consolidated financial statements

Consolidated Financial Statements


Simple Group (Subs +Associates)

Balance Sheet & Income Statements


• Group / Consolidated Financial Statements

• Balance Sheet & Income Statement in accordance with relevant IFRs / IASs.

• Simple groups including subsidiaries & associates

• Definition of holding, subsidiary and associated undertaking;

• Preparation of company accounts and consolidated financial statements as per

IAS-27

Syllabus Requirement


• IAS 27 Consolidated and Separate Financial Statements

• IFRS 3 Business Combinations (revised)

• IAS 28 Investments in Associates

• IAS 31 Interests in Joint Ventures

• IAS 21 The Effect of Changes in Foreign Exchange Rates

Accounting Standards Covering the Group


preparation and presentation of consolidated financial

statements for a group of entities under the control of a parent

In accounting for investments in subsidiaries, jointly controlled

entities, and associates when an entity elects, or is required by

local regulations, to present separate (non-consolidated) financial

statements

IAS-27 Objective …..


Consolidated financial statements:-

Financial statements of a group presented as those of a

single economic entity. Control

Power to govern the financial and operating policies of an entity so

as to obtain benefits from its activities. Group:-

Parent and all its subsidiaries. Non-controlling interest (NCI)

Equity in a subsidiary not attributable, directly or indirectly, to

Parent.

IAS-27 Key definitions …..


Separate financial statements

Presented by a parent in which the investments are

accounted for on the basis of the direct equity interest rather

than on the basis of the reported results and net assets of the

investees.

A subsidiary

An entity, including an unincorporated entity such as a

partnership, that is controlled by another entity (known as the

parent).

….IAS-27 Key definitions


Control (Identification of Subsidiary)

Where more than 50% of ordinary shares (and so votes)

are owned

However without owning own majority of the ordinary share

control may be established through:

• More than half of the voting rights by virtue of an agreement;

• Power to govern the financial and operating policies under statute

or an agreement;

• Power to appoint/remove majority of board of directors

• Power to cast the majority of votes at board of directors

Further Concepts


Single Entity Concept

Both the parent and subsidiary companies are legally required to

prepare separate sets of accounts

These separate entity accounts are not useful to the shareholders

of the parent company (who in turn are owners of the group), as:• Cost of each subsidiary in the parent’s accounts does not reflect its

performance since acquisition;

• It is difficult to understand the activities of the group as a whole by looking at

several individual sets of financial statements;

• The individual accounts may be distorted by the effects of transactions

between group companies

Further Concepts


Presentation of Consolidated Accounts

With following exemptions parent is required to present

consolidated Financial Statements• Parent is itself a wholly /Partially owned subsidiary and its other

owners, including those not otherwise entitled to vote, have been informed about, and do not object

• Parent is not traded in public market• Parent neither filed or is filing its financial statements with SECP for

issuing any class of instrument in public market

• Ultimate or any intermediate parent of the parent produces

consolidated financial statements available for public use that comply

with IFRS.

Further Concepts


Consolidated Accounts should include all subsidiaries both

Domestic & Foreign:Not any subsidiary is exempted• whose business is of a different nature from the parent's• That operates under severe long-term restrictions impairing the

subsidiary's ability to transfer funds to the parent• That had previously been consolidated and that is now being held for

sale.• SPE (Special purpose Entity) should be consolidated where substance of

relationship indicates that SPE is controlled by reporting entity• Once an investment ceases to fall within the definition of a subsidiary, it

should be accounted for as an associate under IAS 28, as a joint venture under IAS 31, or as an investment under IAS 39, as appropriate

However, a subsidiary that meets the IFRS 5 criteria as an asset held for sale shall be accounted for under that Standard

Further Concepts

http://www.iasplus.com/standard/ias28.htm




Solving the question – Consolidation Process• Control is on/off switch• Associates have two lines• Start with goodwill• All , All, none role• N.C.I. present separately in consolidated accounts in equity section • NCI share in profit of group shall separately be disclosed• For B/sheet & P/L account use Year end values• Intragroup balances, transactions, income, and expenses should be eliminated in

full. • Intragroup losses may indicate that an impairment loss on the related asset

should be recognized• Financial statements of Parent & subsidiaries should be prepared at same

reporting date• If it is impracticable , adjustment must be made for the significant transactions, or

events that occur between the dates of the subsidiary's and the parent's financial statements.

