valued at fair value of CU32,000.
What is the amount of the gain on a bargain purchase arising on the acquisition?
4 Ling Ltd purchased 80% of the ordinary shares of Moy Ltd on 1 June 20X0 for CU5,400,000. The
summarised statement of financial position of Moy Ltd on this date showed the following.
CU'000
Ordinary share capital 1,000
Share premium account 500
Revaluation surplus 400
Retained earnings 2,700
4,600
The fair value of the identifiable net assets of Moy Ltd exceeded their carrying amount by
CU150,000. The statement of financial position of Moy Ltd included goodwill of CU500,000. Ling
Ltd has chosen to use the proportionate basis to measure the goodwill and non-controlling interest
arising on the acquisition of Moy Ltd.
In accordance with IFRS 3 (revised) Business Combinations what is the amount of goodwill
acquired in the business combination?
5 Sansom Ltd has two subsidiaries, Mabbutt Ltd and Waddle Ltd. It purchased 10,000 CU1 shares in
Mabbutt Ltd on 1 January 20X1 for CU35,000 when the retained earnings of Mabbutt Ltd stood at
CU21,000 and the fair value of the NCI was CU13,000.. It purchased 15,000 CU1 shares in Waddle
Ltd for CU20,000 on 31 December 20X1 when the retained earnings of Waddle Ltd stood at
CU16,000 and the fair value of the NCI was CU10,000. Non-controlling interests at the acquisition
date are to be measured at their fair value.

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 The issued share capital of the two subsidiaries is as follows.
Mabbutt Ltd CU15,000
Waddle Ltd CU20,000
By the end of 20X4 goodwill impairment losses totalled CU4,400.
What is the carrying amount of goodwill in the consolidated statement of financial position at
31 December 20X4?
6 Tom Ltd has purchased all the share capital of Jerry Ltd during the year.
Which of the following items should Tom Ltd take into account when calculating the fair value of the
net assets acquired in accordance with IFRS 3 (revised) Business Combinations?
(1) A possible loss dependent on the outcome of a legal case which has not been provided for in
Jerry Ltd's books. The acquisition date fair value of the loss can be estimated reliably.
(2) A provision required to cover the costs of reorganising Jerry Ltd's departments to fit in with
Tom Ltd's structure.
(3) A warranty provision in Jerry Ltd's books to cover the costs of commitments made to
customers.
7 Wilsons Ltd purchased 70% of Watneys Ltd for CU20,000 on 30 June 20X2. The fair value of the
non-controlling interest at that date was CU7,000. The statements of financial position of Watneys
Ltd are as follows.
30 September
20X2 20X1
CU CU
Ordinary share capital 1,000 1,000
Share premium 2,000 2,000
Retained earnings 21,000 12,000
24,000 15,000
Profits accrue evenly over the year. Wilsons Ltd uses fair value wherever possible as a preferred
method of accounting.
What is the goodwill acquired in the business combination?

8 Leeds Ltd acquired the whole of the issued share capital of Cardiff Ltd for CU12 million in cash. In
arriving at the purchase price Leeds Ltd had taken into account future costs for reorganising Cardiff
Ltd of CU1 million and Cardiff Ltd's anticipated future trading losses of CU2 million. The fair value
of the net assets of Cardiff Ltd before taking into account these matters was CU7 million.
In accordance with IFRS 3 (revised) Business Combinations, what is the amount of goodwill
acquired in the business combination?
9 Castor Ltd acquires 75% of the share capital of Pollux Ltd on 1 December 20X1. The consideration
transferred is CU1 million in cash and 300,000 CU1 ordinary shares of Castor Ltd. The market value
of each of Castor Ltd's shares on 1 December 20X1 is 300 pence. On 1 December 20X1the fair
value of Pollux Ltd's net assets is CU1 million. Castor Ltd intends to recognise the non-controlling
interest in Pollux Ltd at its fair value on 1 December 20X1 of CU280,000.
In accordance with IFRS 3 Business Combinations what is the amount of goodwill acquired in the
business combination to be dealt with in Castor Ltd's consolidated accounts?
10 In accordance with IFRS 3 Business Combinations the timetable for the acquisition of a subsidiary
will usually include the following four dates.
(1) The date on which consideration passes.
(2) The date on which an offer becomes or is declared unconditional.
(3) The date from which the acquiring company has the right to share in the profits of the acquired
business under the agreement.

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 (4) The date on which control passes.
What will be the effective date for accounting for the business combination?
11 Sam Ltd has a share capital of CU10,000 split into 2,000 A ordinary shares of CU1 each and 8,000
B ordinary shares of CU1 each. Each A ordinary share has ten votes and each B ordinary share
has one vote. Both classes of shares have the same rights to dividends and on liquidation. Tom Ltd
owns 1,500 A ordinary shares in Sam Ltd. Dick Ltd owns 5,000 B ordinary shares in Sam Ltd.
All three companies conduct similar activities and there is no special relationship between the
companies other than that already stated. The shareholdings in Sam Ltd are held as long-term
investments and are the only shareholdings of Tom Ltd and Dick Ltd.
In accordance with IFRS 10 Consolidated Financial Statements which company(s) should prepare
consolidated financial statements?

12 ANDRESS LTD
The statement of profit or loss and statement of financial position for the year 20X0 for Andress Ltd
and Bacall Ltd are given below.
Statements of profit or loss for the year ended 31 December 20X0
Andress Ltd Bacall Ltd
CU CU
Revenue 10,000 7,000
Cost of sales (6,000) (2,000)
Gross profit 4,000 5,000
Expenses and tax (3,000) (2,000)
Profit 1,000 3,000
Statements of financial position as at 31 December 20X0
Andress Ltd Bacall Ltd
CU CU
ASSETS
Non-current assets
Property, plant and equipment 25,300 9,000
Investments (3,200 shares in Bacall Ltd at cost) 3,200 –
28,500 9,000
Current assets 22,500 7,000
Total assets 51,000 16,000
EQUITY AND LIABILITIES
Equity
Ordinary share capital 10,000 4,000
Share premium account 4,000 –
Retained earnings 2,000 7,000
Total equity 16,000 11,000
Non-current liabilities 10,000 2,000
Current liabilities 25,000 3,000
Total equity and liabilities 51,000 16,000
Andress Ltd has owned 80% of Bacall Ltd since incorporation.
Requirement
Prepare, for Andress Ltd, the consolidated statement of profit or loss for the year ended 31
December 20X0 and the consolidated statement of financial position at that date.
13 CRAWFORD LTD PART 1
The statements of financial position and statements of profit or loss for Crawford Ltd and Dietrich
Ltd are given below:

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 Statements of financial position as at 30 June 20X0
Crawford Ltd Dietrich Ltd
CU CU
ASSETS
Non-current assets
Property, plant and equipment 27,000 12,500
Investments (2,000 CU1 shares in Dietrich Ltd at cost) 2,000 –
29,000 12,500
Current assets 25,000 12,000
Total assets 54,000 24,500
EQUITY AND LIABILITIES
Equity
Ordinary share capital 20,000 3,000
Share premium account 6,000 –
Retained earnings 9,000 14,000
Total equity 35,000 17,000
Non-current liabilities 12,000 –
Current liabilities 7,000 7,500
Total equity and liabilities 54,000 24,500
Crawford Ltd acquired its shares in Dietrich Ltd five years ago when Dietrich's retained earnings
were nil. At the start of the current year retained earnings were CU2,000 and CU4,000
respectively.
Statement of profit or loss for the year ended 30 June 20X0
Crawford Ltd Dietrich Ltd
CU CU
Revenue 24,000 30,000
Cost of sales (9,000) (11,000)
Gross profit 15,000 19,000
Distribution costs (2,300) (1,300)
Administrative expenses (1,500) (2,700)
Profit from operations 11,200 15,000
Finance cost (1,200) –
Profit before tax 10,000 15,000
Income tax expense (3,000) (5,000)
Profit for the year 7,000 10,000
Requirement
(a) Briefly explain the objectives of producing group accounts. (3 marks)
(b) Briefly explain the following words/phrases.
(i) Single entity concept
(ii) Control
(iii) Equity (6 marks)
(c) Prepare, for Crawford Ltd, the consolidated statement of profit or loss and the consolidated
statement of changes in equity (retained earnings and the non-controlling interest columns
only) for the year ended 30 June 20X0 and the consolidated statement of financial position as
at that date. (12 marks)
(21 marks)
Now, go back to the Learning objectives in the Introduction. If you are satisfied you have achieved these
objectives, please tick them off.

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Technical reference

Point to note. The following sets out the examinability of the standards covered in this chapter.

IFRS 3 All paragraphs but excluding paragraphs 24-30, 41-44, 54-55, 57 and 67. Appendix B
is excluded except for B5-B11, B31-B34 and B64-B67 and the illustrative examples
are also excluded.

The paragraphs listed below are the key references you should be familiar with.

1 IFRS 3 BUSINESS COMBINATIONS

Basics
• Definitions: control, acquirer, acquiree, acquisition date, goodwill. IFRS 3 (App A)

• Acquisition method: acquirer, cost of combination, allocation over IFRS 3 (5)

identifiable assets, liabilities and contingent liabilities.
• Control through: IAS 27 (13)

– P holds more than half of the voting rights in S

– P holds a majority of voting rights in S, through an agreement with
others
– P has power to govern the financial and operating policies of S under
statute or agreement
– P has power to appoint or remove the majority of S's top
management.
Acquisition date
• Date that control passes IFRS 3 (8-9)

Consideration transferred
• Measured at fair value of assets given, liabilities assumed and equity IFRS 3 (37-38)
instruments issued.
• Subsequent adjustment to cost:
– Subsequent adjustments within measurement period affect goodwill IFRS 3 (45-50)

– If after initial accounting complete, then in current period.

Recognition and measurement of identifiable net assets acquired
• Identifiable assets – exist at acquisition date and:
– May or may not have been recognised in the acquiree's own financial IFRS 3 (10-14)
statements
• Identifiable contingent liabilities – exist at acquisition date and:
– Reliably measurable IFRS 3 (23)

– NormalIAS 37 disclosures IFRS 3 (B64)

– Subsequently carried at higher ofIAS 37 value and value at IFRS 3 (56)

acquisition date.
Goodwill
• Non-current asset IFRS 3 (32)

• No amortisation but subject to annual impairment reviews. IAS 36 (10)

445
 Gain on bargain purchase
• Reassess identification and measurement of the net assets acquired and IFRS 3 (36)
measurement of consideration transferred.
• Any remaining amount recognised in profit or loss in period the acquisition IFRS 3 (34)
is made.
Initial accounting
• At acquisition date or within 12 months thereof. IFRS 3 (45)

• Subsequently: errors accounted for retrospectively, everything else IFRS 3 (50)

prospectively.
Disclosures IFRS 3 (B64-B67)

• Business combinations effected in the accounting period or after its finish

but before financial statements authorised for issue (in the latter case, by
way of note).
• Gains, losses, errors and other adjustments which relate to combinations
effected in the current or previous periods.
• Changes in the carrying amount of goodwill during the period.
2 IFRS 10 CONSOLIDATED FINANCIAL STATEMENTS
Scope
• An entity that is a parent shall present consolidated financial statements, IFRS 10 (4)
unless:
– Wholly or partially-owned subsidiary and all other owners do not
object to no CFS
– Debt or equity instruments not publicly traded
– Not in the process of filing financial statements with any regulatory
body for the purpose of making a public offering
– Ultimate or intermediate parent publishes consolidated financial
statements compliant with IFRS
Control
• An investor controls an investee when it is exposed, or has rights, to IFRS 10 (6)
variable returns from its involvement with the investee and has the ability
to affect those returns through its power over the investee.
• An investee has power over an investee when the investor has existing (IFRS 10)
rights that give it the current ability to direct the relevant activities ie the
activities that significantly affect the investee’s returns
Accounting requirements
• A parent shall present consolidated financial statements using uniform IFRS 10 (19)
accounting policies for like transactions and other events in similar
circumstances.
• Non-controlling interest to be presented in the consolidated statement of IFRS 10 (22)
financial position within equity, but separately from owners’ equity.
Appendix A
Definitions: control, group, non-controlling interest, parent, power, relevant
activities, subsidiary

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3 IAS 27 SEPARATE FINANCIAL STATEMENTS
Definitions – as per IFRS 10 IAS 27 (5)

Parent's separate financial statements

• Investments in subsidiaries, joint ventures and associates should be IAS 27 (10)
accounted for either at cost or in accordance with IFRS 9 (IAS 39), unless
they are classified as held for sale.
• A dividend from a subsidiary, joint venture or associate shall be IAS 27 (12)
recognised when the right to receive the dividend is established.
Disclosures
• When a parent elects not to prepare consolidated financial statements, it IAS 27 (16)
shall disclose
(a) Details of the entity and a statement that the exemption from
consolidation has been used
(b) A list of significant investments in subsidiaries, joint ventures and
associates
(c) A description of the method used to account for these investments

4 IFRS 12 DISCLOSURE OF INTERESTS IN OTHER ENTITIES

• Deals with disclosure requirements for an entity that has an interest in IFRS 12 (5)
subsidiaries, joint ventures or associates.
• An entity shall disclose information about significant judgements and IFRS 12 (7)
assumptions it has made in determining that it has control, joint control or
significant influence.
• An entity shall disclose information regarding:
IFRS 12 (10)
– Its interests in subsidiaries
– The interests that non-controlling interests have in the group’s activities
and cash flows IFRS 12 (11)

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 Answers to Interactive questions

Answer to Interactive question 1

Austin Ltd: Consolidated statement of financial position as at 31 December 20X7
CU
Non-current assets
Property, plant and equipment (80,000 + 8,000) 88,000
Current assets (58,000 + 13,000) 71,000
Total assets 159,000
Equity attributable to owners of the parent
Called up share capital (Austin Ltd only) 100,000
Retained earnings (Austin Ltd only) 30,000
130,000
Non-controlling interest (20% × Reed Ltd's 15,000) 3,000
Total equity 133,000
Liabilities (20,000 + 6,000) 26,000
Total equity and liabilities 159,000
(Retained earnings are Austin Ltd's only, because Reed Ltd has, as yet, earned nothing under Austin
Ltd's control.)

Answer to Interactive question 2

Austin Ltd
Consolidated statement of profit or loss for the year ended 31 December 20X8
CU
Revenue (20,000 + 5,000) 25,000
Costs (15,000 + 3,000) (18,000)
Profit 7,000
Profit attributable to:
Owners of Austin Ltd (ß) 6,600
Non-controlling interest (20% × 2,000) 400
7,000
Consolidated statement of financial position as at 31 December 20X8
CU
Non-current assets
Property, plant and equipment (82,000 + 9,000) 91,000
Current assets (81,000 + 20,000) 101,000
Total assets 192,000
Equity attributable to owners of parent
Called up share capital (Austin Ltd only) 100,000
Retained earnings
(35,000 + (80% × (7,000 – 5,000)) 36,600
(ie Austin Ltd + its share of Reed Ltd post-acquisition)
136,600
Non-controlling interest (20% × Reed Ltd's 17,000) 3,400
Total equity 140,000
Liabilities (40,000 + 12,000) 52,000
Total equity and liabilities 192,000

448
Answer to Interactive question 3
CU’000
Statement of financial position at 31 December 20X5
Non-current assets – goodwill
Consideration transferred – current 8 million shares × CU3.50 28,000
– contingent at fair value at acquisition date 100
28,100
Net assets acquired (20,000)
Goodwill 8,100
Current liabilities – contingent consideration at fair value at period end 1,200
Profit or loss for year ended 31 December 20X5
Finance cost – unwinding of discount – CU100,000 × 10% 10
Additional consideration for acquisition – (CU1.2 million – (100,000 + 10,000)) 1,090
Statement of financial position at 31 December 20X6
Non-current assets – goodwill 8,100
Profit or loss for year ended 31 December 20X6
Finance cost – unwinding of discount – CU1.2 million × 10% 120
Additional consideration for acquisition – (CU1.75 million paid – (1.2 + 0.12 million)) 430
Note that the contingent consideration of CU1.75 million was settled in cash on 31 December 20X6 so
there is no liability to be recognised at the end of 20X6.
Answer to Interactive question 4
P Ltd has paid CU10,000 to buy 75% of S Ltd's net assets of (16,000 – 4,000) = CU12,000
CU
Consideration transferred 10,000
Plus: Non-controlling interest at acquisition (12,000 × 25%) 3,000
Less: Net assets at acquisition (12,000)
Goodwill 1,000
Answer to Interactive question 5
CU'000 CU'000
Recording investment in Eclipse Ltd
Shares to be issued 1 July 20X7
DR Investment in Eclipse Ltd (5m × 60p) 3,000
CR Cash (issue costs) 10
CR Share capital (5m × 25p) 1,250
CR Share premium (3,000 – 1,250 – 10 issue costs) 1,740
Cash
DR Investment in Eclipse Ltd 1,000
CR Cash 1,000
Shares to be issued 1 July 20X8
DR Investment in Eclipse Ltd (1m × 60p) 600
CR Shares not yet issued (heading under equity) 600
Goodwill on consolidation of Eclipse Ltd
CU'000 CU'000
Consideration transferred
Shares 3,000
Cash 1,000
Shares to be issued δ 600
4,600
Non-controlling interest at acquisition ((3,628 – 200) × 25%) 857
5,457
Identifiable assets and liabilities
Per books of Eclipse Ltd 3,628
Contingent liability (200)
(3,428)
Goodwill 2,029

449
 Answer to Interactive question 6
Foot Ltd – Consolidated statement of financial position as at 31 December 20X8
Proportionate
Measurement of NCI at acquisition basis Fair value
CU CU
ASSETS
Non-current assets
Property, plant and equipment (150,000 + 500,000) 650,000 650,000
Intangibles (W3) 300,000 325,000
950,000 975,000
Current assets (1,700,000 + 680,000) 2,380,000 2,380,000
Total assets 3,330,000 3,355,000

EQUITY AND LIABILITIES

Attributable to owners of Foot Ltd
Ordinary share capital (CU1 shares) 500,000 500,000
Retained earnings (W5) 1,785,000 1,785,000
2,285,000 2,285,000
Non-controlling interest (W4) 245,000 270,000
Equity 2,530,000 2,555,000
Current liabilities (600,000 + 200,000) 800,000 800,000
Total equity and liabilities 3,330,000 3,355,000
Workings
(1) Group structure
Foot Ltd

75%

Belt Ltd
(2) Net assets of Belt Ltd
At period end Acquisition date Post-acquisition
CU CU CU
Share capital 100,000 100,000 –
Retained earnings 880,000 500,000 380,000
980,000 600,000 380,000
(3) Goodwill
Proportionate
Measurement of NCI at acquisition basis Fair value
CU CU
Consideration transferred 750,000 750,000
NCI at the acquisition date – 25% × 600,000/at fair value 150,000 175,000
900,000 925,000
Less: net assets acquired (600,000) (600,000)
300,000 325,000
(4) Non-controlling interest
Proportionate
Measurement of NCI at acquisition basis Fair value
CU CU
NCI at acquisition – 25% × 600,000 (W2)/fair value 150,000 175,000
Share of post-acquisition profits – 25% × 380,000 (W2) 95,000 95,000
245,000 270,000
(5) Retained earnings
CU
Foot Ltd 1,500,000
Belt Ltd (75% × 380,000 (W2)) 285,000
1,785,000

450
Answers to Self-test

1
CU'000
Vaynor Ltd 90
Weeton Ltd ((40 + 10) × 100%) 50
Yarlet Ltd ((70 – 30) × 80%) 32
Consolidated retained earnings 172

2
Yum Ltd

90% 75%

Peep Ltd Pitti Ltd

CU
Peep – consideration transferred 360,000
Non-controlling interest at acquisition (300,000 × 10%) 30,000
Net assets at acquisition (300,000)
Goodwill 90,000
Pitti – consideration transferred 100,000
Non-controlling interest at acquisition (160,000 × 25%) 40,000
Net assets at acquisition (160,000)
Gain on a bargain purchase (20,000)*

* Recognised in consolidated profit or loss in the period in which the acquisition is made (ie on 31
December 20X6).

3
CU
Consideration transferred 77,000
Non-controlling interest at acquisition at fair value 32,000
109,000
Net assets at acquisition (100,000 + 50,000) (150,000)
Gain on a bargain purchase (41,000)

4
CU'000
Fair value of consideration transferred 5,400
Non-controlling interest (4,250 × 20%) 850
Less: Fair value of net assets acquired (4,600 + 150 fair value adj – 500 (4,250)
goodwill)
Goodwill 2,000

451
 5 Goodwill shown in the statement of financial position will be CU7,600.
CU CU
Mabbutt Ltd
Consideration transferred 35,000
Fair value of non-controlling interest at acquisition 13,000
Less: Net assets
Share capital 15,000
Retained earnings 21,000
(36,000)
Goodwill 12,000
Impairment to date (4,400)
Balance c/f 7,60
Waddle Ltd CU CU
Consideration transferred 20,000
Fair value of non-controlling interest at acquisition 10,000
Less: Net assets at acquisition
Share capital 20,000
Retained earnings 16,000
(36,000)
(6,000) *
* Recognised as a gain in consolidated profit or loss in the year in which the acquisition was made.

6 (1) and (3)

Contingent liabilities should be recognised even though not provided for in the acquiree's books
and the warranty provision should be recognised as it arises from past events.
Reorganisation plans are only put into effect once control is gained. No liability or contingent liability
therefore exists at the time of acquisition.
7
CU CU
Consideration transferred 20,000
Fair value of non-controlling interest at acquisition 7,000
27,000
Less: Net assets at acquisition
Share capital 1,000
Share premium 2,000
Retained earnings – 1 October 20X1 12,000
– Nine months ( 9/12 × 21,000 – 6,750
12,000)
(21,750)
Goodwill 5,250
8
CUm
Fair value of consideration 12
Less: Fair value of net assets acquired (7)
Goodwill acquired 5
Acquirer's reorganisation plans and acquiree's or acquirer's future operating losses do not meet
the recognition criteria for liabilities as the related liabilities did not exist at the acquisition date.

452
9
CU'000
Fair value of consideration
Cash 1,000
Shares at fair value (300 × 3) 900
Non-controlling interest at FV 280
Less: Fair value of net assets acquired (1,000)
Goodwill acquired 1,180

10 (4) The date on which control passes.

A business combination is accounted for from the acquisition date, which is the date on which
control in the acquiree is obtained (IFRS 3 paragraph 8).

11 Tom Ltd has control of Sam Ltd and so should prepare consolidated financial statements.
Total number of votes:
Votes
A shares 2,000 × 10 = 20,000
B shares 8,000 × 1 = 8,000
28,000
15,000
Tom Ltd controls 28,000 = 54% of the votes
Note: we have to assume that 54% gives Tom control ie power, rights to variable returns and
the ability to affect the level of returns.

12 ANDRESS LTD
Consolidated statement of profit or loss for the year ended 31 December 20X0
CU
Revenue (10,000 + 7,000) 17,000
Cost of sales (6,000 + 2,000) (8,000)
Gross profit 9,000
Expenses and tax (3,000 + 2,000) (5,000)
Profit 4,000
Profit attributable to
Owners of Andress Ltd (ß) 3,400
Non-controlling interest (20% × 3,000) 600
4,000
Consolidated statement of financial position as at 31 December 20X0
ASSETS CU
Non-current assets
Property, plant and equipment (25,300 + 9,000) 34,300
Current assets (22,500 + 7,000) 29,500
Total assets 63,800
EQUITY AND LIABILITIES
Equity attributable to owners of the parent
Ordinary share capital 10,000
Share premium account 4,000
Retained earnings (2,000 + (80% × 7,000)) 7,600
21,600
Non-controlling interest (20% × 11,000) 2,200
Total equity 23,800
Non-current liabilities (10,000 + 2,000) 12,000
Current liabilities (25,000 + 3,000) 28,000
Total equity and liabilities 63,800

453
 Point to note:
Andress has owned the shares in Bacall since incorporation and the shares were acquired at
nominal value (3,200 shares for CU3,200). There is therefore no difference between the value of
the consideration transferred by Andress and the value of the assets it acquired, so no goodwill
was acquired.

13 CRAWFORD LTD PART 1

(a) The objectives of producing group accounts
Group accounts aim to reflect substance, ie if one company controls another, they effectively
operate as a single economic entity.
Therefore, the parent, or controlling company, should provide information about the economic
activities of the group by preparing consolidated accounts. These will show the economic
resources controlled by the group, the obligations of the group and the results achieved with
those resources. The overall aim is to present the results and state of affairs of the group as
if they were those of a single entity.
(b) Terms
(i) Single entity concept
The single entity concept focuses on the existence of the group as an economic unit (as
discussed above). This contrasts with legal form where each group company is actually
a separate legal person.
(ii) Control
Control is defined as:
(i) Power
(ii) Exposure, or rights to variable returns from involvement with the investee
(iii) Ability to use power to affect the level of variable returns
In an individual company the assets are under the direct control of that company.
However, where a company becomes a subsidiary, the assets are under indirect control
of the parent via its control of the subsidiary.
Control can be achieved in a number of ways, the most obvious being a holding of over
50% of the ordinary, ie vote-carrying, shares.
(iii) Equity
Equity is defined in the IASB Conceptual Framework (Elements) as the residual amount
found by deducting all of the entity's liabilities from all of its assets. In an individual
company those net assets are owned by one ownership interest – the company's
shareholders. However, in consolidated accounts the consolidated net assets will include
100% of the subsidiary even though some of those net assets may not beowned by the
group. Therefore, the equity interest may be split between
• The parent company's shareholders
• The non-controlling shareholders in the subsidiary

(c) Consolidated statement of financial position as at 30 June 20X0

CU
ASSETS
Non-current assets
Property, plant and equipment (27,000 + 12,500) 39,500
Current assets (25,000 + 12,000) 37,000
Total assets 76,500

454
 EQUITY AND LIABILITIES
Equity attributable to owners of the parent
Ordinary share capital 20,000
Share premium account 6,000
Retained earnings (9,000 + (2/3 × 14,000 - nil)) 18,333
44,333
Non-controlling interest (1/3 × 17,000) 5,667
Total equity 50,000
Non-current liabilities 12,000
Current liabilities (7,000 + 7,500) 14,500
Total equity and liabilities 76,500
Consolidated statement of profit or loss for the year ended 30 June 20X0
CU
Revenue (24,000 + 30,000) 54,000
Cost of sales (9,000 + 11,000) (20,000)
Gross profit 34,000
Distribution costs (2,300 + 1,300) (3,600)
Administrative expenses (1,500 + 2,700) (4,200)
Profit from operations 26,200
Finance cost (1,200)
Profit before tax 25,000
Income tax (3,000 + 5,000) (8,000)
Profit for the year 17,000
Profit attributable to
Owners of Crawford Ltd (ß) 13,667
Non-controlling interest (1/3 × 10,000) 3,333
17,000

Consolidated statement of changes in equity for the year ended 30 June 20X0 (extracts)
Attributable to
owners
of Crawford Ltd Non-controlling
Retained earnings interest
CU CU
Balance brought forward (2,000 + (2/3 × 4,000))
(1/3 × (3,000 + 4,000)) 4,666 2,334
Total comprehensive income for the period 13,667 3,333
Balance carried forward 18,333 5,667
Point to note:
No goodwill arises on the acquisition of Dietrich Ltd as the shares were acquired at net asset
value, ie their nominal value when retained earnings were CUnil.

