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9 Non-controlling interest/associate held by a subsidiary

9 Non-controlling interest/associate held by a subsidiary

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The draft financial statements for the year ended 30 June 20X6 are as follows.

STATEMENTS OF FINANCIAL POSITION AS AT 30 JUNE 20X6

Non-current assets

Property, plant and equipment

Intangible assets

Investment in Holgarth

Investment in Batterbee

Current assets

Inventories

Trade receivables

Cash and cash equivalents



Equity

Share capital

Share premium

Retained earnings

Revaluation surplus

Non-current liabilities

Deferred tax liability

Current liabilities

Trade and other payables



Otway

$m



Holgarth

$m



Batterbee

$m



1,012



765

203

1,980



920

350





1,270



442

27





469



620

950

900

2,470

4,450



1,460

529

510

2,499

3,769



214

330

45

589

1,058



1,000

200

1,128

142

2,470



400

140

809

70

1,419



220

83

263

62

628



100



50



36



1,880

4,450



2,300

3,769



394

1,058



Holgarth

$m

4,200

(2,940)

1,260

(290)

(80)

890

(274)

616



Batterbee

$m

1,460

(1,020)

440

(196)

(24)

220

(72)

148



STATEMENTS OF PROFIT OR LOSS AND OTHER COMPREHENSIVE INCOME

FOR THE YEAR ENDED 30 JUNE 20X6



Revenue

Cost of sales

Gross profit

Distribution costs and administrative expenses

Finance costs

Dividend income (from Holgarth and Batterbee)

Profit before tax

Income tax expense

PROFIT FOR THE YEAR

Other comprehensive income that will not be reclassified to

profit or loss

Gain on revaluation of property

Income tax expense relating to other comp income

Other comprehensive income, net of tax

TOTAL COMPREHENSIVE INCOME FOR THE YEAR



Otway

$m

4,480

(2,690)

1,790

(620)

(50)

260

1,380

(330)

1,050



30

(9)

21

1,071



7

(2)

5

621



12

(4)

8

156



Dividends paid in the year



250



300



80



Retained earnings brought forward



328



493



195



Additional information:

(a)



382



Neither Holgarth nor Batterbee had any reserves other than retained earnings and share premium

at the date of acquisition. Neither issued new shares since acquisition.



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



(b)



The fair value difference on the subsidiary relates to property, plant and equipment being

depreciated through cost of sales over a remaining useful life of 10 years from the acquisition date.

The fair value difference on the associate relates to a piece of land (which has not been sold since

acquisition).



(c)



Group policy is to measure non-controlling interests at acquisition at fair value. The fair value of the

non-controlling interests on 1 July 20X2 was calculated as $188m.



(d)



Holgarth's intangible assets include $87 million of training and marketing expenditure incurred

during the year ended 30 June 20X6. The directors of Holgarth believe that these should be

capitalised as they relate to the start-up period of a new business venture in Scotland, and intend to

amortise the balance over five years from 1 July 20X6.



(e)



During the year ended 30 June 20X6 Holgarth sold goods to Otway for $1,300 million. The

company makes a profit of 30% on the selling price. $140 million of these goods were held by

Otway on 30 June 20X6 ($60 million on 30 June 20X5).



(f)



Annual impairment tests have indicated impairment losses of $100m relating to the recognised

goodwill of Holgarth including $25m in the current year. The Otway Group recognises impairment

losses on goodwill in cost of sales. No impairment losses to date have been necessary for the

investment in Batterbee.



Required

Prepare the statement of profit or loss and other comprehensive income for the year ended 30 June 20X6

for the Otway Group and a statement of financial position at that date.



Answer

OTWAY GROUP

CONSOLIDATED STATEMENT OF FINANCIAL POSITION AS AT 30 JUNE 20X6

Non-current assets

Property, plant and equipment (1,012 + 920 + (W10) 60)

Goodwill (W2)

Other intangible assets (350 – (W9) 87)

Investment in associate (W3)

Current assets

Inventories (620 + 1,460 – (W8) 42)

Trade receivables (950 + 529)

Cash and cash equivalents (900 + 510)



Equity attributable to owners of the parent

Share capital

Share premium

Retained earnings (W4)

Revaluation surplus (W5)

Non-controlling interests (W6)

