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9 Investment entities: applying the consolidation exception

9 Investment entities: applying the consolidation exception

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as the other criteria of IFRS 10.4(a) have been met. The amendments clarify that the exemption

from presenting consolidated financial statements applies to an intermediate non-investment entity

parent that is a subsidiary of an investment entity parent

(b)



The accounting by an investment entity parent for an investment entity subsidiary that also

provides investment service. A subsidiary that provides services related to the parent's

investment activities should not be consolidated if the subsidiary itself is an investment entity. The

amendments clarify that an investment entity parent should measure the investment entity

subsidiary at fair value through profit or loss.



(c)



Application of IFRS 12. The amendments clarify that an investment entity that prepares financial

statements in which all of its subsidiaries are measured at fair value through profit or loss (FVTPL)

is required to present the disclosures relating to investment entities as required by IFRS 12.



(d)



The application of the equity method by a non-investment entity investor to an investment entity

joint venture or associate. When applying the equity method, a non-investment entity investor in

an investment entity retains the fair value measurement applied by the associate to its interests in

subsidiaries, unless the non-investment entity investor is a joint venturer where the joint venture is

an investment entity. Different wording would apply depending on whether is an associate or joint

venture.



2.10 Disclosure

IFRS 12 Disclosure of interests in other entities was issued in 2011 as part of the ‘package of five

standards’ relating to consolidation. It removes all disclosure requirements from other standards relating

to group accounting and provides guidance applicable to consolidated financial statements.

The standard requires disclosure of:

(a)



The significant judgements and assumptions made in determining the nature of an interest in

another entity or arrangement, and in determining the type of joint arrangement in which an

interest is held



(b)



Information about interests in subsidiaries, associates, joint arrangements and structured entities

that are not controlled by an investor



2.10.1 Disclosure of subsidiaries

The following disclosures are required in respect of subsidiaries:

(a)



The interest that non-controlling interests have in the group’s activities and cash flows, including

the name of relevant subsidiaries, their principal place of business, and the interest and voting

rights of the non-controlling interests



(b)



Nature and extent of significant restrictions on an investor's ability to use group assets and

liabilities



(c)



Nature of the risks associated with an entity's interests in consolidated structured entities, such as

the provision of financial support



(d)



Consequences of changes in ownership interest in subsidiary (whether control is lost or not)



2.10.2 Disclosure of associates and joint arrangements

The following disclosures are required in respect of associates and joint arrangements:

(a)



Nature, extent and financial effects of an entity’s interests in associates or joint arrangements,

including name of the investee, principal place of business, the investor’s interest in the investee,

method of accounting for the investee and restrictions on the investee’s ability to transfer funds to

the investor



(b)



Risks associated with an interest in an associate or joint venture



(c)



Summarised financial information, with more detail required for joint ventures than for associates



Part C Group financial statements  12: Revision of basic groups



359



2.11 Attribution of losses

Under IFRS 10, non-controlling interests can be negative. This is consistent with the idea that noncontrolling interests are part of the equity of the group.



2.12 Revision: summary of techniques

The summary given below is very brief but it encompasses all the major, but basic, rules of consolidation

for, first, the consolidated statement of financial position.

Knowledge brought forward from earlier studies



Summary of technique: consolidated statement of financial position





Net assets: 100% P plus 100% S







Share capital: P only







Reserves: 100% P plus group share of post-acquisition retained reserves of S less consolidation

adjustments







Non-controlling interest: NCI at acquisition plus NCI share of S's post acquisition retained

reserves



The next section is a recap of the techniques you should remember from your earlier studies. The P2

syllabus introduces a range of extra complications in consolidations, but the basics will always form part

of any question.



