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CONSOLIDATIONS IFRS 10

IAS 27

1



Key definitions

Consolidated financial statements Financial statements of a group in which A, L, OE, I and

E of parent and its subsidiaries are presented as those ofa single economic entity

Parent An entity that controls one or more entities

Subsidiary An entity that is controlled by another entity

Control

(IFRS 10: Appendix A)

2



Control IFRS 10 identifies three elements of control

1. Power over investee

2. Exposure, or rights to variable returns frominvolvement with the investee

3. Ability to use power over the investee to affect theamount of the investor’s returns(IFRS 10:7)

An investor must possess all three elements toconclude it controls an investee. Conclusion isreassessed if there is an indication to at least one ofthe three elements.

3



Elements of control: (1) Power The investor has existing rights that gives it the ability to direct

the relevant activities (activities that significantly affect theinvestee’s returns)

Power arises through Voting rights

such as when power over an investee is obtained directly and solely fromthe voting rights granted by equity instruments such as shares (oftenstraightforward)

Contractual arrangements when power results from one or more contractual arrangements (often

more complex)(IFRS 10:11)

Investor may have special relationship with investee thatindicates that it has power over the investee Investee’s operations are dependant on the investor Investee’s key management personnel are current or previous

employees of the investor Significant portion of the investee’s activities are conducted for the

investor.4



Elements of control: Power (ctd ) Substantive v protective rights

IFRS 10 specifies that only substantive rights are considered inassessing power

Gives holder practical ability to exercise the rights when decisionsneed to be made

Investor with protective rights would not have power over an

investee Eg, Right to approve new debt financing

(IFRS 10:11-14)

Considerations relating to voting rights

Power with a majority of voting rights Majority of voting rights but no power

Power without a majority of voting rights

5



Power with a majority of voting rights

6

An investor that holds more than half of the voting rights ofan investee has power in the following situations

the relevant activities are directed by a vote of the holder ofthe majority of the voting rights, or

a majority of the members of the governing body that directsthe relevant activities are appointed by a vote of the holder ofthe majority of the voting rights

(IFRS 10: B35)



Majority of voting rights but no power For an investor that holds more than half of the voting rights of

an investee, to have power over an investee,

the investor’s voting rights must be substantive

and must provide the investor with the current ability to direct therelevant activities

If another entity has existing rights that provide that entity with

the right to direct the relevant activities and that entity is not anagent of the investor, the investor does not have power over theinvestee.

An investor does not have power over an investee, even thoughthe investor holds the majority of the voting rights in theinvestee, when those voting rights are not substantive.

Eg, if the relevant activities are subject to direction by agovernment, court, administrator or regulator.

(IFRS 10: B36, B37)7



Power without a majority of voting rights

An investor can have power even if it holds less than a

majority of the voting rights of an investee, for example,through:

a contractual arrangement between the investor and other vote holders

rights arising from other contractual arrangements the investor’s voting rights

potential voting rights

a combination of the above

(IFRS 10: B38)

8



Example 1: Power, voting rights

9

An investor acquires 48 per cent of the voting rights of an investee.

The remaining voting rights are held by thousands of shareholders,none individually holding more than 1 per cent of the voting rights.None of the shareholders has any arrangements to consult any of theothers or make collective decisions. When assessing the proportionof voting rights to acquire, on the basis of the relative size of the

other shareholdings, the investor determined that a 48 per centinterest would be sufficient to give it control.

In this case, on the basis of the absolute size of its holding and therelative size of the other shareholdings, the investor concludes that it

has a sufficiently dominant voting interest to meet the powercriterion without the need to consider any other evidence of power.

(IFRS 10: B43, Eg 4)



Example 2: Power, voting rightsInvestor A holds 40 per cent of the voting rights of an investee andtwelve other investors each hold 5 per cent of the voting rights of the

investee. A shareholder agreement grants investor A the right toappoint, remove and set the remuneration of management responsible

for directing the relevant activities. To change the agreement, a two-thirds majority vote of the shareholders is required.

In this case, investor A concludes that the absolute size of theinvestor’s holding and the relative size of the other shareholdings aloneare not conclusive in determining whether the investor has rightssufficient to give it power.

However, investor A determines that its contractual right to appoint,

remove and set the remuneration of management is sufficient toconclude that it has power over the investee.

(IFRS 10: B43, Eg 5

10



Example 3: Power, voting rights

Investor A holds 45 per cent of the voting rights of aninvestee. Two other investors each hold 26 per cent of the voting rights of the investee. The remaining voting rightsare held by three other shareholders, each holding 1 percent. There are no other arrangements that affect decision-

making.In this case, the size of investor A’s voting interest and itssize relative to the other shareholdings are sufficient toconclude that investor A does not have power . Only twoother investors would need to co-operate to be able to

prevent investor A from directing the relevant activities ofthe investee.

(IFRS 10: B44, Eg 6)

11



Elements of control: Power (ctd )

Relevant activities for entities whose operations aredirected through voting rights are generally its operatingand financing activities.

May be situations where voting rights are less relevantbecause rights relate to administrative tasks only

Analysis of investor’s contractual and non-contractual rightsmay be necessary

Appoint key management personnel

Veto significant transactions

12

E l P l i i i



Example: Power, relevant activities

13

Two investors form an investee to develop and market a medical product. One investor isresponsible for developing and obtaining regulatory approval of the medical product.Once the regulator has approved the product, the other investor will manufacture and

market it.If all the activities—developing and obtaining regulatory approval as well asmanufacturing and marketing of the medical product—are relevant activities, eachinvestor needs to determine whether it is able to direct the activities that mostsignificantly affect the investee’s returns. Accordingly, each investor needs to consider whether developing and obtainingregulatory approval or the manufacturing and marketing of the medical product is theactivity that most significantly affects the investee’s returns and whether it is able todirect that activity. In determining which investor has power, the investors wouldconsider:(a) the purpose and design of the investee;

(b) the factors that determine the profit margin, revenue and value of the investee as wellas the value of the medical product;(c) the effect on the investee’s returns resulting from each investor’s decision-makingauthority with respect to the factors in (b); and (d) the investors’ exposure to variabilityof returns

(IFRS 10:B13, Eg 1

El t f t l (2) E



Elements of control: (2) Exposure, or

rights to variable returns

Returns must have the potential to vary as a result of theinvestee’s performance

Can be positive, negative or both

Examples

Change in value of investment Dividends or interest

Management or service fees(IFRS 10:15)

14

El f l (3) Abili



Elements of control: (3) Ability to use

power to affect returns

This considers the interaction between the first two controlconcepts

An investor with decision-making rights determines whether it is a principal or an agent.

