lecture 7- consolidated financial statements (part 5) (2)

8/10/2019 Lecture 7- Consolidated Financial Statements (Part 5) (2)

1/34

CONSOLIDATED FINANCIALSTATEMENTS

(PART 5)

ByDr Mazni Abdullah, CA (M), CFiA (M), MMIM, PhD (Stirling), MBA (Malaya), BAcc(Malaya)


2/34

COMPLEX GROUP STRUCTURES1) Multiple Direct Subsidiaries (Fellow

Subsidiaries)

Apply the same consolidation principle / adjustmenttechnique.

For each acquisition of subsidiary, the goodwill ismeasured.

Goodwill, NCI and post acquisition reserves of eachsubsidiary are combined in the consolidated accounts.


3/34

COMPLEX GROUP STRUCTURES2) Indirect Subsidiaries

Parent company obtains control in a subsidiary viaindirect interest i.e. via shares held by its othersubsidiary/ies in the group.

75%

45% (indirect interest)

60%

Papa Bhd

Direct Subsidiary- Achik Bhd

Indirect Subsidiary-Busu Bhd


4/34

COMPLEX GROUP STRUCTURES

Indirect Subsidiaries Achik Bhd Busu BhdParent interest:

Direct 75%Indirect 75% x 60% 45%Non-controlling interest (NCI):Direct 25% 40%

Indirect 25% x 60% 15%100% 100%


5/34

Consolidation Techniques for Indirect

Subsidiaries Follow the same consolidation principles. Two methods to consolidate the group accounts:

1) Stage by stage (multiple stage) consolidationmethod/ consolidation of consolidation method/two-stage consolidation

2) One stage (short cut technique) consolidationmethod/ indirect interest method/ one-stageconsolidation


6/34


Subsidiaries1) Consolidation of consolidation method Series of consolidation- starting with the most junior

subsidiary/ lowest tier of the vertical group structure Refer to previous diagram

First - consolidate financial statements of Busu Bhd with Achik Bhd to obtain the Consolidated FinancialStatements of Achik Bhd

Next -consolidate the consolidated FinancialStatements of Achik Bhd with the Financial Statementsof Papa Bhd


7/34


Subsidiaries2) Indirect interest method Only one consolidation process involves covering all

entities in the group. Use actual holding % and effective shareholding %. Share capital & pre-acquisition retained profit of the

sub-subsidiary (grandson) are apportioned to theGroup and NCI based on actual shareholding %.

Post-acquisition retained profit of the sub-subsidiary(grandson) is apportioned to the Group & NCI basedon effective shareholding %.


8/34


Subsidiaries2) Indirect interest method

60% 40%

Share Capital & Pre-acquisition Retained Profit ofBusu Bhd [ actual shareholding %]

GROUP NCI


9/34


Subsidiaries2) Indirect interest method

45% 55%

(75% x 60%) (40% +[25% x 60%])

Post-acquisition Retained Profit of Busu Bhd[ effective shareholding %]

GROUP NCI


10/34

Consolidation Techniques for IndirectSubsidiariesExample 5.1 NEJ The 31 December 20x8 balance sheets of 3 companies in a

group are as follows:

A BhdRM000

B BhdRM000

C BhdRM000

Share Capital 100 60 50

Retained profit 45 51 25

145 111 75

Investment :45,000 shares in B Bhd 70 - -

30,000 shares in C Bhd - 36 -

Other net assets 75 75 75

145 111 75


11/34

Consolidation Techniques for IndirectSubsidiaries The share capital of A Bhd, B Bhd, and C Bhd comprises

100,000 shares, 60,000 shares, and 50,000 sharesrespectively.

The shareholdings were acquired on 1 January 20x1, when BBhd retained profit were RM20,000 and C Bhd retained profitwere RM10,000.

Required: Prepare the consolidated balance sheet of A Bhd and its

subsidiaries as at 31 December 20x8.