• In no case may the difference be more than three months• Use uniform accounting policies for like transactions and other events in similar

circumstances for group


Solving the question – Consolidation Process• Where losses applicable to the minority exceed the minority interest in the

equity of the relevant subsidiary, the excess, and any further losses attributable to the minority, are charged to the group unless the minority has a binding obligation to, and is able to, make good the

losses. • Where excess losses have been taken up by the group, if the subsidiary in

question subsequently reports profits, all such profits are attributed to the group until the minority's share of losses previously absorbed by the group has been recovered


Partial Disposal of an Investment in a Subsidiary

The accounting depends on whether control is retained or lost

Partial disposal of an investment in a subsidiary while control is retained. This is accounted for as an equity transaction with owners, and gain or loss is not recognised.

Partial disposal of an investment in a subsidiary that results in loss of control. Loss of control triggers remeasurement of the residual holding to fair value. Any difference between fair value and carrying amount is a gain or loss on the disposal, recognised in profit or loss. Thereafter, apply IAS 28, IAS 31, or IAS 39, as appropriate, to the remaining holding.


Acquiring Additional Shares in the Subsidiary After Control Is Obtained

Acquiring additional shares in the subsidiary after control was obtained is accounted for as an equity transaction with owners (like acquisition of 'treasury shares'). Goodwill is not remeasured.


Separate Financial Statements of the Parent or Investor in an Associate or Jointly Controlled Entity

In the parent's/investor's individual financial statements, investments in subsidiaries, associates, and jointly controlled entities should be accounted for either:

• at cost, or • in accordance with IAS 39.

The parent/investor shall apply the same accounting for each category of investments.

Investments that are classified as held for sale in accordance with IFRS 5 shall be accounted for in accordance with that IFRS.

Investments carried at cost should be measured at the lower of their carrying amount and fair value less costs to sell.

The measurement of investments accounted for in accordance with IAS 39 is not changed in such circumstances.

An entity shall recognise a dividend from a subsidiary, jointly controlled entity or associate in profit or loss in its separate financial statements when its right to receive the dividend in established.


Disclosure


• Nature of relationship the parent does not own more than half of the voting

power

• the reasons why the ownership, of more than half of the voting or potential

voting power of an investee does not constitute control

• Reporting date of subsidiary if it is different from parent, and reason for using

different reporting date

• the nature and extent of any significant restrictions on the ability of subsidiaries

to transfer funds to the parent in the form of cash dividends or to repay loans or

advances


Disclosure

Separate financial statements for a parent , investor in a jointly controlled entity,

or investor in an associate

• The fact that the statements are separate financial statements and the reasons

why those statements are prepared if not required by law,

• A list of significant investments in subsidiaries, jointly controlled entities, and

associates, including the name, country of incorporation or residence,

proportion of ownership interest and, if different, proportion of voting power

held, and

• A description of the method used to account for the foregoing investments


IFRS 3 now allows two methods of recognizing the non-controlling interest

IFRS 3 Business Combinations allows a choice of method to value the non-

controlling interest (NCI) at acquisition:• As a proportion of the net assets of the subsidiary company.• At fair value.

An entity may choose to apply a different measurement method to different acquisitions.

IFRS - 3

Pirate acquired 80% of Sailor on 31 October 20X7. On this date the net assets of Sailor amounted to $160,000. Sailor had 100,000 shares in issue with a market value on 30 October 20X7 of $2.Required:Calculate the non-controlling interest at acquisition using both methods.

1. As a proportion of net assets: 20% x $160,000 = $32,000.

2. At fair value: 20% x 100,000 x $2 = $40,000.

The difference of $8,000 between the two amounts is goodwill.


Positive goodwill is shown in the consolidated statement of financial position as

an intangible non-current asset.

It is held at cost and reviewed for impairment annually. The cumulative amount

of the impairment is:a) Deducted from goodwill on the face of the consolidated statement of financial position;b) Deducted from group reserves.