An investor that is an agent does not control an investee whenit exercises decision-making rights delegated to it.(IFRS 10:17, 18)

15



SEPARATE FINANCIAL STATEMENTS OF

THE PARENT

The investment in a subsidiary is accounted for in theseparate financial statements of the parent at cost

Dr Investment in subsidiary

Cr Bank

The parent records all dividends received or receivable fromthe subsidiary with the following j/e

Dr Bank / Dividend receivable

Cr Dividend income

(IAS 27)

16

CONSOLIDATION OF WHOLLY OWNED




SUBSIDIARY AT ACQUISITION Parent / subsidiary relationship comes about as a result

of a business combination IFRS 3 defines a business combination as a transaction or

event in which the acquirer obtains control of one or morebusinesses

IFRS 3 requires acquisition method to be used Identification of acquirer

Determination of acquisition date

Recognition and measurement of

Identifiable assets and liabilities assumed

Any non-controlling interest in subsidiary

Recognition and measurement of goodwill or gain from bargain purchase option

17

Recognition and measurement of goodwill or



Recognition and measurement of goodwill or

gain from bargain purchase option Internally generated goodwill not recognised as intangible

asset When goodwill is purchased in a business combination, it

may be recognised as an intangible asset GW is defined in IFRS 3 as the excess of

the acquisition date fair value of the consideration transferred

over

the acquisition date fair value of the net amount of identifiableassets acquired and liabilities assumed

(this definition will be modified when dealing with partly-owned subsidiariesand non-controlling interests)

GW is thus the future economic benefits arising from assetsthat are not capable of being individually identified andseparately recognised.

18

Eg 1 Consolidation at acquisition: Goodwill



Eg 1- Consolidation at acquisition: GoodwillS plcSTATEMENT OF FINANCIAL POSITION AT 31 DECEMBER 20X1

Other assets 3030

Share capital 20

Retained earnings 10

30

19

P plcSTATEMENT OF FINANCIAL POSITION AT 31 DECEMBER 20X1

(a) (b) (c)Other assets 120 105 125

Investment in S 30 45 25

150 150 150

Share capital 100 100 100

Retained earnings 50 50 50150 150 150

On 31 December 20X1 P Limited acquired 100% of the ordinary share capital of S plc for(a) £30(b) £45(c) £25

The other assets of S plc consist of inventory and accounts receivable which are considered to befairly valued.Required: Prepare a consolidated SOFP at 31 December 20X1.



Eg 1 - Procedure

Analyse equity of subsidiary for at acquisition adjustments Offset (eliminate) the carrying amount of the parent’s

investment in the subsidiary (in P’s records as a Dr balance)against the capital and reserves of S at date of acquisition (inS’s records as Cr balances)

Combine like items of assets, liabilities, equity, income andexpenses of the parent with those of its subsidiary

(IFRS 10:B86)

On the consolidated SOFP, the assets and liabilities of S

replace the amount recorded by P as its investment in S.

20

Eg 1 Workings



Eg 1- Workings Analysis of equity of S

At acquisition

Pro-forma consolidating j/e

21

(a) (b) (c)

SC 20 20 20

RE 10 10 10

30 30 30

Inv in S 30 45 25

- 15 (5)GW BPO

Dr Cr Dr Cr Dr Cr

SC 20 20 20RE 10 10 10

GW 15

Inv in S 30 45 25

Gain 5



Eg 1 - Solution

P & S GROUPCONSOLIDATED STATEMENT OF FINANCIAL POSITION

AT 31 DECEMBER 20x1

(a) (b) (c)

Other assets (120 + 30) / (105 + 30) / (125 + 30) 150 135 155

Goodwill [15 (Dr GW)] 15

150 150 155Share capital [100 + 20 – 20 (Dr SC)] 100 100 100

Retainedearnings

(a) / (b) [50 + 10 -10 (Dr RE)](c) [50 + 10 -10 (Dr RE) + 5 (Cr Gain)]

50 50 55

150 150 155

22



Principles learnt

On consolidated SOFP,

Group share capital is the share capital of P only Group RE is

RE of P, plus

RE of S

Post acquisition (thus eliminate at acquisition)

Investment in S (from P’s TB) does not appear

Other assets and liabilities of P and S are summedtogether

The consolidation adjustments are not recorded inthe records of P or S

23



Change in value of non depreciable

assets of subsidiary

An arms-length transaction involving the transfer ofownership of shares in a subsidiary may be a reliableindicator of major asset held by the subsidiary

Adjustments are made to identifiable tangible assets

on the basis of specific information regarding the valuation of those assets

implied information by examining the SOFP of thesubsidiary

24

Eg 2 - Consolidation at acquisition: Excess



Eg 2 Consolidation at acquisition: Excessattributable to non-depreciable asset

S plcSTATEMENT OF FINANCIAL POSITION

AT 31 DECEMBER 20X1Land 2

Other assets

30

Share capital 20Retained earnings 10

30

25

P plcSTATEMENT OF FINANCIAL POSITION

AT 31 DECEMBER 20X1(a) (b) (c)

Other assets 120 105 125


150 150 150

Share capital 100 100 100Retained earnings 50 50 50

150 150 150

On 31 December 20X1 P Limited acquired 100% of the ordinary share capital of S plc for(a) £30, when FV of land is £25(b) £45, when FV of land is £37(c) £25, when FV of land is £20Required: Prepare a consolidated SOFP at 31 December 20X1.Ignore tax

Eg 2 - Workings



Eg 2 Workings Analysis of equity of S

At acquisition


26

(a) (b) (c)

SC 20 20 20

RE 10 10 10

Land (37 – 25) / (20 – 25) 12 (5)

30 42 25

Inv in S 30 45 25

- 3 -GW

Dr Cr Dr Cr Dr Cr

SC 20 20 20

RE 10 10 10

Land 12 5

GW 3

Inv in S 30 45 25



Eg 2 - Solution


AT 31 DECEMBER 20x1

(a) (b) (c)

Land (25) / [25 + 12 (Dr Land)] / [25 – 5 (Cr Land)] 25 37 20


Other assets (120 + 5) / (105 + 5) / (125 + 5) 125 110 130

150 150 150

Share capital [100 + 20 – 20 (Dr SC)] 100 100 100

Retainedearnings

[50 + 10 -10 (Dr RE)] 50 50 50

150 150 150

27



Principles learnt

The change in the fair value of the land

has not been recorded in the financial statements of S has been recorded as a consolidation adjustment only.