455
456
CHAPTER 11

Consolidated statement of
financial position

Introduction
Examination context
Topic List
1 Context
2 Consolidated statement of financial position workings
3 Mid-year acquisitions
4 Intra-group balances
5 Unrealised intra-group profit
6 Fair value adjustments
7 Other consolidation adjustments
Summary and Self-test
Technical reference
Answers to Interactive questions
Answers to Self-test

457
 Introduction

Learning objectives Tick

off
• Identify the financial effects of group accounting in the context of the IASB Conceptual
Framework
• Explain and demonstrate the concepts and principles surrounding the consolidation of
financial statements including:

– The single entity concept

– Substance over form
– The distinction between control and ownership
• Calculate the amounts to be included in an entity's consolidated statement of financial
position in respect of its new and continuing interests in subsidiaries in accordance with
the Bangladesh financial reporting framework
• Prepare and present a consolidated statement of financial position (or extracts
therefrom) including adjustments for intra-group transactions and balances, goodwill,
non-controlling interests and fair values

• Explain the application of IFRS to specified group scenarios

Specific syllabus references for this chapter are: 1d,1h, 3d,3e, 3f, 3g.

Syllabus links
This chapter looks in detail at the preparation of the consolidated statement of financial position and is
fundamental to the Financial Accounting and Reporting syllabus. It builds on the principles introduced in
Chapter 10 and applies them to more complex situations. A detailed knowledge and understanding of
this topic will also be assumed at the Advanced Stage.

Examination context
In a consolidated statement of financial position question the majority of marks are likely to be awarded
for the preparation of the statement of financial position or extracts therefrom including a number of
consolidation adjustments.
In the examination, candidates may be required to:
• Prepare a consolidated statement of financial position (or extracts therefrom) including the results
of the parent entity and one or more subsidiaries from individual financial statements or draft
consolidated financial statements and including adjustments for the following:
– Acquisition of a subsidiary, including mid-year acquisitions
– Goodwill
– Intra-group items
– Unrealised profits
– Fair values
– Other consolidation adjustments
• Explain the process of preparing a consolidated statement of financial position in the context of the
single entity concept, substance over form and the distinction between control and ownership
• Explain the two methods of measuring the non-controlling interest at acquisition and prepare
financial information by the two methods

458
 1 Context

Section overview
This chapter considers the preparation of the consolidated statement of financial position in more detail.

1.1 Consolidated statement of financial position

This chapter builds on the basic principles of group accounts (dealt with in Chapter 10) by applying
them in more detail to the preparation of the consolidated statement of financial position. In particular it
covers the following issues:
• Standardised workings
• Intra-group balances
• Unrealised intra-group profit
• Fair value adjustments
All of the above relate to the application of the single entity concept and reflect the distinction between
control and ownership.

2 Consolidated statement of financial position workings

Section overview
A number of standard workings should be used when answering consolidation questions.

2.1 Question technique

As questions increase in complexity a formal pattern of workings is needed. Review the standard
workings below, then attempt Interactive question 1 which puts these into practice.
(1) Establish group structure
P Ltd

80%

S Ltd
(2) Set out net assets of S Ltd
At year end At acquisition Post acquisition
CU CU CU
Share capital X X X
Retained earnings X X X
X X X

(3) Calculate goodwill

CU
Consideration transferred X
Plus: Non-controlling interest at acquisition X
X
Less: Net assets at acquisition (see W2) (X)
X
Impairment to date (X)
Balance c/f X

459
 The double entry to consolidate the subsidiary will be:
CU CU
DR Share of subsidiary’s net assets X
DR Goodwill X
CR Investment in subsidiary X
(4) Calculate non-controlling interest (NCI) at year end
CU
At acquisition((NCI% × net assets (W2) or fair value) X
Share of post-acquisition profits and other reserves (NCI% × post-acquisition (W2)) X
X
(5) Calculate retained earnings
CU
P Ltd (100%) X
S Ltd (share of post-acquisition retained earnings (see W2)) X
Goodwill impairment to date (see W3) (X)
Group retained earnings X
Point to note:
You should use the proportionate basis for measuring the NCI at the acquisition date unless a question
specifies the fair value basis.
Interactive question 1: Consolidated statement of financial position workings
[Difficulty level: Easy]
The following are the summarised statements of financial position of a group of companies as at
31 December 20X1.
Rik Ltd Viv Ltd Neil Ltd
CU CU CU
Non-current assets
Property, plant and equipment 100,000 40,000 10,000
Investments
Shares in Viv Ltd (75%) 25,000
Shares in Neil Ltd (2/3) 10,000
Current assets 45,000 40,000 25,000
180,000 80,000 35,000
Equity
Share capital (CU1 ordinary) 50,000 20,000 10,000
Retained earnings 100,000 40,000 15,000
Total equity 150,000 60,000 25,000
Liabilities 30,000 20,000 10,000
180,000 80,000 35,000
Rik Ltd acquired its shares in Viv Ltd and Neil Ltd during the year, when their retained earnings were
CU4,000 and CU1,000 respectively. At the end of 20X1 the goodwill impairment review revealed a loss
of CU3,000 in relation to the acquisition of Viv Ltd.

Requirement
Prepare the consolidated statement of financial position of Rik Ltd at 31 December 20X1.
Fill in the proforma below.

460
Rik Ltd: Consolidated statement of financial position as at 31 December 20X1

CU
Non-current assets
Property, plant and equipment
Intangibles (W3)
Current assets

Equity attributable to owners of the parent

Share capital
Retained earnings (W5)
Non-controlling interest (W4)
Total equity
Liabilities

WORKINGS

(1) Group structure

Rik Ltd

75% 2/3

Viv Ltd Neil Ltd

(2) Net assets

Year end Acquisition Post-acquisition
CU CU CU
Viv Ltd
Share capital
Retained earnings

Year end Acquisition Post-acquisition

CU CU CU
Neil Ltd
Share capital
Retained earnings

(3) Goodwill
Viv Ltd Neil Ltd Total
CU CU CU
Consideration transferred
Plus: Non-controlling interest at acquisition
Less: Net assets at acquisition
Viv Ltd (W2)
Neil Ltd (W2)
Goodwill
Impairment to date
Balance c/f

461
 (4) Non-controlling interest
CU
Viv Ltd – Share of net assets at acquisition (W2)
– Share of post-acquisition (W2)
Neil Ltd – Share of net assets at acquisition (W2)
– Share of post-acquisition (W2)
(5) Retained earnings
CU
Rik Ltd
Viv Ltd – Share of post-acquisition retained earnings (W2)
Neil Ltd – Share of post-acquisition retained earnings (W2)
Goodwill impairment to date (W3)

See Answer at the end of this chapter.

3 Mid-year acquisitions

Section overview
• If a subsidiary is acquired mid-year, net assets at acquisition will need to be calculated.
• Unless told otherwise assume profits of the subsidiary accrue evenly over time.

3.1 Calculation
A parent entity might not acquire a subsidiary at the start or end of a year. If the subsidiary is acquired
mid-year, it is necessary to calculate reserves, including retained earnings, at the date of acquisition.
This is necessary in order to:
• Calculate net assets at acquisition (which is required as part of the goodwill calculation)
• Calculate consolidated reserves, eg retained earnings
Point to note:
It is usually assumed that a subsidiary's profits accrue evenly over time.
Interactive question 2: Mid-year acquisition [Difficulty level: Easy]
P Ltd acquired 80% of S Ltd on 31 May 20X2 for CU20,000. S Ltd's retained earnings had stood at
CU15,000 on 1 January 20X2.
S Ltd's equity at 31 December 20X2 was as follows.
CU
Share capital 1,000
Retained earnings 15,600
Equity 16,600
Requirements
(a) Produce the standard working for S Ltd's net assets (W2).
(b) Produce the standard working for goodwill on consolidation (W3).
(c) Calculate S Ltd's retained earnings which will be included in the consolidated retained earnings.

462
 Fill in the proforma below.
(a) Net assets (W2)
End of reporting period Acquisition Post acquisition
CU CU CU
Share capital
Retained earnings

(b) Goodwill (W3)

CU
Consideration transferred
Plus: Non-controlling interest at acquisition (W2)
Less: Net assets (W2)

(c) Profit from S Ltd included in consolidated retained earnings

CU
Share of post-acquisition retained earnings of S Ltd (W2)
See Answer at the end of the chapter.

4 Intra-group balances
Section overview
• Group accounts reflect transactions with third parties only.
• The effects of transactions between group members should be cancelled on consolidation.
• This is an application of the single entity concept.

4.1 The single entity concept

The objective of group accounts is to present the group as a single entity. Hence the effects of
transactions between group members need to be eliminated, as the group has not transacted with
any third party. These transactions could be between the parent company and a subsidiary or between
two subsidiaries.

P
Eliminate effect
of transactions
between group
members
Single entity concept
S S

Reflecting the group as a single entity means that items which are assets in one group company and
liabilities in another need to be cancelled out, otherwise group assets and liabilities will be overstated.
Intra-group balances result from, for example,

463
 • One group company's loans, debentures or redeemable preference shares held by another group
company.
• Intra-group trading.

4.2 Loans, debentures and redeemable preference shares

Cancel the credit balance in one company against the debit balance in the other before adding assets
and liabilities line-by-line.

4.3 Intra-group trading

Outstanding amounts in respect of intra-group trading are usually recorded in the statement of financial
position in current accounts (= receivable or payable account for a fellow group company).

Step 1
Check that current accounts agree before cancelling. They may not agree if goods or cash are in-transit
at year end.

Step 2
Make balances agree by adjusting for in-transit items in the receiving company's books.

Step 3
Cancel intra-group balances.
Worked example: Intra-group trading
Extracts from the statement of financial position of Impala Ltd and its subsidiary Springbok Ltd at
31 March 20X4 are as follows.
Impala Ltd Springbok Ltd
CU CU
Receivable from Springbok Ltd 25,000 –
Payable to Impala Ltd – (20,000)
Springbok Ltd sent a cheque for CU5,000 to Impala Ltd on 28 March 20X4, which Impala Ltd did not
receive until 2 April 20X4.

Solution
Steps 1 and 2
Assume that Impala Ltd had received the cash from Springbok Ltd.
Impala Ltd Springbok Ltd
CU CU
Receivable from Springbok Ltd (25-5) 20,000 –
Cash and cash equivalents 5,000 –
Payable to Impala Ltd – (20,000)
Step 3
Cancel inter-company balances on consolidation, leaving just the cash in transit in the consolidated
statement of financial position
CU
Cash and cash equivalents 5,000

464
 5 Unrealised intra-group profit

Section overview
• The consolidated statement of financial position should show assets at their cost to the group.
• Any profit arising on intra-group transactions should be eliminated from the group accounts until it
is realised, eg by a sale outside the group.

5.1 Introduction
One of the implications of the application of the single entity concept is that group accounts should only
reflect profits generated from transactions which have been undertaken with third parties, ie entities
outside the group.
Intra-group activities may give rise to profits that are unrealised as far as the group as a whole is
concerned. These profits can result from:
• Intra-group trading when goods still held in inventory of buying company.
• Intra-group transfers of non-current assets.
Unrealised profits must be eliminated from the statement of financial position on consolidation to prevent
the overstatement of group profits.

5.2 Inventories
As we have seen in section 4.3 any receivable/payable balances outstanding between group companies,
resulting from trading transactions, should be cancelled on consolidation. If these transactions have been
undertaken at cost to the selling company no further problem arises.
However, each company in a group is a separate trading entity and may sell goods to another group
member at a profit. If these goods remain in inventories at the end of the reporting period this profit is
unrealised from the group's point of view.
In the consolidated statement of financial position, applying the single entity concept, inventories
should be valued at the lower of cost and net realisable value to the group. Where goods transferred at
a profit are still held at the year end the unrealised profit should be eliminated on consolidation. This
is achieved by creating a provision for unrealised profit (PURP).
The way in which this adjustment is made depends on whether the company making the sale is the
parent or a subsidiary.
5.2.1 Parent sells goods to a subsidiary
The issues are best illustrated by an example.

Worked example: Intra-group profit (PS)

Ant Ltd, a parent company, sells goods which cost CU1,600 to Bee Ltd for CU2,000. Ant Ltd owns 75%
of the shares in Bee Ltd. Bee Ltd still hold the goods in inventories at the year end.
In the single entity accounts of Ant Ltd the profit of CU400 should be recognised. In the single entity
accounts of Bee Ltd the inventory should be valued at CU2,000.
If we simply add together the figures for retained reserves and inventory as recorded in the individual
statements of financial position of Ant Ltd and Bee Ltd the resulting figures for consolidated reserves
and consolidated inventory will each be overstated by CU400. A consolidation adjustment is therefore
necessary as follows:
CU CU
DR Seller's (Ant Ltd's) retained earnings (ie adjust in retained earnings working) 400
CR Inventories in consolidated statement of financial position 400

465
 Point to note:
In this example, as the parent was the seller the unrealised profit is all 'owned' by the shareholders
of Ant Ltd. None is attributable to the non-controlling interest.

5.2.2 Subsidiary sells goods to parent or to another subsidiary

Where the subsidiary is the selling company the profit on the transfer will have been recorded in the
subsidiary's books.
Worked example: Intra-group profit (SP or S)
Using the worked example above, if we now assume that Bee Ltd sold the goods to Ant Ltd the
adjustment would be as follows:
CU CU
DR Seller's (Bee Ltd's) retained earnings (ie adjust in net assets working) 400
CR Inventories in consolidated statement of financial position 400
Points to note:
1 The net assets of the subsidiary making the sale at the end of the reporting period will be
reduced by the amount of the unrealised profit. Any subsequent calculations based on this net
assets figure will therefore be affected as follows:
• The group share of the post-acquisition retained earnings of the subsidiary should be
reduced, ie the group will bear its share of the adjustment.
• The non-controlling interest will be based on these revised net assets ie the non-
controlling interest will bear its share of the adjustment.
2 Inventories in the consolidated statement of financial position should be reduced by the full amount
of the unrealised profit irrespective of whether the parent or a subsidiary is the selling
company.
3 If Bee Ltd had sold the goods to another subsidiary, rather than to the parent, the adjustment should
be the same.

Interactive question 3: Unrealised profits [Difficulty level: Intermediate]

P Ltd owns 80% of S Ltd, which it acquired when the retained earnings of S Ltd were CU20,000. No
goodwill was acquired. Statements of financial position at the end of the current accounting period are
as follows.
P Ltd S Ltd
CU CU
Assets 170,000 115,000
Share capital 30,000 10,000
Retained earnings 100,000 65,000
Equity 130,000 75,000
Liabilities 40,000 40,000
170,000 115,000
During the current accounting period S Ltd sold goods to P Ltd for CU18,000, which gave S Ltd a profit
of CU6,000. At the end of the reporting period half of these goods were included in P Ltd's inventories.
Requirement
Show how the adjustment to eliminate unrealised profits should appear in the consolidation workings for
P Ltd.

466
 Fill in the proforma below.
CU CU
DR
CR

WORKINGS
(1) Group structure
P Ltd

80%

S Ltd
(2) S Ltd net assets
End of the reporting Acquisition Post-
period acquisition
CU CU CU CU
Share capital
Retained earnings
Per question
Less: PURP

(4) Non-controlling interest

CU
Share of net assets at acquisition (W2)
Share of post-acquisition (W2)

(5) Retained earnings

CU
P Ltd
Share of S Ltd

See Answer at the end of this chapter.

5.3 Non-current asset transfers

As well as trading with each other, group companies may wish to transfer non-current assets (NCA).
If the asset is transferred at a price different from the transferor’s carrying amount two issues arise:
• The selling company will have recorded a profit or loss on sale.
• The purchasing company will have recorded the asset at the amount paid to acquire it, and will
use that amount as the basis for calculating depreciation.
On consolidation, the single entity concept applies. The consolidated statement of financial position
should show assets at their cost to the group, and any depreciation charged should be based on that
cost. In other words, the group accounts should reflect the non-current asset as if the transfer had not
been made.
The adjustment in the consolidated statement of financial position should be calculated as follows:
CU
Carrying amount of NCA at year end in the transferee’s financial statements X
Less: Carrying amount of NCA at year end if transfer had not been made (X)
Unrealised profit X

467
 The adjustment for unrealised profit should then be made as:
CU CU
DR Selling company retained earnings X
CR NCA carrying amount in consolidated statement of financial position X
This treatment is consistent with that of inventories.
5.3.1 Parent sells non-current asset to subsidiary
As with inventories the impact of the adjustment will depend on whether the parent company or the
subsidiary makes the sale.

Interactive question 4: Non-current asset transfers [Difficulty level: Easy]

P Ltd owns 80% of S Ltd. P Ltd transferred to S Ltd a non-current asset at a value of CU15,000 on 1
January 20X7. The original cost to P Ltd was CU20,000 and the accumulated depreciation at the date
of transfer was CU8,000. The asset had, and still has, a total useful life of five years.
Requirement
Calculate the consolidated statement of financial position adjustment at 31 December 20X7.
Fill in the proforma below.
Following the transfer the asset will be measured at
CU
Cost
Less: Depreciation

Had the transfer not been made, the asset would stand in the books at
CU
Cost
Less: Accumulated depreciation at date of transfer
Expense for current year

Overall adjustment in CSFP

CU CU
DR Seller's (P Ltd's) retained earnings
(ie adjust in retained earnings working)
CR Non-current assets

Point to note:
In this question, as the parent is the selling company, none of the adjustment is attributed to the
non-controlling interest.
See Answer at the end of this chapter.

5.3.2 Subsidiary sells non-current asset to parent

Again a consolidation adjustment should be made to reflect the situation that would have existed if the
transfer had not been made.
The amount of the adjustment should be calculated as before (see above).
The adjustment is then made as follows:
CU CU
DR Seller's (S Ltd) retained earnings (adjust in net assets working) X
CR NCA carrying amount in consolidated statement of financial position X
Points to note:
1 As the subsidiary is the seller the adjustment to retained earnings should be made in the net
assets working.
2 Any subsequent calculations based on this net assets figure will therefore be affected as follows:

468
 • The group share of the post-acquisition retained earnings of the subsidiary will be reduced ie
as for sale of inventories.
• The non-controlling interest will be based on these revised net assets, ie as for sale of
inventories.

6 Fair value adjustments

Section overview
• In calculating the goodwill acquired in a business combination, the net assets of the subsidiary
should be measured at their fair value.
• A consolidation adjustment will be required for any difference between the carrying amount and
fair value of the net assets.

6.1 Calculation of goodwill

Where a subsidiary has not reflected fair values in its single entity financial statements, adjustments will
need to be made as part of the consolidation process. Goodwill should be calculated by comparing the
consideration transferred and the non-controlling interest in the subsidiary with the net assets acquired.
The net assets brought into this calculation should be at fair value, which may be different to the carrying
amount in the single entity financial statements.

6.2 Reflecting fair values

The identifiable assets and liabilities of a subsidiary should be brought into the consolidated financial
statements at their fair value. Normally these fair values are not reflected in the single entity financial
statements. Therefore the difference between fair values and carrying amounts should be treated as a
consolidation adjustment made only for the purposes of the consolidated financial statements.
Fair value is defined as follows by IFRS 13 Fair value measurement.

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.

Points to note:
1 If all fair values have been recognised by the acquiree, then its financial statements are suitable for
the consolidation process and no adjustment is necessary.
2 Goodwill in the subsidiary's individual statement of financial position is not part of the identifiable
assets and liabilities acquired. If the subsidiary's own statement of financial position at acquisition
includes goodwill, this should not be consolidated. In the net asset working retained earnings
at acquisition and at the end of the reporting period should be reduced by the amount of the
goodwill.
Adjustments should be made at acquisition and may also have to be taken up in subsequent periods:
• In the consolidated statement of financial position changes will often be necessary to the
acquiree's carrying amounts for non-current assets and the accumulated
depreciation/amortisation.
• In the consolidated statement of profit or loss such changes will affect the current period's
depreciation/amortisation charges.
Other adjustments may have to be made, depending on the circumstances. An adjustment will always
be necessary for any contingent liabilities recognised at the acquisition date, to the extent they are
only disclosed by way of note in the acquiree's financial statements.

469
 Interactive question 5: Fair value adjustments [Difficulty level: Easy]
P Ltd acquires 60% of S Ltd on 31 December 20X4 for CU80,000. The statement of financial position of
S Ltd at this date is as follows.
CU
Freehold land (fair value CU30,000) 20,000
Goodwill arising on the acquisition of a sole trader 5,000
Sundry assets (carrying amount = fair value) 130,000
155,000
Share capital 20,000
Retained earnings 85,000
Equity 105,000
Liabilities 50,000
155,000
Requirement
Calculate the goodwill acquired in the business combination with S Ltd. Fill in the proforma below.
(1) Group structure
P Ltd

60%
S Ltd
(2) Net assets of S Ltd
Year end = Acquisition date
CU CU
Share capital
Revaluation surplus
Retained earnings
Add: fair value uplift
Less: Goodwill which is not an identifiable asset

(3) Goodwill
CU
Consideration transferred
Plus: Non-controlling interest at acquisition (W2)
Less: Fair value of net assets at acquisition (W2)

Point to note:
In the assets section of the consolidated statement of financial position the freehold land should be
measured at CU30,000. The goodwill in the subsidiary's statement of financial position of CU5,000
should not be recognised as an intangible asset in the consolidated statement of financial position.
See Answer at the end of this chapter.

Interactive question 6: Fair value adjustments [Difficulty level: Exam standard]

Chris Ltd acquired 60% of Andy Ltd for CU8m on 1 July 20X2 when Andy Ltd's statement of financial
position showed net assets of CU5m. The fair value of Andy Ltd's property, plant and equipment with a
remaining useful life of 10 years was CU1m higher than carrying amount, but this was not reflected in
Andy Ltd's books. At 30 June 20X5 Andy Ltd's statement of financial position shows net assets of
CU10m. Andy Ltd's financial statements still disclose a contingent liability for a claim for damages against

470
 it. At the acquisition date its fair value was estimated at CU100,000, which was its fair value until 30 June
20X5 when it was re-estimated at CU80,000.
Requirement
Calculate as at 30 June 20X5 Chris Ltd's share of Andy Ltd's post-acquisition reserves, the goodwill
arising on consolidation and the adjustment to be made to Andy Ltd's depreciation charge for the
consolidated statement of profit or loss for the year ended 30 June 20X5.
Fill in the proforma below.
CU'000
Chris Ltd's share of Andy Ltd's post-acquisition reserves (W1)

Goodwill arising on consolidation (W2)

Adjustment to Andy Ltd's depreciation charge (W3)

WORKINGS
(1) Net assets and post-acquisition reserves
At Post-
Year end acquisition acquisition
CU'000 CU'000 CU'000
Andy Ltd
Net assets
PPE fair value uplift
Depreciation thereon
Contingent liability

Chris Ltd's share

(2) Goodwill
CU'000
Consideration transferred
Non-controlling interest at acquisition (W1)
Net assets at acquisition (W1)

(3) Depreciation charge

CU'000
Additional charge for year ended 30 June 20X5
See Answer at the end of this chapter.

7 Other consolidation adjustments

Section overview
• If a subsidiary has reserves other than retained earnings, the group share of post-acquisition
reserves should be consolidated.
• The balances of the subsidiary should be adjusted to reflect the accounting policies of the parent
company prior to consolidation.

7.1 Other reserves in a subsidiary

A subsidiary may have other reserves apart from retained earnings in its statement of financial position,
eg a revaluation surplus. If this is the case, such reserves should be treated in exactly the same way as
retained earnings.
• Other reserves at acquisition form part of the net assets at acquisition, ie they should be
recorded in the net assets working at acquisition.

471
 • The group share of any post acquisition movement in other reserves should be recognised in
the consolidated statement of financial position.
Points to note:
1 A separate working should be used for each reserve; do not mix retained earnings with other
reserves as the other reserves may include amounts which are not distributable by way of dividend.
2 If a subsidiary is loss-making or has any other negative reserves the group should consolidate
its share of the post-acquisition losses/negative reserves.

7.2 Accounting policy alignments

On consolidation uniform accounting policies should be applied for all amounts. This is another
consequence of the single entity concept.
If the parent company and subsidiary have different accounting policies the balances in the subsidiary's
financial statements should be adjusted to reflect the accounting policies of the parent company.
Point to note:
These adjustments are made in the net assets working.

Interactive question 7: Accounting policy alignments [Difficulty level: Easy]

William Ltd has been 85% owned by Mary Ltd for some years. On 1 January 20X4 William Ltd acquired
an item of plant for CU40,000. William Ltd depreciates this item of plant at 15% on a reducing balance
basis, while Mary Ltd's policy for this class of plant is 10% per annum on a straight-line basis.
Requirement
Set out the adjustment required in the preparation of the consolidated statement of financial position at
31 December 20X5.
Fill in the proforma below.
Following the transfer the asset will be included at:
CU
Carrying amount of plant in CSFP
Carrying amount in William Ltd's SFP
Increase in carrying amount

CU CU
DR Non-current assets
CR Consolidated retained earnings
CR Non-controlling interest
See Answer at the end of this chapter.

472
Summary and Self-test

Summary

473
474
Self-test
Answer the following questions
1 The summarised statements of financial position of Black Ltd and Red Ltd at 31 December 20X6
were as follows.
Black Ltd Red Ltd
CU'000 CU'000
Total assets 60,000 29,000

Share capital 20,000 10,000

Retained earnings 24,000 4,000
Equity 44,000 14,000
Current liabilities 16,000 15,000
Total equity and liabilities 60,000 29,000
On 1 January 20X7 Black Ltd bought all the share capital of Red Ltd for CU17,000,000 in cash. The
carrying amounts of Red Ltd's assets are considered to be fair values.
What will be the amount of retained earnings to be included in the consolidated statement of financial
position as at 1 January 20X7?
2 Milton Ltd owns all the share capital of Keynes Ltd. The following information is extracted from the
individual company statements of financial position as on 31 December 20X1.
Milton Ltd Keynes Ltd
CU CU
Current assets 500,000 200,000
Current liabilities 220,000 90,000
Included in Milton Ltd's purchase ledger is a balance in respect of Keynes Ltd of CU20,000. The
balance on Milton Ltd's account in the sales ledger of Keynes Ltd is CU22,000. The difference
between those figures is accounted for by cash in transit.
If there are no other intra-group balances, what is the amount of current assets less current liabilities
in the consolidated statement of financial position of Milton Ltd and its subsidiary?
3 Laker Ltd owns 80% of the ordinary shares of Hammond Ltd. The following amounts have been
extracted from their draft financial statements at 31 December 20X0.
Laker Ltd Hammond Ltd
CU CU
Current liabilities
Trade payables 5,200 7,100
Amount owed to subsidiary 500 –
Income tax 100 150
Amounts owed to trade investments 150 200
Other payables 50 70
6,000 7,520
Hammond Ltd shows an amount receivable from Laker Ltd of CU620 and the difference is due to
cash in transit.
What is the total carrying amount of current liabilities in the consolidated statement of financial
position of Laker Ltd?