In some cases, the goodwill calculation results in a negative amount referred to by IFRS 3

as a bargain purchasea) Negative goodwill is recognized in profit or loss in the period in which it arises. It therefore

increases group reserves in the consolidated statement of financial position.

IFRS - 3


PracticeTrail Balance Dec. 20x9 H Ltd S Ltd

Investment in S Ltd. 1,880

Assets 4,000 3,000

Dividend Paid 200 100

Cost of Sales 2,400 1,500

Total 8,480 4,600

Liabilities 1,000 700

Capital 2,000 1,000

Ret Earning – op 2,000 400

General Reserve 400 500

Sales 3,000 2,000

Dividend Income 80

Total 8,480 4,600

H ltd Purchased 80% share of S ltd. On Jan 1 20x9


Practice – Goodwill at Fair Value & Proportionate share of Net Assets

Financial Position H Ltd S Ltd Land 14,000 12,000 Investment in S Ltd. 20,000 - Inventories 10,000 5,000 Receiveable 2,000 1,500 Cash 1,000 1,200 47,000 19,700 Capital Rs.1 share 30,000 12,000 Retained Earning 10,000 6,000 Payebles 7,000 1,700 47,000 19,700

H acquired 80% shares of S ltd. When S retained earnings were 3000Market price of share at the date of acquisition was Rs. 2.00


Practice – Goodwill at Fair Value & Proportionate share of Net Assets


Impairment Impairment:-

An impairment occurs if the recoverable value of an asset falls

below the carrying value. Recoverable Value:-

This is the higher of VIU and NRV.

VIV = Value in use

NRV = Net realizable value. Impairment Of Subsidiary:-

Goodwill impairment is identified by looking at the impairment

of the whole subsidiary


ImpairmentABC bought 100% of the equity of a subsidiary at the beginning of the year for

$900m. At acquisition the subsidiary’s share capital was $100m and retained

earnings were $400m. The subsidiary had retained profits for the year of

$200m. Goodwill has an infinite life and an impairment review of the sub at the

first year-end revealed a value in use (VIU) of $780m and net realizable value

(NRV) of $350m.

Required:

Calculate the balance of goodwill at the year-end after the impairment.


A parent, Terra, buys 70% of a sub for $800m at the year start, when the share

capital is $50m, reserves are $350m and a fair value adjustment (FVA) of

$100m is required on machines with a life of five years. The fair value of the

non-controlling interest is $317m .

During the year the sub made profits retained of $50m and sold goods valued

at $12m to the parent with a margin of 25%; one third of which is still in

inventory in the parent.

Goodwill has an infinite life and a year end review reveals a value in use (VIU)

of $360m and net realizable value (NRV) of $666m.

It is the group‘s policy to value the non-controlling interest at fair value (full

goodwill).

Impairment


Fair Value Adjustment H S

Equip

2,102

1,900

Investment in S

4,098

Inves 240

210

Development Exp

1,800

Inventories 713

265

Receivable 580

300

7,733

4,475

Cash (24)

40

Capital 1,800

1,200

Share Premium 1,000

600

Retained Earnings 3,214

2,400

payable 1,743

235

7,733

4,475

FV

Equip (100)

Development Exp (140)

Long term Recv -

Inves. Shares - (240)

H acquired 80% shares on Jan 1 when retained earnings of S were Rs. 2,000At year End Depriciation for the year due to revaluation of equip. reduced to 20and amortization of Development Exp. Reduced by 70

Co. policy is to record revaluation in full & credit minority with their share in revaluation


Acquisition By Issuance of Shares Long term Debtors 1,200 Capital (Rs.1 Each) 7,000 FV of Assets (other then Long Term Debtors) 33,340 Long Term debtors will be received after 3 years (Discount rate is 20%) H, Acquired 100% shares. H issued 3 shares to S for 1 share plus sash Rs. 1 for

each share held. Market value of H share is Rs. 2. Compute Goodwill S H 1 3 7000 (7000 x 3 x 2) = 42,000

+ Rs. 1 = 7,00049,00034,124

Goodwill 14,876

FV of assets 33,340PV of Long term1,200 X (1/(1.2 ^3))1,200 x 0.5787 694

34,124


Practice – Acq. By shares Issuance & FVInvestor Limited acquired 27 million Rs.10 shares of Investee Limited on January 1, 2008. This acquisition was effected by means of anexchange of 3 shares in Investor Limited for every 5 shares in Investee Limited. In addition, Rs.100 million were to be paid after two years.