28





SUBSIDIARY AFTER ACQUISITION Analyse equity of subsidiary At date of acquisition for at acquisition adjustments

to establish the fair value of the identifiable net assets ofthe subsidiary

to calculate goodwill or bargain purchase option The period between the date of acquisition and

the start of the current financial year to establishthe post-acquisition profits or losses of the subsidiaryattributable to the parent company for adjustments at

beginning of current year The current year profit of the subsidiary company

and any dividends paid for current year adjustments

29



Example 3: Consolidation after acquisition

S plcSTATEMENT OF FINANCIAL POSITION AT 31 DECEMBER 20X1

Net assets 30

30

Share capital 20


30

30


Net assets 150

150

Share capital 100


150

On 1 January 20X2 P Limited acquired 100% of the share capital of

S Limited for £30.



Example 3: Consolidation after acquisition . .

TRIAL BALANCES 31/12/20x3 31/12/20x2

P S P S

Net assets 220 47 160 35

Investment in S 30 - 30 -

250 47 190 35

Share capital 100 20 100 20

Retained earnings – boy 90 15 50 10

Profit for period 60 12 40 5

250 47 190 35

31

Required:Prepare consolidated financial statements for 20x2 and 20x3.

Trial balances of P plc and S plc at 31 December 20x2 and 20x3 are

as follows:

Eg 3 - Workings



g g Analysis of equity of S

32

31/12/20x3 31/12/20x2

At acquisition Pro-forma Pro-forma

SC 20 Dr 20 Dr

RE 10 Dr 10 Dr

30 30

Inv in S 30 Cr 30 Cr

- -Beginning of year

RE at boy 15 (31/12/x2) 10 (31/12/x1)

RE at acquisition (10) (10)

5 -

Current year

Profit 12 5

Eg 3 Workings



Eg 3 – Workings . . .


33

20x3 20x2

Dr Cr Dr Cr

At acq

SC 20 20

RE 10 10

Inv in S 30 30

Eg 3 - Solution



g

P & S GROUPCONSOLIDATED STATEMENT OF CHANGES IN EQUITYFOR THE YEAR ENDED 31 DECEMBER

20x3 20x2

SC RE SC RE

Bal at boy 100 95 [90 + 15 – 10 (At acq)] 100 50 [90 + 15 – 10 (At acq)]

Profit for

period

72 45

Bal at eoy 100 167 100 95

34

P & S GROUPCONSOLIDATED STATEMENT OF COMPREHENSIVE INCOMEFOR THE YEAR ENDED 31 DECEMBER

20x3 20x2Profit for the period 72 (60 + 12) 45 (40 + 5)

Eg 3–

Solution . . .



g


AT 31 DECEMBER

20x3 20x2

Net assets 267 (220 + 47) 195 (160 + 35)

267 195

Share capital 100 P only, or[100 + 20 – 20 (At acq)] 100 P only, or[100 + 20 – 20 (At acq)]

Retained earnings 167 From SOCIE, or[(90 + 15 – 10) + 72]

95 From SOCIE, or[(50 + 10 -10) + 45]

267 195

35



Principles learnt

Group RE at beginning of year =P’s RE at beginning of year

plus P’s share of S’s post acquisition RE at beginning of year

36

Elimination of intra group transactions



Elimination of intra-group transactions

Eliminate in full intragroup

Assets and liabilities Income and expenses

(IFRS 10: 86(B))

37

Eg 4 - Elimination of intragroup transactionsT i l b l P S



38

Trial balances P S Share capital 500 100Retained earnings 260 80Rent income (from S) 36 -

Admin fee income (from S) 12 -Interest income (from S) 6 -Dividend income- S 50 -Dividend income - other 97 33Loan from P - 60Current account - P - 37Gross profit 230 170

1 191 480

Land and buildings 360 -Investment in S 100 -Other investments 150 74Taxation 72 40Loan to S 60 -Current account - S 37 -Dividends paid 140 50Expenses 104 70Other assets 168 246

1 191 480

P plc acquired 100% of theshares in S plc when it was

formed, some years ago.

Required :

Prepare consolidatedfinancial statements for the20X2 financial year.

Eg 4 - Workings



Analysis of equity of S

39

31/12/20x2

At acquisition Pro-forma

SC 100 Dr

RE 0

100

Inv in S 100 Cr

-Beginning of year

RE at boy 80

RE at acquisition (0)

80

Current yearProfit 93 (170 +33 – 70 – 40)

Dividend (50) Dr Div inc (P) Cr Div pd (S)

o nP GROUP plcCONSOLIDATED STATEMENT OF COMPREHENSIVE INCOMEFOR THE YEAR ENDED 31 DECEMBER 20x2



E g 4 -

S ol u

t i o FOR THE YEAR ENDED 31 DECEMBER 20x2

Gross profit (230 + 170) 400

Dividends received [(97 + 33) + 50 – 50)] 130

Expenses (104 + 70 - 54) (120)Profit before tax 410

Taxation (72 + 40) (112)

Profit for the period 298

40

P GROUP plcCONSOLIDATED STATEMENT OF CHANGES IN EQUITYFOR THE YEAR ENDED 31 DECEMBER 20x2

Retainedearnings

Balance at beginning of year (260 + 80 – 0) 340


Dividends (140 + 50 – 50) (140)

Balance at end of year 498

Pro-forma j/e Dr Cr

Rent inc 36

Admin fee inc 12

Int inc 6

Expenses 54

Pro-forma j/e Dr Cr

Dividend inc - S 50Dividends paid 50

Eg 4 – Solution . . .