Step 1



Read the question and draw up the group structure (W1), highlighting useful information:









Step 2



Draw up a proforma taking into account the group structure identified:













Step 3



Step 4



The percentage owned

Acquisition date

Pre-acquisition reserves



Leave out cost of investment

Put in a line for goodwill

Put in a line for investment in associate

Remember to include non-controlling interests

Leave lines in case of any additions



Work methodically down the statement of financial position, transferring:





Figures to proforma or workings







100% of all assets/liabilities controlled at the year end aggregated in brackets on

face of proforma, ready for adjustments







Cost of subsidiary/associate and reserves to group workings, setting them up as you

work down the statement of financial position







Share capital and share premium (parent only) to face of proforma answer







Open up a (blank) working for non-controlling interests



Read through the additional notes and attempt the adjustments showing workings for all

calculations.

Do the double entry for the adjustments onto your proforma answer and onto your group

workings (where the group workings are affected by one side of the double entry).



360



12: Revision of basic groups  Part C Group financial statements



Examples:

Cancel any intragroup items eg current account balances, loans

Adjust for unrealised profits:

Unrealised profit on intragroup sales



X



% held in inventories at year end



%



= Provision for unrealised profit (PUP)



X



DR Retained earnings



(adjust in company selling goods)



CR Group inventories



Make fair value adjustments:

Acq'n date



Step 5



Movement



Year end



Inventories



X



(X)



X



Depreciable noncurrent assets

Non-depreciable

non-current assets

Other fair value

adjustments



X



(X)



X



X



(X)



X



X/(X)



(X)/X



X/(X)



X



(X)



X



This total appears

in the goodwill

working



This total is used to

adjust the subsidiary's

reserves in the

reserves working



The individual

figures here are

used to adjust the

relevant balances on

the consolidated

statement of

financial position



Complete goodwill calculation

Consideration transferred



X



Non-controlling interests (at % fair value (FV) of net assets or at 'full' FV)



X



Less net fair value of identifiable assets acquired and liabilities assumed:

Share capital



X



Share premium



X



Retained earnings at acquisition



X



Other reserves at acquisition



X

X



Fair value adjustments at acquisition



(X)

Less impairment losses on goodwill to date



X

(X)

X



Part C Group financial statements  12: Revision of basic groups



361



Step 6



Complete the consolidated retained earnings calculation:

Parent

Per question

Adjustments

Fair value adjustments movement

Pre-acquisition retained earnings

Group share of post acq'n ret'd earnings:

Subsidiary (Y × %)

Associate (Z × %)

Less group share of impairment losses to date



Subsidiary



Assoc



X

X/(X)

X/(X)

(X)

Y



X

X/(X)

X/(X)

(X)

Z



X

X/(X)



X

X

(X)

X



Note: Other reserves are treated in a similar way.



Step 7



Complete 'Investment in associate' calculation:

Cost of associate



X



Share of post-acquisition retained reserves (from reserves working Z × %)



X



Less group impairment losses on associate to date



(X)

X



Complete the non-controlling interests calculation:

NCI at acquisition (from goodwill working)



X



NCI share of post acq'n reserves (from reserves working Y × NCI %)



X

(X)



Less NCI share of impairment losses (only if NCI at 'full' FV at acq'n)



X

The technique for the preparation of a consolidated statement of profit or loss and other comprehensive

income is given below.



Consolidated statement of profit or loss and comprehensive income

Overview

The statement of profit or loss and other comprehensive income shows a true and fair view of the group's

activities since acquisition of any subsidiaries.

(a)



The top part of the statement of profit or loss and other comprehensive income shows the income,

expenses, profit and other comprehensive income controlled by the group.



(b)



The reconciliation at the bottom of the statement of profit or loss and other comprehensive income

shows the ownership of those profits and total comprehensive income.



Method



Step 1



Read the question and draw up the group structure and where subsidiaries/associates are

acquired in the year identify the proportion to consolidate. A timeline may be useful.



Step 2



Draw up a pro-forma:





Step 3



362



Remember the non-controlling interests reconciliation at the foot of the statement.



Work methodically down the statement of profit or loss and other comprehensive income,

transferring figures to proforma or workings:





100% of all income/expenses (time apportioned  x/12 if appropriate) in brackets on

face of proforma, ready for adjustments







Exclude dividends receivable from subsidiary



12: Revision of basic groups  Part C Group financial statements







Subsidiary's profit for the year (PFY) and total comprehensive income (TCI) (for

NCI) to face of proforma in brackets (or to a working if many adjustments).