475
 4 Austen Ltd has owned 100% of Kipling Ltd and 60% of Dickens Ltd for many years. At 31 December
20X5 the trade receivables and trade payables shown in the individual company statements of
financial position were as follows.
Austen Ltd Kipling Ltd Dickens Ltd
CU'000 CU'000 CU'000
Trade receivables 50 30 40
Trade payables 30 15 20

Trade payables are made up as follows.

Amounts owing to
Austen – – –
Kipling 2 – 4
Dickens 3 – –
Other suppliers 25 15 16
30 15 20
The intra-group accounts agreed after taking into account the following.
(1) An invoice for CU3,000 posted by Kipling Ltd on 31 December 20X5 was not received by
Austen Ltd until 2 January 20X6
(2) A cheque for CU2,000 posted by Austen Ltd on 30 December 20X5 was not received by
Dickens Ltd until 4 January 20X6.
What amount should be shown as trade receivables in the consolidated statement of financial
position of Austen Ltd?
5 The following is the draft statement of financial position information of Ho Ltd and Su Ltd, as on
30 September 20X2.
Ho Ltd Su Ltd
CU'000 CU'000
Ordinary CU1 shares 2,600 1,000
Retained earnings 750 700
Trade payables 350 900
Other payables – 100
3,700 2,700
Total assets 3,700 2,700
Ho Ltd acquired 60% of the share capital of Su Ltd several years ago when Su Ltd's retained
earnings were CU300,000. Su Ltd has not yet accounted for the estimated audit fee for the year
ended 30 September 20X2 of CU40,000.
What should the amount of consolidated retained earnings be on 30 September 20X2?
6 Oxford Ltd owns 100% of the issued share capital of Cambridge Ltd, and sells goods to its
subsidiary at a profit margin of 20%. At the year end their statements of financial position showed
inventories of
Oxford Ltd CU290,000
Cambridge Ltd CU160,000

The inventory of Cambridge Ltd included CU40,000 of goods supplied by Oxford Ltd and there was
inventory in transit from Oxford to Cambridge amounting to a further CU20,000.
At what amount should inventory be carried in the consolidated statement of financial position?

476
7 Rugby Ltd has a 75% subsidiary, Stafford Ltd, and is preparing its consolidated statement of
financial position as on 31 December 20X6. The carrying amount of property, plant and equipment
in the two companies at that date is as follows.
Rugby Ltd CU260,000
Stafford Ltd CU80,000
On 1 January 20X6 Stafford Ltd had transferred some equipment to Rugby Ltd for CU40,000. At
the date of transfer the equipment, which had cost CU42,000, had a carrying amount of CU30,000
and a remaining useful life of five years. The group accounting policy is to depreciate equipment on
a straight-line basis down to a nil residual value.
What figure should be disclosed as the carrying amount of property, plant and equipment in the
consolidated statement of financial position of Rugby Ltd as on 31 December 20X6?
8 Lynton Ltd acquired 75% of the 200,000 CU1 ordinary shares and 50% of the 100,000 CU1
redeemable preference shares of Pinner Ltd when its retained earnings were CU24,000. The
retained earnings of Lynton Ltd and Pinner Ltd are now CU500,000 and CU60,000 respectively.
What figures for non-controlling interest and consolidated retained earnings should be included in
the current consolidated statement of financial position?
9 Hill Ltd owns 60% of the ordinary share capital of Down Ltd and all of its 10% borrowings.
The following transactions have been recorded by Down Ltd as at 31 December 20X3.
Half year's interest due CU15,000
Interim dividend paid CU50,000
Hill Ltd has not yet accounted for the interest receivable from Down Ltd.
In preparing the consolidated statement of financial position for Hill Ltd and its subsidiary at
31 December 20X3, what adjustments are required in respect of intra-group dividends and
debenture interest?
10 Nasty Ltd and Horrid Ltd are wholly-owned subsidiaries of Ugly Ltd. Inventory in their individual
statements of financial position at the year end is shown as follows.
Ugly Ltd CU30,000 Horrid Ltd CU10,000
Nasty Ltd CU20,000
Sales by Horrid Ltd to Nasty Ltd during the year were invoiced at CU15,000, which included a profit
to Horrid Ltd of 25% on cost. Two thirds of these goods were in inventory at the year end.
At what amount should inventory appear in the consolidated statement of financial position?
11 Fallin Ltd acquired 100% of the share capital of Gaydon Ltd for CU150,000 on 1 May 20X6.
Equity at 30 April was as follows.
Fallin Ltd Gaydon Ltd
20X7 20X7 20X6
CU'000 CU'000 CU'000
Ordinary share capital 100 50 50
Revaluation surplus – 25 15
Retained earnings 340 135 25
440 210 90
An impairment review at 30 April 20X7 revealed that goodwill acquired in the business combination
with Gaydon Ltd had become impaired by CU6,000 in the year.
What should the consolidated equity of the Fallin Ltd group be on 30 April 20X7?

Data for questions 12 to 16

With reference to the information below, answer questions 19 to 23 with respect to the consolidated
financial statements of VW Ltd.
Summarised statements of financial position as at 30 September 20X7

477
 VW Ltd Polo Ltd Golf Ltd
CU'000 CU'000 CU'000
ASSETS
Property, plant and equipment 200 40 30
Investments
100,000 shares in Polo Ltd 150 – –
40,000 shares in Golf Ltd 70 – –
Current assets
Inventories 150 90 80
Trade receivables 250 40 20
Cash 50 20 10
870 190 140
EQUITY AND LIABILITIES
Equity
Ordinary shares of CU1 each 500 100 50
Retained earnings 90 40 70
Total equity 590 140 120
Current liabilities 280 50 20
870 190 140
Notes
(1) VW Ltd acquired its shares in Polo Ltd on 1 October 20X5 when Polo Ltd's retained earnings were
CU30,000.
(2) VW Ltd acquired its shares in Golf Ltd on 30 September 20X6. Golf Ltd's net profit for the year
ended 30 September 20X7 was CU30,000.
(3) It is the policy of the VW group to measure goodwill and the non-controlling interest using the
proportionate basis.
(4) Included in Polo Ltd's inventory at 30 September 20X7 was CU15,000 of goods purchased from
VW Ltd during the year. VW Ltd invoiced Polo Ltd at cost plus 50%.
(5) During the year ended 30 September 20X7 Polo Ltd sold goods costing CU50,000 to Golf Ltd for
CU70,000. Golf Ltd still had half of these goods in inventory at 30 September 20X7.
(6) The following intra-group balances are reflected in the above statement of financial position of VW
Ltd at 30 September 20X7.
CU20,000 receivable from Polo Ltd
CU10,000 payable to Golf Ltd
12 What should be the amount of non-controlling interest be?
13 What should be the total of group inventories be?
14 What should be the amount of trade receivables be?
15 What amount of goodwill should be included under intangible assets?
16 The consolidated retained earnings should be presented at what amount?

17 CRAWFORD LTD PART 2

Following on from the facts in Chapter 10 Self-test question 13 (Crawford Ltd part 1), assume that
Crawford Ltd paid CU2,500 (not CU2,000) for the 2,000 shares in Dietrich Ltd and that Crawford
Ltd's property, plant and equipment were CU26,500 (not CU27,000), all other information remaining
the same. An impairment review at 30 June 20X0 revealed that goodwill in respect of Dietrich Ltd

478
 had fallen in value over the year by CU40. By 1 July 20W9 goodwill had already been written down
by CU210.
Requirement
Prepare the consolidated statement of financial position of Crawford Ltd as at 30 June 20X0.
(7 marks)
18 DUBLIN LTD
The following are the summarised statements of financial position of a group of companies as at 31
December 20X9.
Dublin Shannon Belfast
Ltd Ltd Ltd
CU CU CU
ASSETS
Non-current assets
Property, plant and equipment 90,000 60,000 50,000
Investments: 40,000 CU1 shares in Shannon 50,000 – –
30,000 CU1 shares in Belfast 45,000 – –
185,000 60,000 50,000
Current assets 215,000 50,000 30,000
Total assets 400,000 110,000 80,000
EQUITY AND LIABILITIES
Equity
Ordinary share capital 190,000 50,000 40,000
Revaluation surplus – 10,000 –
Retained earnings 60,000 30,000 16,000
Total equity 250,000 90,000 56,000
Current liabilities 150,000 20,000 24,000
Total equity and liabilities 400,000 110,000 80,000
Dublin Ltd purchased its shares in Shannon Ltd five years ago when there were retained earnings
of CU20,000 and a balance on its revaluation surplus of CU10,000.
Belfast Ltd had retained earnings of CU16,000 when Dublin Ltd acquired its shares on 1 January
20X9.
At the end of 20X9 the goodwill impairment review revealed a loss of CU300 in relation to the
goodwill acquired in the business combination with Belfast Ltd.
During November 20X9, Shannon Ltd had sold goods to Belfast Ltd for CU12,000 at a mark-up on
cost of 20%. Half of these goods were still held by Belfast Ltd at 31 December 20X9.
Dublin Ltd prefers to measure goodwill and the non-controlling interest using the proportionate
method wherever possible.
Requirement
Prepare the consolidated statement of financial position as at 31 December 20X9 of Dublin Ltd and
its subsidiaries.
(12 marks)
19 EDINBURGH LTD
The following draft consolidated statement of financial position has been prepared for Edinburgh
Ltd and its subsidiary Glasgow Ltd.

479
 Draft consolidated statement of financial position as at 31 December 20X5

CU CU
ASSETS
Non-current assets
Property, plant and equipment 229,000
Intangible - goodwill 9,000
Investments 17,000
255,000
Current assets
Inventories 108,400
Trade and other receivables 129,000
Cash and cash equivalents 39,850
277,250
Total assets 532,250
EQUITY AND LIABILITIES
Equity attributable to owners of the parent
Ordinary share capital 250,000
Revaluation surplus 12,000
Retained earnings 55,000
317,000
Non-controlling interest 22,250
Total equity 339,250
Non-current liabilities
6% loan notes 20,000
Current liabilities
Trade and other payables 173,000
Total equity and liabilities 532,250

The following issues need to be accounted for in preparing the final financial statements.
(1) Edinburgh acquired its 80% interest in Glasgow Ltd on 1 January 20X5 and acquired
CU12,000 of Glasgow Ltd’s 6% loan notes on the same date. Edinburgh’s other investments
amount to CU5,000.
(2) In calculating goodwill, the fair value of the non-controlling interest in Glasgow Ltd was
estimated at CU15,500 but was erroneously included at CU13,500.
(3) The post-acquisition retained earnings of Glasgow Ltd include CU10,000 relating to a machine
invoiced and delivered to a third-party customer on 1 July 20X5. This price includes a three-
year support service and the cost of providing this service is estimated at CU400 per annum.
The invoice has been paid in full.
(4) During the year Glasgow Ltd sold 5 machine tools for resale to Edinburgh Ltd priced at
CU2,400 each. Edinburgh had resold 3 of these at the year end. Glasgow Ltd applies a 20%
mark-up on cost for all sales.
Requirement
Prepare the final consolidated statement of financial position for Edinburgh Ltd as at 31 December
20X5.
(15 marks)
20 CLOSE LTD

480
The summarised statements of financial position of Close Ltd and Steele Ltd as at 31 December
20X9 were as follows.
Close Ltd Steele Ltd
CU CU CU CU
ASSETS
Non-current assets
Property, plant and equipment 80,000 58,200
Investments 84,000 –
164,000 58,200
Current assets
Inventories 18,000 12,000
Trade and other receivables 62,700 21,100
Investments – 2,500
Cash and cash equivalents 10,000 3,000
Current account – Close Ltd – 3,200
90,700 41,800
Total assets 254,700 100,000
EQUITY AND LIABILITIES
Equity
Ordinary share capital (CU1 shares) 120,000 60,000
Share premium account 18,000 –
Revaluation surplus 23,000 16,000
Retained earnings 56,000 13,000
Total equity 217,000 89,000
Current liabilities
Trade and other payables 35,000 11,000
Current account – Steele Ltd 2,700 –
37,700 11,000
Total equity and liabilities 254,700 100,000

The following information is relevant.

(1) On 1 January 20X7 Close Ltd acquired 48,000 shares in Steele Ltd for CU84,000 cash when
the retained earnings of Steele Ltd were CU8,000 and the balance on the revaluation surplus
was CU16,000.
(2) The inventories of Close Ltd include CU4,000 of goods from Steele Ltd invoiced to Close Ltd
at cost plus 25%.
(3) A cheque for CU500 from Close Ltd to Steele Ltd, sent before 31 December 20X9, was not
received by the latter company until January 20Y0.
(4) An impairment review at 31 December 20X9 revealed that an impairment loss of CU500 in
respect of goodwill on the acquisition of Steele Ltd needs to be recognised. By 1 January 20X9
this goodwill had already suffered impairments totalling CU1,700.
(5) The non-controlling interest and goodwill arising on the acquisition of Steele Ltd were both
calculated using the proportionate method.

481
 Requirements
(a) Prepare the consolidated statement of financial position of Close Ltd and its subsidiary Steele
Ltd as at 31 December 20X9. (12 marks)
(b) Explain the adjustments necessary in respect of intra-group sales when preparing the
consolidated statement of financial position of the Close Ltd group. (6 marks)
(18 marks)
21 PAYNE LTD

The following draft statement of financial position has been prepared for Payne Ltd. Payne Ltd
acquired its 80% subsidiary Glass Ltd on 30 September 20X4.
Payne Ltd – draft consolidated statement of financial position as at 31 March 20X5

CU000 CU000
ASSETS
Non-current assets
Property, plant and equipment 3,690
Goodwill 145
Other intangibles 475
4,310
Current assets
Inventories 1,330
Trade and other receivables 1,398
Cash and cash equivalents 968
3,696
Total assets 8,006

EQUITY AND LIABILITIES

Equity attributable to owners of the parent
Ordinary share capital 2,400
Share premium account 640
Revaluation surplus 475
Retained earnings 1,859
5,374
Non-controlling interest 320
Total equity 5,694

Non-current liabilities
Provision for restructuring costs 78

Current liabilities
Trade and other payables 2,234
Total equity and liabilities 8,006

A number of issues have not been taken into account in preparing the draft consolidated financial
statements.
(1) Other intangibles includes CU275,000 being goodwill in the books of Glass Ltd which arose
on the acquisition of an unincorporated business some years ago. The carrying amount of
this goodwill at the date when Payne Ltd acquired Glass Ltd was CU300,000. It has since
been amortised in the books of Glass Ltd.

482
 (2) Freehold land held by Glass Ltd at the acquisition date had a carrying amount of CU250,000.
The market value of the land at that date was CU683,000.
(3) At the acquisition date Glass Ltd disclosed a contingent liability as a potential CU300,000,
although its fair value was assessed at CU58,000. A final decision on this matter is expected
to be reached by the end of 20X5.
(4) At the acquisition date the directors of Payne Ltd intended to restructure and reorganise Glass
Ltd and have provided for restructuring costs of CU78,000.
(5) Glass Ltd sells part of its output to Payne Ltd. Included in the inventories of Payne Ltd are
goods valued at CU150,000 purchased from Glass Ltd since acquisition at cost to Glass Ltd
plus 25%.
(6) Payne Ltd measures non-controlling interest at acquisition at fair value based on share price.
NCI in the draft statement of financial position has been calculated as fair value at acquisition
date plus 20% of the post-acquisition retained earnings of Glass Ltd. No adjustment has been
made for (1) to (5) above.
Requirement
Prepare the final consolidated statement of financial position for Payne Ltd as at 31 March 20X5.
(13 marks)
Now, go back to the Learning objectives in the Introduction. If you are satisfied you have achieved these
objectives, please tick them off.

483
 Technical reference

For a comprehensive Technical reference section, covering all aspects of group accounts (except group
statements of cash flows) see Chapter 10.

484
Answers to Interactive questions

Answer to Interactive question 1

Rik Ltd: Consolidated statement of financial position as at 31 December 20X1

CU
Non-current assets
Property, plant and equipment (100,000 + 40,000 + 10,000) 150,000
Intangibles (W3) 6,667
156,667
Current assets (45,000 + 40,000 + 25,000) 110,000
266,667
Equity attributable to owners of the parent
Called up share capital 50,000
Retained earnings (W5) 133,334
183,334
Non-controlling interest (W4) 23,333
Total equity 206,667
Liabilities (30,000 + 20,000 + 10,000) 60,000
266,667

WORKINGS

(1) Group structure

Rik Ltd

75% 2/3

Viv Ltd Neil Ltd

(2) Net assets
Post-
Year Acquisition acquisition
end
CU CU CU
Viv Ltd
Share capital 20,000 20,000 –
Retained earnings 40,000 4,000 36,000
60,000 24,000
Neil Ltd
Share capital 10,000 10,000 –
Retained earnings 15,000 1,000 14,000
25,000 11,000

485
 (3) Goodwill
Viv Ltd Neil Ltd Total
CU CU CU
Consideration transferred 25,000 10,000
Non-controlling interest at acquisition
Viv Ltd (25% × 24,000 (W2)) 6,000
Neil Ltd (1/3 × 11,000 (W2)) 3,667
Net assets at acquisition (24,000) (11,000)
Goodwill 7,000 2,667 9,667
Impairment to date (3,000) – (3,000)
4,000 2,667 6,667
(4) Non-controlling interest
CU CU
Viv Ltd – Share of net assets at acquisition (25% × 24,000 (W2)) 6,000
– Share of post-acquisition (25% × 36,000 (W2)) 9,000
15,000
Neil Ltd – Share of net assets at year end (1/3 × 11,000 (W2)) 3,667
– Share of post-acquisition (1/3 × 14,000 (W2)) 4,666
8,333
23,333
(5) Retained earnings
CU
Rik Ltd 100,000
Viv Ltd – Share of post-acquisition retained earnings (75% × 36,000 (W2)) 27,000
Neil Ltd – Share of post-acquisition retained earnings (2/3 × 14,000 (W2)) 9,334
Goodwill impairment to date (W3) (3,000)
133,334
Answer to Interactive question 2
(a) Net assets (W2)
Post-
Year end Acquisition acquisition
CU CU CU
Share capital 1,000 1,000 –
Retained earnings (15,000 + (5/12 × (15,600 – 15,600 15,250 350
15,000)))
16,600 16,250
(b) Goodwill (W3)
CU
Consideration transferred 20,000
Plus: Non-controlling interest at acquisition (16,250 × 20% (W2)) 3,250
Less: Net assets at acquisition (W2) (16,250)
7,000

486
(c) Profit from S Ltd included in consolidated retained earnings
CU
Share of post-acquisition retained earnings of S Ltd (80% × 350 (W2)) 280
Answer to Interactive question 3
CU CU
DR Seller's (S Ltd's) retained earnings (adjust in net assets working) 3,000
CR Inventories in CSFP (1/2 × 6,000) 3,000
WORKINGS
(1) Group structure
P Ltd
80%

S Ltd

(2) S Ltd net assets

Year end Acquisition Post-
acquisition
CU CU CU CU
Share capital 10,000 10,000
Retained earnings
Per question 65,000
Less: PURP (3,000)
62,000 20,000 42,000
72,000 30,000
(3) Non-controlling interest CU
Share of net assets at acquisition (20% × 30,000) 6,000
Share of post-acquisition (W2) (20% × 42,000) 8,400
14,400
(4) Retained earnings CU
P Ltd 100,000
Share of S Ltd (80% × 42,000 (W2)) 33,600
133,600

Answer to Interactive question 4

Following the transfer the asset will be measured at
CU
Cost to S Ltd 15,000
Less: Depreciation – (15,000/3 remaining years (8,000 is 2/5 of cost)) (5,000)
10,000
Had the transfer not been made, the asset would stand in the books at
CU
Cost 20,000
Less: Accumulated depreciation at date of 'transfer' (8,000)
Charge for current year (CU20,000/5) (4,000)
8,000
Overall adjustment in CSFP
CU CU
DR Seller's (P Ltd's) retained earnings 2,000
CR Non-current assets 2,000

487
 Answer to Interactive question 5
(1) Group structure
P Ltd

60%
S Ltd
(2) Net assets of S Ltd

Year end = Acquisition date

CU CU
Share capital 20,000
Retained earnings 85,000
Add: Fair value uplift (30,000 – 20,000) 10,000
Less: Goodwill (5,000)
90,000
110,000
(3) Goodwill

CU
Consideration transferred 80,000
Non-controlling interest at acquisition (40% × 110,000 (W2)) 44,000
Less: FV of net assets at acquisition (W2) (110,000)
Goodwill 14,000

Answer to Interactive question 6

CU'000
Chris Ltd's share of Andy Ltd's post-acquisition reserves (W1) 2,832
Goodwill arising on consolidation (W2) 4,460
Adjustment to Andy Ltd's depreciation charge (W3) 100

WORKINGS

(1) Net assets and post-acquisition reserves

At Post
Year end acquisition acquisition
CU'000 CU'000 CU'000
Andy Ltd
Net assets 10,000 5,000 5,000
PPE fair value uplift 1,000 1,000 0
Depreciation thereon – 3 years = 30% (300) 0 (300)
Contingent liability (80) (100) 20
10,620 5,900 4,720
Chris Ltd's share – 60% 2,832

488
(2) Goodwill
CU'000
Consideration transferred 8,000
Non-controlling interest (40% × 5,900 (W1)) 2,360
Net assets (W1) (5,900)
Goodwill 4,460

(3) Depreciation charge for year ended 30 June 20X5

CU'000
Additional charge (10% × 1,000) 100

Point to note:
If future events resulted in the contingent liability ceasing to exist (eg because it relates to a legal claim
being defended and the court judgement is in favour of the defendant), it should be re-measured at CUnil
and the whole of the remaining CU80,000 should be recognised in current period profit or loss. If future
events result in the contingent liability crystallising into a liability (eg because the court judgement is in
favour of the plaintiff), it should be re-measured at CUnil but the carrying amount of the net assets would
be after deducting the liability.

Answer to Interactive question 7

Following the transfer the asset will be included at
CU
Carrying amount of plant in CSFP (40,000 × 80%) 32,000
Carrying amount in William Ltd's SFP (40,000 × 85% × 85%) 28,900
Increase in carrying amount 3,100

CU CU
DR Non-current assets 3,100
CR Consolidated retained earnings (85%) 2,635
CR Non-controlling interest (15%) 465

489
 Answers to Self-test

1
CU'000
Retained earnings – Black Ltd only 24,000
No post-acquisition profits have yet arisen in Red Ltd.
2
Milton Keynes Adjustment Consolidated
CU'000 CU'000 CU'000 CU'000
Current assets 500 200 –22 + 2 680
Current liabilities (220) (90) +20 (290)
280 110 390
3
CU
Laker 6,000
Hammond 7,520
Less: Intra-group indebtedness (500)
Total current liabilities 13,020
4
CU'000 CU'000
Austen Ltd 50
Kipling Ltd 30
Dickens Ltd 40
Less: Cash in transit (2)
38
118
Less: Intra-group receivables
Owed to Kipling Ltd (2 + 3 + 4) 9
Owed to Dickens Ltd 3
(12)
Group trade receivables 106
5
CU'000
Ho Ltd 750
Su Ltd – Ho Ltd's share of post-acquisition retained earnings
(60% ((700 – 40) – 300)) 216
Consolidated retained earnings 966
6
CU'000
Oxford Ltd 290
Cambridge Ltd 160
In transit to Cambridge Ltd 20
Less: PURP ((40 + 20) × 20%) (12)
Group inventory 458

490
7 The adjustment required following the intragroup transfer is CU8,000.
Is Should be
CU CU
Cost 40,000 42,000
Accumulated depreciation (8,000) (18,000)
Carrying amount 32,000 24,000
Adjustment required:
DR Stafford Ltd retained earnings CU8,000,
CR Property, plant and equipment CU8,000.
PPE in consolidated statement of financial position = 260,000 + 80,000 – 8,000 =
CU332,000

CU
Non-controlling interest
Ordinary shares (25% × (200,000 + 60,000)) 65,000

Consolidated retained earnings

Lynton Ltd 500,000
Pinner Ltd (75% × (60,000 – 24,000)) 27,000
527,000

Point to note:
Redeemable preference shares should be classified as liabilities.
9
CU'000 CU'000
(1) DR Current assets in Hill with interest receivable 15
CR Retained earnings of Hill 15
To account for the interest receivable by Hill Ltd
CU'000 CU'000
(2) DR Current liabilities in Down 15
CR Current assets in Hill 15

To cancel intra-group balances for interest – there will be no o/s balances for the dividends as
they have been paid and would not be included as payables even if unpaid.
Summary: CU'000 CU'000
DR Current liabilities 15
CR Retained earnings of Hill 15
10
CU
Ugly Ltd 30,000
Nasty Ltd 20,000
Horrid Ltd 10,000
Less: PURP (2/3 × 15,000 × /125 )
25
(2,000)
Group inventory 58,000

491
 11

CU'000 CU'000
Ordinary share capital 100
Revaluation surplus (25 – 15) 10
Retained earnings
Fallin Ltd 340
Gaydon Ltd (135 – 25) 110
Goodwill impairment to date (6)
444
Group equity 554

Questions 12 to 16

VW Ltd

100% 80%

Polo Ltd Golf Ltd

12 Non-controlling interest = 20% × (50,000 + 70,000) = CU24,000

13

CU'000
VW Ltd 150
Polo Ltd 90
Golf Ltd 80
320
Less: PURP
Note (3) (15,000 × 50/150 in VW Ltd's retained earnings) (5)
Note (4) (1/2 × 70,000 - 50,000 in Polo Ltd's retained earnings) (10)
Group inventories 305
14

CU'000
VW Ltd 250
Less: Intra-group receivable (20)
Polo Ltd 40
Golf Ltd 20
Less: Intra-group receivable (10)
Group trade receivables 280