41

P GROUP plcCONSOLIDATED STATEMENT OF FINANCIAL POSITION AT 31 DECEMBER 20x2

ASSETS

Land & buildings (360 + 0) 360

Other investments (150 + 74) 224

Other assets (168 + 246) 414

998

EQUITY

Share capital (500 + 100 – 100) 500

Retained earnings (From SOCIE) 498

998

Pro-forma j/e Dr Cr

Loan from P 60

Current a/c – P 37Loan to S 60

Current a/c – S 37

Change in value of depreciable asset



Change in value of depreciable asset

When a depreciable asset of the subsidiary is revalued by theparent company at acquisition it is necessary for the parent company to assess the remaining

useful life of the asset, and

depreciate the asset in the consolidated financial statements basedon this estimate.

The subsidiary generally does not change the asset’s value in itsrecords. Thus, the depreciation charge of the subsidiary will need to be adjusted

by the difference between the group’s depreciation charge and thatof the subsidiary.

As the consolidation journal entries are merely proforma entries

and do not get posted to a ledger, it is necessary to adjust theretained earnings and the accumulated depreciation account of thesubsidiary each year for the cumulative difference to date.

42

Eg 5 - Consolidation after acquisition: Excessb bl d bl



attributable to depreciable assetS plcSTATEMENT OF FINANCIAL POSITION

AT 31 DECEMBER 20X1Plant 40

At cost 80

Accumulated depreciation (40)

Other net assets 110

150

Share capital 100


150

43

P plcSTATEMENT OF FINANCIAL POSITION

AT 31 DECEMBER 20X1Net assets 480

480

Share capital 300


480

On 1 January 20X2, P plc acquired 100% of the share capital of S plc. Plant wasconsidered to have a fair value of £60 at the date of acquisition. The estimated

future life was agreed to be five years.

Eg 5 . . . Trial balances of P plc and S plc at 31 December 20x2 and 20x3 are



Trial balances 31/12/20x3 31/12/20x2

P S P S Share capital 300 100 300 100

Retained earnings beginning of year 184 68 160 50

Profit before depreciation and tax 60 48 40 38

Plant, accumulated depreciation - 56 - 48

544 272 500 236Plant, cost - 80 - 80

Depreciation - 8 - 8

Taxation 24 16 16 12

Investment in S plc 170 - 170 -

Other net assets 350 168 314 136544 272 500 236

44

Trial balances of P plc and S plc at 31 December 20x2 and 20x3 areas follows:


n g s

Analysis of plant S Ltd Consolidatedadjustment Group

Cost 80



E g 5 - W

o r k i n Cost 80

31/12/X1 Accumulated depreciation (40)

01/01/X2 Carrying amount 40 /5 yr= 8

20 /5 yr= 4

60 /5 yr= 12

31/12/X2 Depreciation (8) (4) (12)

32 16 48

31/12/X3 Depreciation (8) (4) (12)

24 12 36

31/12/X4 Depreciation (8) (4) (12)16 8 24

31/12/X5 Depreciation (8) (4) (12)

8 4 12

31/12/X6 Depreciation (8) (4) (12)

0 0 0

45

31/12/20x3 31/12/20x2

At acquisition Pro-forma Pro-forma• Analysisof equity



E g 5

– W o r k i n g s

46

SC 100 Dr 100 Dr

RE 50 Dr 50 Dr

Plant 20 Dr 20 Dr

170 170

Inv in S 170 Cr 170 Cr

- -

Beginning of year

RE at boy 68 (31/12/x2) 50 (31/12/x1)

RE at acquisition (50) (50)

Group depreciation (4) (x2 deprn)Dr RE Cr Acc deprn

-

14 0

Current year

Profit 24 (48 – 4 – 16) 18 (38 – 8 – 12)

Group depreciation (4) Dr Deprn Cr Acc Deprn (4) Dr Deprn Cr Acc Deprn

20 14

of equityof S

Eg 5 - Solution



47

P & S GROUPCONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME

FOR THE YEAR ENDED 31 DECEMBER20x3 20x2

Profit before tax 96 (60 + 48 – 8 – 4 (CY Deprn)] 66 [40 + 38 – 8 -4 (CY Deprn)]

Taxation (40) (24 + 16) (28) (16 + 12)

Profit for the period 56 38

Pro-forma j/e – 20x2 Dr Cr

Depreciation expense 4

Accumulated depreciation 4


Depreciation expense 4


n . . .

P & S GROUPCONSOLIDATED STATEMENT OF CHANGES IN EQUITYFOR THE YEAR ENDED 31 DECEMBER 20x2



E g 5 – S o l u t i o n

48

FOR THE YEAR ENDED 31 DECEMBER 20x2

Sharecapital

Retainedearnings

Balance at 31/12/x1 300 160 [160 + 50 – 50 (At acq)]

Profit for the period - 38

Balance at 31/12/x2 300 198


Retained earnings 4


P & S GROUPCONSOLIDATED STATEMENT OF CHANGES IN EQUITY

FOR THE YEAR ENDED 31 DECEMBER 20x3Sharecapital

Retainedearnings

Balance at 31/12/x2 300 198 [184 + 68 – 50 (At acq) – 4 (Boy Acc dep)]

Profit for the period - 56

Balance at 31/12/x3 300 254

n . . .