75% 60%

A B C


12/34

Consolidation of Consolidation Method

1. Consolidate B Bhd & C Bhd (Immediate Group)2. Determine the Goodwill amount

RM000

Total consideration 36NCI (40% x 60) 24

60

FV of net assets acquired:

Share capital 50Retained Profit 10 60

GOODWILL -


13/34


(1) B Bhd + C Bhd (Immediate Group)CJE 000 000

a) Dr Share Capital (C) (60% x 50) 30

Dr Retained profit (C) (60% x 10) 6

Cr Investment in C Bhd 36( to eliminate investment account)

b) Dr Retained profit (C) (60% x [25-10]) 9

Cr Retained profit (B) 9

(to transfer post-acquisition retained profit)

c) Dr Share Capital (C) (40% x 50) 20


Cr NCI 30

(to record NCI)


14/34


15/34


CJE 000 000 d) Dr Share Capital (B) (75% x 60) 45

Dr Retained profit (B) (75% x 20) 15

Dr Goodwill 10

Cr Investment in B Bhd 70

( to eliminate investment account)

e) Dr Retained profit (B) (75% x [51-20+9]) 30

Cr Retained profit (A) 30


f) Dr Share Capital (B) (25% x 60) 15Dr Retained profit (B) (25%x [51+9]) 15

Cr NCI 30

(to record NCI)


16/34

Consolidation worksheet A Bhd B Bhd C Bhd dr cr GROUP

Goodwill - - - d) 10 10

Inv in B 70 - - d) 70 -

Inv in C - 36 - a) 36 -

Other assets 75 75 75 225

Share Capital 100 60 50 a) 30 100

c) 20d) 45

f) 15

Retained profit 45 51 25 a) 6

b) 9 b) 9

d) 15

e) 30 e) 30

f) 15

NCI c) 30 60

f) 30


17/34

Consolidation of Consolidation MethodA Bhd and its subsidiaries consolidated balance sheet as at

31 December 20x8

RM 000

Goodwill on consolidation 10

Other net assets 225235

Share capital 100

Retained profit 75

Non-controlling interest 60

235


18/34

Indirect Interest Method

B BhdRM000

C BhdRM000

GROUP

Direct 75% -

Indirect - 45%(75% x 60%)

Non-controlling interest (NCI)

Direct 25% 40%Indirect - 15%

(25% x 60%)


19/34

Indirect Interest MethodCJE 000 000

a) Dr Share capital (B) (75% x 60) 45

Dr Share capital (C) (60% x 50) 30

Dr Retained profit (B) (75% x 20) 20


Dr Goodwill on consolidation 10Cr Investment in B Bhd 70

Cr Investment in C Bhd 36

( to eliminate investment accounts)

b) Dr Retained profit (B) (75% x [51-20]) 23.25

Dr Retained profit (C) (45% x [25-10]) 6.75

Cr Retained profit (A) 30



20/34

Indirect Interest Method000 000

c) Dr Share capital (B) (25% x 60) 15

Dr Share capital (C) (40% x 50) 20

Dr Retained profit (B) (25% x 51) 12.75


Dr Retained profit (C) (55% x [25-10]) 8.25Cr NCI 60

( to record NCI)


21/34

Consolidation worksheet A Bhd B Bhd C Bhd dr cr GROUP

Goodwill - - - a) 10 10

Inv in B 70 - - a) 70 -

Inv in C - 36 - a) 36 -

Other assets 75 75 75 225

Share Capital 100 60 50 a) 45 100

a) 30c) 15

c) 20

Retained profit 45 51 25 a) 15 b) 30 75a) 6

b) 23.25

b) 6.75

c) 12.75

c) 4 ; 8.25

NCI c) 60 60


22/34

Indirect Interest MethodA Bhd and its subsidiaries consolidated balance sheet as at

31 December 20x8

RM 000

Goodwill on consolidation 10

Other net assets 225235

Share capital 100

Retained profit 75

Non-controlling interest 60

235


23/34

Other group structure connecting affiliationstructure

Diagram 1 Diagram 2

B70%

A 20%

80%C

80% 60% A B C

10%


24/34

Effective Acquisition Date in Indirect

Subsidiaries1) The effective acquisition date of the indirect subsidiary

is the date in which the Parent acquires the directsubsidiary ( this situation applies when the direct

subsidiary acquired the indirect subsidiary on anearlier date ).

2) The effective acquisition date of the indirect subsidiaryis the date in which the direct subsidiary acquires the

indirect subsidiary ( this situation applies when theindirect subsidiary was acquired on a date later thanthe acquisition date of the direct subsidiary by theultimate Parent ).


25/34

Effective Acquisition Date in IndirectSubsidiaries

Acquisition date: 1 Jan 2010


Deemed acquisition date BBhd by the Ultimate

Parent- P Bhd= 1 Jan 2010.



