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12 ED Equity method: share of other net asset changes

12 ED Equity method: share of other net asset changes

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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



388



(f)



The nature of, and changes in, the risks associated with the entity's interests in consolidated

structured entities, joint ventures, associates and unconsolidated structured entities (e.g.

commitments and contingent liabilities)



(g)



The consequences of changes in the entity's ownership interest in a subsidiary that do not result

in loss of control (i.e. the effects on the equity attributable to owners of the parent)



(h)



The consequences of losing control of a subsidiary during the reporting period (i.e. the gain or

loss, and the portion of it that relates to measuring any remaining investment at fair value, and the

line item(s) in profit or loss in which the gain or loss is recognised (if not presented separately)).



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



Chapter Roundup





Go back to your earlier study material and practise more questions if you are unsure of basic consolidation

techniques.







Definitions are very important when looking at group accounts.







Some of these definitions are from IAS 28 as well as IFRS 3 (revised) and IFRS 10. Some are new, and

some you will have met before.







IFRS 3 (revised) requires recognition of contingent consideration, measured at fair value, at the

acquisition date.







The non-controlling interest may be valued either at fair value or at the non-controlling interest's

proportionate share of the acquiree's identifiable net assets.







IFRS 10 Consolidated financial statements requires a parent to present consolidated financial

statements.







Goodwill should be calculated after revaluing the subsidiary company's assets.







If the subsidiary does not incorporate the revaluation in its own accounts, it should be done as a

consolidation adjustment.







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

of the identifiable assets and liabilities acquired.







The accounting requirements and disclosures of the fair value exercise are covered by IFRS 3 (revised).

IFRS 13 Fair value measurement gives extensive guidance on how the fair value of assets and liabilities

should be established.







IFRS 3 does not allow combinations to be accounted for as a uniting of interests; all combinations must

be treated as acquisitions.







IAS 28 deals with accounting for associates and joint ventures. The definitions are important as they

govern the accounting treatment, particularly 'significant influence' and 'joint control'.







IFRS 11 (see Chapter 13) and IAS 28 require joint ventures to be accounted for using the equity method.







The equity method should be applied in the consolidated accounts:













Statement of financial position: investment in associate at cost plus (or minus) the group's share

of the associate's post-acquisition profits (or losses)

Profit or loss (statement of profit or loss and other comprehensive income): group share of

associate's profit after tax.

Other comprehensive income (statement of profit or loss and other comprehensive income):

group share of associate's other comprehensive income after tax.



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.



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



389



Quick Quiz

1



Fill in the blanks in the statements below, using the words in the box.

Per IFRS 10, A is a parent of B if:



390



(a)



A holds (1) ……………….. in B



(b)



A can appoint, reassign or remove (2) ………………..



(c)



A is exposed to (3) ……………….. from its involvement with B



2



If a company holds 20% or more of the shares of another company, it has significant influence.

True or false?



3



What is significant influence?



4



What is a non-controlling interest?



5



How is the non-controlling interest on acquisition to be valued?



6



How should an investment in a subsidiary be accounted for in the separate financial statements of the

parent?



7



Describe the requirement of IFRS 3 (revised) in relation to the revaluation of a subsidiary company's

assets.



8



Under IFRS 13 Fair value measurement, what is meant by Level 1 inputs?



9



Which party to a business combination is the acquirer?



10



in which a investor has a

An associate is a/an

subsidiary or a joint venture of the investor. Complete the blanks.



11



What is the effect of the equity method on the statement of profit or loss and other comprehensive income

and the statement of financial position?



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



, but which is not a



Answers to Quick Quiz

1



(a)

(b)

(c)



A majority of the voting rights

Key management personnel who can direct the relevant activities

Variable returns



2



True.



3



The power to participate but not to control.



4



The part of the net profit or loss and the net assets attributable to interests not owned by the parent.



5



Either at fair value or at the non-controlling interest's proportionate share of the acquiree's identifiable net

assets.



6



(a)

(b)

(c)



7



Fair value is not affected by the acquirer's intentions. Therefore, only intentions after acquisition are

reflected in the statement of profit or loss and other comprehensive income after acquisition.