P & S GROUP plcCONSOLIDATED STATEMENT OF FINANCIAL POSITION AT 31 DECEMBER



E g 5 – S o l u t i o n 3

20x3 20x2

ASSETS

Plant 36 48 At cost 60 (80 – 40 + 20) 60 (80 – 40 + 20)

Accumulated depreciation (24) (56 – 40 + 4 + 4) (12) (48 – 40 + 4)

Other net assets 518 (350 + 168) 450 (314 + 136)

554 498

EQUITY AND LIABILITIES

Share capital 300 (P only) 300 (P only)

Retained earnings 254 (from SOCIE) 198 (from SOCIE)

554 498

49

Pro-forma j/e Dr Cr

Dep exp 4

Acc Dep 4

Pro-forma j/e–

x2 and x3 Dr Cr


Plant 40Pro-forma j/e Dr Cr

RE 4

Acc Dep 4

PARTLY OWNED SUBSIDIARIES



When a subsidiary is not ownedentirely by a parent company (or by

subsidiaries of the parent), theshareholders outside the group areknown as the non-controllinginterests (referred to in previous

versions of the standard as minority

shareholders or outside shareholders) The NCI are shareholders of the

subsidiary and have no interest in theconsolidated financial statements

Non-controlling interest defined as

equity of subsidiary not attributable,directly or indirectly, to a parent

(IFRS 10, Defns)

50

P

S

NCI

Goodwill definition (taking intolli i )



account non-controlling interests)

GW is defined in IFRS 3 as the excess of

the acquisition date fair value of the consideration transferredand

the amount of any non-controlling interest in theacquiree

over

the acquisition date fair value of the net amount ofidentifiable assets acquired and liabilities assumed.

51

Effect on consolidated SOFP



52

Effect on consolidated SOFP

The parent / subsidiary company relationship results inthe parent company controlling the economicresources of the subsidiary

Thus, full carrying amounts (not only P’s share) ofthe A and L of S are included on the consolidated SOFP

of the group The portion of S’s net assets owned by the non-

controlling interests are shown as ‘non-controllinginterests’ on the group SOFP within equity,

separately from the equity of the parent.(IFRS 10:22)

Effect on consolidated SOCI



53

Effect on consolidated SOCI

The parent / subsidiary company relationship gives the

parent company the power to govern the financial andoperating policies of the subsidiary

Thus, the subsidiary’s I and E items are included in full on the consolidated SOCI of the group.

The profit and TCI of the group is then allocatedbetween Equity holders / owners of the parent

Non-controlling interests

as a reconciliation at the bottom of the group SOCI.(IFRS 10: B94)

Eg 1- Consolidation at acquisition: GoodwillS plcP plc



S plcSTATEMENT OF FINANCIAL POSITION AT 31 DECEMBER 20X1

Other assets 30

30

Share capital (20 shares of £1) 20


30

54


(a) (b) (c)

Other assets 126 110 130


150 150 150

Share capital 100 100 100

Retained earnings 50 50 50

150 150 150

On 31 December 20X1 P Limited acquired 80% of the ordinary share capital of S plc for(a) £24(b) £40(c) £20

The other assets of S plc consist of inventory and accounts receivable which are considered to befairly valued.Required: Prepare a consolidated SOFP at 31 December 20X1.

Eg 1- Workings

A l i f i f S



Analysis of equity of S

55

(a) (b) (c)

At acquisition TotNCI

(20%)P

(80%) TotNCI

(20%)P

(80%) TotNCI

(20%)P

(80%

SC 20 20 20

RE 10 10 10

30 6 24 30 6 24 30 6 24

Goodwill calculation

FV of consideration 24 40 20

NCI 6 6 6

30 46 26

FV of net assets 30 30 30

- 16 (4)

GW Gain fromBPO

Eg 1- Workings




56

(a) (b) (c)Dr Cr Dr Cr Dr Cr

SC 20 20 20

RE 10 10 10

GW 16

NCI 6 6 6

Inv in S 24 40 20

Gain 4

Eg 1 - Solution




AT 31 DECEMBER 20x1(a) (b) (c)

Other assets (126 + 30) / (110 + 30) / (130 + 30) 156 140 160


156 156 160

Share capital [100 + 20 – 20 (Dr SC)] 100 100 100

Retainedearnings

(a) / (b) [50 + 10 -10 (Dr RE)](c) [50 + 10 -10 (Dr RE) + 4 (Cr Gain)]

50 50 54

NCI 6 6 6

156 156 160

57

CONSOLIDATION OF PARTLY OWNEDSUBSIDIARY AFTER ACQUISITION



SUBSIDIARY AFTER ACQUISITION Income and expenses of S included in consolidated

SOCI from acquisition date Non-controlling interests in profit or loss of S are

Identified

Disclosed separately from profit or lossattributable to P

58

Example 2: Consolidation after acquisition On 1 January 20x1, P plc acquired 75% of the shares in S plc for



TRIAL BALANCES 31/12/20x2 31/12/20x1P S P S

Net assets 58,5 40 48 36

Investment in S 24 - 24 -

Dividends paid 12 6 10 4

94,5 46 82 40

Share capital 50 20 50 20

Retained earnings – boy 22 16 15 12

Profit for period 18 10 14 8

Dividend income 4,5 - 3 -94,5 46 82 40

59

Required: Prepare consolidated financial statementsfor 20x1 and 20x2.

£24 000. Trial balances of P plc and S plc at 31 December 20x1 and20x2 are as follows:

n g s Analysis of equity of S

31/12/20x2 31/12/20x1



E g 2 - W

o r k i

60

31/12/20x2 31/12/20x1

Tot

Pro- forma

NCI(25%)

P(75%) Tot

Pro- forma

NCI(25%)

P(75%)

At acquisition

SC 20 Dr SC 20 Dr SC

RE 12 Dr RE 12 Dr RE

32 8 24 32 8 24

Cr NCI(SOFP)

Cr Inv Cr NCI(SOFP)

Cr Inv

Beginning of year

RE at boy 16 12

RE at acquisition(12) (12)4 1 3 0

Dr RECr NCI(SOFP)

i n g s Analysis of equity of S . . .

31/12/20x2 31/12/20x1

Pro NCI P Pro NCI P



E g 2 - W

o r k i

61

Tot

Pro- forma

NCI(25%)

P(75%) Tot

Pro- forma

NCI(25%)

P(75%)

Current yearProfit 10 2,5 7,5 8 2 6

Dr NCI(SOCI)Cr NCI(SOFP)

Dr NCI(SOCI)Cr NCI(SOFP)

Dividend paid (6) (1,5) (4,5) (4) (1) (3)

CrDiv pd

(S)

Dr NCI

(SOFP)

DrDiv inc

(P)

CrDiv pd

(S)

Dr NCI

(SOFP)

DrDiv inc

(P)

40 10 30 36 9 21

(40 x25%)

(36 x25%)

Summary of pro-forma consolidating entries

20x2 Dr Cr

At acquisition



62

At acquisition

SC 20

RE 12

NCI (SOFP) 8

Inv in S 24

Beginning of year

RE 1

NCI (SOFP) 1

Current year

NCI (SOCI) 2,5

NCI (SOFP) 2,5

Div inc (P) 6

NCI (SOFP) 1,5

Div pd (S) 4,5

Eg 2 - SolutionP & S GROUP




20X2 20X1

Profit for the period 28 (18 + 10) 22 (14 + 8)

Other comprehensive income - -

Total comprehensive income 28 22

Attributable to:

Equity holders of parent 25,5 (28 – 2,5) or(18 + 7,5) 20 (22 – 2) or (14 + 6)

Non-controlling interests 2,5 Dr NCI (SOCI) 2 Dr NCI (SOCI)

28 22

63

Eg 2 – solution . . .