Associate's PFY and other comprehensive income (OCI) to face of proforma in

brackets.



Step 4



Go through question, calculating the necessary adjustments showing workings for

all calculations, transfer the numbers to your proforma and make the adjustments

in the non-controlling interests working where the subsidiary's profit is affected.



Step 5



Calculate 'Share of profit of associate' and 'Share of other comprehensive income of

associate' (where appropriate):

A's profit for the year (PFY)  Group %

Any group impairment loss recognised on the associate during the period



X

(X)

X



Shown before group profit before tax.

X



A's other comprehensive income (OCI)  Group %



Both the associate's profit or loss and other comprehensive income are calculated based on

after tax figures.



Step 6



Complete non-controlling interests in subsidiary's PFY and TCI calculation:

PFY/TCI per question (time-apportioned  /12 if

appropriate)

Adjustments, eg PUP on sales made by S

Impairment losses (if NCI held at fair value)

x



 NCI%



PFY

X



TCI (if req'd)

X



(X)/X

(X)

X



(X)/X

(X)

X



X



X



Now try the following question to refresh your memory on the topics listed above.



Exam focus

point



The consolidation questions in the Paper P2 exam are much more difficult than those in your earlier

studies. The examiner will not bother to test basic consolidation techniques directly, although they may

come up in a question: rather he will ask about one of the more complex areas which we will look at in the

next few chapters.



Part C Group financial statements  12: Revision of basic groups



363



Question



Groups revision: non-controlling interest at fair value



You are provided with the following statements of financial position (balance sheets) for Shark and

Minnow.

STATEMENTS OF FINANCIAL POSITION AS AT 31 OCTOBER 20X0



Non-current assets, at net book value

Plant

Fixtures

Investment

Shares in Minnow at cost

Current assets

Inventory at cost

Receivables

Bank



$'000



$'000



Minnow

$'000

$'000



325

200

525



70

50

120



200

220

145

100



Equity

$1 Ordinary shares

Retained earnings

Current liabilities

Payables

Bank overdraft



Shark



465

1,190



70

105

0



700

215

915

275

0



275

1,190



175

295

170

50

220



55

20



75

295



The following information is also available.

(a)



Shark purchased 70% of the issued ordinary share capital of Minnow four years ago, when the

retained earnings of Minnow were $20,000. There has been no impairment of goodwill.



(b)



For the purposes of the acquisition, plant in Minnow with a book value of $50,000 was revalued to

its fair value of $60,000. The revaluation was not recorded in the accounts of Minnow. Depreciation

is charged at 20% using the straight-line method.



(c)



Shark sells goods to Minnow at a mark up of 25%. At 31 October 20X0, the inventories of Minnow

included $45,000 of goods purchased from Shark.



(d)



Minnow owes Shark $35,000 for goods purchased and Shark owes Minnow $15,000.



(e)



It is the group's policy to value the non-controlling interest at fair value.



(f)



The market price of the shares of the non-controlling shareholders just before the acquisition was

$1.50.



Required

Prepare the consolidated statement of financial position of Shark as at 31 October 20X0.



364



12: Revision of basic groups  Part C Group financial statements



Answer

SHARK

CONSOLIDATED STATEMENT OF FINANCIAL POSITION (BALANCE SHEET) AS AT 31 OCTOBER 20X0

$'000

Non-current assets

Plant (W4)

Fixtures (200 + 50)



$'000



397

250

647

777

724



Intangible asset: goodwill (W1)

Current assets

Inventory (W5)

Receivables (W6)

Bank



281

200

100

581

1,305



Capital and reserves

Share capital

Retained earnings (W2)



700

222

922

83

1,005



Non-controlling interests (W3)

Current liabilities

Payables (W7)