492
15
CU CU
Polo – consideration transferred 150,000
Net assets
Share capital 100,000
Retained earnings at acquisition 30,000
(130,000)
Goodwill 20,000
Golf – consideration transferred 70,000
Non-controlling interest at acquisition (90,000 (below) × 20%) 18,000
88,000
Net assets at acquisition
Share capital 50,000
Retained earnings (70 – 30) 40,000
(90,000)
Gain on a bargain purchase (2,000)
– Recognised in CIS in period of acquisition
16
CU
VW Ltd 90,000
Less: PURP per 13 above (5,000)
85,000
Polo Ltd ((40,000 – 10,000 PURP per 13 above) – 30,000) –
Golf Ltd (80% × 30,000) 24,000
Gain on bargain purchase of Golf Ltd 2,000
Consolidated retained earnings 111,000
17 CRAWFORD LTD PART 2
Consolidated statement of financial position as at 30 June 20X0
CU
ASSETS
Non-current assets
Property, plant and equipment (26,500 + 12,500) 39,000
Intangibles (W1) 250
39,250
Current assets (25,000 + 12,000) 37,000
Total assets 76,250

EQUITY AND LIABILITIES

Equity attributable to owners of parent
Ordinary share capital 20,000
Share premium account 6,000
Retained earnings (W3) 18,083
44,083
Non-controlling interest (W2) 5,667
Total equity 49,750
Non-current liabilities 12,000
Current liabilities (7,000 + 7,500) 14,500
Total equity and liabilities 76,250

493
 WORKINGS
(1) Goodwill
CU
Consideration transferred 2,500
Non-controlling interest at acquisition (3,000 × 1/3) 1,000
3,500
Net assets at acquisition (3,000)
500
Impairment to date (210 + 40) (250)
250
(2) Non-controlling interest at year end
CU
1/3 × 17,000 5,667
(3) Retained earnings
CU
Crawford Ltd 9,000
Dietrich Ltd ( /3 × 14,000)
2
9,333
Less: Goodwill impairment to date (W1) (250)
18,083
18 DUBLIN LTD
Consolidated statement of financial position as at 31 December 20X9
CU
ASSETS
Non-current assets
Property, plant and equipment (90,000 + 60,000 + 50,000) 200,000
Intangibles (W3) 2,700
202,700
Current assets (215,000 + 50,000 + 30,000 – 1,000 (W6)) 294,000
Total assets 496,700
EQUITY AND LIABILITIES
Equity attributable to owners of the parent
Ordinary share capital 190,000
Retained earnings (W5) 80,900
270,900
Non-controlling interest (W4) 31,800
Total equity 302,700
Current liabilities (150,000 + 20,000 + 24,000) 194,000
Total equity and liabilities 496,700

WORKINGS
(1) Group structure
Dublin Ltd

80% 75%

Shannon Ltd Belfast Ltd

494
 (2) Net assets
Year Acquisition Post-
end date acquisition
Shannon Ltd CU CU CU
Share capital 50,000 50,000 –
Revaluation surplus 10,000 10,000 –
Retained earnings (30,000 – 1,000 (W6)) 29,000 20,000 9,000
89,000 80,000
Belfast Ltd
Share capital 40,000 40,000 –
Retained earnings 16,000 16,000 –
56,000 56,000
(3) Goodwill
Shannon Ltd Belfast Ltd
CU CU
Consideration transferred 50,000 45,000
Non-controlling interest at acquisition 16,000 14,000
((80,000 × 20% / 56,000 × 25%)
66,000 59,000
Net assets at acquisition
Shannon Ltd (W2) (80,000)
Belfast Ltd (W2) (56,000)
(Gain on a bargain purchase)/goodwill (14,000) 3,000
Recognised in profit or loss (impairment) to date 14,000 (300)
– 2,700
(4) Non-controlling interest at year end
CU CU
Shannon Ltd
NCI at acquisition (W3) 16,000
Share of post-acquisition reserves ((W2) 9,000 × 20%) 1,800
17,800
Belfast Ltd
NCI at acquisition (W3) 14,000
Share of post-acquisition reserves ((W2) nil × 25%) -
14,000
31,800
(5) Retained earnings
CU
Dublin Ltd 60,000
Shannon Ltd (80% × 9,000 (W2)) 7,200
Belfast Ltd (75% × nil (W2)) –
Less: Goodwill impairment to date (W3) (300)
Add: Gain on a bargain purchase (W3) 14,000
80,900
(6) PURP
CU12,000 × 20/120 × 50% = CU1,000
CU CU
DR Retained earnings (Shannon) 1,000
CR Group inventory (current assets) 1,000

495
 19 EDINBURGH LTD

Consolidated statement of financial position as at 31 December 20X5

CU CU
ASSETS
Non-current assets
Property, plant and equipment 229,000
Intangible – goodwill (W1) 11,000
Investments (17,000 – 12,000) 5,000
245,000
Current assets
Inventories (108,400 – 800 (W4)) 107,600
Trade and other receivables 129,000
Cash and cash equivalents 39,850
276,450
Total assets 521,450
EQUITY AND LIABILITIES
Equity attributable to owners of the parent
Ordinary share capital 250,000
Revaluation surplus 12,000
Retained earnings (W2) 53,560
315,560
Non-controlling interest (W3) 23,890
Total equity 339,450
Non-current liabilities
6% loan notes(20,000 – 12,000) 8,000
Deferred income (W5) 600
8,600
Current liabilities
Trade and other payables 173,000
Deferred income (W5) 400
173,400
Total equity and liabilities 521,450

WORKINGS
(1) Goodwill
CU
Per draft accounts 9,000
Additional NCI at acquisition date(15,500 – 13,500) 2,000
11,000
(2) Retained earnings
CU
Per draft accounts 55,000
After-sales service (1,000 (W5) × 80%) (800)
PURP (800 (W4) × 80%) (640)
53,560

496
 (3) Non-controlling interest
CU
Per draft accounts 22,250
Additional fair value at acquisition date 2,000
After-sales service (1,000 (W5) × 20%) (200)
PURP (800 (W4) × 20%) (160)
23,890
(4) PURP
CU
CU12,000 × 20/120 × 2/5
800
(5) Service support costs
2.5 years @ CU400 = CU1,000
CU CU
DR Retained earnings (80%) 800
DR NCI (20%) 200
CR Deferred income – non-current 600
CR Deferred income – current 400
20 CLOSE LTD
(a) Consolidated statement of financial position as at 31 December 20X9

CU CU
ASSETS
Non-current assets
Property, plant and equipment (80,000 + 58,200) 138,200
Intangibles (W3) 14,600
152,800
Current assets
Inventories (18,000 + 12,000 – 800 PURP (W2)) 29,200
Trade and other receivables (62,700 + 21,100) 83,800
Investments 2,500
Cash and cash equivalents (10,000 + 3,000 + 500) 13,500
129,000
Total assets 281,800
EQUITY AND LIABILITIES
Equity attributable to owners of the parent
Ordinary share capital 120,000
Share premium account 18,000
Revaluation surplus 23,000
Retained earnings (W5) 57,160
218,160
Non-controlling interest (W4) 17,640
Total equity 235,800
Current liabilities
Trade and other payables (35,000 + 11,000) 46,000
Total equity and liabilities 281,800

497
 (b) Adjustments
When group companies have been trading with each other two separate adjustments may be
required in the consolidated statement of financial position.
(i) Elimination of unrealised profits
If one company holds inventories at the year end which have been acquired from another
group company, this may include a profit element that is unrealised from a group
perspective.
Here Steele Ltd has sold goods to Close Ltd at cost plus 25%. The mark-up of 25% will
only become realised when the goods are sold to a third party. Therefore if any intra-
group inventory is still held at the year end, the profit thereon should be eliminated from
the consolidated accounts.
This will require an adjustment of CU800 (4,000 × 25/125) which is always made against
the selling company's retained earnings, ie

DR CR
CU CU
Steele Ltd's retained earnings (W2) 800
Consolidated inventory 800

As well as eliminating the unrealised profit, this reduces inventory back to its original cost
to the group.
(ii) Eliminate intra-group balances
As group companies are effectively treated as one entity, any intra-group balances must
be eliminated on consolidation. Here, intra-group current accounts have arisen as a result
of the intra-group trading and these must be cancelled out. Before this can be done the
current accounts must be brought into agreement by adjusting the accounts of the
'receiving' company (here Steele Ltd) for the cheque in-transit, ie
DR CR
CU CU
Cash 500
Current account 500

This will reduce the current account receivable to CU2,700, which means that it now
agrees with the payable balance shown in the accounts of Close Ltd.

DR CR
CU CU
Current account in Close Ltd 2,700
Current account in Steele Ltd 2,700
WORKINGS
(1) Group structure
Close Ltd

80%

Steele Ltd

498
(2) Net assets of Steele Ltd
Acquisition Post-
Year end date acquisition
CU CU CU CU
Share capital 60,000 60,000 –
Revaluation surplus 16,000 16,000 –
Retained earnings
Per question 13,000
Less: PURP (4,000 × 25/125) (800)
12,200 8,000 4,200
88,200 84,000
(3) Goodwill
CU
Consideration transferred 84,000
Non-controlling interest at acquisition (84,000 × 20% (W2)) 16,800
100,800
Less: Net assets at acquisition (W2) (84,000)
16,800
Impairment to date (500 + 1,700) (2,200)
Balance c/f 14,600
(4) Non-controlling interest at year end
CU
Steele Ltd – NCI at acquisition (20% × 84,000 (W3)) 16,800
Share of post-acquisition reserves (20% × 4,200(W2)) 840
17,640
(5) Retained earnings
CU
Close Ltd 56,000
Steele Ltd (80% × 4,200 (W2)) 3,360
Less Goodwill impairment to date (W3) (2,200)
57,160

21 PAYNE LTD
Payne Ltd –consolidated statement of financial position as at 31 March 20X5

CU000 CU000
ASSETS
Non-current assets
Property, plant and equipment (3,690 + (683 – 250)) 4,123
Goodwill (W1) 70
Other intangibles (475 – 275) 200
4,393
Current assets
Inventories (1,330 – 30 (W4)) 1,300
Trade and other receivables 1,398
Cash and cash equivalents 968
3,666
Total assets 8,059

499
 EQUITY AND LIABILITIES
Equity attributable to owners of the parent
Ordinary share capital 2,400
Share premium account 640
Revaluation surplus 475
Retained earnings (W2) 1,933
5,448
Non-controlling interest (W3) 319
Total equity 5,767
Current liabilities
Trade and other payables 2,234
Acquired contingent liability 58
Total equity and liabilities 8,059
WORKINGS
(1) Goodwill
CU’000
Per draft 145
Goodwill in subsidiary (not recognised) 300
Fair value adjustment on land (683 – 250) (433)
Contingent liability recognised (reduces net assets) 58
70
(2) Retained earnings
CU’000
Per draft 1,859
Add back restructuring costs (not a liability at acquisition date) 78
Add back share of subsidiary’s goodwill impairment ((300 – 275) × 80%) 20
Deduct share of PURP (30 (W4) × 80%) (24)
1,933
(3) Non-controlling interest
CU’000
Per draft 320
Add back share of subsidiary’s goodwill impairment ((300 – 275) × 20%) 5
Deduct share of PURP (30 (W4) × 20%) (6)
319

(4) PURP
% CU’000
Sale price 125 150
Cost (100) (120)
Gross profit 25 30
(5) Non-amortisation of goodwill
Current period profits have been reduced by the amortisation of the goodwill on acquisition of
an unincorporated business, measured at CU300,000 at acquisition less CU275,000 carrying
amount.
This goodwill is not identifiable, so it should not be recognised as an asset. Nor should any
amortisation be recognised as an expense. Current period profits should be increased by
CU25,000.

500
CHAPTER 12

Consolidated statements of
financial performance

Introduction
Examination context
Topic List
1 Consolidated statement of profit or loss
2 Intra-group transactions and unrealised profit
3 Consolidated statement of profit or loss workings
4 Mid-year acquisitions
5 Dividends
6 Other adjustments
7 Consolidated statement of changes in equity
Summary and Self-test
Technical reference
Answers to Interactive questions
Answers to Self-test

501
 Introduction

Learning objectives Tick off

• Identify the financial effects of group accounting in the context of the IASB Conceptual
Framework
• Explain and demonstrate the concepts and principles surrounding the consolidation of
financial statements including:
– The single entity concept
– Substance over form
– The distinction between control and ownership

• Calculate the amounts to be included in an entity’s consolidated statements of financial

performance in respect of its new and continuing interests in subsidiaries in accordance
with the Bangladesh financial reporting framework
• Prepare and present a consolidated statement of profit or loss (or extracts therefrom)
including adjustments for intra-group transactions and balances, goodwill, non-
controlling interests and fair values
• Prepare and present a consolidated statement of changes in equity (or extracts
therefrom) in accordance with the Bangladesh financial reporting framework
• Explain the application of IFRS to specified group scenarios
Specific syllabus references for this chapter are: 1d, 1h, 3d ,3e, 3f, 3g.

Syllabus links
This chapter looks in detail at the preparation of the consolidated statement of profit or loss and is
fundamental to the Financial Accounting and Reporting syllabus. It builds on the principles introduced in
Chapter 10 and applies them to more complex situations. A detailed knowledge and understanding of
this topic and of the consolidated statement of changes in equity will also be assumed at the Advanced
Stage.

Examination context
The focus of questions on this topic will normally be on consolidation adjustments such as intra-group
trading and unrealised profits. A mid-year acquisition is likely to be incorporated, so any dates given
should be read carefully.
The consolidated statement of changes in equity could be examined in conjunction with the consolidated
statement of profit or loss or could appear as part of another question.
In the examination, candidates may be required to:
• Prepare a consolidated statement of profit or loss (or extracts therefrom) including the results of the
parent entity and one or more subsidiaries from individual financial statements or draft consolidated
financial statements and including adjustments for the following:
– Acquisition of a subsidiary, including a mid-year acquisition
– Intra-group transactions
– Unrealised profits
– Interest and management charges
• Explain the preparation of a consolidated statement of profit or loss in the context of the single entity
concept, substance over form and the distinction between control and ownership
• Prepare a consolidated statement of changes in equity (or extracts therefrom) including the effects
of new and continuing interests in subsidiaries

502
 1 Consolidated statement of profit or loss

Section overview
The preparation of the consolidated statement of profit or loss is consistent with the consolidated
statement of financial position.

1.1 Basic principles

In Chapter 10 we introduced the basic principles and mechanics involved in the consolidation of the
statement of profit or loss as follows:
Consolidated statement of profit or loss
CU
Revenue X
(P + S (100%) – intra-group items)

Profit after tax (PAT) (Control) X

(Ownership)
Attributable to:
Owners of P (ß) X
Non-controlling interest (NCI% × S's PAT) X
X

The consolidated statement of profit or loss is prepared on a basis consistent with the consolidated
statement of financial position. Therefore:

The consolidated statement of profit or loss In the consolidated statement of profit or loss
shows income generated from the net assets dividend income from the subsidiary is replaced with
under the parent company’s control the subsidiary’s income and expenses on a line-by-
line basis as far as profit after tax (PAT)

The single entity concept is applied The effects of transactions between group members
are eliminated on consolidation

The ownership of profits is shared between Profit after tax is split between the profit attributable
the owners of the parent and any non- to the parent’s shareholders (balancing figure) and
controlling interest the profit attributable to the non-controlling interest
(calculated as the NCI's share of S’s PAT)

In sections 2-6 of this chapter we will consider a number of consolidation adjustments. We have already
seen many of the issues raised in the context of the consolidated statement of financial position. In this
chapter we will look at how the adjustments are made from the point of view of the consolidated statement
of profit or loss.

503
 2 Intra-group transactions and unrealised profit

Section overview
• The value of intra-group sales should be deducted as a consolidation adjustment from
consolidated revenue and cost of sales.
• A provision for unrealised profit should be set against the selling company’s profit.
• Profits or losses on non-current asset transfers should be eliminated against the selling
company’s profit.
• A depreciation adjustment may be required so that depreciation is based on the cost of the asset
to the group.

2.1 Intra-group trading

When one company in a group sells goods to another group member an identical amount is added to
the revenue of the first company and to the cost of sales of the second. Yet as far as the entity’s dealings
with third parties are concerned no sale has taken place.
The consolidated figures for sales revenue and cost of sales should represent sales to, and purchases
from third parties. An adjustment is therefore necessary to reduce the sales revenue and cost of sales
figures by the value of intra-group sales made during the year.
This adjustment is made as follows:

Step 1
Add across P and S revenue and P and S cost of sales.

Step 2
Deduct value of intra-group sales from revenue and cost of sales.
Points to note:
This adjustment has no effect on profit and hence will have no effect on the non-controlling interest
share of profit.
The intra-group trading could be between a parent and a subsidiary or between two subsidiaries.

2.2 Unrealised profits on trading

If any items sold by one group company to another are included in inventories (ie have not been sold
on outside the group by the end of the reporting period), their value must be adjusted to the lower of
cost and NRV to the group (as for CSFP), again applying the single entity concept.
Steps to set up the provision for unrealised profit (PURP) are:

Step 1
Calculate the amount of inventories remaining at the end of the reporting period.

Step 2
Calculate the intra-group profit included in it.

Step 3
Make a provision against the inventories to reduce them to cost to the group (or NRV if lower).
Points to note:
1 In practical terms the provision is set up by increasing cost of sales by the amount of the
unrealised profit. (If closing inventory is reduced, cost of sales is increased).

504
 2 This provision should always be set against the selling company’s profit. As a result, where the
seller is a subsidiary that is not wholly owned, the provision reduces the profit for the year for
NCI calculations.
3 Where the purchasing company sold on to a third party some of the goods purchased from the
selling company, any profit earned on those goods will have been realised as far as the group is
concerned, so no adjustment is necessary.
Interactive question 1: Unrealised profits [Difficulty level: Exam standard]
Whales Ltd owns 75% of Porpoise Ltd. The gross profit for each company for the year ended 31 March
20X7 is calculated as follows:
Whales Ltd Porpoise
Ltd
CU CU
Revenue 120,000 70,000
Cost of sales (80,000) (50,000)
Gross profit 40,000 20,000
During the year Porpoise Ltd made sales to Whales Ltd amounting to CU30,000. CU15,000 of these
sales were in inventories at the year end. Profit made on the year end inventories items amounted to
CU2,000.
Requirement
Calculate group revenue, cost of sales and gross profit.
Fill in the proforma below.
Whales Ltd Porpoise Ltd Adj Consol
CU CU CU CU
Revenue
C of S – per Q
– PURP
GP
See Answer at the end of this chapter.

2.4 Non-current asset transfers

The consolidated statement of profit or loss should include depreciation of non-current assets based on
cost to the group, and should exclude any profit or loss on non-current asset transfers between group
members. This is consistent with the treatment in the consolidated statement of financial position.
The adjustment is made as follows:
• Eliminate the profit or loss on transfer and adjust depreciation in full (control).
• The profit or loss is eliminated against the seller. This automatically affects the non-controlling
interest where S was the seller (ownership).
• Depreciation is adjusted against the seller even though it is the purchaser who recorded it. This is
because the depreciation adjustment reflects the realisation of the profit over time, ie over the
asset’s life (ownership).

Worked example: Non-current asset transfers

(Based on Interactive question 4 in Chapter 11)
P Ltd owns 80% of S Ltd. P Ltd transferred to S Ltd a non-current asset (NCA) at a value of CU15,000
on 1 January 20X7. The original cost to P Ltd was CU20,000 and the accumulated depreciation at the
date of transfer was CU8,000. The asset has a total useful life of five years, which is unchanged.

505
 At 31 December 20X7 the adjustment in the consolidated statement of financial position (CSFP) was
calculated by comparing
CU
Carrying amount of NCA with transfer (15,000 × 2/3) 10,000
Carrying amount of NCA without transfer
((20,000 – 8,000) × 2/3) (8,000)
2,000
Adjustment made in CSFP was:
CU CU
DR Seller’s retained earnings 22,000
CR Non-current assets 2,000

In the consolidated statement of profit or loss(CSPL) for the year:

(a) Eliminate the profit (or loss) on transfer at 1 January 20X7 since it is unrealised
CU CU
DR Seller’s IS for year (heading where profit credited)
(15,000 – 12,000) 3,000
CR NCA carrying amount in CSFP 3,000
Point to note:
For the non-current asset note to the consolidated statement of financial position, the credit to non-
current asset carrying amounts should be split into a debit of CU5,000 to the non-current asset cost
account and a credit of CU8,000 to the non-current asset accumulated depreciation account.
(b) Increase/(decrease) the depreciation charge, so that it is calculated on the asset's cost to the
group. In this case, decrease the charge by

CU
Depreciation without transfer ((20,000 – 8,000)/3) 4,000
Depreciation with transfer (15,000/3) (5,000)
(1,000)

CU CU
DR NCA carrying amount in CSFP 1,000
CR Selling company IS for year (heading where depreciation charged) 1,000

Point to note:
The non-current asset note to the consolidated statement of financial position should include this
debit in accumulated depreciation. The overall effect is an adjustment of CU2,000 in both the
consolidated statement of profit or loss and consolidated statement of financial position.

Interactive question 2: Non-current asset transfers

[Difficulty level: Exam standard]
P Ltd owns 80% of S Ltd. P Ltd transferred a non-current asset to S Ltd on 1 January 20X7 at a value of
CU15,000. The asset originally cost P Ltd CU12,000 and depreciation to the date of transfer was
CU4,800. The profit on transfer has been credited to depreciation expense. The asset has a useful life
of five years, which is unchanged. Total depreciation for 20X7 was CU35,000 for P Ltd and CU25,000
for S Ltd.
Requirement
Show the adjustments required for the above transaction in the consolidated statement of profit or loss
for the year ended 31 December 20X7.

506
 Fill in the proforma below.
P Ltd S Ltd Adj Consol
CU CU CU CU
Depreciation – per Q
NCA PURP
Depreciation adjustment
See Answer at the end of this chapter.

3 Consolidated statement of profit or loss workings

Section overview
The key working for the preparation of the consolidated statement of profit or loss is the consolidation
schedule.

3.1 Pro forma workings

As questions increase in complexity a formal pattern of workings is needed.
(1) Establish group structure
P

80%

S
(2) Prepare consolidation schedule
P S Adj Consol
CU CU CU CU
Revenue X X (X) X
Cost of sales – Per Q (X) (X) X (X)
– PURP (seller's books) (X) or (X)
Expenses – Per Q (X) (X)
(X)
– Goodwill impairment (if any)* (X) (X)((X)
Tax – Per Q (X) (X) (X)

Profit X
May need workings for (eg)
– PURPs
– Goodwill impairment
(3) Calculate non-controlling interest (NCI)
CU
S PAT × NCI% NCI% × X = X

* If the non-controlling interest is measured at fair value, then the NCI% of the impairment loss will be
debited to the NCI. This is based upon the NCI shareholding. For instance, if the parent has acquired
75% of the subsidiary and the NCI is measured at fair value, then 25% of any goodwill impairment will
be debited to NCI. See example Chapter 10 Section 8.

507
 Interactive question 3: Statement of profit or loss workings
[Difficulty level: Easy]
Pathfinder Ltd owns 75% of Sultan Ltd. Statements of profit or loss for the two companies for the year
ending 30 September 20X7 are as follows.
Pathfinder Sultan
Ltd Ltd
CU CU
Revenue 100,000 50,000
Cost of sales (60,000) (30,000)
Gross profit 40,000 20,000
Expenses (20,000) (10,000)
Investment income from Sultan Ltd 1,500 –
Profit before tax 21,500 10,000
Income tax expense (6,000) (3,000)
Profit for the year 15,500 7,000
During the year one group company sold goods to the other for CU20,000 at a gross profit margin of
40%. Half of the goods remained in inventories at the year end.
Requirements
(a) Prepare extracts from Pathfinder Ltd’s consolidated statement of profit or loss for the year ended
30 September 20X7 showing revenue, cost of sales, gross profit and non-controlling interest,
assuming that the intra-group sales have been made by Pathfinder Ltd to Sultan Ltd.
(b) Prepare the whole of Pathfinder Ltd’s consolidated statement of profit or loss for the year ended 30
September 20X7, assuming that the intra-group sales have been made by Sultan Ltd to Pathfinder
Ltd.
Fill in the proforma below.
(a) Consolidated statement of profit or loss (extracts) for the year ended 30 September 20X7
CU
Revenue
Cost of sales
Gross profit
Non-controlling interest (W3)
WORKINGS
(1) Group structure
P

75%

S
(2) Consolidation schedule
Pathfinder Ltd Sultan Ltd Adj Consol
CU CU CU CU
Revenue
Cost of sales – per Q
– PURP (W4)
Expenses
Income tax
Profit

508
 (3) Non-controlling interest
CU
Sultan Ltd
(4) PURP
% CU CU
Selling price
Cost
Gross profit

(b) Consolidated statement of profit or loss for the year ended 30 September 20X7

CU
Revenue
Cost of sales
Gross profit
Expenses
Profit before tax
Income tax expense
Profit for the year

Profit attributable to:

Owners of Pathfinder Ltd (β)
Non-controlling interest (W3)

WORKINGS
(1) Group structure
As part (a)
(2) Consolidation schedule

Pathfinder Ltd Sultan Ltd Adj Consol

CU CU CU CU
Revenue
Cost of sales – per Q
– PURP
(W4)

Expenses
Income tax
Profit

(3) Non-controlling interest

CU
Sultan Ltd

(4) PURP

As part (a)
See Answer at the end of this chapter.

509
 4 Mid-year acquisitions

Section overview
• The results of the subsidiary should be consolidated from the date of acquisition.
• The profit or loss amounts of the subsidiary should be time apportioned.

4.1 Method of apportionment

When we looked at the statement of financial position we saw that consolidated retained earnings
included only the post-acquisition profits of the subsidiary. This principle also applies to the
consolidated statement of profit or loss. If the subsidiary is acquired during the accounting period, the
entire statement of profit or loss of the subsidiary should be split between pre-acquisition and post-
acquisition proportions. Only the post-acquisition figures should be included in the consolidated
statement of profit or loss.
Points to note:
1 Assume revenue and expenses accrue evenly over the year unless the contrary is indicated –
therefore time-apportion results of the subsidiary from the date of acquisition.
2 Time-apportion totals for revenue, cost of sales, expenses and tax first, then deduct post-acquisition
intra-group items.
3 Recognise as an expense any goodwill impairment losses arising on the acquisition (calculation of
goodwill was dealt with in Chapter 11). Note that if the NCI is held at fair value, part of that
impairment loss will be allocated to the NCI.

Interactive question 4: Mid-year acquisition [Difficulty level: Easy]

P Ltd acquired 75% of S Ltd on 1 April 20X7. Extracts from the companies’ statements of profit or loss
for the year ended 31 December 20X7 are as follows.
P Ltd S Ltd
CU CU
Revenue 100,000 75,000
Cost of sales (70,000) (60,000)
Gross profit 30,000 15,000
Since acquisition P Ltd has made sales to S Ltd of CU15,000. None of these goods remain in inventories
at the year end.
Requirement
Calculate revenue, cost of sales and gross profit for the group for the year ending 31 December 20X7.
P Ltd Consolidated statement of profit or loss for the year ended 31 December 20X7
P Ltd S Ltd Adj Consol
CU CU CU CU
Revenue
Cost of sales
Gross profit
See Answer at the end of this chapter.