SC RE Attributableto P NCI Tot

Bal 01/01/x1 50 15 (15 + 12 – 12) 65 - 65

Acq of S 8 At acq

TCI 20 (From SOCI) 20 2 CY 22

Dividends (10) P only, or (10 + 4 – 4) (10) (1) CY (11)Bal31/12/x1

50 25 [22 + 16 – 12 (at acq) – 1 (NCI boy)]

75 9 84

TCI 25,5 (From SOCI) 25,5 2,5 CY 28

Dividends (12) P only, or (12 + 6 – 6) (12) (1,5) CY (13,5)

Bal 31/12/x2 50 38,5 88,5 10 98,5

64

Eg 2 –

solution . . . P & S GROUP




20X2 20X1

ASSETS

Net assets (58,5 + 40) (48 + 36) 98,5 84

98,5 84


Equity

Share capital 50 50

Retained earnings 38,5 25

Equity attributable to equity holders of parent 88,5 75

Non-controlling interest 10 9

98,5 84

65

Consolidation after acquisition- principles learnt



66

principles learnt The non-controlling interest’s share of the post

acquisition RE of S, to the beginning of the year , is

allocated by a consolidating adjustmentDr RECr Non-controlling interest (SOFP)

The non-controlling interest’s share of profits for thecurrent year is allocated by a consolidating adjustment

Dr Non-controlling interest (SOCI)Cr Non-controlling interest (SOFP)

The dividends paid of S is eliminated against thedividend income of P and the non-controlling interest(SOFP)

Dr Dividend income (P)Dr NCI (SOFP)Cr Dividend paid (S)

Elimination of intra-group transactions

l l l d b d



Same principles apply to partly owned subsidiaries asto wholly owned subsidiaries

Eliminate in full intragroup Assets and liabilities

Income and expenses(IFRS 10: 86(B))

However, non-controlling interests’ share of profit iscalculated before eliminating the intra-grouptransactions

Intra-group transactions are eliminated whencomputing group profit.

67

Eg 3 - Elimination of intra-group transactionsTrial balances – 31/12/x2 P S

Share capital 500 100d



68

Retained earnings 260 80Rent income (from S) 36 - Admin fee income (from S) 12 -

Interest income (from S) 6 -Dividend income- S 40 -Dividend income - other 97 35Loan from P - 58Current account - P - 37Gross profit 230 170

1 181 480Land and buildings 380 -Investment in S 80 -Other investments 150 74Taxation 72 40Loan to S 58 -

Current account - S 37 -Dividends paid 140 50Expenses 104 70Other assets 160 246

1 181 480

P plc acquired 80% of theshares in S plc when it was

formed, some years ago.

Required :Prepare consolidated

financial statements for the20x2 financial year.

k i n g s • Analysis of equity of S 31/12/20x2

Tot

NCI(20%)

P(80%)



E g 3 - W

o r k

69

Tot

At acquisition

SC100

RE 0

100 20 80

Goodwill calculation

FV of consideration 80

NCI 20

100

FV of net assets 100

-

Beginning of year

RE at boy 80


80 16 64

Pro-forma j/e Dr Cr

At acquisition

SC 100

RE 0

NCI (SOFP) 20

Inv in S 80Beginning of year

RE 16

NCI (SOFP) 16

k i n g s

• Analysis of equity of S . . . 31/12/20x2

NCI( %)

P(8 %)



E g 3 - W

o r k

70

Tot (20%) (80%)

Current year

Trading profit 170

Dividend income 35

Expenses (including intra-group) (70)

Tax (40)

95 19 76

Dividend paid (50) (10) (40)

225 45 180

(225 x20%)

Pro-forma j/e Dr Cr

Current year

NCI (SOCI) 19

NCI (SOFP) 19

Div inc (P) 40

NCI (SOFP) 10

Div pd (S) 50

Eg 3 - SolutionP GROUP plcCONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME



CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOMEFOR THE YEAR ENDED 31 DECEMBER 20x2

Gross profit (230 + 170) 400

Dividends received [(97 + 35) + 40 – 40)] 132

Expenses (104 + 70 - 54) (120)

Profit before tax 412

Taxation (72 + 40) (112)


Attributable to

Equity holders of parent (300 – 19) 281

Non-controlling interest 19

300

71

Pro-forma j/e Dr Cr

Rent inc 36

Admin fee inc 12

Int inc 6

Expenses 54

Eg 3 –

Solution . . .



72

P GROUP plcCONSOLIDATED STATEMENT OF CHANGES IN EQUITY

FOR THE YEAR ENDED 31 DECEMBER 20x2Share

capitalRetainedearnings

Attrib-utable

to PNCI Total

Balance 01/01/x2 500 324 [260 + 80 - 0– 16 (NCI boy)]

824 36 [20 (at acq)+ 16 (boy)]

860

Profit for the period 281 281 19 CY 300

Dividends (140) (140 + 50 – 50) (140) (10) CY (150)

Balance 31/12/x2 500 465 965 45 1 010

Eg 3 –

Solution . . .

