Group Accounting:

If one company owns more than 50% of the ordinary shares of another company:

 this will usually give the first company ‘control’ of the second company

 the first company (the parent P) has enough voting power to appoint all the directors of the second
company (the subsidiary S)

 P is able to manage S as if it were merely a department of P, rather than a separate entity

 in strict legal terms P and S remain distinct, but in economic substance they can be regarded as a single
unit (a ‘group’).

IFRS 10 Consolidated Financial Statements uses the following definitions in Appendix A:

 'parent – an entity that controls one or more entities'

 'subsidiary – an entity that is controlled by another entity' (known as the parent)

 'control of an investee – an investor controls an investee when the investor is exposed, or has rights,
to variable returns from its involvement with the investee and has the ability to affect those returns
through its power over the investee.'

Control is identified by IFRS 10 as the sole basis for consolidation and comprises the following three
elements: (memorize) (PAR)

 'power over the investee

 exposure, or rights, to variable returns from its involvement with the investee

 the ability to use its power over the investee to affect the amount of the investor's returns

IFRS 10 states that investors should periodically consider whether control over an investee has been
gained or lost and goes on to consider that a range of circumstances may need to be considered when
determining whether or not an investor has power over an investee, such as:

 exercise of the majority of voting rights in an investee

 contractual arrangements between the investor and other parties holding less than 50% of the voting
shares, with all other equity interests held by a numerically large, dispersed and unconnected group

 potential voting rights (such as share options or convertible loans) may result in an investor gaining or
losing control at some specific date.

A parent need not present consolidated financial statements if and only if:

 the parent itself is a wholly owned subsidiary or a partially-owned subsidiary and its owners, including
those not otherwise entitled to vote, have been informed about, and do not object to, the parent not
preparing consolidated financial statements

 the parent's debt or equity instruments are not traded in a public market
 the parent did not file its financial statements with a securities commission or other regulatory
organisation for the purpose of issuing any class of instruments in a public market

 the ultimate parent company produces consolidated financial statements that comply with IFRS
Accounting Standards and are available for public use.

The directors of a parent company may not wish to consolidate some subsidiaries due to:

 poor performance of the subsidiary

 poor financial position of the subsidiary

 differing activities of the subsidiary from the rest of the group.

These reasons are not permitted under IFRS Accounting Standards.

Some companies in the group may have differing accounting dates. In practice such companies will often
prepare financial statements up to the group accounting date for consolidation purposes.

For the purpose of consolidation, IFRS 10 states that where the reporting date for a parent is different
from that of a subsidiary, the subsidiary should prepare additional financial information as of the same
date as the financial statements of the parent unless it is impracticable to do so.

If it is impracticable to do so, IFRS 10 allows use of subsidiary financial statements made up to a date of
not more than three months earlier or later than the parent's reporting date, with due adjustment for
significant transactions or other events between the dates.

Basic principle

The basic principle of a consolidated statement of financial position is that it shows all assets and
liabilities of the parent and subsidiaries.

Intra-group items are excluded, e.g. receivables and payables shown in the consolidated statement of
financial position only include amounts owed from/to third parties.

Single subsidiary:

1 investment in subsidiary (S) shown in parent’s (P’s) statement of financial position is replaced by net
assets of S.

2 cost of investment in S is effectively cancelled against ordinary share capital and reserves of the
subsidiary, leaving goodwill as a balance.

This produces a consolidated statement of financial position showing:

 net assets of the whole group (P + S)

 share capital of the group (which always equals the share capital of P only) and

 retained earnings, comprising profits earned by the group (i.e. all of P’s historical profits plus P’s share
of S’s post-acquisition profits).

Assets – liabilities = capital

Assets – liabilities = can also be called as net assets

Net assets = capital

Purchase consideration – Fv of net assets = goodwill

There are 2 methods by which goodwill may be calculated:

(i)proportion of net assets method

(ii) fair value method

The proportion of net assets method calculates the value of goodwill attributable to the parent only,
while the fair value method calculates the goodwill attributable to both the parent and non-controlling
interest. (method will be provided in question)

Positive goodwill

 capitalised as an intangible non-current asset

 tested annually for possible impairments

 amortisation of goodwill is not permitted by the IFRS Accounting Standard.

