Download - IFRS Chapter 9 the Consolidated Statement of Financial Positon

Chapter 9The consolidated statement of financial position

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Contents

1. IAS summary of consolidation procedures

2. Non-controlling interest

3. Dividends paid by a subsidiary

5. A technique of consolidation

7. Intra-group sales of non-current assets

4. Goodwill arising on consolidation

6. Intra-group trading

Contents

8. Summary ： consolidated statement of financial position

11. Fair values in acquisition accounting

10. Dividends and pre-acquisition profits

9. Acquisition of a subsidiary during its accounting period

IAS summary of consolidation procedures

Accounting standards: IAS 27Basic procedure (a) The carrying amount of the parent’s

investment in each subsidiary and the parent’s portion of equity of each subsidiary are eliminated or cancelled

(b) Non-controlling interests in the net income of consolidated subsidiaries are adjusted against group income

(c) Non-controlling interests in the net assets of consolidated subsidiaries should be presented separately in the consolidated statement of financial position


Cancellation and part cancellation The preparation consists of two procedures: Take the individual accounts of the parent company and

each subsidiary and cancel out items which appear as a asset in one company and a liability in another

Add together all the un-cancelled assets and liabilities throughout the group

Items requires cancellation: The asset shares in subsidiary companies which appears

in the parent company’s accounts will be matched with the liability’s share capital in the subsidiary’s accounts

There may be intra-group trading.


Part cancellation An item may appear in the statements of

financial position of a parent company and its subsidiary, but not at the same amounts

The remaining un-cancelled will appear in the consolidated statements of financial position

Goodwill arising from consolidation

Non-controlling interest

Non-controlling interest can be valued at:(a) Share of net assets; or(b) Fair value (per IFRS 3 revised) Fair value can be based on MV of shares, or

you may be given the FV. Valuation of the NCI will affect the goodwill

calculation


Procedure (a) Aggregate the assets and liabilities in the

statement of financial position is 100%p+100%s irrespectively of how much actually own

This shows that the amount of net assets controlled by the group.

(b) Share capital in that of the parent only

(c) Calculate the non-controlling interest share of the subsidiary’s net assets

(d) Balance of subsidiary’s reserves are consolidated


Goodwill represents the difference between the amount paid to acquire the net assets of a subsidiary and the fair value of those net assets. It may be positive or negative.

Goodwill arising on consolidation is the difference between the consideration transferred plus the non-controlling interest and the fair value of the identifiable assets and liabilities acquired.


GoodwillConsideration transferred XNon-controlling interest X

Less: Net fair value of identifiable assets, liabilities and contingent liabilities

(X)X


Group NCI

$ $ $ Consideration transferred/Fair value of non-controlling interests X

X Less: Net fair value of identifiable assets

acquired and liabilities assumedX Group/NCI % (X) (X)

X X

X


Example: Goodwill and pre-acquisition profits Sing Co acquired the ordinary shares of Wing Co on 31 March when the draft

statement of financial position of each company were as follows.

SING COSTATEMENT OF FINANCIAL POSITION AS AT 31 MARCH

＄Assets Non-current assets Investment in 50,000 shares of Wing Co at cost 80,000 Current assets 40,000Total assets 12,000Equity and liabilitiesEquity Ordinary shares 75,000 Retained earnings 45,000Total equity and liabilities 120,000


Example: Goodwill and pre-acquisition profits

WING CO

STATEMENT OF FINANCIAL POSITION AS AT 31 MARCH

Current assets

Equity

50,000 ordinary shares of ＄ 1 each

Retained earnings

＄60,000

50,000

10,000

60,000


Solution The technique to adopt here is to produce a new working ： ‘ Goodwill’ . A formula is working out below.

Good willConsideration transferred

Non-controlling interest at acquisition

Net assets acquired as represented by :

Ordinary share capital

Share premium

Retained earnings on acquisition

＄

X

XX

＄

X

X

X

(X)

X


Goodwill

Applying this to our example will look like this

Consideration transferredNon-controlling interest at acquisitionNet assets acquired as represented by :Ordinary share capitalRetained earnings on acquisition

＄

50,000

10,000

＄80,000-80,000

(60,000) 20,000

Solution:


Goodwill

SING COCONSOLIDATED FINANCIAL STATEMENT OF FINANCIAL POSITION

AssetsNon-current assets Goodwill arising on consolidationCurrent assetsEquityOrdinary sharesRetained earnings

＄

20,000100,000120,000

75,00045,000

Solution:


Goodwill is likely to be higher when NCI is valued at FV. This excess is termed:Goodwill attributable to the NCI.Non- controlling interest at year end then becomes:

NCI% of S net assets XPURP (if applicable) (X)Goodwill attributable to NCI X

X

Goodwill – NCI at fair value

Goodwill arising from consolidationExample:P acquired 75% of the shares in S on 1 January 2007 when S had trained earnings of ＄ 15,000. The market share price of S’s shares just before the date of acquisition was ＄ 1.60. P values non-controlling interest at fair value. Good will is not impaired.The statements of financial position of P and S are as follows:

Property, plant and equipment

Shares in S

Current assets

Share capital - ＄ 1shares

Retained earnings

Current liabilities

P( ＄ )

60,000

68,000

128,000

52,000

180,000

100,000

70,000

170,000

10,000

180,000

S( ＄ )

50,000

-

50,000

35,000

85,000

50,000

25,000

75,000

10,000

85,000

Goodwill arising from consolidationSolution CONSOLIDATED STATEMENT OF FINANCIAL POSITION

Assets


Goodwill(w1)

Current assets(52,000+35,000)

Total assets

Equity and liabilities

Equity attributable to the owners of p

Share capital

Retained earnings(W2)

Non-current assets

Total equity

Current liabilities(10,000+10,000)

＄

110,000

23,000

87,000

220,000

100,000

77,500

177,500

22,500

200,000

20,000

220,000


Solution: Workings

1.Goodwill

Consideration transferred

Non-controlling interest at acquisition (12,500 shares @ ＄ 1.60)

Net assets of S at acquisition(50,000+15,000)

Goodwill (parent and non-controlling interest)

Non-controlling interest at fair value (as above)

Non-controlling share of net assets at acquisition

Goodwill attributable to non-controlling interest

＄

68,000

20,000

(65,000)

23,000

20,000

(16,250)

3,750


Solution:2.Retained earnings

Per statement of financial position

Less pre-acquisition

Group share of S (10,000×25%)

Group retained earnings

P( ＄ )

70,000

7,500

77,500

S( ＄ )

25,000

(15,000)

10,000

3.Non-controlling interest at year end

Share of net assets of S(75,000×25%)

Goodwill(W1)

＄

18,750

3,750

22,500


Impairment of goodwill Impairment tests are conducted at least at

each year end. Any resulting impairment loss is first recognised against consolidated goodwill.

Calculate retainedearnings

Aggregate the assets and

liabilitiesCancel

common items

Calculate non-controlling

interest

Calculate goodwill

A technique of consolidation


Example ：The draft statement of financial position of Ping Co and Pong Co June 20×4 were as follows

PING CO

STATEMENT OF FINANCIAL POSITION AS AT 30 JUNE 20×4Assets

Non-current assets


20,000 ordinary shares in Pong Co at cost

Current assets

Inventory

Receivables

Cash

Total assets

＄

50,000

30,000

3,000

16,000

2,000

＄

80,000

21,000

101,000


Equity

Ordinary shares of ＄ 1 each

Revaluation surplus

Retained earnings

Current liabilities

Owed to Pong Co

Trade payables

Total equity and liabilities

Example ：

＄

45,000

12,000

26,000

8,000

10,000

＄

83,000

18,000

101,000

A technique of consolidationExample ：

PING CO STATEMENT OF FINANCIAL POSITION AS AT JUNE 2004Assets


Current assets

Inventory

Owed by Ping Co

Receivables

Total assets

Equity

Ordinary shares of ＄ 1 eachRevaluation surplusRetained earnings

Current liabilitiesOwed to Pong CoTrade payables


＄

8,000

10,000

7,000

25,000

5,000

28,000

＄

40,000

25,000

65,000

58,000

70,000

65,000


Solution:

1. Agree current accounts

Ping Co has goods in transit of ＄ 2,000making its total inventory ＄ 3,000+ ＄ 2,000= ＄ 5,000and its liability to Pong Co ＄ 8,000+ ＄ 2,000= ＄ 10,000

Cancel common items: these are the current accounts between the two companies of ＄ 10,000

2. Calculate goodwill

GoodwillConsideration transferred

Non-controlling interest(w3)

Net assets acquired as represented by:

Ordinary shares capital

Revaluation surplus on acquisition

Retained earnings on acquisition

Goodwill

＄

25,000

5,000

6,000

＄

30,000

7,200

37,200

(36,000)

1,200


Solution:

3.Calculate non-controlling interest

(a) At acquisition

Pong Co’s net assets(w2)

×20%

(b) At year end

Pong Co’s net assets(65,000-7,000)

×20%

＄

36,000

7,200

＄

58,000

11,600

＄

12,000

--

12,000

4. Calculate consolidated reserves

Consolidated revaluation surplus

Ping Co

Share of Pong Co’s post acquisition revaluation surplus


Solution:

Consolidated retained earnings

Retained earnings per question

Less pre-acquisition

Share of Pong: 80%×$22,000

Ping

$

26,000

17,600

43,600

Pong

$

28,000

(6,000)