P GROUP plcPro-forma j/e Dr Cr



73

pCONSOLIDATED STATEMENT OF FINANCIAL POSITION AT 31 DECEMBER 20x2

ASSETS Land & buildings (380 + 0) 380

Other investments (150 + 74) 224

Other assets (160 + 246) 406

1 010

EQUITY

Share capital (500 + 100 – 100) 500

Retained earnings (From SOCIE) 465

Equity attributable to equity holders of parent 965

Non-controlling interest 451 010

Pro forma j/e Dr Cr

Loan from P 58

Current a/c – P 37

Loan to S 58

Current a/c – S 37

Change in value of depreciable assets



74

Same principles apply to partly owned subsidiaries

as to wholly owned subsidiaries Pro-forma consolidating entries for cumulative

group depreciation to beginning of year is takeninto account before allocating ‘RE to boy’ to non-

controlling interests Pro-forma group adjustments for current year

group depreciation is taken into account before allocating current year profit to non-controllinginterests

Eg 4On 1 March 20X5, P plc acquired 80% of the share capital of S plc. Plant was consideredto have a fair value of £45,5 at the date of acquisition. S plc had acquired the plant on1 March 20x4 Estimated total useful life is 8 years and P plc agreed with this estimate



Trial balances 28/02/20x7 28/02/20x6

P S P S

Share capital 100 000 40 000 100 000 40 000

Retained earnings beginning of year 45 760 11 000 26 560 5 000

Profit before depreciation and tax 42 000 20 000 32 000 16 000

Plant, accumulated depreciation - 18 000 - 12 000

187 760 89 000 158 560 73 000

Plant, cost - 48 000 - 48 000

Investment in S plc 38 800 - 38 800 -

Other net assets 132 160 29 400 106 960 15 000

Taxation 16 800 5 600 12 800 4 000

Depreciation - 6 000 - 6 000

187 760 89 000 158 560 73 000

75


1 March 20x4. Estimated total useful life is 8 years and P plc agreed with this estimate.

Eg 4 - Workings

S L dConsolidated

G



Analysis of plant S LtdConsolidatedadjustment

Group

01/03/x4 Cost 48

28/02/x5 Accumulated depreciation (6)

Carrying amount 42 /7 yr= 6

3,5 /7 yr= 0,5

45,5 /7 yr= 6,5

28/02/x6 Depreciation (6) (0,5) (6,5)

36 3 39

28/02/x7 Depreciation (6) (0,5) (6,5)30 2,5 32,5

01/03/x7 – 28/02/x12

Depreciation for remaining5 years

(30) (2,5) (32,5)

0 0 0

76

Eg 4 –

Workings Analysis of equityof S 28/02/x7 28/02/x6



77

At acquisition TotNCI

(20%)P

(80%) Pro-forma TotNCI

(20%)P

(80%) Pro-forma

SC Dr SC 40 Dr SC

RE Dr RE 5 Dr RE

Plant Dr Plant 3,5 Dr Plant

48,5 9,7 38,8

Cr NCI Cr Inv in S Cr NCI Cr Inv in S

Beginning of year

RE at boy 5


Group depreciation Dr RECr Acc dep

-

0

Dr RE

28/02/x7 28/02/x6

Eg 4 –Workings . . .



78

/ / 7 / /

Current year Tot NCI P Pro-forma Tot NCI P Pro-forma

Profit 6

Group depreciation Dr DepCr Acc Dep

(0.5) Dr DepCr Acc Dep

5,5 1,1 4,4

Dr NCI (CI)

Cr NCI (FP)

Dr NCI (CI)

Cr NCI (FP)54 10.8

= 20% = 20%

Eg 4 - Solution

P & S GROUP



79


FOR THE YEAR ENDED 28 FEBRUARY20x7 20x6

Profit before tax [ (CY Deprn)] 41,5 [32 + 16 – 6 - 0,5 (CY Deprn)]

Taxation ( ) ( ) (16,8) (12,8 + 4)

Profit for the period 24,7


Depreciation expense 0,5

Accumulated depreciation 0,5


Depreciation expense

Accumulated depreciation

t i o n . .

. P & S GROUPCONSOLIDATED STATEMENT OF CHANGES IN EQUITYFOR THE YEAR ENDED 28 FEBRUARY 20X6

Sharecapital

Retainedearnings

Attribto P NCI Tot



E g 4 – S

o l u t

80

capital g to P NCI Tot

Balance at 01/03/x5 100 26,56 (26,56 + 5 – 5) 126,56 - 126,56

Acquisition of sub 9,7Profit for the period 23,6 23,6 1,1 24,7

Balance at 28/02/x6 100 50,16 150,16 10,8 160,96


Retained earnings

Accumulated depreciation


FOR THE YEAR ENDED 28 FEBRUARY 20X7

Sharecapital

Retainedearnings

Attribto P NCI Tot

Balance at 28/02/x6 ( ) ( )

Profit for the period

Balance at 38/02/x7

t i o n . .

. P & S GROUP plcCONSOLIDATED STATEMENT OF FINANCIAL POSITION AT 28 FEBRUARY

20X7 20X6



E g 4 –

S o l u ASSETS

Plant 39

At cost ( ) 45,5 (48 – 6+ 3,5)

Accumulated depreciation ( ) (6,5) (18 – 6 + 0,5)

Other net assets 121,96

160,96

EQUITY AND LIABILITIESShare capital (P only) 100 (P only)

Retained earnings (from SOCIE) 50,16 (from SOCIE)

Attributable to P 150,16

Non-controlling interests 10,8

160,96

81

INTRA-GROUP TRADING

If t ll d t



If a parent company sells goods to asubsidiary company

The GP of the parent is realised andrecognised in the parent’s financialstatements

The GP of the group

Remains unrealised if the goods are unsold by thesubsidiary

Becomes realised once the goods are sold by thesubsidiary (to customers outside the group)

No implication for the NCI as the NCI haveno share in the profit of the parent

82

INTRA-GROUP TRADING . . . If a subsidiary company sells goods to a parent



If a subsidiary company sells goods to a parentcompany The GP of the subsidiary is realised and recognised in the

subsidiary’s financial statements

The GP of the group Remains unrealised if the goods are unsold by the parent

Becomes realised once the goods are sold by the parent(tocustomers outside the group)

Implication for the NCI as the NCI have a share in theprofit of the subsidiary Any unrealised profit of the subsidiary (in the parent’s

inventory) must be eliminated before computing the NCIshare of profit

83

a d i n g –

s i d i a r y

TRIAL BALANCES 31/12/20x5

P S

On 1 January 20x3, P plc acquired 80% of the shares in S plc for£48. Trial balances of P plc and S plc at 31 December 20x5 are asfollows:



E x a m p l e 1 : I n

t r a - g r o u p

t r a

p a r e n t s e l l s g

o o d s t o s u b s P S

Investment in S 48

Other net assets 106 77

Inventory 30 20

Tax expense 6 3

190 100

Share capital 100 50Retained earnings – boy 70 40

Profit before tax 20 10

190 100

84

Included in the closing inventory of S plc are goods bought from P plc for £3. The cost of these goods to P plc is £2.