Non-current liabilities

Deferred tax liability (100 + 50)

Current liabilities

Trade and other payables (1,880 + 2,300)



$m

1,992

53

263

222

2,530

2,038

1,479

1,410

4,927

7,457

1,000

200

1,481

168

2,849

278

3,127

150

4,180

7,457



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



383



OTWAY GROUP

CONSOLIDATED STATEMENT OF PROFIT OR LOSS AND OTHER COMPREHENSIVE INCOME

FOR THE YEAR ENDED 30 JUNE 20X6

Revenue (4,480 + 4,200 – (W8) 1,300)

Cost of sales (2,690 + 2,940 – (W8) 1,300 + (W8) 24 + (W10) 10 + 25)

Gross profit

Distribution costs and administrative expenses (620 + 290 + (W9) 87)

Finance costs (50 + 80)

Share of profit of associate (148  25%)

Profit before tax

Income tax expense (330 + 274)

PROFIT FOR THE YEAR

Other comprehensive income that will not be reclassified to profit or loss:

Gain on revaluation of property (30 + 7)

Share of other comprehensive income of associate (8  25%)

Income tax expense relating to other comprehensive income (9 + 2)

Other comprehensive income for the year, net of tax

TOTAL COMPREHENSIVE INCOME FOR THE YEAR



37

2

(11)

28

1,325



Profit attributable to:

Owners of the parent (1,297 – 94)

Non-controlling interests (W7)



1,203

94

1,297



Total comprehensive income attributable to:

Owners of the parent (1,325 – 95)

Non-controlling interests (W7)



1,230

95

1,325



Workings

1



Group structure

Otway

1.7.X2 (4 years ago)



320

= 80%

400

Holgarth

2



1.7.X5 (1 year ago)



55

= 25%

220

Batterbee



Goodwill



Group

$m



Consideration transferred

Fair value of non-controlling interests

Fair value of net assets acquired:

Share capital

Share premium

Retained earnings at acq'n

Revaluation surplus at acq'n

 fair value adjustment

Total FV of net assets

Less cumulative impairment losses



384



$m

7,380

(4,389)

2,991

(997)

(130)

37

1,901

(604)

1,297



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



$m

765

188



400

140

120

40

100

(800)

153

(100)

53



3



Investment in associate

Cost of associate

Share of post-acquisition retained reserves [(263 + 62 – 195 – 54)  25%]

Less impairment losses on associate to date



4



Consolidated retained earnings c/f

Per question

PUP (W8)

Start up costs (W9)

Depreciation on FV adjustment (W10)

Less pre-acquisition

Group share:

Holgarth [520  80%]

Batterbee [68  25%]

Less impairment losses on goodwill:

Holgarth [80% × 100] (W2)

Less impairment losses on associate

Batterbee



5



Consolidated revaluation surplus c/f

Per question

Less pre-acquisition

Group share:

Holgarth [30  80%]

Batterbee [8  25%]



6



Otway

$m

1,128



Holgarth

$m

809

(42)

(87)

(40)

(120)

520



Batterbee

$m

263



Holgarth

$m

70

(40)

30



Batterbee

$m

62

(54)

8



(0)

(195)

68



416

17

(80)

(0)

1,481

Otway

$m

142



24

2

168



Non-controlling interests (statement of financial position)



$m

188

104

6

(20)

278



At acquisition (W2)

Share of post acquisition retained earnings [520 (W4)  20%]

Share of post acquisition revaluation surplus [30 (W5)  20%]

Less: impairment losses on goodwill [20% × 100] (W2)

7



$m

203

19

(0)

222



Non-controlling interests (statement of profit or loss and other comprehensive income)



Holgarth's PFY/TCI per question

Less impairment losses

Less PUP (W8)

Less start-up costs (W9)

Less FV depreciation (W10)



 NCI share 20% =



PFY

$m

616

(25)

(24)

(87)

(10)

470



TCI

$m

621

(25)

(24)

(87)

(10)

475



94



95



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



385



8



Intragroup trading

Cancel intragroup sales and purchases:

DEBIT

CREDIT



Revenue

Cost of sales



$1,300,000

$1,300,000



Unrealised profit (Holgarth to Otway):



$m

18

42

24



In opening inventories (60  30%)

In closing inventories (140  30%)

Increase (to cost of sales)

9



Start-up costs

IAS 38 Intangible assets states that start-up, training and promotional costs should all be written

off as an expense as incurred as no intangible asset is created that can be recognised (the benefits

cannot be sufficiently distinguished from internally generated goodwill, which is not recognised).