8



Quoted prices in active markets for identical assets that the entity can access at the measurement date.



9



The acquirer is the entity that obtains control of the other combining entities or businesses.



10



An associates is an entity in which an investor has a significant influence, but which is not a subsidiary

or a joint venture of the investor.



11



(a)



Statement of profit or loss and other comprehensive income. Investing entity includes its share of

the earnings of the associate, by adding its share of profit after tax.



(b)



Statement of financial position. Investment in associates is included in assets at cost. This will

increase or decrease each year according to whether the associate makes a profit or loss.



At cost, or

In accordance with IFRS 9 Financial instruments, or

Using the equity method as described in IAS 28 Investments in associates and joint ventures



Now try the question below from the Practice Question Bank



Number



Level



Marks



Time



Q17



Introductory



18



35 mins



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



391



392



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



Complex groups and

joint arrangements



Topic list



Syllabus reference



1 Complex groups



D1



2 Consolidating sub-subsidiaries



D1



3 Direct holdings in sub-subsidiaries



D1



4 IFRS 11 Joint arrangements



D1



Introduction

This chapter introduces the first of several more complicated consolidation

topics. The best way to tackle these questions is to be logical and to carry out

the consolidation on a step by step basis.

In questions of this nature, it is very helpful to sketch a diagram of the group

structure, as we have done. This clarifies the situation and it should point you

in the right direction: always sketch the group structure as your first working

and double check it against the information in the question.

In Chapter 12 you met the concept of the ‘joint venture’, a form of joint

arrangement which is equity accounted under IAS 28. IFRS 11 (Section 4)

covers all types of joint arrangements. It establishes principles for how joint

operations should be distinguished from joint ventures and how to account for

each type of joint arrangement in individual accounts and in consolidated

accounts.



393



Study guide

Intellectual level

D1



Group accounting including statement of cash flows



(a)



Apply the method of accounting for business combinations including

complex group structures



3



(h)



Outline and apply the key definitions and accounting methods which relate

to interests in joint arrangements



3



Exam guide

If the groups question does not involve an acquisition or disposal or a statement of cash flows, then it is

likely to involve a complex group.



1 Complex groups

FAST FORWARD



When a holding company has several subsidiaries, the consolidated statement of financial position

shows a single figure for non-controlling interests and for goodwill arising on consolidation. In cases

where there are several subsidiary companies the technique is to open up a single non-controlling interest

working and a single goodwill working.



1.1 Introduction

In this section we shall consider how the principles of statement of financial position consolidation may be

applied to more complex structures of companies within a group.

(a)



Several subsidiary companies



You have already seen this type of structure in your previous studies.

(b)



Sub-subsidiaries



P holds a controlling interest in S which in turn holds a controlling interest in SS. SS is therefore a

subsidiary of a subsidiary of P, in other words, a sub-subsidiary of P.



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13: Complex groups and joint arrangements  Part C Group financial statements



(c)



Direct holdings in sub-subsidiaries: 'D' shaped groups



In this example, SS is a sub-subsidiary of P with additional shares held directly by P.

In practice, groups are usually larger, and therefore more complex, but the procedures for consolidation of

large groups will not differ from those we shall now describe for smaller ones.



1.2 A parent company which has several subsidiaries

Where a company P has several subsidiaries S1, S2, S3 and so on, the technique for consolidation is

exactly as previously described. Cancellation is from the holding company, which has assets of

investments in subsidiaries S1, S2, S3, to each of the several subsidiaries.

The consolidated statement of financial position will show:

(a)

(b)



A single figure for non-controlling interest, and

A single figure for goodwill arising



A single working should be used for each of the constituents of the consolidated statement of financial

position: one working for goodwill, one for non-controlling interest, one for retained earnings (reserves),

and so on.



1.3 Sub-subsidiaries

A slightly different problem arises when there are sub-subsidiaries in the group, which is how should we

identify the non-controlling interest in the retained earnings of the group? Suppose P owns 80% of the

equity of S, and that S in turn owns 60% of the equity of SS.