Impairment of positive goodwill

If goodwill is considered to have been impaired during the postacquisition period this must be reflected
within the group financial statements.

Accounting for the impairment differs according to the policy followed to value the non-controlling
interests, reflecting the ownership of the goodwill.

Proportion of net assets method:

Dr Group reserves(Retained earnings)

Cr Goodwill

Fair value method:

Dr Group reserves (% of impairment attributable to the parent

Dr NCI (% of impairment attributable to NCI –

Cr Goodwill

3 parts

15 multiple choice questions ( each 2 marks 2*15 =30 marks)

3 MTQS (small data followed by 5 MCQS (5*3= 15 mcqs *2 =30 marks)

2 CRQS( contructive response questions) ( consolidation and single entity ) ( data and long questions )
use excel or word ) that will be attached to your question paper.
Each CRQ will be for 20 marks (2* 20= 40)

Fair value of consideration and net assets

To ensure that an accurate figure is calculated for goodwill:

 consideration paid must be accounted for at fair value

 subsidiary’s identifiable assets and liabilities acquired must be accounted for at their fair values.

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(memorize)

Calculation of cost of investment

The cost of acquisition includes the following elements:

 cash paid at the date of acquisition

 fair value of any other consideration e.g. deferred/contingent considerations and share exchanges

In some situations part or all of the purchase consideration is deferred until a later date –

deferred consideration.

 deferred consideration (i.e. a promise to pay an agreed sum on a predetermined date in the future)
should be measured at fair value at the date of the acquisition, taking into account the time value of
money.

 fair value of any deferred consideration is calculated by discounting the amounts payable to present
value at acquisition.

 any contingent consideration should be included at fair value, which will be given in the exam.
(Contingent consideration is a future payment to be made provided certain conditions are met.

These conditions vary depending on the terms of the settlement).

There are two ways to discount the deferred amount to fair value at the acquisition date:

1 You may need to apply the discount fraction to the deferred amount, where r is the interest rate and n
the number of years to settlement

1 /(1 + r)^n

2 The examiner may give you the discount factor of the payment based on a given cost of capital. (For
example, $1 receivable in three years’ time based on a cost of capital of 10% = $0.75). You would then
apply this factor to the deferred amount to calculate the fair value.

Each year the discount is then unwound by ‘charging’ interest on the outstanding liability. This increases
the deferred liability each year (to increase to future cash liability) and the discount is treated as a
finance cost.
This is also applied to any contingent consideration, as the fair value given will be at the present value.
As it is based on uncertain events, the fair value of the contingent consideration at acquisition could be
different to the actual consideration transferred.

Any differences are normally treated as a change in accounting estimate and adjusted prospectively in
accordance with IAS 8 (See Chapter 8).

Therefore the contingent consideration liability will be increased or decreased at the year end, with the
movement taken to profit or loss and shown in retained earnings.

Share exchange
Often the parent will issue shares in itself in return for the shares acquired in the subsidiary. The share
price at acquisition should be used to record the fair value of the shares.

At the reporting date make the adjustment on the face of the statement of financial position when
adding together assets and liabilities.

Fair value adjustments could include adjustments to recognised assets, such as property. There may also
be intangible assets that are not recognised in the subsidiary's financial statements due to being
internally generated. These will be recognised within the consolidated financial statements, as the
parent is now purchasing these assets as part of buying the subsidiary, and a reliable measure of cost is
therefore available.

In addition to this, any contingent liabilities in the subsidiary need to be recognised as liabilities in the
consolidated financial statements if a fair value is assigned to them. As contingent liabilities will only be
a disclosure note in the subsidiary's individual financial statements, the adjustment to be made in the
consolidated financial statements will be to reduce the net assets. There may also be an adjustment
necessary to the value of inventory at the acquisition date. The subsidiary will be carrying the inventory
at the lower of cost and net realisable value, but its fair value will be replacement cost. If such an
adjustment is necessary, take care to evaluate whether any adjustment is needed at the reporting date.
If the entire inventory at the acquisition date has been sold by the reporting date then no further
adjustment will be necessary in the reporting date column.