Deemed acquisition date B Bhd by the Ultimate Parent P Bhd

= 1 Jan 2012

Ultimate Parent PBhd

Direct Subsidiary- A Bhd

Indirect Subsidiary- B Bhd

Ultimate Parent PBhd

Direct Subsidiary- A Bhd

Indirect Subsidiary

B Bhd


26/34


27/34

Acquisition of subsidiary during theaccounting period

Pre-acquisition profit/loss of subsidiary should not becombined with the profit/loss of the parent

Two approaches to exclude the pre-acquisition profit/loss

of the subsidiary acquired during the year from theconsolidated statement of comprehensive income.1. Whole year approach the profit/loss of the

subsidiary for the whole accounting period is included inthe consolidated statement of comprehensive incomeand will deduct later the pre-acquisition profit/loss .

2. Part-of the year approach to include only the post-acquisition profit/loss of the subsidiary in theconsolidated statement of comprehensive income.


28/34

Acquisition of subsidiary during the accounting period Example 4.15 NEJ(2013)

A Bhd acquires 90% interest in B Bhd on 31 March 20x8. Thesummarised statement of comprehensive income of B Bhd for the year ended 31 Dec 20x8 as follows:

Assume that revenue & expenses of B Bhd accrue evenly throughout

the year.RM000

Revenue 360

Expenses 240

Profit before tax 120

Tax 40

Profit after tax 80

Other comprehensive income -

Total comprehensive income 80


29/34

Acquisition of subsidiary during the accounting period

B Bhds operation results may be included in the consolidated

statement of comprehensive income for the year ended 31 Dec 20x8as follows:

(1) Whole-year approach RM000

Revenue 360

Expenses 240Profit before tax 120

Tax 40

Profit after tax 80

Pre-acquisition profit 20 (3/12 x 80)

Profit for the year 60




30/34

Acquisition of subsidiary during the accounting period

B Bhds operation results may be included in the consolidated

statement of comprehensive income for the year ended 31 Dec 20x8as follows:

(1) Part of the year approach RM000

Revenue 270 (9/12 x 360)

Expenses 180 (9/12 x 240)Profit before tax 90

Tax 30 (9/12 x 40)

Profit after tax 60




31/34

Subsidiary Reporting Losses

The full loss of a subsidiary shall be included inthe consolidated income statement.

The NCI in that subsidiary is allocated with its

share of the loss In the accounts of Parent (separate account), the

investment in the subsidiary shall be writtendown to recognise impairment losses (MFRS136).

Refer Example 4.17 & 4.18 in NEJ


32/34

Subsidiary with preference share capital Preference shares no voting power; not determine the

control status Issues: apportionment of Income & Net Assets

Participative/ non-participative preference shares Cumulative/non-cumulative preference shares Redeemable/ not redeemable preference shares If the preference shares of subsidiary are partly held by the

parent and partly held by the outsiders: Eliminate the portion of the subsidiarys preference shares held by the

parent The difference between the cost of acquisition & the redemption value

of the shares will be recorded as a charge / a credit to the groupreserves. The income & net assets attributable to the preference shares held by

the outsiders should be accounted as part of NCI in the consolidatedfinancial statements.

Refer Example 4.19 NEJ


33/34

Subsidiary with bonds No consolidation issue arises if the bonds entirely held by a 3 rd party.

The bond is presented as liability.1. Parent held the bonds either partly/wholly the intercompany

indebtedness & the related income/expense should be eliminated.2. Parent acquires the bonds directly from the subsidiary on the date

of issue the book value of the bonds investment in the parents book will be proportionately equal to the book value of the bonds inthe subsidiarys book.

3. Parent acquires the bonds from the 3 rd party: The purchase cost may not be proportionately equal to the book value of

the bonds. The difference will be accounted as gain/loss on early

extinguishing of bonds in the consolidated financial statements.


34/34

Reverse Acquisition

The acquirer is the entity whose equity interests have been acquired & the issuing entity is the acquiree. Normally happens when a large non-listed company

(private company) arranges to have itself acquired by asmall public listed company as a means of obtainingstock exchange listing (known as back-door listing).

In substance- the large non listed company is theacquirer because ultimately its shareholders gain controlover the the combining entities.

MFRS 3- Business Combination : small public listed company (legal acquirer/ parent) Non-listed company (legal acquiree/ subsidiary)

Major consolidation problem determination of the costof acquisition.

lecture 7- consolidated financial statements (part 5) (2)

Documents