510
 5 Dividends

Section overview
• Intra-group dividends should be cancelled on consolidation.
• The uncancelled amount should be disclosed in the consolidated statement of changes in equity.

5.1 Treatment
Dealing with intra-group dividends is made a bit more complicated by the fact that:
• Dividends received are shown as income in the statement of profit or loss; but
• Dividends paid are shown in the statement of changes in equity.
Nevertheless the single entity concept must be applied to dividends paid by the subsidiary, by:
• Cancelling P’s dividend income from S in P’s statement of profit or loss against S’s dividends in S’s
statement of changes in equity.
• Leaving the uncancelled amount of S’s dividends to be shown as the dividends to the non-
controlling interest in the consolidated statement of changes in equity (see section 7 below).

6 Other adjustments

Section overview
The effect of all other intra-group transactions should be cancelled on consolidation.

6.1 Redeemable (and some irredeemable) preference shares

Redeemable (and some irredeemable) preference shares are treated as a financial liability (under
IAS 32 Financial Instruments: Presentation) rather than as part of equity. Consequently, distributions to
shareholders are classed as finance costs rather than as dividends.
On consolidation finance income received/receivable in the parent’s books is cancelled against the
amount paid/payable in the subsidiary’s books, leaving only the portion paid/payable to third parties as
a finance cost.

6.2 Interest and management charges

Interest or management charges paid/payable in the statement of profit or loss of the subsidiary
(expense) should be cancelled against the interest or management charges received/receivable in
the statement of profit or loss of the parent company (income).

7 Consolidated statement of changes in equity

Section overview
• The consolidated statement of changes in equity (CSCE) shows the change in group equity
reconciling the position at the start of the year with the position at the end of the year.
• There are separate analysis columns for each type of share capital and reserves in respect of
the parent's equity holders.
• Changes in the non-controlling interest in share capital and reserves are presented in a single
column.

511
 7.1 Structure of CSCE
The CSCE is the link between the consolidated statement of profit or loss or consolidated statement of
profit or loss and other comprehensive income and the figures for equity shown in the consolidated
statement of financial position, in that it shows the movement between the retained earnings brought
forward at the start of the year and those carried forward at the end of the year. As can be seen in the
proforma layout in Chapter 2, the CSCE also shows movements on share capital, other reserves and on
the non-controlling interest. Listed below are the main points.
• Owners of the parent: there are separate analysis columns for each type of share capital and
reserves, together with a total column.
– There will nearly always be entries for total comprehensive income for the year and dividends
paid/payable. Total comprehensive income for the year will be the profit for the year plus any
item of 'other comprehensive income'.
– There will sometimes be entries for issues of share capital and revaluations of non-current
assets (dealt with in Chapter 4). Revaluation gains or losses will be shown as part of total
comprehensive income.
• Non-controlling interest in subsidiaries: there is only a single column, which is the equivalent
of the total column for the owners of the parent.
– There will nearly always be entries for the NCI’s share of S’s total comprehensive income for
the year and dividends paid/payable.
– There will sometimes be entries for S’s revaluations of non-current assets (dealt with in
Chapter 4).
– In practice there will sometimes be entries for issues of share capital by S, but these fall outside
the syllabus.
– Transfers between reserves in S should never be shown, because they contra out against
each other in this single column.
– If a partly-owned subsidiary is acquired during the year there will be an entry for NCI added
on the acquisition of a subsidiary (see section 7.4).

Worked example: CSCE

The following are extracts from the financial statements for the year ended 30 June 20X8 of William Ltd
and Rufus Ltd.
William Rufus
Ltd Ltd
CU CU
Profit from operations 196,000 95,000
Dividends from Rufus Ltd 24,000 –
Profit before tax 220,000 95,000
Income tax expense (70,000) (30,000)
Profit for the year 150,000 65,000
Dividends paid 20,000 30,000
Share capital (CU1 shares) 200,000 50,000
William Ltd purchased 40,000 shares in Rufus Ltd some years ago. William Ltd's retained earnings at 1
July 20X7 were CU270,000.
Prepare the consolidated statement of profit or loss and the consolidated statement of changes in equity
for William Ltd for the year ended 30 June 20X8, as far as the information permits. You should assume
that Rufus Ltd had no retained earnings at 1 July 20X7. NCI is measured on the proportionate basis.

512
 Solution
Consolidated statement of profit or loss for the year ended 30 June 20X8
CU
Profit from operations (196 + 95) 291,000
Income tax expense (70 + 30) (100,000)
Profit for the year 191,000
Profit attributable to:
Owners of William Ltd ( 178,000
Non-controlling interest (20% × 65) 13,000
191,000
Point to note:
The amount attributable to the owners of William Ltd can be separately calculated, omitting the intra-
group dividend (as William Ltd’s shareholders are given their share of Rufus Ltd’s profits, they cannot
also be given their share of a dividend paid out of those profits):
100% of (150,000 – 24,000) + 80% of CU65,000 = CU178,000.
Consolidated statement of changes in equity for the year ended 30 June 20X8

Attributable to owners
of William Ltd Non-
Share Retained controlling
capital earnings Total interest Total
CU CU CU CU CU
Balance at 1 July 20X7 (W) 200,000 270,000 470,000 10,000 480,000
Total comprehensive income
for the year – 178,000 178,000 13,000 191,000
Dividends (W) – (20,000) (20,000) (6,000) (26,000)
Balance at 30 June 20X8 200,000 428,000 628,000 17,000 645,000
WORKING
NCI share of Rufus Ltd’s: dividend 20% × 30,000 = CU6,000
share capital 20% × 50,000 = CU10,000

7.2 Transfers to reserves

Some companies transfer amounts from retained earnings to named reserves. Such transfers are
made in the analysis columns in the CSCE and are therefore shown net of NCI.
In the analysis columns in the CSCE:

Group P's transfers P% of S's

transfers between = between + transfers between
reserves reserves reserves

This matches with the treatment of reserves attributable to the owners of P in the consolidated
statement of financial position, ie they include P’s reserves and P’s share of S’s post-acquisition
reserves. 6

513
 7.3 Retained earnings brought forward
To calculate each of the group reserves brought forward, simply do a working, as you would for the
consolidated statement of financial position, but at the start of the year. Therefore each group opening
reserve will be:

Group P’s P% of S’s Goodwill impairment (to

reserve reserve post-acquisition start of year) and any
= + ±
b/f b/f reserve b/f other adjustments to
opening position

Point to note:
The NCI amount brought forward will be the NCI share of S's equity (ie NCI’s share of S’s capital and
reserves) brought forward or fair value of NCI plus NCI share of the subsidiary’s post-acquisition
reserves.

Interactive question 5: Retained earnings brought forward

[Difficulty level: Exam standard]
Continuing the facts from Worked example: CSCE above, you should now assume that Rufus Ltd’s
retained earnings at 1 July 20X7 were CU120,000.
You have also now ascertained that when William Ltd purchased its 40,000 shares in Rufus Ltd, Rufus
Ltd's retained earnings stood at CU70,000. NCI is measured at fair value. The fair value of the NCI at
the date of acquisition was CU25,000.
Three years ago a goodwill impairment loss of CU10,000 was recognised in William Ltd's consolidated
financial statements.
Requirement
Prepare the consolidated statement of changes in equity for William Ltd for the year ended 30 June 20X8
taking account of the additional information.
Fill in the pro forma below.

Consolidated statement of changes in equity for the year ended 30 June 20X8

Attributable to owners
of William Ltd Non-
Share Retained controlling
capital earnings Total interest Total
CU CU CU CU CU
Balance at 1 July 20X7 (W)
Dividends
Total comprehensive income
for the year
Balance at 30 June 20X8
WORKING
CU
Group retained earnings b/f
William Ltd
Rufus Ltd
Goodwill impairment to date

514
 CU
NCI b/f
Fair value at acquisition
Share of post-acquisition retained earnings
Goodwill impairment

See Answer at the end of this chapter.

7.4 Acquisition during the year

Section 4 explained that the results for the new subsidiary should only be brought into the consolidated
statement of profit or loss from the date of acquisition. Any non-controlling interest in the results of the
newly-acquired subsidiary should similarly be calculated from that date and the amount included as
profit for the year in the non-controlling interest column in the CSCE in the normal way.
But in the year end consolidated statement of financial position, the non-controlling interest in the new
subsidiary will be calculated as their share of the year end equity in the new subsidiary. This should
include not only the profit for the post-acquisition period but also their share of the newly-acquired
subsidiary’s:
• Share capital; plus
• Retained earnings brought forward at the start of the current year; plus
• Current year profits to the date of acquisition.
Their share of the total of these amounts should be brought into the CSCE as a single line described as
‘Added on acquisition of subsidiary’.

Interactive question 6: Acquisition during the year

[Difficulty level: Exam standard]
Joseph Ltd acquired an 80% interest in Mary Ltd on 1 October 20X8. The following figures relate to the
year ended 31 March 20X9.
Joseph Ltd Mary Ltd
CU'000 CU'000
Statement of profit or loss
Revenue 800 550
Costs (400) (350)
Profit before tax 400 200
Income tax expense (140) (50)
Profit for the year 260 150

Statements of changes in equity (extracts) Retained earnings

CU'000 CU'000
Brought forward 400 300
Total comprehensive income for the year 260 150
Carried forward 660 450

Additional information
CU'000 CU'000
Share capital 500 100

515
 NCI is measured on the proportionate basis

Requirement

Prepare the consolidated statement of profit or loss and the consolidated statement of changes in equity
for the Joseph Ltd group for the year ended 31 March 20X9.
Fill in the pro forma below.
Consolidated statement of profit or loss for the year ended 31 March 20X9
CU'000
Revenue
Costs
Profit before tax
Income tax expense
Profit for the year
Profit attributable to:
Owners of Joseph Ltd
Non-controlling interest (W1)

Consolidated statement of changes in equity for the year ended 31 March 20X9

Attributable to owners
of Joseph Ltd Non-
Share Retained controlling
capital earnings Total interest Total
CU'000 CU'000 CU'000 CU'000 CU'000
Brought forward
Total comprehensive income
for the year
Added on acquisition of
subsidiary (W2)

Carried forward

WORKINGS
(1) Non-controlling interest in profit for the year
CU'000

(2) Non-controlling interest added on acquisition

CU'000 CU'000
Share capital
Retained earnings b/f
Profit for first half of current year
20% of
See Answer at the end of this chapter.

516
Summary and Self-test

Summary

517
 Self-test
Answer the following questions
1 Barley Ltd has owned 100% of the issued share capital of Oats Ltd for many years. Barley Ltd sells
goods to Oats Ltd at cost plus 20%. The following information is available for the year.

Revenue
CU
Barley Ltd 460,000
Oats Ltd 120,000
During the year Barley Ltd sold goods to Oats Ltd for CU60,000, of which CU18,000 were still held
in inventory by Oats Ltd at the year end.
At what amount should total revenue appear in the consolidated statement of profit or loss?
2 Ufton Ltd is the sole subsidiary of Walcot Ltd. The cost of sales figures for 20X1 for Walcot Ltd and
Ufton Ltd were CU11 million and CU10 million respectively. During 20X1 Walcot Ltd sold goods
which had cost CU2 million to Ufton Ltd for CU3 million. Ufton Ltd has not yet sold any of these
goods.
What shoulds the consolidated cost of sales figure be for 20X1?
3 For the year ended 30 April 20X6 Hop Ltd and its 90% subsidiary Skip Ltd had the following trading
accounts.
Hop Ltd Skip Ltd
CU CU
Revenue 100,000 46,000
Cost of sales (70,000) (34,500)
Gross profit 30,000 11,500
Notes
(1) In each company all sales were made at the same percentage mark-up.
(2) Goods purchased by Skip Ltd at a cost of CU9,000 were sold to Hop Ltd. This transaction is
reflected in the above trading accounts.
(3) Hop Ltd had sold two-thirds of these purchases at the year end.
(4) There had been no trading between Skip Ltd and Hop Ltd in previous years.
(a) What should the consolidated revenue be for the year?
(b) What should the consolidated gross profit be for the year?
4 Shaw Ltd owns 75% of the ordinary share capital and 40% of the CU125,000 of 8% debt of Wilde
Ltd.
The following details are extracted from the books of Wilde Ltd.
Income tax expense CU24,000
Profit after tax CU70,000
Shaw Ltd has profit before tax of CU80,000 in its own accounts and has no paid or proposed
dividends.
Neither company has yet accounted for interest payable or receivable.
What should the total consolidated profit before tax be for the year?

518
5 The statement of changes in equity of Suton Ltd shows the following in respect of retained earnings

CU'000
Balance brought forward 21
Total comprehensive income for the year 10
Interim dividend paid (7)
Balance carried forward 24
80% of the share capital of Suton Ltd had been acquired by Teigh Ltd some years ago when Suton
Ltd’s retained earnings amounted to CU5,000.
(a) How much of Suton Ltd’s retained earnings should be included in closing consolidated retained
earnings?
(b) How much of Suton Ltd’s profit for the period should be included in the consolidated profit for
the financial year attributable to the owners of Teigh Ltd?
(c) If the non-controlling shareholders’ interest in Suton Ltd amounted to CU5,200 at the start of
the year, how much should it be at the end of the year?
6 Cherry Ltd owns 75% of Plum Ltd and 60% of Peach Ltd. For the year ended 31 December 20X1
Plum Ltd reported a net profit of CU118,000 and Peach Ltd reported a net profit of CU56,000.
During 20X1 Plum Ltd sold goods to Peach Ltd for CU36,000 at cost plus 50%. At the year end
these goods are still held by Peach Ltd.
In the consolidated statement of profit or loss for the year ended 31 December 20X1 what should
the profit attributable to the non-controlling interest be?
7 Chicken Ltd owns 80% of Egg Ltd. Egg Ltd sells goods to Chicken Ltd at cost plus 50%. The total
sales invoiced to Chicken Ltd by Egg Ltd in the year ended 31 December 20X1 were CU900,000
and, of these sales, goods which had been invoiced at CU60,000 were held in inventory by Chicken
Ltd at 31 December 20X1.
What should the reduction in aggregate group gross profit be?
8 Marlowe Ltd owns 60% of the ordinary share capital and 25% of the CU200,000 5% loan stock of
Southey Ltd. Neither company has yet accounted for interest payable or receivable.
The following details are extracted from the books of Southey Ltd.

Profit CU100,000
Dividend paid CU40,000
What amount should be shown as the profit attributable to the non-controlling interest in the
consolidated statement of profit or loss of Marlowe Ltd?
9 Several years ago Horace Ltd acquired 75% of the ordinary share capital of Sylvia Ltd. The
statement of profit or loss of Sylvia Ltd for the year ended 28 February 20X7 showed profit after tax
of CU4,000. During the year Horace Ltd sold goods to Sylvia Ltd at a mark up on cost of 50%. 75%
of these goods had been sold to third parties by the year end.
What should the non-controlling interest be in the consolidated statement of profit or loss of Horace
Ltd for the year ended 28 February 20X7?
10 Set out below are the summarised statements of profit or loss of Dennis Ltd and its 80% subsidiary
Terry Ltd.
Dennis Ltd Terry Ltd
CU CU
Profit from operations 89,000 45,000
Dividend from Terry Ltd 16,000 –
Profit before tax 105,000 45,000
Income tax expense (42,000) (15,000)
Profit for the year 63,000 30,000

519
 What is the profit for the year attributable to the owners of Dennis Ltd to be disclosed in the
consolidated statement of profit or loss?

11 HUMPHREY LTD
The following are the draft statements of profit or loss for the year ended 30 September 20X5 of
Humphrey Ltd and its subsidiary Stanley Ltd.
Humphrey Stanley
Ltd Ltd
CU'000 CU'000
Revenue 1,100 400
Cost of sales (600) (240)
Gross profit 500 160
Distribution costs (60) (50)
Administrative costs (65) (55)
Profit from operations 375 55
Finance cost (25) (6)
Investment income 20 5
Profit before tax 370 54
Income tax expense (160) (24)
Profit for the year 210 30
The following information is relevant
(1) Humphrey Ltd acquired 80% of Stanley Ltd many years ago, when the retained earnings of
that company were CU5,000. Both companies have only ordinary shares in issue. Non-
controlling interest is measured at fair value. At the acquisition date the fair value of the NCI
was estimated at CU13,000.
(2) Total intra-group sales in the year amounted to CU100,000, Humphrey Ltd selling to Stanley
Ltd.
(3) At the year end the statement of financial position of Stanley Ltd included inventory purchased
from Humphrey Ltd. Humphrey Ltd had recognised a profit of CU2,000 on this inventory.
(4) The retained earnings of Humphrey Ltd and Stanley Ltd as at 30 September 20X4 were
CU90,000 and CU40,000 respectively. Stanley Ltd’s share capital is comprised of 50,000 CU1
ordinary shares.
(5) Humphrey Ltd paid dividends of CU100,000 in the year. Stanley Ltd paid a dividend of
CU20,000.
Requirement
Prepare a consolidated statement of profit or loss and extracts from the consolidated statement of
changes in equity in respect of retained earnings and non-controlling interest for the year ended 30
September 20X5. (8 marks)

12 HIGH LTD
High Ltd acquired its 80% interest in the ordinary shares and 25% interest in the redeemable
preference shares of Tension Ltd for CU9,000 and CU1,000 respectively on 1 April 20X3 when
Tension Ltd’s retained earnings were CU4,000. There were no other reserves at that date. The
preference shares carry no votes.
The following are the draft statements of profit or loss of High Ltd and Tension Ltd for the year
ended 31 March 20X9.

520
 High Ltd Tension Ltd
CU CU CU CU
Revenue 274,500 181,250
Dividends from Tension Ltd
Ordinary 4,800 –
Preference 150 –
Bank deposit interest 250 100
279,700 181,350
Less Cost of sales 126,480 86,520
Distribution costs 67,315 42,885
Administrative costs 25,555 17,295
Preference dividend paid – 600
(219,350) (147,300)
60,350 34,050
Income tax expense (29,000) (15,100)
Profit for the year 31,350 18,950
The following information is also available.
(1) The inventory of High Ltd at 31 March 20X9 includes goods purchased from Tension Ltd at a
profit to that company of CU700. Total intra-group sales for the year amounted to CU37,500.
(2) On 1 April 20X8 High Ltd sold plant costing CU7,000 to Tension Ltd for CU10,000. The profit
on sale has been taken to cost of sales. Depreciation has been provided by Tension Ltd at
10% per annum on the cost of CU10,000.
(3) Included in Tension Ltd’s administrative costs is an amount for CU3,500 in respect of
management charges invoiced and included in revenue by High Ltd.
(4) Tension Ltd’s issued share capital comprises 10,000 50p ordinary shares and 4,000 CU1 15%
redeemable preference shares.
(5) Four years ago a goodwill impairment loss was recognised in High Ltd’s consolidated financial
statements leaving goodwill in the consolidated statement of financial position at CU1,200. A
further CU180 impairment loss needs to be recognised in the current year.
(6) Retained earnings at 1 April 20X8 were CU576,000 for High Ltd and CU72,600 for Tension
Ltd.
(7) Non-controlling interest is measured on the proportionate basis.
Requirements
(a) Prepare the consolidated statement of profit or loss for the year ended 31 March 20X9 and
calculate the retained earnings brought forward attributable to the owners of High Ltd and to
the non-controlling interest. (9 marks)
(b) For each adjustment you have made in the consolidation schedule explain why you have made
it (include in your answer the journal adjustment and the impact on consolidated profit). (8
marks)

521
 (17 marks)
13 ETHOS LTD
The following draft statements of profit or loss and extracts from the statements of changes in equity
were prepared for the year ended 31 March 20X9.

Statements of profit or loss Ethos Ltd Pathos Ltd

CU CU
Revenue 303,600 217,700
Cost of sales (143,800) (102,200)
Gross profit 159,800 115,500
Operating costs (71,200) (51,300)
Profit from operations 88,600 64,200
Investment income 2,800 1,200
Profit before tax 91,400 65,400
Income tax expense (46,200) (32,600)
Profit for the year 45,200 32,800
Statements of changes in equity (extracts)
Ethos Ltd Pathos Ltd
General Retained General Retained
reserve earnings reserve earnings
CU CU CU CU
Balance brought forward – 79,300 – 38,650
Total comprehensive income for the year – 45,200 – 32,800
Transfer between reserves 15,000 (15,000) 5,000 (5,000)
Dividends paid on ordinary shares – (30,000) – –
Balance carried forward 15,000 79,500 5,000 66,450
On 30 November 20X8 Ethos Ltd acquired 75% of the issued ordinary capital of Pathos Ltd for
CU130,000. Pathos Ltd has in issue 100,000 CU1 ordinary shares. Ethos Ltd has 500,000 CU1
ordinary shares in issue.
Ethos Ltd measures non-controlling interest at fair value. The fair value of the non-controlling
interest in Pathos Ltd at the date of acquisition was CU42,000.
Profits of both companies accrue evenly over the year.
Requirements
(a) Prepare the consolidated statement of profit or loss and consolidated statement of changes in
equity for the year ended 31 March 20X9. (9 marks)
(b) Explain why only four months of Pathos Ltd’s profit or loss should be included in the
consolidated statement of profit or loss. (2 marks)

522
 (11 marks)
14 HIGG LTD
The draft consolidated statement of profit or lossof Higg Ltd for the year ended 30 June 20X5,
incorporating the results of its two subsidiaries Flapp Ltd and Topp Ltd, is as follows:
CU
Revenue 1,265,900
Cost of sales (806,400)
Gross profit 459,500
Operating costs (213,800)
Profit from operations 245,700
Finance cost (12,500)
Investment income 13,600
Profit before tax 246,800
Income tax expense (115,000)
Profit for the year 131,800
Profit attributable to:
Owners of the parent 119,850
Non-controlling interest 11,950
131,800
The following information is relevant:
(1) Higg Ltd has owned 90% of the CU100,000 share capital of Flapp Ltd since its date of
incorporation ten years ago.
(2) Higg Ltd acquired 70% of the CU100,000 issued ordinary shares of Topp Ltd for CU95,000 on
1 July 20X1 when the retained earnings of Topp Ltd were CU13,200. On the same date Higg
Ltd acquired 20% of the CU100,000 8% loan stock of Topp Ltd.
(3) The revenue of Flapp Ltd includes sales to Topp Ltd of CU36,000, all invoiced at cost plus 25%.
On 30 June 20X5 the inventory of Topp Ltd included CU9,000 in respect of such goods.
(4) Three years ago a goodwill impairment loss of CU5,910 was recognised in Higg Ltd’s
consolidated financial statements. A further loss of CU1,970 needs to be reflected in the current
year financial statements.
(5) Higg Ltd paid ordinary dividends of CU20,000 and dividends to irredeemable preference
shareholders of CU8,000. Topp Ltd paid ordinary dividends of CU10,000.
(6) The retained earnings of Higg Ltd, Flapp Ltd and Topp Ltd as at 1 July 20X4 were CU72,400,
CU46,900 and CU29,600 respectively. The share capital of Higg Ltd comprises 500,000 CU1
ordinary shares and 100,000 CU1 irredeemable preference shares.

The draft statement of profit or loss has been prepared by simply adding together the line items for
all three companies. Profit attributable to the non-controlling interest has been arrived at by adding
together 10% of the profit after tax of Flapp Ltd and 30% of the profit after tax of Topp Ltd.
No adjustments have been made for any of the issues arising from (1) to (6) above.
Higg Ltd prefers to measure goodwill and the non-controlling interest using the proportionate method
wherever possible.
Requirement
Prepare the final consolidated statement of profit or loss and statement of changes in equity for the
year ended 30 June 20X5 for the Higg group.
(8 marks)
Now, go back to the Learning objectives in the Introduction. If you are satisfied you have achieved these
objectives, please tick them off.

523
 Technical reference

For a comprehensive Technical reference section, covering all aspects of group accounts (except group
statements of cash flows) see Chapter 10.

524
Answer to Interactive questions

Answer to Interactive question 1

Whales Porpoise
Ltd Ltd Adj Consol
CU CU CU CU
Revenue 120,000 70,000 (30,000) 160,000
C of S – per Q (80,000) (50,000) 30,000
– PURP (2,000) (102,000)
GP 40,000 18,000 – 58,000
Points to note:
1 The intra-group sale is eliminated in the adjustments column. It has no effect on the overall profit.
2 The unrealised profit is eliminated by increasing the cost of sales of the selling company. Where
the selling company is the subsidiary this will reduce the profit figure on which the calculation of
non-controlling interest is subsequently based.