Post-acquisition revaluations:
If there is a post-acquisition revaluation in the subsidiary's non-current assets, the full amount of the
gain should be added to non-current assets. The parent's share of the gain is taken to the revaluation
surplus, with the NCI share of the gain being taken to NCI.

IF REVALUATION GAIN

Asset dr

Nci cr (nci share)

Revaluation surplus (OCI) PARENT

IF REVALUATION LOSS
P/L DR(BASED ON PARENTS SHARE)

NCI DR

ASSET CR

INTRA GROUP TRADING:

Trading happening between parent and subsidiary
P and S may well trade with each other leading to the following potential problem areas:

 current accounts between P and S

 loans held by one company in the other

 dividends and loan interest

 unrealised profits on sales of inventory

 unrealised profits on sales of non-current assets

Current accounts

If P and S trade with each other than this will probably be done on credit. Note that these intra-group
transactions are usually recorded within a single account in each entity, known as the current account.
This will lead to:

 a receivables (current) account in one entity’s SFP

 a payables (current) account in the other entity’s SFP.

These are amounts owing within the group rather than outside the group and therefore they must not
appear in the consolidated statement of financial position. They are therefore cancelled against each
other on consolidation, by deducting from the relevant lines on the SFP.

Cash/goods in transit

At the year end, the current accounts may not agree, owing to the existence of in-transit items such as
goods or cash. The usual rules are as follows:

 If there are goods or cash in transit, adjust the statement of financial position as if the goods or cash
had been received: –

cash in transit adjusting entry is:

 Dr Cash

 Cr Receivables

goods in transit adjusting entry is:

 Dr Inventory
 Cr Payables

This adjustment is for the purpose of consolidation only.

 Once in agreement, the current accounts may be cancelled as normal.

 This means that reconciled current account balance amounts are removed from both receivables and
payables in the consolidated statement of financial position.

UNREALIZED PROFIT:
Profits made by entities within a group on transactions with other group entities are:

 recognised in the accounts of the individual entities concerned, but

 in terms of the group as a whole, such profits are unrealised and must be eliminated from the
consolidated financial statements.

Unrealised profit may arise within a group on:

 inventory where entities trade with one another

 non-current assets where one group entity has transferred an asset to another.

The key is that we need to remove this profit by creating a Provision for Unrealised Profit (PUP)

Intra-group trading and unrealised profit in inventory

When one group entity sells goods to another, a number of adjustments may be needed.

 Current accounts must be cancelled (see earlier in this chapter).

 Where goods are still held by a group entity, any unrealised profit must be cancelled.

 Inventory must be included at cost to the group (i.e. original cost to the entity which then sold it).

The process to adjust for unrealised profit is:

1 Determine the value of closing inventory held by an individual entity which has been purchased from
another entity in the group.

2 Using mark-up or margin, calculate the value of profit included within closing inventory.

3 Make the adjustments.

These will depend on which entity is the seller.

If the seller is the parent, the profit element is included in the parent’s retained earnings and belongs to
the group.
Adjustment required:

Dr Group retained earnings

Cr Group inventory (deduct from inventory on the face of the SFP)

If the seller is the subsidiary, the profit element is included in the subsidiary’s retained earnings and
relates partly to the group, partly to any non-controlling interest (NCI).

Adjustment required:

Dr Subsidiary retained earnings

Cr Group inventory (deduct from inventory on the face of the SFP

Subsidiary sells goods to parents , urp = 500

Subsidiary profit for the year is 20000 ( divide parent and NCI )

BEFORE DOING THE DIVISION ELIMINATE THE ELEMENT OF URP ( 20000-500= 19500)

DR SUBS PROFIT 500

CR GROUP INVENTORY 500

WHEN WE ARE DEALING WITH PROFIT, THERE ARE 2 WAYS

Markup and margin

Markup is applied on cost

Example pen cost 100

20% markup (profit) 100*20%= 20

Price 100+20= 120

In case of markup 100%+20%= 120%

Cost = 100%= 18000-6000= 12000

Markeup 50% = 18000/150% * 50% = 6000

Price is 150% = 18000

Margin- applied on selling price

Price 100%

Margin 20%

Cost 80%
Non-current assets
If one group entity sells non-current assets to another, adjustments must be made to recreate the
situation that would have existed if the sale had not occurred:

 there would have been no profit on the sale

 depreciation would have been based on the original cost of the asset to the group.