Bank overdraft



280

20

300

1,305



Workings

1



Goodwill



Group

$'000



Consideration transferred

FV NCI (30%  170,000  $1.50)

Net assets acquired

Share capital

Retained earnings

Revaluation surplus (60 – 50)



170

20

10

200.0

76.5m



Goodwill in parent

2



$'000

200.0

76.5



Retained earnings



Shark

$'000

215

(9)



Per question

Unrealised profit (W5)

Excess dep'n on plant (W4)

At acquisition



Minnow

$'000

50

(8)

(20)

22



Share of Minnow’s post-acquisition retained earnings

(70%  22)



16

222



Part C Group financial statements  12: Revision of basic groups



365



3



Non-controlling interests



$’000

76.5

6.6

83.1



At acquisition (W1)

NCI share of post acqn. retained earnings (30%  22)

4



Plant

Shark

Minnow

Per question

Revalued (60 – 50)

Depreciation on revalued plant (10  20%  4)



$'000



$'000

325



70

10

(8)

72

397



5



Inventory

Shark

Minnow

Less PUP (45  25/125)



6



Receivables



$'000

70

(9)



61

281

$'000



Shark

Less intragroup

Minnow

Less intragroup



$'000

220



$'000

145

35

110



105

15

90

200



7



Payables



$'000



Shark

Less intragroup

Minnow

Less intragroup



$'000

275

15

260



55

35

20

280



3 IFRS 3 (revised), IFRS 13 and fair values

FAST FORWARD



Goodwill arising on consolidation is the difference between the purchase consideration and the fair value

of the identifiable assets and liabilities acquired.

To understand the importance of fair values in the acquisition of a subsidiary consider again the definition

of goodwill.



Key term



Goodwill. Any excess of the cost of the acquisition over the acquirer's interest in the fair value of the

identifiable assets and liabilities acquired as at the date of the exchange transaction.

The statement of financial position of a subsidiary company at the date it is acquired may not be a guide

to the fair value of its net assets. For example, the market value of a freehold building may have risen



366



12: Revision of basic groups  Part C Group financial statements



greatly since it was acquired, but it may appear in the statement of financial position at historical cost less

accumulated depreciation.



3.1 What is fair value?

Fair value is defined as follows by IFRS 13 – it is an important definition.



Key term



Fair value. The price that would be received to sell an asset or paid to transfer a liability in an orderly

transaction between market participants at the measurement date.

(IFRS 13)

We will look at the requirements of IFRS 3 (revised) and IFRS 13 regarding fair value in more detail below.

First, let us look at some practical matters.



3.2 Fair value adjustment calculations

Until now we have calculated goodwill as the difference between the cost of the investment and the book

value of net assets acquired by the group. If this calculation is to comply with the definition above we

must ensure that the book value of the subsidiary's net assets is the same as their fair value.

There are two possible ways of achieving this.

(a)



The subsidiary company might incorporate any necessary revaluations in its own books of

account. In this case, we can proceed directly to the consolidation, taking asset values and

reserves figures straight from the subsidiary company's statement of financial position.



(b)



The revaluations may be made as a consolidation adjustment without being incorporated in the

subsidiary company's books. In this case, we must make the necessary adjustments to the

subsidiary's statement of financial position as a working. Only then can we proceed to the

consolidation.



Note. Remember that when depreciating assets are revalued there may be a corresponding alteration in

the amount of depreciation charged and accumulated.



3.3 Example: Fair value adjustments

P Co acquired 75% of the ordinary shares of S Co on 1 September 20X5. At that date the fair value of

S Co's non-current assets was $23,000 greater than their net book value, and the balance of retained

earnings was $21,000. The statements of financial position of both companies at 31 August 20X6 are

given below. S Co has not incorporated any revaluation in its books of account.