10



Fair value – Holgarth



At

acquisition

$m



Property, plant and equipment

(800 – 400 – 140 –120 – 40)

* Additional depreciation =



100



10



100

100



Additional

depreciation*

$m

(40)

(40)



At year

end

$m

60

60



= 10 per annum to cost of sales  4 years = 40



4.11 ED Sale or contribution of assets between an investor and its

associate or joint venture

In December 2012, the IASB published an ED Sale or contribution of assets between an investor and its

associate or joint venture. The ED proposes to eliminate the inconsistency between IFRS 10, which

requires full gain recognition, and IAS 28, which only allows gain recognition to the extent of the

interest attributed to other shareholders. The ED requires that:

(a)



All gains and losses on non-monetary assets sold or contributed to an associate or joint venture

which constitute a business would be fully recognised by the investor.



(b)



Any gain or loss on assets sold or contributed that do not meet the definition of a business would

be recognised only to the extent of the other investors’ interest in the associate or joint venture.



The requirement of full recognition of gains or losses in transactions involving businesses would apply

regardless of the legal form of the transaction in which such a business was transferred, for example

through the sale of a group of assets and liabilities, through the sale and purchase of an investment in a

subsidiary, or in some other manner. Existing guidance on 'linked transactions' in IFRS 10 would be

explicitly extended to these types of transactions as well.



4.12 ED Equity method: share of other net asset changes

This Exposure Draft was published in November 2012. The objective of the proposed amendments is to

provide additional guidance to IAS 28 on the application of the equity method. Specifically; the

proposed amendments intend to specify the following.



386



(a)



An investor should recognise, in the investor’s equity, its share of the changes in the net assets of

the investee that are not recognised in profit or loss or other comprehensive income (OCI) of the

investee, and that are not distributions received (‘other net asset changes’).



(b)



The investor must reclassify to profit or loss the cumulative amount of equity that the investor had

previously recognised when the investor discontinues the use of the equity method.



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



5 IFRS 12 Disclosure of interests in other entities

FAST FORWARD



IFRS 12 Disclosure of interests in other entities requires disclosure of a reporting entity’s interests in

other entities in order to help identify the profit or loss and cash flows available to the reporting entity and

determine the value of a current or future investment in the reporting entity.



5.1 Objective

IFRS 12 was published in 2011. It is effective for annual accounting periods beginning on or after 1

January 2013, but earlier application is permitted.

The objective of the standard is to require entities to disclose information that enables the user of the

financial statements to evaluate the nature of, and risks associated with, interests in other entities, and the

effects of those interests on its financial position, financial performance and cash flows.

This is particularly relevant in light of the financial crisis and recent accounting scandals. The IASB

believes that better information about interests in other entities is necessary to help users to identify the

profit or loss and cash flows available to the reporting entity and to determine the value of a current or

future investment in the reporting entity.



5.2 Scope

IFRS 12 covers disclosures for entities which have interests in:











Subsidiaries

Joint arrangements (ie joint operations and joint ventures, see Chapter 13)

Associates, and

Unconsolidated structured entities.



5.3 Structured entities

IFRS 12 defines a structured entity.



Key term



Structured entity. An entity that has been designed so that voting or similar rights are not the dominant

factor in deciding who controls the entity, such as when any voting rights relate to administrative tasks

only and the relevant activities are directed by means of contractual arrangements. (IFRS 12)



5.4 Main disclosures

The main disclosures required by IFRS 12 for an entity that has investments in other entities are as

follows.

(a)



The significant judgements and assumptions made in determining whether the entity has control,

joint control or significant influence of the other entities, and in determining the type of joint

arrangement



(b)



Information to understand the composition of the group and the interest that non-controlling

interests have in the group's activities and cash flows



(c)



The nature, extent and financial effects of interests in joint arrangements and associates,

including the nature and effects of the entity's contractual relationship with other investors



(d)



The nature and extent of interests in unconsolidated structured entities



(e)



The nature and extent of significant restrictions on the entity's ability to access or use assets and

settle liabilities of the group



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



387



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