The net PUP amount should be deducted when adding across the parent and subsidiary’s non-current
assets. The profit on transfer should be deducted from the reserves of the selling company.

Dr retained earning (seller)

Cr non current assets (of group)

The difference in depreciation, i.e. the excess depreciation charged against the buying entity’s profit,
should be added to the reserves of the buying company. The adjustment to the subsidiary’s reserves in
will then affect the post- acquisition profit, and effectively be shared between the parent and non-
controlling interest.

Mid-year acquisitions
Calculation of reserves at date of acquisition If a parent acquires a subsidiary mid-year, the net assets at
the date of acquisition must be calculated based on the net assets at the start of the subsidiary's
financial year plus the profits of up to the date of acquisition.

To calculate this it is normally assumed that S’s profit after tax accrues evenly over time. However, there
may be exceptions to this. The most common one of these is an intra-group loan from the parent to the
subsidiary at the date of acquisition.

If this is the case, the subsidiary will have incurred loan interest in the post-acquisition period that would
not have been charged in the pre-acquisition period.
Steps: (if parent lends a loan to the subsidiary at the acquisition date
and acquisition is mid year)
Add back interest expense to the net profit which will give you profit before interest

Apportion the profit before interest to Find out post and pre acquisition profit – by dividing monthly

Deduct the interest expense from the post acquisition profit only to find out the correct post acquisition
profit for the subsidiary.
Consolidated statement of profit and loss:
Basic principle

The consolidated statement of profit or loss (CSPL) shows the profit generated by all resources disclosed
in the related consolidated statement of financial position, i.e. the net assets of the parent entity (P) and
any of its subsidiaries.

These notes will assume a single subsidiary (S), although the FR exam may have two.

The consolidated statement of profit or loss follows these basic principles:

 From revenue down to profit for the year include all of P’s income and expenses plus all of S’s income
and expenses (reflecting P’s control of S).

 After profit for the year show split of profit between amounts attributable to the parent's
shareholders and those attributable to the non-controlling interest (to reflect ownership).

The mechanics of consolidation As with the statement of financial position, it is common to use a
standard approach when producing a consolidated statement of profit or loss:

 group structure diagram

 proforma statement of profit or loss, combining income and expense for both parent and subsidiary

 workings for any adjustments detailed in the question, e.g. PUP, fair value depreciation etc.

 non-controlling interest (NCI) share of profit

2 Intra-group trading
Sales and purchases The effect of intra-group trading must be eliminated from the consolidated
statement of profit or loss.

Such trading will be included in the sales revenue of one group entity and the purchases of another.
 Consolidated sales revenue = P’s revenue + S’s revenue – intra-group sales.

 Consolidated cost of sales (COS) = P’s COS + S’s COS – intra-group sales.

Interest
If there is a loan outstanding between group entities the effect of any loan interest received and paid
must be eliminated from the consolidated statement of profit or loss.

The relevant amount of interest should be deducted from group investment income and group finance
costs.

If there is a mid-year acquisition, be careful with the finance costs, as the finance costs may include
interest on a loan from the parent which has only arisen in the post-acquisition period.

For example, if the subsidiary's finance costs were $400,000 and the parent has owned the subsidiary
for six months, the finance costs to be consolidated would normally be $200,000 ($400,000 × 6/12).

However, if, on acquisition, the parent loaned the subsidiary $2m at 10% interest, there will be $100,000
of finance cost in the second six months that would not appear in the first six months.

The interest charge without the parent loan interest would be $300,000. Six months of this would be
$150,000, and this is the figure that would be included within the consolidated statement of profit or
loss.

Dividends
A payment of a dividend by S to P will need to be removed from investment income in the statement of
profit or loss. The effect of this on the consolidated statement of profit or loss is that any dividend
income shown in the consolidated statement of profit or loss must arise from investments other than
those in subsidiaries or associates.

Provision for unrealised profit

Inventory

If any goods sold intra-group are included in closing inventory, their value must be adjusted to the cost
to the group (as in the CSFP).