Answer to Interactive question 2

P Ltd S Ltd Adj Consol
CU CU CU CU
Depreciation – per Q (35,000) (25,000)
NCA PURP (15,000 – (12,000 – 4,800)) (7,800)
Depreciation adjustment
((15,000/3) – ((12,000 – 4,800*)/3)) 2,600 (65,200)

* 4,800 is 2/5 of cost

Answer to Interactive question 3

(a) Consolidated statement of profit or loss (extracts) for the year ended 30 September 20X7
CU
Revenue (W2) 130,000
Cost of sales (W2) (74,000)
Gross profit 56,000
Non-controlling interest (W3) 1,750
WORKINGS
(1) Group structure
P

75%

525
 (2) Consolidation schedule
Pathfinder Sultan
Ltd Ltd Adj Consol
CU CU CU CU
Revenue 100,000 50,000 (20,000) 130,000
C of S – per Q (60,000) (30,000) 20,000
– PURP (W4) (4,000) (74,000)
Expenses (10,000)
Income tax (3,000)
Profit 7,000

(3) Non-controlling interest

CU
Sultan Ltd 25% × 7,000 (W2) 1,750

(4) PURP
% CU CU
Selling price 100 20,000
Cost (60) (12,000)
Gross profit 40 8,000 ×½= 4,000

(b) Consolidated statement of profit or loss for the year ended 30 September 20X7
CU
Revenue (W2) 130,000
Cost of sales (W2) (74,000)
Gross profit 56,000
Expenses (W2) (30,000)
Profit before tax 26,000
Income tax expense (W2) (9,000)
Profit for the year 17,000

Profit attributable to:

Owners of Pathfinder Ltd (β) 16,250
Non-controlling interest (W3) 750
17,000
WORKINGS
(1) Group structure
As part (a)
(2) Consolidation schedule
Pathfinder Sultan
Ltd Ltd Adj Consol
CU CU CU CU
Revenue 100,000 50,000 (20,000) 130,000
C of S – per Q (60,000) (30,000) 20,000
– PURP (W4) (4,000) (74,000)
Expenses (20,000) (10,000) (30,000)
Income tax (6,000) (3,000) (9,000)
Profit 3,000

526
 (3) Non-controlling interest
CU
Sultan Ltd 25% × 3,000 (W2) 750

(4) PURP
As part (a)

Answer to Interactive question 4

P Ltd Consolidated statement of profit or loss for the year ended 31 December 20X7
9
/12
P Ltd S Ltd Adj Consol
CU CU CU CU
Revenue 100,000 56,250 (15,000) 141,250
C of S (70,000) (45,000) 15,000 (100,000)
Gross profit 30,000 11,250 – 41,250

Answer to Interactive question 5

Consolidated statement of changes in equity for the year ended 30 June 20X8

Attributable to owners
of William Ltd Non-
Share Retained controlling
capital earnings Total interest Total
CU CU CU CU CU
Brought forward (W) 200,000 302,000 502,000 33,000 535,000
Total comprehensive income
for the year – 178,000 178,000 13,000 191,000
Dividends – (20,000) (20,000) (6,000) (26,000)
Carried forward 200,000 460,000 660,000 40,000 700,000

WORKING
CU
Group retained earnings b/f
William Ltd 270,000
Rufus Ltd (80% × (120,000 – 70,000)) 40,000
Goodwill impairment to date (10,000 x 80%) (8,000)
302,000

CU
NCI b/f
Fair value at acquisition 25,000
Share of post-acquistion retained earnings ((120,000- 70,000) x 20%) 10,000
Goodwill impairment (10,000 x 20%) (2,000)
33,000

527
 Answer to Interactive question 6
Consolidated statement of profit or loss for the year ended 31 March 20X9
CU'000
Revenue (Joseph + half Mary) 1,075
Costs (Joseph + half Mary) (575)
Profit before tax 500
Income tax (Joseph + half Mary) (165)
Profit for the year 335

Profit attributable to:

Owners of Joseph Ltd (β) 320
Non-controlling interest (W1) 15
335

Consolidated statement of changes in equity for the year ended 31 March 20X9
Attributable to owners
of Joseph Ltd Non-
Share Retained controlling
capital earnings Total interest Total
CU'000 CU'000 CU'000 CU'000 CU'000
Brought forward 500 400 900 – 900
Total comprehensive income
for the year – 320 320 15 335
Added on acquisition of subsidiary – – – 95 95
(W2)
Carried forward 500 720 1,220 110 1,330

WORKINGS
(1) Non-controlling interest in profit for the year
CU'000
20% of (150,000 × 50%) 15
(2) Non-controlling interest added on acquisition
CU'000 CU'000
Share capital 100
Retained earnings b/f 300
Profit for first half of current year (150,000 × 50%) 75
20% of 475 95

528
Answers to Self-test

1 Revenue = 460,000 + 120,000 – 60,000 = CU520,000

2 CU19 million
Walcot Ufton Adj Consol
Ltd Ltd
CUm CUm CUm CUm
Cost of sales (11) (10) 3
(19)
PURP (1)
3 (a) CU134,000
CU'000
Hop Ltd 100
Skip Ltd 46
Less: Intra-group sales (9 × 46/34.5) (12)
134
(b) CU40,500
CU'000
Hop Ltd 30.0
Skip Ltd 11.5
Less: PURP ((12 – 9) × 1/3) (1.0)
40.5
4 CU168,000
Shaw Ltd Wilde Ltd Adj Cons
CU CU CU CU
Interest receivable (40% × 10,000*) 4,000 (4,000) –
Interest payable (10,000) 4,000 (6,000)
PBT 80,000 94,000 174,000
168,000
*125,000 × 8%
5 (a) Share of Suton's post-acquisition retained earnings = (24,000 – 5,000) × 80%
= 19,000 × 80% = CU15,200
(b) Profit for the year = 10,000 × 80% = CU8,000

(c) NCI c/f will be CU5,800

CU'000
B/f 5.2
Share of IS (10 × 20%) 2.0
Less Share of dividends (7 × 20%) (1.4)
C/f 5.8
6 CU48,900
CU
Share of Plum Ltd profit (25% ×118,000) 29,500
Share of Peach Ltd profit (40% × 56,000) 22,400
Less Share of PURP (25% × 36,000 × 50/150) (3,000)
48,900

529
 7 CU20,000
% CU
Sales price 150 60,000
Cost (100) (40,000)
Gross profit 50 20,000

8 CU36,000
CU
Profit prior to finance cost 100,000
Finance cost (200,000 × 5%) (10,000)
90,000
× 40% 36,000
9 CU1,000
CU
Share of profit after tax (25% × 4,000) 1,000

Point to note:
As the inventory was sold by Horace Ltd, the PURP adjustment would be against Horace Ltd's
profits and would have no impact on the NCI.

10 CU71,000
CU
Profit from operations – Dennis Ltd 89,000
Less income tax expense (42,000)
47,000
Group share of Terry Ltd (80% × 30,000) 24,000
71,000
11 HUMPHREY LTD

Consolidated statement of profit or loss for the year ended 30 September 20X5
CU'000
Revenue (W2) 1,400
Cost of sales (W2) (742)
Gross profit 658
Distribution costs (W2) (110)
Administration expenses (W2) (120)
Profit from operations 428
Finance cost (W2) (31)
Investment income (W2) 9
Profit before tax 406
Income tax expense (W2) (184)
Profit for the year 222
Profit attributable to
Owners of Humphrey Ltd ( 216
Non-controlling interest (W3) 6
222

530
Consolidated statement of changes in equity for the year ended 30 September 20X5 (extracts)
Retained
earnings
attributable to Non-
owners of controlling
Humphrey Ltd interest Total
CU'000 CU'000 CU'000
Balance brought forward (W4 and W6) 118 20 138
Total comprehensive income for the year 216 6 222
Dividends paid on ordinary shares (W5) (100) (4) (104)
Balance carried forward 234 22 256

WORKINGS
(1) Group structure
Humphrey Ltd

80%

Stanley Ltd

(2) Consolidation schedule

Humphrey Stanley Adj Consol

Ltd Ltd
CU'000 CU'000 CU'000 CU'000
Revenue 1,100 400 (100) 1,400
C of S
Per Q (600) (240) 100
PURP (2) – – (742)
Distribution (60) (50) (110)
Administrative (65) (55) (120)
Finance cost (25) (6) (31)
Inv income (20 – 16 (W5)) 4 5 9
Income tax (160) (24) (184)
PAT 30
(3) Non-controlling interest

CU'000
20% × 30,000 (W2) or as PAT in question 6
(4) Retained earnings b/f
CU'000
Group
Humphrey Ltd 90
Stanley Ltd (80% × (40 – 5)) 28
118

531
 (5) Intra-group dividend
Check consistency between companies.
CU'000
Received by Humphrey Ltd (80% × 20) 16
Received by NCI (20% × 20) 4
Paid by Stanley Ltd 20
(6) Non-controlling interest b/f
CU'000
Fair value at acquisition 13
Share of post-acquisition retained earnings to 1 October 20X4
(40,000 – 5,000) × 20% 7
20
12 HIGH LTD
(a) Consolidated statement of profit or loss for the year ended 31 March 20X9
CU
Revenue (W2) 414,750
Cost of sales (W2) (178,900)
Gross profit 235,850
Distribution costs (W2) (110,200)
Administration expenses (W2) (39,530)
Profit from operations 86,120
Finance cost (W2) (450)
Investment income (W2) 350
Profit before tax 86,020
Income tax expense (W2) (44,100)
Profit for the year 41,920
Attributable to
Owners of High Ltd ( 38,270
Non-controlling interest (W3) 3,650
41,920
Retained earnings brought forward
Attributable to owners of High Ltd (W5) 630,280
Non-controlling interest (W5) 14,520

(b) Adjustments in consolidation schedule

(i) Intra-group sales of inventory
As the consolidated accounts treat High Ltd and Tension Ltd as one entity, the total intra-
group trading needs to be eliminated on consolidation. The total of CU37,500 will be in
both Tension Ltd’s revenue and High Ltd’s cost of sales. The adjustment required is
DR CR
CU CU
Revenue 37,500
Cost of sales 37,500
This has no impact on net consolidated profit.

532
 For the same reason, it is also necessary to eliminate the unrealised profit on the
inventory held by High Ltd at the year end. This adjustment will also reduce inventory to
original cost to the group.
The adjustment is
DR CR
CU CU
Cost of sales of Tension Ltd 700
Inventory in the consolidated statement of financial position 700
This will reduce consolidated profit.
(ii) Intra-group sale of plant
For the same reasons as given for inventory above, it is necessary to eliminate the
unrealised profit and reduce the plant to its original cost.
The adjustment is
DR CR
CU CU
Cost of sales of High Ltd 3,000
Cost of plant in the consolidated statement of financial positio 3,000
This will have a one-off impact on consolidated profit this year.
In current and future years (until the plant has been fully depreciated by Tension Ltd) it
will also be necessary to adjust the depreciation charge by 10% of the PURP, to reflect
the gradual realisation of the above profit through the annual depreciation charge. This
will require the following.
DR CR
CU CU
Accumulated depreciation in the consolidated
statement of financial position 300
Cost of sales of High Ltd 300
Therefore the net impact is to reduce current year consolidated profit by CU2,700.
(iii) Management charges
As with intra-group trading, this charge must be contra’d out on consolidation to reflect
the single entity concept.
The adjustment required is
DR CR
CU CU
Revenue of High Ltd 3,500
Administrative costs of Tension Ltd 3,500
This has no impact on consolidated profit.
(iv) Impairment of goodwill
Goodwill only exists in the consolidated accounts and therefore the individual statements
of profit or loss include no impairment of goodwill. The impairment charge for the year is
dealt with as follows.
DR CR
CU CU
Administration costs 180
Goodwill in the consolidated statement of financial position 180
This will reduce consolidated profit.
(v) Redeemable preference shares
These are in substance liabilities and the net 'dividend' payable outside the group should
be included as part of the consolidated finance cost.

533
 Effectively the 'dividends' paid by Tension Ltd are contra’d against the dividends received
by High Ltd and the adjustment required is
DR CR
CU CU
Dividends received 150
Dividends paid (25% × CU600) 150

This leaves CU450 payable to third parties.

WORKINGS
(1) Group structure
High Ltd

80% ords (25% prefs)

Tension Ltd

(2) Consolidation schedule

High Ltd Tension Ltd Adj Consol

CU CU CU CU
Revenue 274,500 181,250 (37,500) 414,750
(3,500)
C of S
Per Q (126,480) (86,520) 37,500
Inventory PURP (700)
NCA PURP (3,000)
Depreciation (10% × 3,000) 300 (178,900)
Distrib (67,315) (42,885) (110,200)
Admin
Per Q (25,555) (17,295) 3,500
Impairment of goodwill (180) (39,530)
Preference dividends received 150 (150)
Preference dividends paid (600) 150 (450)
Inv income – interest 250 100 350
Income tax (29,000) (15,100) (44,100)
PAT 18,250

(3) Non-controlling interest

20% × CU18,250 = CU3,650

534
 (4) Goodwill
CU
Consideration transferred 9,000
Non-controlling interest at acquisition (9,000 × 20%) 1,800
Less net assets at acquisition
Ordinary shares (5,000)
Retained earnings (4,000)
On acquisition 1,800
Carrying amount at last impairment (1,200)
Impairment loss previously recognised 600
(5) Retained earnings b/f
Group: CU
High Ltd 576,000
Tension Ltd ((72,600 – 4,000) × 80%) 54,880
Less: Impairment loss to date (W4) (600)
630,280
Non-controlling interest (72,600 × 20%) 14,520

Point to note:
Alternative calculation for PAT of Tension Ltd (W2)
CU
PAT per question 18,950
Less Inventory PURP (700)
18,250
13 ETHOS LTD
(a) Consolidated statement of profit or loss for the year ended 31 March 20X9
CU
Revenue (W2) 376,167
Cost of sales (W2) (177,867)
Gross profit 198,300
Operating costs (W2) (88,300)
Profit from operations 110,000
Investment income (W2) 3,200
Profit before tax 113,200
Income tax expense (W2) (57,067)
Profit for the year 56,133
Profit attributable to
Owners of Ethos Ltd ( 53,400
Non-controlling interest (W3) 2,733
56,133

535
 Consolidated statement of changes in equity for the year ended 31 March 20X9
Attributable to owners of Ethos Ltd
Ordinary Non-
share General Retained controlling
capital reserve earnings Total interest Total
CU CU CU CU CU CU
Balance brought
forward 500,000 – 79,300 579,300 – 579,300
Total comprehensive
income for the year – – 53,400 53,400 2,733 56,133
Transfer between
reserves (W4) – 16,250 (16,250) – – –
Added on
acquisition of
subsidiary – – – – 42,000 42,000
Dividend paid
on ordinary
shares – – (30,000) (30,000) – (30,000)
Balance carried
forward 500,000 16,250 86,450 602,700 44,733 647,433

(b) Time apportionment

The results of a subsidiary are included in the consolidated accounts only from the date control
is achieved.
Ethos Ltd acquired 75% of the issued ordinary capital of Pathos Ltd on 30 November 20X8.
This is the date on which control passed and hence the date from which the results of Pathos
Ltd should be reflected in the consolidated statement of profit or loss.
Therefore only profits earned by Pathos Ltd in the four months since that date are post-
acquisition profits.
The remaining previous eight months profit from 1 April 20X8 to 30 November 20X8 are all
pre-acquisition profits and should be included in the calculation of goodwill on consolidation.

WORKINGS

(1) Group structure

Ethos Ltd

75% (acq 30 November 20X8 ∴4/12 in)

Pathos Ltd
(2) Consolidation schedule
4/12
Ethos Ltd Pathos Ltd Adj Consol
CU CU CU CU
Revenue 303,600 72,567 – 376,167
C of S (143,800) (34,067) – (177,867)
Op costs (71,200) ((17,100) (88,300)
Inv income 2,800 400 3,200
Income tax (46,200) (10,867) (57,067)
PAT 10,933

536
 (3) Non-controlling interest in profit for the year
CU
25% x 10,933 (W2) 2,733
(4) Transfer to general reserve
CU
Ethos Ltd 15,000
Pathos Ltd (75% × 5,000 × 4/12) 1,250
16,250
Points to note:
1 The NCI in Pathos Ltd’s reserve transfer does not appear because the two entries are
cancelled out in the single NCI column
2 Alternative calculation for PAT of Pathos Ltd (W2)
CU
PAT per question 32,800 × 4/12 10,933

14 HIGG LTD
Consolidated statement of profit or loss for the year ended 30 June 20X5
CU
Revenue (1,265,900 – 36,000) 1,229,900
Cost of sales (806,400 – 36,000 + 1,800 (W1)) (772,200)
Gross profit 457,700
Operating costs (213,800 + 1,970 goodwill impairment) (215,770)
Profit from operations 241,930
Finance cost (12,500 – 1,600) (10,900)
Investment income (13,600 – 1,600 – 7,000 (W4)) 5,000
Profit before tax 236,030
Income tax expense (W2) (115,000)
Profit for the year 121,030
Profit attributable to Owners of Higg Ltd ( 109,260
Non-controlling interest (W2) 11,770
121,030
Consolidated statement of changes in equity for the year ended 30 June 20X5

Attributable to owners of Higg Ltd

Ordinary Preference Non-
share share capital Retained controlling
capital (irredeemable) earnings Total interests Total
CU CU CU CU CU CU
Balance brought
forward (W3, W5) 500,000 100,000 120,180 720,180 53,570 773,750
Total comprehensive income
for the year – – 109,260 109,260 11,770 121,030
Dividend paid on ordinary
shares (W4) – – (20,000) (20,000) (3,000) (23,000)
Total dividends on preference
shares (irredeemable) – – (8,000) (8,000) – (8,000)

Balance carried forward 500,000 100,000 201,440 801,440 62,340 863,780

537
 WORKINGS

(1) PURP (9,000 × 25/125) CU1,800

(2) Non-controlling interest
CU
Per draft statement of profit or loss 11,950
PURP in Flapp (1,800 (W1) × 10%) (180)
11,770
(3) Retained earnings b/f
CU
Group
Higg Ltd 72,400

Flapp Ltd (90% × 46,900) 42,210

Topp Ltd (70% × (29,600 – 13,200 at acquisition)) 11,480

Less: Goodwill impaired to 1 July 20X4 (5,910)
120,180
(4) Intra-group dividends and interest
CU
Paid by Topp Ltd
Dividends 10,000
Interest (8% × 100,000) 8,000
Received by Higg Ltd
Dividends (70% × 10,000) 7,000
Interest (20% × 8,000) 1,600

Dividends received by NCI (30% × 10,000) 3,000

(5) Non-controlling interest b/f
Flapp Ltd
CU
Share capital 100,000
Retained earnings 46,900
146,900
× 10% 14,690

Topp Ltd
CU
Share capital 100,000
Retained earnings 29,600
129,600
× 30% 38,880

Total 53,570

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CHAPTER 13

Associates and joint ventures

Introduction
Examination context
Topic List
1 Investments in associates
2 Equity method: consolidated statement of financial position
3 Equity method: consolidated statement of profit or loss
4 Associate's losses
5 Transactions between a group and its associate
6 IFRS 11 Joint Arrangements
7 Joint operations
8 Joint ventures
9 IFRS 12 Disclosure of Interests in Other Entities
Summary and Self-test
Technical reference
Answers to Interactive questions
Answers to Self-test

539
 Introduction

Learning objectives Tick off

• Explain the relationship between a group and its associate or joint venture

• Explain the principles behind the treatment of the associate or joint venture

• Reflect an associate in group accounts by means of equity accounting

• Reflect a joint venture in group accounts by means of equity accounting

• Deal with transactions between a group and its associate or joint venture

Specific syllabus references for this chapter are: 3c, 3d, 3e 3f, 3g.

Syllabus links
More complex aspects of group financial statements will be examined at the Advanced stage. It is
therefore important that you have a sound understanding of the accounting treatment of associates and
joint ventures to carry forward.

Examination context
It is likely that associates and joint ventures will be examined in the context of the preparation of a
consolidated statement of financial position or statement of profit or loss, within a group structure which
includes at least one subsidiary. A written element of such a question could focus on an explanation of
equity accounting by reference to the underlying principles. Alternatively, a “mixed topic” question could
require the preparation of extracts from the consolidated financial statements in relation to an associate
or joint venture.
In the examination candidates could be required to:
• Explain the equity method and the principles behind it
• Incorporate the results of an associate in the consolidated financial statements using the equity
method
• Incorporate the results of a joint venture in the consolidated financial statements using the equity
method

540
 1 Investments in associates

Section overview
• An associate is an entity over which the investor exercises significant influence.
• Significant influence is presumed where the investor holds 20% or more of the voting rights.
• An associate is not part of the group.
• An investment in an associate should be accounted for in the consolidated financial statements
using the equity method of accounting.

1.1 Introduction
In the previous chapters we have seen that where a parent entity controls another entity (normally by
holding over 50% of the ordinary share capital) it is said to have a subsidiary. The results of the parent
and subsidiary are consolidated in group accounts as if they were a single entity.
However, investments can take a number of different forms. An investing entity may obtain sufficient
shares such that it has significant influence over it, without achieving control. This type of investment
is referred to as an associate and is dealt with by IAS 28 Investments in Associates and Joint Ventures.
In the first part of this chapter we will look at how to account for an associate.

1.2 Scope and definitions

IAS 27 Separate Financial Statements is to be applied in accounting for investments in associates
in the investor's own financial statements as an individual company.
So IAS 28 is to be applied in the CFS only. The requirements of IAS 28 are very similar to those of
IAS 27, adjusted for the fact that the investor company has significant influence over the associate, rather
than the control it has over a subsidiary.
The definition of an associate is as follows:

Definitions
Associate: An entity, including an unincorporated entity such as a partnership, over which the investor
has significant influence and that is neither a subsidiary nor an interest in a joint venture.
Significant influence: The power to participate in financial and operating policy decisions of the
investee, but is not control or joint control over those policies.

Points to note:
1 A holding of 20% or more of the voting power in an investee (but less than the 51% which would
create a parent/subsidiary relationship) is presumed to provide the investor with that significant
influence, while a holding of less than that is presumed not to do so. Both of these presumptions
are rebuttable on the facts of the case.
2 It is the mere holding of 20% which is sufficient.
3 It is possible for an investee to be the associate of one investor and the subsidiary of another,
because the former investor can still have significant influence when the latter has control. A holder
of more than 75% can do most things in a company, such as passing a special resolution, without
paying much attention to the other shareholders, so someone else holding 20% is unlikely to have
significant influence. But it is always necessary to have regard to the facts of the case.
4 Significant influence is evidenced in a number of ways. It is presumed in the case of a 20%
shareholding but IAS 28 also states that significant influence can be shown by one or more of the
following:

541
 • Representation on the board of directors
• Participation in policy making decisions
• Material transactions between the investor and investee
• Interchange of managerial personnel
• Provision of essential technical information
5 Significant influence may be lost in the same circumstances as a parent may lose control over
what was a subsidiary.

1.3 Equity method

The equity method should be used in relation to associates, the rationale being that it reflects the
significant influence the investor holds by making the investor answerable for the associate's overall
performance, not just for the distributions received. So the investor's share of the associate should be
included in the investor's financial statements.
Under the equity method, the investment in the associate is initially recognised at cost, but the carrying
amount is then increased or decreased by the investor's share in the post-acquisition change in the
associate's net assets.
Shares of post-acquisition profits/losses should be recognised in the investor's consolidated statement
of profit or loss.
When an investment in an associate meets the 'held for sale' criteria of IFRS 5 Non-current Assets Held
For Sale and Discontinued Operations, eg it is expected to be sold within 12 months of acquisition, it is
still classified as an associate, but it is not subject to equity accounting; IFRS 5 is applied instead.
Once significant influence is lost, the investee is no longer an associate, so the investor's statements of
profit or loss should subsequently include only distributions received.
The procedures used in consolidation are applied wherever possible to accounting for associates. So:
• Profits and losses on transactions between the investor and the associate should be
eliminated to the extent of the investor's share.
• There are provisions as to reporting dates, adjustments for material transactions when the dates
do not coincide and uniform accounting policies which are very similar to those for subsidiaries.
• Recognition of a share of an associate's losses should only result in the investor's interest being
written down below nil (so as to become a liability) if the investor has incurred obligations on
behalf of the associate.
The differences are that:
• There is no cancellation of the investment against the share of the associate's net assets.
This is because there is no line-by-line addition to items in the statement of financial position of the
investor's share of the associate's assets and liabilities. Such addition is appropriate under
conditions of control, but not under those of significant influence.
• There is no goodwill calculation at the date the investment is made.
• Instead, the investor's interest in the associate is shown in the statement of financial position, as a
single line under non-current assets.
• The whole of that interest is subjected to an impairment review if there is an indicator of
impairment.
• That interest includes items which are in substance a part of the investment, such as long-term
loans to the associate. But short-term receivables which will be settled in the ordinary course of
business remain in current assets.
• The investor's interest in the associate's post-tax profits less any impairment loss is
recognised in its consolidated statement of profit or loss.

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1.4 Investor's separate financial statements
Under IAS 27, the investment in the associate is carried at cost in the investor's statement of financial
position.
The knock-on effect is that the only income included in the investor's statement of profit or loss are the
distributions received.
Point to note
For examination purposes you should assume that a holding of 20% or more of the ordinary share
capital constitutes significant influence.

1.5 Relationship with the group

An associate is not part of the group as a group comprises the parent and its subsidiaries only. In terms
of the syllabus, the group investment in the associate is always held by the parent company, not a
subsidiary. So:

1.6 Treatment in consolidated financial statements: accounting principles

An investment in an associate should be accounted for in the consolidated financial statements using
the equity method of accounting. This method reflects the substance of the relationship between the
entities rather than their legal form. The group's share of the associate's profits, assets and liabilities
should be included in the consolidated financial statements rather than the cost of the investment and
dividend income received.
Point to note:
The equity method is only used in the group accounts ie when the parent company holds investments
in subsidiaries as well as associates. If the investor does not issue consolidated financial statements the
investment will be shown in the investor's individual financial statements as described in section 1.4
above.

2 Equity method: consolidated statement of financial

position

Section overview
• The investment in the associate should be shown as a single line entry in the consolidated
statement of financial position.
• If the carrying amount of the investment has suffered an impairment it should be written down to
its recoverable amount.

2.1 Basic principle

An associate should be accounted for as follows:
• The interest in the associate should be presented as a single line under non-current assets
described as 'Investments in Associates'.
• It should initially be recognised at cost and is subsequently adjusted in each period for the parent's
share of the post-acquisition change in net assets (retained earnings).

543
 • In group retained earnings the group's share of the associate's post-acquisition retained
earnings should be included (as for a subsidiary).
Point to note:
The assets and liabilities of the associate are not included on a line-by-line basis.

2.2 Calculation of carrying amount

The investment in the associate should be calculated as follows:

CU
Original cost (in P's books) X
Share of post-acquisition change in net assets X
X
Less: Impairment losses to date (X)
X
Point to note:
If the parent company has made any long term loans to the associate which are not expected to be
repaid in the foreseeable future these should be included as part of the investment in the associate.

2.3 Initial cost of investment

At the date the investment in the associate is made it is recognised at cost. (see section 2.1). This
represents the investor's share of the fair value of the net assets acquired plus goodwill arising
on acquisition. This goodwill is not separately calculated or disclosed (the treatment with a
subsidiary) but instead is included as part of the carrying amount of the investment. This
presentation aims to avoid giving the misleading impression that the investor has acquired a goodwill
asset through control over its share of the associate’s individual assets and liabilities. It has only gained
significant influence over the affairs of the associate so no goodwill is calculated at the date the
investment is made.
If the fair value of the net assets of the associate did exceed their carrying value, the original cost of the
investment will effectively have included a fair value uplift. In this case, additional depreciation on the fair
value uplift will subsequently be deducted from the investment in the associate in the statement of
financial position.

2.4 Impairment losses

As a result of the above, impairment tests are performed in relation to the investment as a whole. If
the investment has suffered an impairment it should be written down to its recoverable amount (see
section 2.2).
Point to note:
If there is a discount on the purchase of the investment (ie the cost is less than the fair value of the net
assets acquired) it should be recognised in profit or loss for the period in which the investment is made.
In practice this is unlikely to occur.
Worked example: Investment in associate
P Ltd acquired 30% of the ordinary share capital of A Ltd on 1 January 20X8 for CU275,000. At that date
A Ltd had retained earnings of CU468,000. The fair value of its net assets was the same as the carrying
value apart from a building with a fair value of CU725,000 and a carrying value of CU500,000. The
building had 30 years of remaining useful life at 1 January 20X8. No fair value adjustment has been
carried out in the books of A Ltd.
At 31 December 20X9 A Ltd had retained earnings of CU521,000. This was substantially below
expectations and P Ltd intends to recognise an impairment loss of CU50,000 against the value of its
investment in A Ltd.
What should be shown as 'investment in associate' in the financial statements of P Ltd at 31 December
20X9?