Required:Prepare consolidated SOCI and SOFP for 20x5.

r k i n g s

e q u i t y o f

S 31/12/20x5

TotPro- forma

NCI(20%)

P(80%)

At acquisition



E g 1 - W

o r

A n a l y s i s

o f e

85

SC 50 Dr SC

RE 10 Dr RE

60 12 48

Cr NCI(SOFP)

Cr Inv

Beginning of year

RE at boy 40RE at acquisition (10)

30 6 24

Dr RECr NCI (SOFP)

Current year

Profit after tax 7 1,4 5,6

97 19,4

Noimplication to

NCI of P’sunrealised

profit

u t i o n

P & S GROUP

CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOMEFOR THE YEAR ENDED 31 DECEMBER 20X5

Profit before tax 29 [(20 – 1) + 10)

Tax expense (9) (6 + 3)



E g 1 - S o l u Profit for the period 20

86

Pro-forma j/e–

20x5 Dr CrProfit before tax 1

Inventory 1

P & S GROUPCONSOLIDATED STATEMENT OF FINANCIAL POSITION AT 31 DECEMBER 20X5 ASSETS

Other net assets (106 + 77) 183

Inventory [(30 -1) + 20] 49

232


Share capital 100Retained earnings [P (70 + 14 -1)] + [S (30 x 0,80) + (7 x 0,80)] 112,6

Equity attributable to equity holders of parent 212,6

Non-controlling interest [(60 + 30 + 7) x 0,20] 19,4

232

r a d i n g –

p a r e n t


P S

On 1 January 20x3, P plc acquired 80% of the shares in S plc for£48. Trial balances of P plc and S plc at 31 December 20x5 are asfollows:



E x a m p l e 2 : I n

t r a - g r o u p t r

s u b s i d i a r y s e l l s g o o d s

t o p P S

Investment in S 48

Other net assets 106 77

Inventory 30 20

Tax expense 6 3

190 100

Share capital 100 50Retained earnings – boy 70 40

Profit before tax 20 10

190 100

87

Included in the closing inventory of P plc are goods bought from S plc for £3. The cost of these goods to S plc is £2.

Required:Prepare consolidated SOCI and SOFP for 20x5.

r k i n g s

e q u i t y o f

S 31/12/20x5

Tot Pro-forma NCI (20%) P (80%)

At acquisition

SC 50 Dr SC



E g 2 - W

o r

A n a l y s i s

o f e

88

5

RE 10 Dr RE

60 12 48Cr NCI (SOFP) Cr Inv

Beginning of year

RE at boy 40

RE at acquisition (10)30 6 24

Dr RE Cr NCI (SOFP)

Current year

Profit after tax 7

S unrealised profit (1)

6 1,2 4,8

96 19,2

The NCImust share

in theunrealisedprofit of S

u t i o n

P & S GROUP

CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOMEFOR THE YEAR ENDED 31 DECEMBER 20X5

Profit before tax 29 [20 + (10 – 1)]

Tax expense (9) (6 + 3)



E g 2 - S o l u Profit for the period 20

89

Pro-forma j/e–

20x5 Dr CrProfit before tax 1

Inventory 1

P & S GROUPCONSOLIDATED STATEMENT OF FINANCIAL POSITION AT 31 DECEMBER 20X5 ASSETS

Other net assets (106 + 77) 183

Inventory [30 + (20 – 1)] 49

232


Share capital 100Retained earnings [P 70 + 14 ] + [S (30 x 0,80) + (6 x 0,80)] 112,8


Non-controlling interest [(60 + 30 + 6) x 0,20] 19,2

232

ACQUISITION OF SUBSIDIARY PARTWAY THROUGH THE YEAR



The ‘at acquisition’ reserves of the subsidiary are an

important number Used as part of the calculation of the FV of the equity of the

subsidiary at acquisition for the purposes of computinggoodwill / BPO

Only reserves earned by the subsidiary post-acquisition arerecognised as earned by the group.

If the subsidiary is acquired part way through the year, it isnecessary to calculate the reserves at acquisition Retained earnings at last SOFP date

profits earned until acquisition date- dividends paid until acquisition date

90

o n of

h r o u g h On 1 April 20x1, P plc acquired 75% of the shares in S plc for

£24 000. Profit of S is earned evenly through the year. Trialbalances of P plc and S plc at 31 December 20x1 are as follows:



E x a

m pl e

1 : A c q u i s i t i o

s u b

s i d i a r y p a r t w a y

t h

t h e

y e a r


P SNet assets 46,5 36

Investment in S 25,5 -

Dividends paid 10 4

82 40

Share capital 50 20

Retained earnings – boy 15 12

Profit for period 14 8

Dividend income 3 -

82 40

91

Required: Prepare consolidated SOFP at 31/12/x1

o r k i n g s

Analysis of equity of S 31/12/20x1

TotNCI

(25%)P

(75%)



E g 1 - W

o

92

At acquisition

SC 20RE (31/12/xo) 12

Profit (01/01/x1 – 31/03/x1) (8 x 3/12) 2

34 8,5 25.5

End of year

RE at eoy (12 + 8 – 4) 16


2 0,5 1,5

36 9

Eg1 –

solutionP & S GROUPCONSOLIDATED STATEMENT OF FINANCIAL POSITION



AT 31 DECEMBER 20X1 ASSETS

Net assets (46,5 + 36) 82,5

82,5


Equity

Share capital 50Retained earnings [P (15 + 14 + 3 - 10) + S (2 x 0,75)] 23,5


Non-controlling interest [(34 + 2) x 0,25] 9

82,5

93

consolidations slides

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