The adjustment for unrealised profit should be shown as an increase to cost of sales, returning closing
inventory back to true cost to group and eliminating the unrealised profit.

Transfers of non-current assets

If one group company sells a non-current asset to another group company the following adjustments are
needed in the statement of profit or loss to account for the unrealised profit and the additional
depreciation.

 Any profit or loss arising on the transfer must be removed from the consolidated statement of profit or
loss included in the seller's profit
4000- 6000 (profit 2000)

 The depreciation charge for the buyer must be adjusted so that it is based on the cost of the asset to
the group.

Impairment of goodwill
Once any impairment has been identified during the year, the charge for the year will be passed through
the consolidated statement of profit or loss. This will usually be through operating expenses, but always
follow any instructions from the examiner.

Goodwill cr

If non-controlling interests have been valued at fair value, a portion of the impairment expense must be
removed from the non-controlling interest's share of profit.

Fair values
If a depreciating non-current asset of the subsidiary has been revalued as part of a fair value exercise
when calculating goodwill, this will result in an adjustment to the consolidated statement of profit or
loss.

The subsidiary's own statement of profit or loss will include depreciation based on the carrying amount
of the asset in the subsidiary's individual statement of financial position. The consolidated statement of
profit or loss must include a depreciation charge based on the fair value of the asset, as included in the
consolidated SFP.

Extra depreciation must therefore be calculated and charged to an appropriate cost category (usually
cost of sales, but in line with examiner requirements).

Professional fees
Professional fees incurred as part of the acquisition should not be capitalised as part of the cost of
investment, but should be recognised as an expense.

In the exam it is likely that any professional fees will be included within the cost of the investment, and
an adjustment is required to remove the fees from the investment and charge them as an expense in
the statement of profit or loss, reducing retained earnings

(Dr expense,

Cr investment).

Deferred consideration
When deferred consideration is included as part of the purchase consideration, it is discounted to
present value. It is then necessary to unwind the discount each year and charge the interest as a finance
cost

(Dr finance cost,

Cr deferred consideration liability).

Take care when dealing with mid-year acquisitions, as the interest needs to be time-apportioned over
the post-acquisition period.

Contingent consideration
Contingent consideration is measured at fair value. In the exam this figure will be provided. Any
subsequent change in this value, which is also provided in the exam, is charged or credited to the
statement of profit or loss. For example, an increase in the consideration liability would be recognised
by:

Dr Expense (in CSPL)

Cr Consideration liability (in CSFP

Mid-year acquisition procedure

If a subsidiary is acquired part way through the year, then the subsidiary’s results should only be
consolidated from the date of acquisition, i.e. the date on which control is obtained. In practice this will
require:

 Identification of the net assets of S at the date of acquisition in order to calculate goodwill.

 Time apportionment of the results of S in the year of acquisition. For this purpose, unless indicated
otherwise, assume that revenue and expenses accrue evenly.

 After time-apportioning S’s results, deduction of post-acquisition intra-group items as normal

The consolidated statement of profit or loss and other comprehensive income

The consolidated statement of profit or loss and other comprehensive income may be asked for in the
exam instead of simply a consolidated statement of profit or loss. The consolidated statement of profit
or loss is the starting point and the other comprehensive income items are then recorded (a proforma
statement of profit or loss and other comprehensive income is included in Chapters 1 and 23).

The items that you may need to consider in the FR syllabus for items of other comprehensive income
include revaluations gains or losses and fair value through other comprehensive income gains or losses
(Chapter 9).
IAS 28 Investments in Associates and Joint Ventures
Definition of an associate

IAS 28 defines an associate as: 'An entity over which the investor has significant influence

Significant influence is the power to participate in the financial and operating policy decisions of the
investee but is not control or joint control over those policies' (IAS 28, para 3). Significant influence is
assumed with a shareholding of 20% to 50%.

Principles of equity accounting and reasoning behind it

Equity accounting is a method of accounting whereby the investment is initially recorded at cost and
adjusted thereafter for the post-acquisition change in the investor’s share of the net assets of the
associate.

The effect of this is that the consolidated statement of financial position includes:

 100% of the assets and liabilities of the parent and subsidiary company on a line by line basis

 an ‘investment in associate’ line within non-current assets which includes the cost of the investment
plus the group share of post-acquisition reserves.