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 Solution
CU
Cost of investment 275,000
Share of post-acquisition increase in net assets
((521,000 – 468,000) × 30%) 15,900
Share of additional depreciation on FV uplift
(((725,000 – 500,000) x 2/30) x 30%) (4,500)
Impairment loss (50,000)
Investment in associate 236,400

2.5 Application of the equity method in the consolidated statement of

financial position
Remember that the equity method is only used in group accounts. This means that the parent has
subsidiaries as well as an associate. In an examination question the practical implication of this is that
you will need to produce the consolidation workings for the subsidiaries (See Chapter 11). These
workings are adapted for the inclusion of the associate as follows:

Working 1: Group structure • Include the associate in the group structure diagram

Working 6: Investment in associate • Cost of investment

• Plus share of post-acquisition retained earnings
• Less any impairment losses to date

Working 5: Consolidated retained • Include the group share of the associate's post-
earnings (reserves) acquisition retained earnings
• Include any impairment losses to date

The calculation of the carrying amount of the investment in the associate will usually be
Working 6.
Interactive question 1: Equity method (CSFP) [Difficulty level: Easy]
P Ltd owns 80% of S Ltd and 40% of A Ltd. Statements of financial position of the three companies at
31 December 20X8 are as follows.
P S A
CU CU CU
Investment: shares in S 800 – –
Investment: shares in A 600 – –
Sundry assets 6,600 5,800 5,400
8,000 5,800 5,400
Share capital – CU1 ordinary shares 1,000 400 800
Retained earnings 4,000 3,400 3,600
Equity 5,000 3,800 4,400
Liabilities 3,000 2,000 1,000
8,000 5,800 5,400

545
 P acquired its shares in S when S's retained earnings were CU520, and P acquired its shares in A when
A's retained earnings were CU400.
In 20X7 an impairment loss of CU20 was recognised in relation to the investment in A.
Requirement
Prepare the consolidated statement of financial position at 31 December 20X8.
Fill in the proforma below.
P Ltd: Consolidated statement of financial position as at 31 December 20X8
CU
Intangibles (W3)
Investments in associates (W6)
Sundry assets

Equity attributable to owners of the parent

Share capital
Retained earnings (W5)

Non-controlling interest (W4)

Total equity
Liabilities

WORKINGS
(1) Group structure
(2) Net assets
Post
Year end Acquisition acquisition
CU CU CU
S Ltd
Share capital
Retained earnings

(3) Goodwill
S Ltd CU
Consideration transferred
Non-controlling interest
Net assets
Balance c/f
(4) Non-controlling interest
CU
Share of net assets at acquisition (W2)
Share of post-acquisition (W2)

(5) Retained earnings

CU
P Ltd
S Ltd
A Ltd
Impairment to date

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 (6) Investment in associate
CU
Original cost
Share of post-acquisition retained earnings
Impairment losses to date

See Answer at the end of this chapter.

3 Equity method: consolidated statement of profit or loss

Section overview
Share of profit of associates should be recognised as a single line entry in the consolidated statement
of profit or loss.

3.1 Basic principle

The associate should be accounted for as follows:
• The group's share of the associate's profit after tax should be recognised in the consolidated
statement of profit or loss as a single line entry.
• This should be disclosed immediately before the group profit before tax as 'Share of profit of
associates'.
• If the associate is acquired mid-year its results should be time-apportioned.
Points to note:
1 It may seem odd to include an after tax amount in arriving at the profit before tax, but this is in line
with the Guidance on Implementing IAS 1 Presentation of Financial Statements.
2 The revenues and expenses of the associate should not be consolidated on a line-by-line basis.

3.2 Impairment review

Where an impairment review in the current period has revealed an impairment loss to be charged to
profit or loss, the loss should be deducted from the parent's share of the profit after tax of the
associate (or added to the parent's share of a post-tax loss.)

3.3 Application of the equity method in the consolidated statement of profit

or loss
An additional working will be required to calculate the parent's share of the associate's profit after tax.

Point to note:
The consolidation schedule (Working 2) will only include the parent and any subsidiaries as the associate
is not consolidated.

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 Interactive question 2: Equity method [Difficulty level: Easy]
P Ltd has owned 80% of S Ltd and 40% of A Ltd for several years. Statements of profit or loss for the
year ended 31 December 20X8 are as follows.
P Ltd S Ltd A Ltd
CU CU CU
Revenue 14,000 12,000 10,000
Cost of sales (9,000) (4,000) (3,000)
Gross profit 5,000 8,000 7,000
Administrative expenses (2,000) (6,000) (3,000)
Profit from operations 3,000 2,000 4,000
Investment income (not intra-group) 1,000 – 400
Profit before tax 4,000 2,000 4,400
Income tax expense (1,000) (1,200) (2,000)
Profit for the year 3,000 800 2,400
An impairment loss of CU120 is to be recognised in 20X8 in relation to the investment in A Ltd.
Requirement
Prepare the consolidated statement of profit or loss for the year ended 31 December 20X8.
Fill in the proforma below.
P Ltd: Consolidated statement of profit or loss for the year ending 31 December 20X8
CU
Revenue (W2)
Cost of sales (W2)
Gross profit
Administrative expenses (W2)
Profit from operations
Investment income (W2)
Share of profit of associates (W4)
Profit before tax
Income tax expense (W2)
Profit for the year
Profit attributable to:
Owners of P Ltd (β)
Non-controlling interest (W3)

WORKINGS
(1) Group structure

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 (2) Consolidation schedule
P Ltd S Ltd Adj Consol
CU CU CU CU
Revenue
Cost of sales
Admin expense
Investment income
Tax

(3) Non-controlling interest

CU
S Ltd
(4) Share of profit of associates
CU
A Ltd
See Answer at the end of this chapter.

4 Associate's losses

Section overview
Losses recognised in respect of the associate should be limited to the carrying amount of the associate.

4.1 Accounting treatment

Where an associate makes a loss the following treatment should be adopted:

Consolidated statement of financial The group's share of the loss should be recognised as
position a reduction in the carrying amount of the associate.

Consolidated statement of profit or The group share of the post-tax loss should be
loss recognised.

Point to note:
Once the carrying amount of the investment in the associate has been reduced to zero, no further
losses should be recognised by the group. The investor is only required to make a provision for any
additional losses incurred by the associate to the extent that the investor has a legal or constructive
obligation to make good these amounts.

Worked example: Associate's losses

At 31 December 20X6, the carrying amount of P Ltd's 40% interest in A Ltd is CU600,000.
In the year ended 31 December 20X7 A Ltd makes a post-tax loss of CU2,000,000.
The associate should be recognised in the consolidated financial statements at 31 December 20X7 as
follows:
Consolidated statement Consolidated statement
of profit or loss of financial position
CU CU
40% × CU2,000,000 = CU800,000 (600,000) Nil
The loss recognised should be limited to the carrying amount of the investment ie CU600,000.

549
 5 Transactions between a group and its associate

Section overview
• Transactions between the group and its associates should not be cancelled on consolidation.
• An adjustment is required for any unrealised profit.

5.1 Basic principle

As we said in section 1 the associate is not part of the group. This means that whilst the single entity
concept applies to the parent and subsidiaries it does not apply to any associates. One of the
consequences of this is that transactions between a group member and an associate should not be
cancelled on consolidation.

5.2 Trading transactions

Trading transactions should not be cancelled on consolidation.
Consolidated statement of profit or No adjustment should be made to revenue or cost of
loss sales for transactions between the group and the associate.
Consolidated statement of financial Receivables and payables balances due from/to the
position associate in the individual statement of financial position of
the parent or its subsidiaries should be carried across into
the consolidated statement of financial position.
Point to note:
In the consolidated statement of financial position balances relating to loans and trading balances
between the group and the associate should be shown separately.

5.3 Dividends
Dividend income from the associate should not be recorded in the consolidated statement of profit
or loss. This is because under the equity method the group's share of the associate's profit before
dividends has been recognised. If the dividend income was also recognised the same profits would be
recognised twice.

5.4 Unrealised profits

Whilst transactions between the group and the associate are not cancelled on consolidation any
unrealised profit on these transactions should be eliminated. In this respect the principle applied is
similar to that applied to a subsidiary (see Chapters 11 and 12).
But the key difference is that only the investor’s share of the unrealised profit should be eliminated,
because only this share of the associate’s net assets and profit for the year is brought into the
consolidated financial statements.
Unrealised profit could also arise on transactions between a subsidiary and an associate but the FAR
exam will only test unrealised profit arising from transactions between the parent and an associate.
Worked example: Unrealised profits
A sale is made by A Ltd to P Ltd. P Ltd has a 25% holding in A Ltd. All of the goods remain in inventory
at the year-end.
75% of the profit made from the sale relates to interests held by other investors therefore only 25% of
the profit (that part which belongs to the group) should be eliminated.

The adjustment is made in the books of the seller. The way that the adjustment is made depends on
whether the selling company is the investor or the associate.

550
 Points to note:
1 Unrealised profit will only arise if the goods transferred are still held by the investor or associate.
If the goods have been sold to a third party there is no unrealised profit.
2 Unrealised profit adjustments apply to the transfer of non-current assets as well as the transfer
of goods.
5.4.1 Investor (parent) sells goods to the associate
Consolidated statement of financial position:
• Reduce P's retained earnings by its share of the unrealised profit.
• Reduce the carrying amount of the investment in A by P's share of the unrealised profit.
Point to note:
The carrying amount of the associate is adjusted rather than inventory as the inventory of the associate
is not consolidated.
Consolidated statement of profit or loss:
• Increase P's cost of sales by its share of the unrealised profit.
Point to note:
This adjustment reduces group profit by its share of the unrealised profit.
Interactive question 3: Unrealised profits (P  A) [Difficulty level: Exam standard]
P Ltd owns 35% of A Ltd. During the current financial year P Ltd sold goods to A Ltd for CU300,000 on
which its gross margin was 40%. A Ltd held CU50,000 of these goods in its inventories at the year end.
Requirement
Show the journal entries necessary to adjust for the PURP in P Ltd's consolidated statement of financial
position and set out the adjustment necessary to P Ltd's consolidated statement of profit or loss.
Fill in the proforma below.
Consolidated statement of financial position journal
CU CU
DR
CR
Consolidated statement of profit or loss

See Answer at the end of this chapter.

5.4.2 Associate sells goods to the investor (parent)

Consolidated statement of financial position
• Reduce P's share of A's retained earnings by its share of the unrealised profit.
• Reduce P's inventory on consolidation by its share of the unrealised profit.
Point to note:
The effect on retained earnings is dealt with by deducting the group share of the unrealised profit
from the group retained earnings and from group inventory.
Consolidated statement of profit or loss
• Reduce P's share of A's profits after tax by its share of the unrealised profit.

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 Interactive question 4: Unrealised profits (A  P) [Difficulty level: Exam standard]
Assume the same facts as in Interactive Question 3 except that A Ltd is the seller and P Ltd holds the
CU50,000 goods in inventory.
Requirements
(a) Show the journal entries to adjust for the PURP in P Ltd's consolidated statement of financial
position.
(b) If A Ltd has profit after tax of CU75,000 calculate the share of profit of associates figure which
should appear in the consolidated statement of profit or loss.
Fill in the proforma below.
(a) Journal – consolidated statement of financial position
CU CU
DR
CR
(b) Share of profit of associates for consolidated statement of profit or loss
CU
Associate’s PAT
× group share
Less: PURP

See Answer at the end of this chapter.

5.5 Disclosures
The minimum disclosures are:
• The fair value for an investment in any associate for which there are published price quotations (ie
the associate's securities are dealt in on a public market).
• Summarised financial statements of the associate.
• Reasons why the investor thinks the 20% presumptions are overcome, if that is the case.
• The associate's reporting date, if different from that of the investor.
• Restrictions on funds transfers from the associate.
• Losses in the associate, both current period and cumulative, which have not been recognised in
the investor's financial statements (because the investment has already been written down to nil).
• The investment to be shown as a non-current asset in the statement of financial position.
• The investor's share of the associate's:
– After-tax profits, to be shown in the investor's statement of profit or loss
– Discontinued operations
– Changes in equity recognised directly in equity, to be shown in other comprehensive income
in the investor's statement of profit or loss and other comprehensive income
– Contingent liabilities.

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 6 IFRS 11 Joint Arrangements

Section overview
• IFRS 11 classifies joint arrangements as either joint operations or joint ventures.
• There must be a contractual arrangement for a joint arrangement to exist

6.1 What is a joint arrangement?

Definition
A joint arrangement is a contractual arrangement whereby two or more parties undertake an economic
activity that is subject to joint control.

The key characteristics of a joint arrangement are that:

• The parties have a contractual agreement between themselves
• The agreement results in them having joint control over the shared activities.

Definitions
Joint control is the contractually agreed sharing of control over an arrangement, which exists only when
the decisions about the relevant activities require the unanimous consent of the parties sharing control.
A party to a joint arrangement is an entity that participates in a joint arrangement, regardless of whether
that entity has control of the arrangement.

6.2 Context
Entities often operate together as strategic alliances to overcome commercial barriers and share risks.
These alliances are often contractually structured as joint arrangements. The objective of a joint
arrangement may be to carry out a one-off project, to focus on one area of operations or to develop new
products jointly for a new market. The joint arrangement focuses on the parties’ complementary skills
and resources. The creation of synergies amongst the parties creates value for each. Joint arrangements
provide the opportunity for organisations to obtain a critical mass and more competitive pricing.
There are many factors critical to the success of joint arrangements, the most important being the
relationship between the parties. It is essential that all contractual terms and arrangements are agreed
in advance including the process for resolving disputes. An exit strategy should be developed and the
terms for dissolution agreed between the parties at the outset. It is particularly important that the
agreement identifies the party which will at dissolution retain any proprietary knowledge held within the
joint arrangement.
The different joint arrangement structures available provide challenges for financial reporting. The unique
risks of joint arrangements need to be readily apparent to users of financial statements, since their
financial and operational risks may be substantially different from those of other members of the reporting
group.

6.3 Forms of joint arrangement

IFRS 11 Joint Arrangements identifies, and deals with, two types of joint arrangement:
• Joint operations
• Joint ventures
Only joint ventures are included in the FAR syllabus

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 7 Joint operations

Section overview
• A joint operation is structured differently from a joint venture.

7.1 What is a joint operation?

This is a joint arrangement whereby the parties that have joint control (the joint operators) have rights to
the assets and obligations for the liabilities of that joint arrangement.
A joint arrangement that is not structured through a separate entity is always a joint operation.
If the arrangement is structured through a separate entity it may be either a joint operation or a joint
venture. Classification depends upon the rights and obligations of the parties to the arrangement
The substance of this type of joint arrangement is that each party is carrying on its own activities as a
separate part of its own business and the accounting procedures reflect this.
A party to a joint operation will recognise its share of the assets, liabilities, revenue and expenses of the
joint operation.

8 Joint ventures

Section overview
• Joint ventures are separate legal entities, so they should prepare their own financial statements.
• In the consolidated statements of the venturer the results and position of the joint venture should
be included using the equity method of accounting.
• The equity method of accounting is the same as that used for accounting for associates in
accordance with IAS 28 Investments in Associates and Joint Ventures.

8.1 What is a joint venture?

This is a joint arrangement whereby the parties that have joint control of the arrangement have rights to
the net assets of the arrangement.
The key identifying factor for a joint venture is that in this type of arrangement a separate legal entity is
set up, with the ownership of that entity being shared by the venturers.
This separate entity may be a:
• Company or
• Partnership
As a separate legal entity the joint venture can enter into contracts and raise finance in its own name. It
will maintain its own accounting records and prepare its own financial statements.
The joint venture will own its own assets, incur its own liabilities, incur its own expenses and earn its own
income.
Normally each joint venturer will be entitled to a pre-determined share of the profits made by the joint
venture.
An investor in a joint venture is a party to a joint venture that does not have joint control over that joint
venture. If the investor has significant influence, he should account for his investment in accordance with
IAS 28. If he does not have significant influence he should account for it as a financial asset.

554
 Worked example: Joint venturers and investors
An entity is established to build a sports stadium for a customer. Once the stadium is built, the entity will
be wound up.
Eight contractors invest in the equity of the entity. Contractors 1 to 5 own 14% each and contractors 6 to
8 own 10% each. There is a contractual arrangement whereby all relevant decisions are taken
unanimously by contractors 1, 2, 3 and 8.
Do these arrangements give rise to a joint venture? If so, who are the venturers and who are the
investors?
Solution
The contractual agreement provides for joint control. The contractors who are parties to the contractual
agreement are Contractors 1, 2, 3 and 8. Between them they own 52% ((3 × 14%) + 10%) of the entity
and the contractual agreement provides that decisions are taken unanimously by them, so they have
joint control over it. There is a joint venture as far as they are concerned and they are venturers.

The other contractors are not involved in the contractual arrangement and therefore are only investors
in the joint venture.

A contractual arrangement will usually be in writing either as a formal document or in the form of
minutes from a meeting. It will normally cover the purpose of the joint venture, its expected duration, any
financial reporting requirements, appointments to the managing committee, voting rights, capital
contributions, procedures for running the day to day operations and how expenses and income are to be
shared.

8.2 Accounting for joint ventures

IFRS 11 requires each venturer in a joint venture to recognise in its consolidated financial statements
its share of the venture using the equity method of accounting.

8.3 Equity method of accounting

You have used the equity method of accounting when accounting for associates under IAS 28.
Under the equity method:
• The investment in the joint venture is initially recorded at cost.
• There are adjustments each period for the venturer’s share of the post-acquisition reserves of the
joint venture, less any impairment losses. Profits are added to the investment and losses deducted.
• In the venturer’s consolidated statement of financial position the investment in the joint venture
is shown as a single line figure as part of non-current assets.
• In the venturer’s consolidated statement of profit or loss there is a single line for the share of the
joint venture’s results.
• The group share of the joint venture’s other comprehensive income will be included in the
consolidated statement of profit or loss and other comprehensive income.

Worked example: Joint venture

AB controls a number of subsidiaries and therefore prepares consolidated financial statements.
AB is also a venturer in JV, a joint venture in which AB owns 25%. AB acquired its share of JV at a cost
of CU1 million on the creation of JV. At that time JV had net assets of CU4 million.
A summarised draft statement of financial position of the AB Group (AB and its subsidiaries, but not its
interest in JV), and JV is as follows:

555
 AB Group JV
CUm CUm
Non-current assets
Property, plant and equipment 60 20
Intangibles 30 8
Investment in JV 1 0
Current assets
Inventories 50 16
Other 80 24
Current liabilities (90) (36)
131 32
Equity
CUm
The equity in AB Group plus JV can be calculated as:
AB Group 131
JV post-acquisition ((32 – 4) × 25%) 7
138
Requirement
Using the equity method prepare the AB Group consolidated statement of financial position including JV.
Solution
CUm
Non-current assets
Property, plant and equipment 60
Intangibles 30
Investment in JV (cost CU1m plus 25% x increase in retained reserves [CU28m]) 8
98
Current assets
Inventories 50
Other 80
228
Equity and liabilities
Equity 138
Current liabilities 90
Equity 228

8.4 Transactions between a venturer and the joint venture

In joint ventures adjustments similar to those in respect of associates are required where there are sales
or purchases between the venturer and the joint venture. An adjustment is required for any profit on the
transaction that is internal to the entity.
If a venturer sells an asset to the joint venture at a profit and the asset is still held by the joint venture:
• The proportion of the asset that is consolidated includes an element of profit recorded by the
venturer.
• This should be removed as it is unrealised profit.
• What remains is only the profit that relates to the share of the asset relating to the other venturers.

556
 Where a venturer purchases assets from the joint venture the venturer’s share of the profit made by the
joint venture should not be recognised until the asset is sold to a third party.
Where a loss is made on a transaction between the venturer and joint venture, it should be recognised
immediately if it represents a reduction in realisable value of current assets or an impairment loss.

8.5 Receivables and payables

If there are receivables or payables outstanding between a joint venture and the venturer the outstanding
balances between the venturer and the joint venture should not be eliminated.
Interactive question 5: Joint venture [Difficulty level: Intermediate]
Bodmas Ltd acquired 30% of the equity capital of a joint venture, Matrix Ltd, in 20X2 when the reserves
of Matrix were CU120 million. It is currently preparing its financial statements for the year ending
31 December 20X5.
The summary statements of financial position for Bodmas and Matrix at 31 December 20X5 were as
follows.

Bodmas Ltd Matrix Ltd

CUm CUm
Property, plant and equipment 820 320
Investment in Matrix 100 –
Current assets 240 160
Loan to Matrix 60 –
1,220 480
Share capital (CU1 shares) 780 100
Retained earnings 440 320
Loan from Bodmas – 60
1,220 480
Requirement
Prepare the summarised consolidated statement of financial position of Bodmas Ltd at 31 December
20X5 using the equity method in accordance with IAS 28 Associates and Joint Ventures .
Fill in the proforma below.
Consolidated statement of financial position

CUm
Non-current assets
Property, plant and equipment
Investment in JV
Current assets
Loan
Other
Equity
Share capital
Retained earnings

See Answer at the end of this chapter.

557
 9 IFRS 12 Disclosure of Interests in Other Entities

Section overview
IFRS 12 sets out the disclosure requirements for associates and joint ventures.

9.1 Significant judgments and assumptions

IFRS 12 sets out the sort of facts that would be made regarding significant judgements and assumptions
(and changes to those judgements and assumptions) regarding an entity. The focus would be on how
the entity concluded that it controlled another entity or how it determined that it had joint control and/or
was a party to a joint arrangement, and what the nature of the joint arrangement was. For example,
disclosures might discuss why or how an entity does not control another entity even though it holds more
than half of the voting rights of the other entity, or how and why it does control another entity even though
it holds less than half of the voting rights of the other entity.

9.2 Disclosures
The following disclosures are required in respect of associates and joint arrangements:
• Nature, extent and financial effects of an entity’s interests in associates or joint arrangements,
including name of the investee, principal place of business, the investor’s interest in the investee,
method of accounting for the investee and restrictions on the investee’s ability to transfer funds to
the investor.
• Risks associated with an interest in an associate or joint venture.
• Summarised financial information, with more detail required for joint ventures than for associates.

558
Summary and Self-test

Summary

559
 Self-test
Answer the following questions
1 Durie Ltd has many subsidiary companies. On 1 January 20X6 Durie Ltd bought 30% of the share
capital of Edberg Ltd for CU6,660. The retained earnings of Edberg Ltd at that date were CU13,000
and the fair value of its assets less liabilities was CU20,000. The excess of fair value over carrying
amount related to a plot of land which was still owned at 31 December 20X9; its fair value was
unchanged at that date. The fair value was not reflected in the books of Edberg Ltd.

The summarised draft statement of financial position of Edberg Ltd on 31 December 20X9 includes
the following.

CU
Share capital – CU1 ordinary shares 5,000
Retained earnings 17,000
Total equity 22,000
By the end of 20X9 the investment in Edberg Ltd had been impaired by CU264.
At what amount should the investment in Edberg Ltd be shown using the equity method on 31
December 20X9?
2 Extracts from the statements of profit or loss of Pik Ltd and its subsidiaries and Wik Ltd, its
associate, for the year ended 31 March 20X6 are as follows.
Pik Ltd (inc subsidiaries) Wik Ltd
CU'000 CU'000
Gross profit 2,900 1,600
Administrative expenses (750) (170)
Distribution costs (140) (190)
Dividends from Wik Ltd 20 –
Profit before tax 2,030 1,240
Income tax expense (810) (440)
Profit for the year 1,220 800

Pik Ltd acquired 25% of the ordinary shares in Wik Ltd on 1 April 20X3 when the retained earnings
of Wik Ltd were CU80,000.
At what amount should the profit before tax be shown in the consolidated statement of profit or loss
of Pik Ltd for the year ended 31 March 20X6?
3 Albert Ltd owns many subsidiaries and 25% of Victoria Ltd. In the year ended 31 December 20X5
Albert Ltd sold goods to Victoria for CU400,000, earning a gross profit of 20%. Victoria Ltd held
CU120,000 of them in its inventories at the year end.
By what amount should Albert Ltd's cost of sales be increased when preparing its consolidated
statement of profit or loss?

560
4 Austen Ltd has owned 100% of Kipling Ltd and 30% of Dickens Ltd, an associate, for many years.
At 31 December 20X5 the trade receivables and trade payables shown in the individual company
statements of financial position were as follows.
Austen Kipling Dickens
Ltd Ltd Ltd
CU'000 CU'000 CU'000
Trade receivables 50 30 40
Trade payables 30 15 20
Trade payables included amounts owing to:
Austen Ltd – – –
Kipling Ltd 2 – 4
Dickens Ltd 7 – –
Other suppliers 21 15 16
30 15 20
The inter-company accounts agreed after taking into account the following.
(1) A sales invoice for CU3,000 posted by Kipling Ltd on 31 December 20X5 was not received by
Austen Ltd until 2 January 20X6.
(2) A cheque for CU6,000 posted by Austen Ltd on 30 December 20X5 was not received by
Dickens Ltd until 4 January 20X6.
What amount should be shown as trade receivables in the consolidated statement of financial
position of Austen Ltd?
5 H Ltd and its subsidiaries (S1 and S2) and associate (A) have the following inter-company balances
at the year end.
H S1 S2 A
CU'000 CU'000 CU'000 CU'000
H with A 50 CR 50 DR
S2 with A 75 DR
S1 with A 80 CR 80 DR
All the differences related to cash in transit and where this is the case adjustments are to be made
in the books of the receiving company.
After making the necessary adjustments to reflect the above, what amounts due to or from
associates should be recognised in the consolidated statement of financial position at the year end?
6 Helen Ltd, a company with several subsidiaries, acquired 35% of Troy Ltd on 1 January 20X6 for
CU90,000. At that date Troy Ltd had share capital of CU70,000 and retained earnings of CU96,000.
It also owns a plot of land which had a fair value of CU60,000 compared to a carrying amount of
CU42,000; this fair value has not been incorporated into the books of Troy Ltd and the fair value is
unchanged at 31 December 20X9. Since the investment was made, Troy Ltd has made total profits
after tax of CU118,000 including CU110,000 made in the current year. The investment in Troy Ltd
has become impaired by CU2,560 during the current year.
What is the net amount to be included in the consolidated statement of profit or loss for the year
ended 31 December 20X9 in respect of Troy Ltd?
7 On 1 January 20X0 Adam Ltd purchased 30% of Eve Ltd for CU55,000. At this date the retained
earnings of Eve Ltd stood at CU60,000 and the fair value of net assets, which was subsequently
reflected in Eve Ltd’s books, was CU170,000. The excess of fair value over carrying amount related
to a plot of land which was still owned at 31 December 20X4.
The statement of financial position of Eve Ltd on 31 December 20X4 showed the following.