22,000

5.Prepare the consolidated statement of financial position

PING CO

CONSOLIDATED STATEMENT OF FIANNCIAL POSITION AS AT 30 JUNE 20×4

Assets

Non-current assets

Property, plant and equipment ($50,000+$40,000)

$ $

90,000

A technique of consolidationSolution:Intangible asset: goodwill

Current assets

Inventories($5,000+$40,000)

Receivables($16,000+$7,000)

Cash

Total assets

EquityOrdinary shares of ＄ 1 eachRevaluation surplusRetained earnings


Current liabilitiesTradepayables($10,000+$7,000)


$

13,00023,0002,000

45,00012,00043,600

$

1,200

38,000

129,200

100,600

11,600

112,200

17,000

129,200

Intra-group trading

Unrealized profit（ a ） Although A company makes a profit when it sells goods

to B, the group doesn’t make a sale until an outside customer buys the goods from B

(b) Any purchases from A Co, which remain unsold by B Co will be included in B’s inventory.

Cost

External sales

Closing inventory at cost

Profit / Loss

X

Nil

X

nil

An adjustment

DEBIT Group retained earnings

CREDIT Group inventory (statement of financial position)

Intra-group trading

11 22 33

Three possibilities as regards the treatment of intra-group profits

Remove only the group’s shares of the profit loading

Remove the whole profit loading

,charging the non-controlling interest with their proportion

Remove the whole profit without charging the non-controlling interest (to reduce group retained earnings by the whole profit loading)

Non-controlling interest in unrealized intra-group profits

Intra-group trading

1

DEBIT

Group retained earnings

2

DEBIT


3

CREDIT

Group inventory(statement of financial position)

Entries to learn

Intra-group sales of non-current assets

To alter retained earnings and accumulated depreciation so that consolidated depreciation is based on the cost to the group

Consolidation adjustments

To alter retained earnings and non-current assets cost so as to remove any element of unrealized profit or loss.

Intra-group sales of non-current assets

The double entry is as follows: (a) Sale by parent DEBT Group retained earnings

CREDIT Non-current assets

with the profit on disposal, less the additional depreciation

(b) Sale by subsidiary DEBIT Group retained earnings

DEBIT Non-controlling interest CREDIT Non-current assets with the profit on disposal, less the additional depreciation

Summary: consolidated statement of financial position

PurposeTo show the net assets with P controls and the

ownership of those assets

Net assetsAlways 100%P plus 100%S providing P holds a majority of

voting rights

Share capital P only

ReasonSimply reporting to the parent company’s shareholders in

another form

Retained earnings

100%P plus group share of post-acquisition retained earnings of S less consolidation adjustments

ReasonTo show the extent to which the group actually owns total

assets less liabilities


NIC shares of S’s consolidated net assets, or valuation at fair value

ReasonTo show the entity in a subsidiary not attributable to the

parent

Acquisition of a subsidiary during its accounting

Necessary to

distinguish

Profits and before acquisition

Profits and after acquisition

Dividends and pre-acquisition profits

Dividends paid by the subsidiary to its parent company may only be credited to profit or loss in the parent’s financial statement to the extent that they are paid from post-acquisition profits.

Dividends received by the parent company from pre-acquisition profits should be credited to investment in subsidiary’s account and treated as reducing the cost of shares acquired.

The post-acquisition element is genuinely earned by the parent and the pre-acquisition element should be deducted from cost of the combination

Fair value in acquisition accounting

Goodwill. Any excess consideration transferred over the acquirer’s interest in the fair value of the identifiable assets and liabilities acquired as at the date of the exchange transaction

Fair value .The amount for which an asset could be exchanged, or a liability settled, between knowledgeable, willing parties in an arm’s length transaction.


Fair value adjustment calculation Two methods: (a) The subsidiary company might incorporate

any necessary revaluation in its own books of account

(b) The revaluations may be made as a consolidation adjustment without being incorporated in the subsidiary company’s books.


Consideration transferred the assets transferred by the acquirer, the liabilities incurred by the acquirer (to former

owners of the acquiree), and equity interests issued by the acquirerDeferred consideration Consideration that is to be paid in the future

should be discounted to present value to determine its fair value

Contingent considerationContingent consideration (i.e. a payment dependent on whether specified future events occur or conditions are met, e.g. a profit target) is measured at fair value taking into account the probability of expected payment and the time period to settlement


Cost of business combination The general principal is the acquirer should measure the cost of

a business combination as the total of the fair value, at the date of exchange, of the assets given, liabilities incurred or assumed, and equity instruments issued by the acquirer, in exchange for control of the acquiree.

The fair value of any deferred consideration is determined by discounting the amounts payable to their present value at the date of exchange.

Approach to the consolidated SFP

Step 1 Group structureStep 2 ProformaStep 3 Assets & liabilitiesStep 4 AdjustmentsStep 5 GoodwillStep 6 Investment in associateStep 7 Non-controlling interestStep 8 Retained earnings

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