The consolidated statement of profit or loss includes:

 100% of the income and expenses of the parent and subsidiary company on a line by line basis

 single line ‘share of profit of associates’ which includes the group share of any associate’s profit after
tax.

Associates in the consolidated statement of financial position

Preparing the consolidated statement of financial position (CSFP) including an associate

The CSFP is prepared on a normal line-by-line basis following the acquisition method for the parent and
subsidiary.
The group share of the associate’s post-acquisition profits or losses, the impairment of associate
investment and the PUP will also be included in the group retained earnings calculation

Fair values and the associate

If the fair value of the associate’s net assets at acquisition are materially different from their book value
the net assets should be adjusted in the same way as for a subsidiary.

Balances with the associate

Generally the associate is considered to be outside the group. Therefore balances between group
companies and the associate will remain in the consolidated statement of financial position. So if a
group company trades with the associate, the resulting payables and receivables will remain in the
consolidated statement of financial position.

Unrealised profit in inventory

Unrealised profits on trading between group and associate must be eliminated to the extent of the
investor's interest (i.e. % owned by parent). Adjustment must be made for unrealised profit in inventory
as follows.

1 Determine the value of closing inventory which is the result of a sale to or from the associate.

2 Use mark-up/margin to calculate the profit earned by the selling company.

3 Make the required adjustments as below:

Where parent sells to associate:

Dr Parent’s cost of sales in CSPL

Cr Investment in associate (to reduce net profit by URP amount)

Where associate sells to parent:

Dr Share of profit of associate in CSPL

Cr Inventory on CSFP

Associates in the consolidated statement of profit or loss

Equity accounting

The equity method of accounting requires that the consolidated statement of profit or loss:

 does not include dividends from the associate

 instead includes the parent’s share of the associate’s profit after tax less any impairment of the
associate in the year, presented below group profit from operations.

Trading with the associate

Generally the associate is considered to be outside the group. Therefore any sales or purchases between
group companies and the associate are not normally eliminated and will remain part of the consolidated
figures in the statement of profit or loss.

It is normal practice to adjust for the unrealised profit in inventory (PUP).

Only P's share of the unrealised profit must be adjusted.

Where parent sells to associate, PUP is added to cost of sales.

Where associate sells to parent, PUP is deducted from share of associate profit.

Disposals
When a shareholding in a subsidiary is disposed of, it must be reflected in:

 the parent company’s individual financial statements and

 the group financial statements.

Parent company financial statements

Gain to parent company

The gain/loss on disposal in the parent company’s accounts is calculated as follows:

Sales proceeds X

Less:carrying amount of investment (X)

Profit/loss on disposal (x)/x

The gain is reported as an exceptional item:

 must be disclosed separately on the face of the parent’s SPL only

 after profit from operations.

Any tax on the gain is calculated by reference to the gain in the parent's individual financial statements.

Disposal of whole subsidiary – in consolidated F/S

The impact of the disposal on the financial statements can be seen below.

 Statement of profit or loss

– 100% of the subsidiary’s results consolidated up to date of disposal

– gain/loss on disposal.

 Statement of financial position

– gain/loss on disposal to be included within retained earnings

 – at the year-end no shares are held by the parent and therefore the disposed subsidiary is not included
in the group statement of financial position.

Consolidation with disposal and retained subsidiary

Within the FR exam a consolidated statement of profit or loss which includes the disposal of a subsidiary
is very likely to also include a retained subsidiary. It is essential that you adopt a methodical approach to
dealing with such a question.

1 Lay out your answer in accordance with the proforma in 3.3 above.

2 Consolidate the retained subsidiary as normal on a line-by-line basis, incorporating any adjustments,
such as intra-group trading, PUP etc.

3 Enter the profit of the disposed subsidiary up to the date of disposal on the line ‘Profit for the period
from discontinued operations’.

4 Calculate the profit or loss on disposal and combine this with the ‘Profit for the period from
discontinued operations’.

5 Calculate the non-controlling interest, taking care to include both the NCI share of the retained
subsidiary profit and the NCI share of the profit of the disposed subsidiary up to the date of disposal.