561
 CU
Share capital 100,000
Revaluation surplus 10,000
Retained earnings 200,000
Total equity 310,000
At what amount should Adam Ltd's investment in Eve Ltd be stated in its consolidated statement of
financial position at 31 December 20X4?
8 Drought Ltd became a venturer in a joint venture by acquiring 40% of the ordinary shares of Deluge
Ltd, on 1 January 20X7 for CU250,000. At that date Deluge Ltd had retained earnings of CU210,000
and a factory building with a fair value CU60,000 in excess of its carrying amount and a remaining
useful life of 20 years. No fair value adjustment has been carried out in the books of Deluge Ltd. At
31 December 20X9 Deluge Ltd had retained earnings of CU420,000.
What amount should be shown as 'investment in joint venture' in the consolidated statement of
financial position of Drought Ltd at 31 December 20X9?
The draft statements of financial position of three companies as at 31 December 20X9 are set out
below.
Haley Socrates Aristotle
Ltd Ltd Ltd
CU CU CU
Property, plant and equipment 300,000 100,000 160,000
Investments at cost
18,000 shares in Socrates Ltd 75,000 – –
18,000 shares in Aristotle Ltd 30,000 – –
Current assets 345,000 160,000 80,000
750,000 260,000 240,000
Ordinary shares of CU1 each 250,000 30,000 60,000
Retained earnings 400,000 180,000 100,000
Total equity 650,000 210,000 160,000
Current liabilities 100,000 50,000 80,000
750,000 260,000 240,000

The retained earnings of Socrates Ltd and Aristotle Ltd when the investments were acquired eight
years ago were CU70,000 and CU30,000 respectively.
Impairment reviews to date have resulted in the need for the following amounts to be written off
Haley Ltd's investments.

CU
Socrates Ltd 12,000
Aristotle Ltd 2,400
Requirement
Prepare the consolidated statement of financial position as at 31 December 20X9. (10 marks)

10 CORFU LTD
Corfu Ltd holds 80% of the ordinary share capital of Zante Ltd (acquired on 1 February 20X9) and
30% of the ordinary share capital of Paxos Ltd. Paxos Ltd is a joint venture set up by Corfu Ltd and
two other venturers on 1 July 20X8. The contractual agreement provides for joint control of Paxos
Ltd. Corfu Ltd uses the equity method of accounting wherever possible.

562
 The draft statements of profit or loss for the year ended 30 June 20X9 are set out below.

Corfu Zante Paxos

Ltd Ltd Ltd
CU'000 CU'000 CU'000
Revenue 12,614 6,160 8,640
Cost of sales and expenses (11,318) (5,524) (7,614)
Trading profit 1,296 636 1,026
Dividends received from Zante Ltd 171 – –
Profit before tax 1,467 636 1,026
Income tax expense (621) (275) (432)
Profit for the year 846 361 594
Included in the inventory of Paxos Ltd at 30 June 20X9 was CU150,000 for goods purchased from
Corfu Ltd in May 20X9, which the latter company had invoiced at cost plus 25%. These were the
only goods Corfu Ltd sold to Paxos Ltd but it did make sales of CU50,000 to Zante Ltd during the
year. None of these goods remained in Zante Ltd's inventory at the year end.
Requirement
Prepare a consolidated statement of profit or loss for Corfu Ltd for the year ended 30 June 20X9.
(8 marks)
11 KING LTD
King Ltd acquired shares in two other companies as follows.
Goodwill Retained
Shares on earnings at
Company Acquisition date acquired acquisition acquisition
% CU CU
Prawn Ltd 1 October 20X7 80 90,000 260,000
Madras Ltd 31 December 20X5 25 – 340,000
The results and changes in retained earnings of the three companies for the year ended
30 September 20X9 are as follows.
King Prawn Madras
Ltd Ltd Ltd
CU'000 CU'000 CU'000
Revenue 800 430 600
Dividend from Prawn Ltd 40 – –
Dividend from Madras Ltd 10 – –
Cost of sales and expenses (550) (255) (440)
Profit before tax 300 175 160
Income tax expense (80) (45) (60)
Profit for the year 220 130 100

Retained earnings
King Prawn Madras
Ltd Ltd Ltd
CU'000 CU'000 CU'000
Balance brought forward 600 320 540
Total comprehensive income for the year 220 130 100
Dividends paid (110) (50) (40)
Balance carried forward 710 400 600

563
 You are also given the following information.
(1) During the year King Ltd made sales of CU80,000 to Prawn Ltd at a gross profit of 25%. At the
year end Prawn Ltd still held CU36,000 of these goods in inventory.
(2) Impairment reviews at the following dates revealed the following amounts to be written off in
respect of King Ltd's investment in Prawn Ltd and Madras Ltd.
Prawn Ltd Madras Ltd
CU'000 CU'000
Review at
30 September 20X8 9 17
30 September 20X9 9 6

Requirement
Prepare the consolidated statement of profit or loss and the retained earnings column in the
consolidated statement of changes in equity of the King Ltd group for the year ended 30 September
20X9. Work to the nearest CU’000. (13 marks)

12 WATER LTD
The draft statements of financial position of three companies as at 30 September 20X5 are as
follows.
Water Hydrogen Oxygen
Ltd Ltd Ltd
CU CU CU
Non-current assets
Property, plant and equipment 697,210 648,010 349,400
Investments
160,000 shares in Hydrogen Ltd 562,000 – –
80,000 shares in Oxygen Ltd 184,000 – –
1,443,210 648,010 349,400
Current assets
Inventories 495,165 388,619 286,925
Trade receivables 415,717 320,540 251,065
Cash 101,274 95,010 80,331
Total assets 2,455,366 1,452,179 967,721
Equity
Ordinary share capital 600,000 200,000 200,000
Retained earnings 1,015,000 820,000 463,000
Total equity 1,615,000 1,020,000 663,000
Non-current liabilities 400,000 150,000 100,000
Current liabilities
Trade payables 440,366 282,179 204,721
Total equity and liabilities 2,455,366 1,452,179 967,721
You are given the following additional information.
(1) Water Ltd purchased the shares in Hydrogen Ltd on 1 October 20X0 when the retained
earnings of Hydrogen Ltd were CU500,000. The goodwill and non-controlling interest arising
on the acquisition of Hydrogen Ltd should be measured using the proportionate method.
(2) The shares in Oxygen Ltd were acquired on 1 October 20X2 when its retained earnings were
CU242,000.

564
 (3) Included in the inventory figure for Water Ltd is inventory valued at CU20,000 which had been
purchased from Hydrogen Ltd at cost plus 25%.
(4) Included in the trade payables figure of Water Ltd is CU18,000 payable to Oxygen Ltd, the
amount receivable being recorded in the trade receivables figure of Oxygen Ltd.
(5) Impairment reviews to date have revealed a total of CU1,000 to be written off goodwill in
respect of Hydrogen Ltd and CU2,000 off in respect of Water Ltd's investment in Oxygen Ltd.
Requirements
(a) Prepare the consolidated statement of financial position for Water Ltd as at 30 September
20X5. (13 marks)

(b) Identify the required accounting treatment for different levels of investment in undertakings for
consolidated accounts purposes, explaining why these are appropriate.
(4 marks)
(c) Set out a brief explanation in note form of how subsidiaries and associates are accounted for
in the consolidated statement of financial position. (4 marks)
(21 marks)

13 MINNIE LTD
Minnie Ltd has a number of wholly-owned subsidiaries and a 50% interest in Mouse Ltd, an entity
set up and controlled jointly with a third party.
The statements of financial position of the two entities as at 31 December 20X5 are as follows:

Minnie Mouse
Group Ltd
CU'000 CU'000
Non-current assets
Property, plant and equipment 406 160
Investment in Mouse Ltd 10
416 160
Current assets
Inventories 100 50
Others 200 110
716 320
Equity
Share capital 200 20
Retained earnings 366 180
566 200
Current liabilities 150 120
716 320

565
 Their respective statements of profit or loss for the year ended 31 December 20X5 are as follows:
Minnie Mouse
Group Ltd
CU'000 CU'000
Revenue 490 312
Cost of sales and expenses (280) (200)
Dividend from Mouse Ltd 20 –
Profit before tax 230 112
Income tax expense (100) (32)
Profit for the year 130 80

Dividends recognised in the statement of changes in equity

during the period: 60 40
During December 20X5 Minnie Ltd transferred goods to Mouse Ltd for CU50,000. Minnie Ltd sells
goods at a mark-up of 25%. Mouse Ltd had not paid Minnie Ltd's invoice or sold any of the goods
to third parties by the year end.
No dividends from Mouse Ltd are outstanding in Minnie Ltd's books.
Requirement
Prepare a consolidated statement of financial position and statement of profit or loss for Minnie Ltd
and its joint venture as at 31 December 20X5 using equity accounting. (8 marks)

Now, go back to the Learning objectives in the Introduction. If you are satisfied you have achieved these
objectives, please tick them off.

566
Technical reference

Point to note The following sets out the examinability of the standards covered
in this chapter.
IAS 28 All paragraphs are examinable.
Only joint ventures are examinable in full. Only knowledge of the
IFRS 11 existence of other joint arrangements is required.

The paragraphs listed below are the key references you should be familiar with.
IAS 28 Investments in Associates and Joint Ventures

Definitions
• The investor has joint control or significant influence over an investee. IAS 28 (2)

• Significant influence is the power to participate in financial and operating

policy decisions of the investee, but is not control or joint control of those
policies.
• A joint venture is a joint arrangement whereby the parties that have joint
control of the arrangement have rights to the net assets of the arrangement. IAS 28 (3)

• Presumptions with regard to less than 20%, 20% or more for an associate. IAS 28 (6)

• Can be an associate, even if the subsidiary of another investor.

• No significant influence if 'associate' in legal reorganisation and so on. IAS 28 (10)

Equity method
• In statement of financial position: joint venture or associate presented as IAS 28 (10)
non-current asset = cost plus share of post-acquisition profit or loss.
• In statement of profit or loss: share of joint venture or associate’s post-tax IAS 28 (10)
profits less any impairment loss.
• In other comprehensive income: share of changes to investee’s other IAS 28 (10)
comprehensive income.
• Use cost/under IAS 39 to account in investor's separate financial IAS 28 (44)
statements.

• An entity which is exempt from preparing CFS under the exemptions in

IFRS 10 need not apply the equity method. IAS 28 (17)

• Investment or portion of investment which is held for sale should be

accounted for under IFRS 5. IAS 28 (20)

567
 IFRS 11 Joint Arrangements
• A joint arrangement is an arrangement in which two or more parties have IFRS 11 (5)
joint control and are bound by a contractual arrangement.
• A joint venture gives venturers joint control and rights to the net assets of IFRS 11 (16)
the arrangement.
• A joint venturer’s interest in a joint venture is recognised as an investment IFRS 11 (24)
and accounted for using the equity method in accordance with IAS 28.
• A party that participates in a joint venture but has neither joint control nor IFRS 11
significant influence should account for its interest in accordance with IFRS
9 (IAS 39).
• In its separate financial statements a joint venture shall account for its IFRS 11 (26)
interest in a joint venture at cost or in accordance with IFRS 9 (IAS 39).

IFRS 12 Disclosure of Interests in Other Entities

• An entity should disclose information that enables users to evaluate:
– The nature, extent and financial effects of its interests in joint IFRS 12 (21)
arrangements and associates.
– The nature of, and changes in, the risks associated with its interests in IFRS 12 (23)
joint ventures and associates.

568
Answers to Interactive questions

Answer to Interactive question 1

P Ltd: Consolidated statement of financial position as at 31 December 20X8
CU
Intangibles (W3) 64
Investments in associates (W6) 1,860
Sundry assets (6,600 + 5,800) 12,400
14,324
Equity attributable to owners of the parent
Share capital 1,000
Retained earnings (W5) 7,564
8,564
Non-controlling interest (W4) 760
Total equity 9,324
Liabilities (3,000 + 2,000) 5,000
14,324
WORKINGS

(1) Group structure

(2) Net assets

Year Post-
end Acquisition acquisition
CU CU CU
S Ltd
Share capital 400 400 –
Retained earnings 3,400 520 2,880
3,800 920
(3) Goodwill
CU
S Ltd
Consideration transferred 800
Non-controlling interest at acquisition (20% × 920 (W2)) 184
Net assets at acquisition (920)
Goodwill 64
(4) Non-controlling interest at year end
CU
Share of net assets at acquisition (20% × 920 (W2)) 184
Share of post-acquisition (20% × 2,880 (W2)) 576
760

569
 (5) Retained earnings
CU
P Ltd 4,000
S Ltd (80% × 2,880 (W2)) 2,304
A Ltd (40% × (3,600 – 400)) 1,280
Impairment to date (20)
7,564
(6) Investment in associate
CU
Original cost 600
Share of post-acquisition retained earnings (40% × (3,600 – 400)) 1,280
1,880
Impairment losses to date (20)
1,860
Answer to Interactive question 2
P Ltd: Consolidated statement of profit or loss for the year ending 31 December 20X8
CU
Revenue (W2) 26,000
Cost of sales (W2) (13,000)
Gross profit 13,000
Administrative expenses (W2) (8,000)
Profit from operations 5,000
Investment income (W2) 1,000
Share of profit of associates (W4) 840
Profit before tax 6,840
Income tax expense (W2) (2,200)
Profit for the year 4,640
Profit attributable to:
Owners of P Ltd (β) 4,480
Non-controlling interest (W3) 160
4,640
WORKINGS
(1) Group structure

(2) Consolidation schedule

P Ltd S Ltd Adj Consol
CU CU CU CU
Revenue 14,000 12,000 26,000
Cost of sales (9,000) (4,000) (13,000)
Admin expenses (2,000) (6,000) (8,000)
Inv. income 1,000 – 1,000
Tax (1,000) (1,200) (2,200)
800

570
(3) Non-controlling interest
CU
S Ltd (20% × 800 (W2)) 160
(4) Share of profit of associates
CU
A Ltd ((40% × 2,400) – 120) 840
Answer to Interactive question 3
Consolidated statement of financial position journal
CU CU
DR P's retained earnings (35% × (50,000 × 40%)) 7,000
CR Investment in A 7,000
Consolidated statement of profit or loss
In the consolidation schedule increase P's cost of sales by CU7,000 (50,000 × 40% × 35%). This reduces
P's profit by CU7,000.

Answer to Interactive question 4

(a) Consolidated statement of financial position journal
CU CU
DR Group retained earnings
(35% × (50,000 × 40%)) 7,000
CR Group inventories 7,000

(b) Share of profit of associates for consolidated statement of profit or loss

CU
Associate’s PAT 75,000
Group share × 35% 26,250
Less: PURP (7,000)
19,250
Answer to Interactive question 5
Consolidated statement of financial position as at 31 December 20X5
CUm
Non-current assets
Property, plant and equipment 820
Investment in JV (100 + ((320 – 120) × 30%)) 160
980
Current assets
Loan 60
Other 240
300
Total assets 1,280

Equity
Share capital 780
Retained earnings (440 + ((320 – 120) × 30%)) 500
Total equity 1,280

571
 Answers to Self-test

1 CU7,596
CU
Cost of investment in Edberg Ltd 6,660
Share of post acquisition change in net assets
(calculated as 30% × change in retained earnings (17,000 – 13,000)) 1,200
7,860
Impairment losses to date (264)
7,596
Tutorial note: if
(a) The amount of the fair value adjustment is the same at the end of the reporting period
and the date the investment is made; and
(b) It has not been reflected in the associate's books, then it can be omitted from the
calculation of the post-acquisition change in the associate's net assets.
2 CU2,210,000
CU'000
Pik Ltd (incl subsidiaries)
Gross profit 2,900
Less Administrative expenses (750)
Distribution costs (140)
Share of profit of associates (25% × 800) 200
2,210
3 Albert Ltd's share of the profit it recognised in respect of the goods held in inventories should be
eliminated, so 25% × CU120,000 × 20% = CU6,000.

4 CU75,000
CU'000 CU'000
Austen Ltd 50
Kipling Ltd 30
Less Intra group (2 + 3) (5)
25
75
Do not cancel balances with Dickens Ltd as Dickens Ltd is an associate.

5 CU130,000 due to associates

All balances with associates are retained on consolidation.
CU'000
H 50 CR
S1 80 CR
130 CR
The CU75,000 DR in S2 disappears once adjustment has been made for cash in transit.

572
6 CU35,940
CU
Share of PAT (110,000 × 35%) 38,500
Less Impairment (2,560)
35,940
7 CU97,000
CU
Cost of investment in Eve Ltd 55,000
Share of post acquisition change in net assets (30% × (310,000 – 170,000)) 42,000
97,000
As the excess of fair value over carrying amount at the date the investment was made was
subsequently reflected in Eve Ltd's books, no fair value adjustment needs to be made at 31
December 20X4.
8 CU330,400
CU
Cost of investment 250,000
Share of post acquisition increase in net assets ((420,000 – 210,000) × 40%) 84,000
Share of depreciation on FVA ((60,000 × 3/20) × 40%) (3,600)
Investment in joint venture 330,400

9 HALEY LTD
Consolidated statement of financial position as at 31 December 20X9
CU
ASSETS
Non-current assets
Property, plant and equipment (300,000 + 100,000) 400,000
Intangibles (W3) 3,000
Investments in associates (W6) 48,600
451,600
Current assets (345,000 + 160,000) 505,000
Total assets 956,600
EQUITY AND LIABILITIES
Equity attributable to owners of parent
Ordinary share capital 250,000
Retained earnings (W5) 472,600
722,600
Non-controlling interest (W4) 84,000
Total equity 806,600
Current liabilities (100,000 + 50,000) 150,000
Total equity and liabilities 956,600

573
 WORKINGS
(1) Group structure

(2) Net assets

Socrates Ltd
Post
Year end Acquisition acquisition
CU CU CU
Share capital 30,000 30,000 –
Retained earnings 180,000 70,000 110,000
210,000 100,000

(3) Goodwill
Socrates
Ltd
CU
Consideration transferred 75,000
Non-controlling interest at acquisition (40% × 100,000 (W2)) 40,000
Net assets at acquisition (W2) (100,000)
15,000
Impairment to date (12,000)
Balance c/f 3,000

(4) Non-controlling interest at year end

CU
Share of net assets at acquisition (40% × 100,000 (W2)) 40,000
Share of post-acquisition reserves (40% × 110,000 (W2)) 44,000
84,000
(5) Retained earnings
CU
Haley Ltd 400,000
Socrates Ltd (60% × 110,000 (W2)) 66,000
Aristotle Ltd (30% × (100,000 – 30,000)) 21,000
Less Impairment to date (12,000 + 2,400) (14,400)
472,600
(6) Investment in associate
CU
Cost of investment in Aristotle Ltd 30,000
Share of post acquisition retained earnings (30% × (100,000 – 30,000)) 21,000
51,000
Impairment to date (2,400)
48,600

574
10 CORFU LTD
Consolidated statement of profit or loss for the year ended 30 June 20X9
CU'000
Revenue (W2) 15,131
Cost of sales and expenses (W2) (13,579)
1,552
Share of profit of joint venture (W4) 178
Profit before tax 1,730
Income tax expense (W2) (736)
Profit for the year 994
Profit attributable to
Owners of Corfu Ltd (β) 964
Non-controlling interest (W3) 30
994
WORKINGS

(1) Group structure

(2) Consolidation schedule

Corfu Ltd Zante Ltd Adj Consol
5/12
CU'000 CU'000 CU'000 CU'000
Revenue 12,614 2,567 (50) 15,131
C of S
Per Q (11,318) (2,302) 50
PURP re Paxos (30% × (150,000 × (9) (13,579)
25/125))
Income tax (621) (115) (736)
150
(3) Non-controlling interest
CU'000
Zante Ltd (20% × 150,000 (W2)) 30
(4) Share of profit of joint venture
CU'000
Paxos Ltd (30% × 594) 178

575
 11 KING LTD
Consolidated statement of profit or loss for the year ended 30 September 20X9
CU'000
Revenue (W2) 1,150
Cost of sales and expenses (W2) (743)
407
Share of profit of associates (W5) 19
Profit before tax 426
Income tax expense (W2) (125)
Profit for the year 301
Profit attributable to:
Owners of King Ltd (β) 275
Non-controlling interest (W3) 26
301
Consolidated statement of changes in equity for the year ended 30 September 20X9 (extract)
Retained
earnings
CU'000
Balance brought forward (W4) 672
Total comprehensive income for the year 275
Dividends paid on ordinary shares (110)
Balance carried forward 837
WORKINGS
(1) Group structure

(2) Consolidation schedule

King Prawn
Ltd Ltd Adj Consol
CU'000 CU'000 CU'000 CU'000
Revenue 800 430 (80) 1,150
C of S and expenses
Per Q (550) (255) 80
PURP (36 × 25%) (9)
Impairment of goodwill re Prawn Ltd (9) (743)
Income tax (80) (45) (125)
PAT 130

576
 (3) Non-controlling interest
CU'000
Prawn Ltd (130,000 × 20%) 26
(4) Retained earnings brought forward
CU’000
King Ltd 600
Prawn Ltd (80% × (320 – 260)) 48
Madras Ltd (25% × (540 – 340)) 50
Less Impairment to date (9 + 17) (26)
672
(5) Share of profit of associates
CU000
Madras Ltd ((25% × 100) – 6) 19

12 WATER LTD
(a) Consolidated statement of financial position as at 30 September 20X5

CU CU
ASSETS
Non-current assets
Property, plant and equipment (697,210 + 648,010) 1,345,220
Intangibles (W3) 1,000
Investments in associates (W7) 270,400
1,616,620
Current assets
Inventories (495,165 + 388,619 – 4,000 (W6)) 879,784
Trade and other receivables (415,717 + 320,540) 736,257
Cash and cash equivalents (101,274 + 95,010) 196,284
1,812,325
Total assets 3,428,945
EQUITY AND LIABILITIES

Equity attributable to owners of the parent

Ordinary share capital 600,000
Retained earnings (W5) 1,353,200
1,953,200
Non-controlling interest (W4) 203,200
Total equity 2,156,400
Non-current liabilities
Borrowings (400,000 + 150,000) 550,000
Current liabilities
Trade payables (440,366 + 282,179) 722,545
Total equity and liabilities 3,428,945

577
 (b) Required accounting treatment for different levels of investment
(i) Control
The investment will be treated as a subsidiary and consolidated in accordance with IFRS
10 Consolidated Financial Statements.
The ability to direct the decision making of the undertaking means that full consolidation
is appropriate. The assets/liabilities and income/expenses under group control are shown
as if they belonged to a single entity.
The non-controlling share is shown in order to indicate the proportion not owned by the
group.
(ii) Significant influence
Many investments involve the influencing of decisions rather than outright control.
Such investments are treated as associates and equity accounted on consolidation in
accordance with IAS 28 Investments in Associates and Joint Ventures.
This level of involvement is reflected by showing the underlying value of the investment
in the statement of financial position and the share of profit in the statement of profit or
loss.
(iii) Simple investment
Here the investor has no significant involvement in the investee undertaking.
Consequently only amounts paid/payable or received/receivable are reflected in the
group accounts.
The cost of such investments is shown in the statement of financial position, whilst
dividend income is reflected in the statement of profit or loss.
(c) Explanation of accounting methods used
(i) Subsidiary – Impact on statement of financial position
• 100% of the net assets of a subsidiary will be included on a line-by-line basis.
• Intra-group balances will be contra'd out.
• Unrealised profits on intra-group sales of inventory and property, plant and
equipment will be removed.
• Goodwill is recognised if the consideration transferred plus the non-controlling
interest at acquisition exceeds the fair value of the net assets acquired.
• Consolidated retained earnings will include
– Parent company's percentage of subsidiary's post-acquisition profits
– Cumulative goodwill impairments to date.
• The non-controlling interest will show the value of the net assets included in the
consolidated statement of financial position but owned by 'outside' interests.
(ii) Associate – Impact on statement of financial position
• The cost of the investment is increased by the share of the post-acquisition increase
in the associate's net assets and decreased by any impairment losses.
• Consolidated retained earnings will include
– The investor company's percentage of the associate's post-acquisition profits
– Cumulative investment impairments to date.

WORKINGS

578
(1) Group structure

(2) Net assets

Hydrogen Ltd
Post-
Year end date Acquisition acquisition
CU CU CU CU
Share capital 200,000 200,000 –
Retained earnings
Per question 820,000
Less: PURP (W6) (4,000)
816,000 500,000 316,000
1,016,000 700,000
(3) Goodwill
Hydrogen Ltd
CU
Consideration transferred 562,000
Non-controlling interest at acquisition (20% × 700,000 (W2)) 140,000
Net assets at acquisition (700,000)
2,000
Impairment to date (1,000)
Balance c/f 1,000
(4) Non-controlling interest at year end
CU
Share of net assets at acquisition (20% × 700,000 (W2)) 140,000
Share of post-acquisition (20% × 316,000 (W2)) 63,200
203,200
(5) Retained earnings
CU
Water Ltd 1,015,000
Hydrogen Ltd (80% × 316,000 (W2)) 252,800
Oxygen Ltd (40% × (463,000 – 242,000)) 88,400
Less Impairment to date (1,000 + 2,000) (3,000)
1,353,200

579
 (6) PURP
% CU
Selling price 125 20,000
Cost (100) (16,000)
GP 25 4,000
(7) Investments in associates
CU
Cost of investment in Oxygen Ltd 184,000
Share of post acquisition retained earnings (40% × (463,000 – 242,000)) 88,400
272,400
Impairment to date (2,000)
270,400
13 MINNIE LTD
Consolidated statement of financial position as at 31 December 20X5
CU'000
Non current assets
Property, plant and equipment 406
Investment in joint venture (W4) 95
501
Current assets
Inventories 100
Others 200
Total assets 801

Equity attributable to owners of the parent

Share capital 200
Retained earnings (W2) 451
651
Current liabilities 150
Total equity and liabilities 801

Consolidated statement of profit or loss for the year ended 31 December 20X5
CU'000
Revenue 490
Cost of sales and expenses (280 + (W3) 5) (285)
Share of profit of joint venture (80 × 50%) 40
Profit before tax 245
Income tax expense (100)
Profit for the year 145

Profit attributable to:

Owners of the parent 145
Non-controlling interests 0
145

580
WORKINGS
(1) Group structure
Minnie
50%

Mouse Pre acq'n ret'd earnings CU0 (set up by Minnie Ltd)

(2) Consolidated retained earnings

Minnie Ltd Mouse Ltd

CU'000 CU'000
Per question 366 180
PURP (W3) (5)
Pre-acquisition retained earnings (0)
180
Group share of post-acquisition earnings
Mouse Ltd (180 × 50%) 90
451

(3) Provision for unrealised profit on inventories

Investor's share of unrealised profit in inventories:
CU50,000 × (25%/125%) × 50% = CU5,000

... DR Cost of sales & Retained earnings CU5,000

CR Investment in Mouse Ltd CU5,000.

(4) Investment in Mouse Ltd

CU'000
Cost of joint venture 10
Add: post-acquisition retained reserves (W2) 90
Less: PURP (W3)* (5)
95

* Adjusted against the joint venture rather than group inventories because in this scenario
it is the joint venture that holds the inventories. The credit adjustment is made wherever the
inventories are held under equity accounting.

581