Consolidated Financial Statements

Report
Consolidated Financial
Statements
Simple Group
(Subs +Associates)
Balance Sheet & Income Statements
Consolidated Financial Statements
Syllabus Requirement
• 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
Consolidated Financial Statements
Accounting Standards Covering the Group
• 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
Consolidated Financial Statements
Consolidated Financial Statements
IAS-27 Objective …..
 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
Consolidated Financial Statements
IAS-27 Key definitions …..
 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.
Consolidated Financial Statements
….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).
Consolidated Financial Statements
Further Concepts
 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
Consolidated Financial Statements
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
Consolidated Financial Statements
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.
Consolidated Financial Statements
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
Consolidated Financial Statements
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
Consolidated Financial Statements
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
Consolidated Financial Statements
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.
Consolidated Financial Statements
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.
Consolidated Financial Statements
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.
Consolidated Financial Statements
Disclosure
Consolidated Financial Statements
• 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
Consolidated Financial Statements
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
Consolidated Financial Statements
IFRS - 3

IFRS 3 now allows two methods of recognizing the non-controlling interest
Pirate
IFRS
3 Business
allows20X7.
a choice
of method
nonacquired
80% ofCombinations
Sailor on 31 October
On this
date the to
netvalue
assetsthe
of Sailor
amounted to $160,000. Sailor had 100,000 shares in issue with a market value on 30
controlling interest (NCI) at acquisition:
October 20X7 of $2.
• As a proportion of the net assets of the subsidiary company.
Required:
• At
value.
Calculate
thefair
non-controlling
interest at acquisition using both methods.
 An entity may choose to apply a different measurement method to different
acquisitions.
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.
Consolidated Financial Statements
IFRS - 3

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)
b)

Deducted from goodwill on the face of the consolidated statement of financial position;
Deducted from group reserves.
In some cases, the goodwill calculation results in a negative amount referred to by IFRS
3 as a bargain purchase
a) 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.
Consolidated Financial Statements
Practice
Trail 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
Consolidated Financial Statements
Practice – Goodwill at Fair Value & Proportionate share of Net Assets
Financial Position
Land
Investment in S Ltd.
Inventories
Receiveable
Cash
Capital Rs.1 share
Retained Earning
Payebles
H Ltd
14,000
20,000
10,000
2,000
1,000
47,000
S Ltd
12,000
5,000
1,500
1,200
19,700
30,000
10,000
7,000
47,000
12,000
6,000
1,700
19,700
H acquired 80% shares of S ltd. When S retained earnings were 3000
Market price of share at the date of acquisition was Rs. 2.00
Consolidated Financial Statements
Practice – Goodwill at Fair Value & Proportionate share of Net Assets
Consolidated Financial Statements
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
Consolidated Financial Statements
Impairment
ABC 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.
Consolidated Financial Statements
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).
Consolidated Financial Statements
Fair Value Adjustment
Equip
Investment in S
Inves
H
S
2,102
1,900
4,098
240
Development Exp
Inventories
Receivable
210
1,800
713
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
265
580
300
7,733
4,475
FV
H acquired 80% shares on Jan 1 when retained earnings of S were Rs. 2,000
At year End Depriciation for the year due to revaluation of equip. reduced to 20
and amortization of Development Exp. Reduced by 70
Equip
(100)
Development Exp
Long term Recv
Inves. Shares
(140)
(240)
Co. policy is to record revaluation in full & credit minority with their share in
revaluation
Consolidated Financial Statements
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
FV of assets
33,340
PV of Long term
S
H
1,200 X (1/(1.2 ^3))
1
3
1,200 x 0.5787
694
7000
(7000 x 3 x 2) = 42,000
34,124
 + Rs. 1
= 7,000
49,000
34,124
Goodwill
14,876
Consolidated Financial Statements
Practice –
Acq. By shares Issuance & FV
Investor Limited acquired 27 million Rs.10 shares of Investee Limited on January 1, 2008. This acquisition was effected by means of an
exchange 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 Limited’s 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 life
of 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 that
these losses could be utilized and hence should be recognized as deferred tax asset. Share capital and reserves of
Investee Limited at acquisition were Rs.300 million (of Rs.10 each) and Rs.25 million respectively. Applicable tax rate is
35%.
Find Good will
27M Shares
S
5
1
27
H
3
3/5
27*3/5
16
Market Price
2o each
FV of shares issued
Cash consideration
PV of 100M
FV of consideration
324
100M after 2 years
Share
300
Reserves
FV of Plant
Tax losses
25
5
8.75
(25*35%)
FV of NA
338.75
FV of Consdieration
FV of NCI
338.75 X 10%
Goodwill
80
404
Consolidated
Financial
Share of Holding
270/300
404
34
98.83
Statements
Class issues
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”.
If FV of NCI is not given
Calculate it from Shares out standing x Market value per share of
subsidiary
Consolidated Financial Statements
Class issues
Basic Flow for Goodwill, NCI & Retained Earnings
Net Assets
Share Capital
Reserves
FV of Net Assets
FV of Consideration 80%
FV of NCI
20%
FV of Business
100%
Good Will
Retained Earnings
Parent (as it is)
Subs. Part - Growth X 80%
Group Consolidated Retained Earning
Acq.
YE
XXX
XXX
XXX
XXX
XXX
XXX
XXX
XXX
XXX
Growth
XXX
XXX
XXX
N.C.I. (for Balance sheet figure) – Proportionate Method
“YE” Net Asset X 20%
N.C.I. (for Balance sheet figure) – FV Method
FV of NCI investment + “Growth” x 20%
Consolidated Financial Statements
Consolidated Financial Statements
Consolidated Financial Statements
Thank You
Consolidated Financial Statements
Relationships
• Entities may have 3 types of relationships
• Control
• Influence
• Passive
Consolidated Financial Statements
Relationships
Parent
Control
Parent
More then
50% shares
holding &
voting power
Parent
Subsidiary
Consolidated Accounts
Asset
Asset
Added
Liabilities
Liabilities
Added
Influence
Less then 50%
shares holding
/voting power
Parent
Associate
Consolidated Accounts
Asset
Share of
Asset
Added
Liabilities
Share of
Liabilities
Added
Consolidated Financial Statements
Terra
FakenStock
Consolidated Financial Statements
Terra
Consolidated Financial Statements
Fair Value Adjustment
H
Equip
2,102
Goodwill
1,250
Inves
240
Development Exp
S
Consol
1,820
3922
210
1,200
450
Share Premium
600
600
1,730
Retained Earnings 2,000
2,400
FV Adjustment
(240)
(150)
3,560
4,050
713
265
978
Receiveable
580
300
880
4,885
4,325
9,210
Cash
(24)
Capital
1,800
- 1,800
Share Premium
1,000
- 1,000
Reatined Earnings
3,214
392
3,606
payable
1,743
235
1,978
810
810
1,477
9,210
7,733
YE
1,200
Inventories
40
Acq
Net asset
- 1,250
- 1,730
NCI
Goodwill
16
Fair Value of Consideration
80% 4,098
Fair Value of NCI
20% 712
Fair Value of Business
Growth
490
100% 4,810
FV of Net assets
3,560
Goodwill
1,250
Consolidated Financial Statements

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