P CO

STATEMENT OF FINANCIAL POSITION AS AT 31 AUGUST 20X6

Assets

Non-current assets

Tangible assets

Investment in S Co at cost

Current assets

Total assets

Equity and liabilities

Equity

Ordinary shares of $1 each

Retained earnings

Current liabilities

Total equity and liabilities



$



$



63,000

51,000

114,000

82,000

196,000



80,000

96,000

176,000

20,000

196,000



Part C Group financial statements  12: Revision of basic groups



367



S CO

STATEMENT OF FINANCIAL POSITION AS AT 31 AUGUST 20X6



$



Assets

Tangible non-current assets

Current assets

Total assets

Equity and liabilities

Equity

Ordinary shares of $1 each

Retained earnings



$

28,000

43,000

71,000



20,000

41,000

61,000

10,000

71,000



Current liabilities

Total equity and liabilities



If S Co had revalued its non-current assets at 1 September 20X5, an addition of $3,000 would have been

made to the depreciation charged to profit or loss for 20X5/X6. It is the group's policy to value the noncontrolling interest at acquisition at its proportionate share of the fair value of the subsidiary's net assets.

Required

Prepare P Co's consolidated statement of financial position as at 31 August 20X6.



Solution

P CO CONSOLIDATED STATEMENT OF FINANCIAL POSITION AS AT 31 AUGUST 20X6

$

Non-current assets

Property, plant and equipment $(63,000 + 48,000*)

Goodwill (W1)



111,000

3,000

114,000

125,000

239,000



Current assets

Equity and liabilities

Equity

Ordinary shares of $1 each

Retained earnings (W2)



$



80,000

108,750

188,750

20,250

209,000

30,000

239,000



Non-controlling interest (W3)

Current liabilities

* (28,000 + 23,000 – 3,000) = $48,000

Workings

1



Goodwill

$

Consideration transferred

Non-controlling interest (64,000 × 25%)

Net assets acquired as represented by

Ordinary share capital

Retained earnings

Fair value adjustment

Goodwill



368



12: Revision of basic groups  Part C Group financial statements



$

51,000

16,000

67,000



20,000

21,000

23,000

(64,000)

3,000



2



Retained earnings

P Co

$

Per question

Depreciation adjustment

Pre acquisition profits

Post acquisition S Co

Group share in S Co

($17,000 × 75%)

Group retained earnings



3



96,000



S Co

$

41,000

(3,000)

(21,000)

17,000



12,750

108,750



Non-controlling interest at reporting date

$

NCI at acquisition (W1)

NCI share of S's post-acquisition retained earnings (25% × 17,000)



4



16,000

4,250

20,250



Fair value adjustments



Property plant and equipment



At acq'n date



Movement



Year end



$



$



$



23,000



(3,000)



20,000



23,000



(3,000)



20,000



Goodwill



Ret'd

earnings



SOFP



Note: S Co has not incorporated the revaluation in its draft statement of financial position. Before

beginning the consolidation workings we must therefore adjust for the fair value uplift at the acquisition

date, the additional depreciation charge that must be reflected in the subsidiary’s post acquisition retained

earnings and the remaining uplift that must be reflected in the consolidated statement of financial position.

The 'fair value table' working is an efficient way of dealing with this, even where there are several fair value

adjustments.



Question



Fair value



An asset is recorded in S Co's books at its historical cost of $4,000. On 1 January 20X5 P Co bought 80%

of S Co's equity. Its directors attributed a fair value of $3,000 to the asset as at that date. It had been

depreciated for two years out of an expected life of four years on the straight line basis. There was no

expected residual value. On 30 June 20X5 the asset was sold for $2,600. What is the profit or loss on

disposal of this asset to be recorded in S Co's accounts and in P Co's consolidated accounts for the year

ended 31 December 20X5?



Answer

S Co: NBV at disposal (at historical cost) = $4,000  1½/4 = $1,500

 Profit on disposal = $1,100 (depreciation charge for the year = $500)

P Co: NBV at disposal (at fair value) = $3,000  1½/2 = $2,250

 Profit on disposal for consolidation = $350 (depreciation for the year = $750)

The non-controlling interest would be credited with 20% of both items as part of the one line entry

in the profit or loss statement.



Part C Group financial statements  12: Revision of basic groups



369



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