Market price of Investor Limiteds shares at acquisition was Rs.20 each. (Considering 12% as cost of capital of the Investor Limited,�PV of Rs.1 receivable in two years time may be taken as Rs.0.797).

Fair value of the plant at acquisition was Rs.25 million against the book value of Rs.20 million. The plant had a remaining useful lifeof 5 years. Depreciation is to be charged using straight line method.

At acquisition, Investee Limited had unrelieved tax losses of Rs.25 million. Directors of the Investor Limited believed thatthese losses could be utilized and hence should be recognized as deferred tax asset. Share capital and reserves ofInvestee Limited at acquisition were Rs.300 million (of Rs.10 each) and Rs.25 million respectively. Applicable tax rate is35%.

Find Good will

27M SharesS H Share 300

5 3 Reserves 251 3/5 FV of Plant 5

27 27*3/5 Tax losses (25*35%) 8.75

16 FV of NA 338.75

Market Price 2o each FV of Consdieration 404

FV of shares issued 324 FV of NCI 338.75 X 10% 34

Cash consideration 100M after 2 years Goodwill 98.83

PV of 100M 80 FV of consideration 404 Share of Holding 270/300


Inter Company PUP (Provision for Unrealized Profits) Inventory 400 (Either will be calculated in “P” or “S” as Inventory

exists)

Inter Co. Margin 100 however will eliminate as it is between “P” &

“S”.

Class issues

If FV of NCI is not given

Calculate it from Shares out standing x Market value per share of

subsidiary


Basic Flow for Goodwill, NCI & Retained EarningsAcq. YE

Net AssetsShare Capital XXX XXXReserves XXX XXXFV of Net Assets XXX XXX

FV of Consideration 80% XXXFV of NCI 20% XXX FV of Business 100% XXX

Retained EarningsParent (as it is) XXX

Subs. Part - Growth X 80% XXXGroup Consolidated Retained Earning XXX

N.C.I. (for Balance sheet figure) – Proportionate Method“YE” Net Asset X 20%

N.C.I. (for Balance sheet figure) – FV MethodFV of NCI investment + “Growth” x 20%

Good Will Growth

Class issues


Thank You


Relationships

• Entities may have 3 types of relationships

• Control

• Influence

• Passive


RelationshipsParent

Control

More then 50% shares holding &

voting power

Parent Subsidiary Consolidated Accounts

Asset Asset Added

Liabilities Liabilities Added

Parent

Influence

Less then 50% shares

holding /voting power

Parent Associate Consolidated Accounts

Asset Share of Asset Added

Liabilities Share of Liabilities Added


TerraFakenStock


Terra


Fair Value Adjustment H S Consol

Equip 2,102

1,820 3922

Goodwill 1,250

-

1,250

Inves 240

210

450

Development Exp -

1,730

1,730

Inventories 713

265

978

Receiveable 580

300

880

4,885

4,325

9,210

Cash (24)

40

16

Capital 1,800

-

1,800

Share Premium 1,000

-

1,000

Reatined Earnings 3,214

392

3,606

payable 1,743

235

1,978

NCI 810

810

7,733

1,477

9,210

Goodwill Acq YE Growth

Net asset 1,200

1,200

Share Premium 600

600

Retained Earnings 2,000

2,400

FV Adjustment (240)

(150)

3,560

4,050

490

Fair Value of Consideration 80% 4,098

Fair Value of NCI 20% 712

Fair Value of Business 100% 4,810

FV of Net assets 3,560

Goodwill 1,250

consolidated financial statements

Documents

parent company

unincorporated entity

entity elects

exemptions parent

group of entities

control power

subsidiary companies

owned subsidiary