It would appear that in this situation:



(a)

(b)

(c)



P owns 80% of 60% = 48% of SS

The non-controlling interest in S owns 20% of 60% = 12% of SS

The non-controlling interest in SS itself owns the remaining 40% of the SS equity



SS is nevertheless a sub-subsidiary of P, because it is a subsidiary of S which in turn is a subsidiary of P.

The chain of control thus makes SS a sub-subsidiary of P which owns only 48% of its equity.

The total non-controlling interest in SS may be checked by considering a dividend of $100 paid by SS

where S then distributes its share of this dividend in full to its own shareholders.



Part C Group financial statements  13: Complex groups and joint arrangements



395



$

S will receive

P will receive

Leaving for the total NCI in SS



$60

80%  $60 =



Question



48

52

100



Effective interest



Top owns 60% of the equity of Middle Co, which owns 75% of the equity of Bottom Co. What is Top Co's

effective holding in Bottom Co?



Answer

Top owns 60% of 75% of Bottom Co = 45%.



1.4 Date of effective control

The date the sub-subsidiary comes under the control of the holding company is either:

(a)

(b)



The date P acquired S if S already holds shares in SS, or

If S acquires shares in SS later, then that later date



You need to think about the dates of acquisition and the order in which the group is built up when you

identify which balances to select as the pre-acquisition reserves of the sub-subsidiary.



Exam focus

point



The examining team havestrongly indicated that fair value NCI will generally be tested with more difficult

group topics. However, this chapter uses examples where the NCI is valued at its proportionate share of

the subsidiary's identifiable net assets. Fair value NCI is shown as an alternative. This is to enable you to

learn the new techniques. Fair value NCI is used in the questions in the exam question bank. You should

keep an eye on Student Accountant magazine for articles giving further advice on this point.



2 Consolidating sub-subsidiaries

FAST FORWARD



Exam focus

point



6/10, 12/12



When dealing with sub-subsidiaries, you will need to calculate effective interest owned by the group and

by the non-controlling interest. The date of acquisition is important when dealing with sub-subsidiaries.

Remember that it is the post-acquisition reserves from a group perspective which are important.

Don't panic when a question seems very complicated – sketch the group structure and analyse the

information in the question methodically.

The basic consolidation method is as follows.

(a)



Net assets: show what the group controls.



(b)



Equity (capital and reserves): show who owns the net assets included elsewhere in the statement

of financial position. Reserves (retained earnings), therefore, are based on effective holdings.



The basic steps are exactly as you have seen in simpler group structures. As you will see in the examples

in this chapter, there are some new complications to be aware of in the workings for goodwill and noncontrolling interests.



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13: Complex groups and joint arrangements  Part C Group financial statements



2.1 Example: Subsidiary acquired first

The draft statements of financial position of P Co, S Co and SS Co on 30 June 20X7 were as follows.

Assets

Non-current assets

Tangible assets

Investments, at cost

80,000 shares in S Co

60,000 shares in SS Co

Current assets

Equity and liabilities

Equity

Ordinary shares of $1 each

Retained earnings

Payables



P Co

$



S Co

$



SS Co

$



105,000



125,000



180,000



120,000



80,000

305,000





110,000

70,000

305,000







60,000

240,000



80,000

195,000

275,000

30,000

305,000



100,000

170,000

270,000

35,000

305,000



100,000

115,000

215,000

25,000

240,000



P Co acquired its shares in S Co on 1 July 20X4 when the reserves of S Co stood at $40,000; and

S Co acquired its shares in SS Co on 1 July 20X5 when the reserves of SS Co stood at $50,000.

It is the group's policy to measure the non-controlling interest at acquisition at its proportionate share of

the fair value of the subsidiary's net assets.

Required

Prepare the draft consolidated statement of financial position of P Group at 30 June 20X7.

Note. Assume no impairment of goodwill.



Solution

This is two acquisitions from the point of view of the P group. In 20X4, the group buys 80% of S. Then in

20X5 S (which is now part of the P group) buys 60% of SS.

P buys 80% of S, then S (80% of S from the group's point of view) buys 60% of SS.

Having calculated the non-controlling interest and the P group interest (see working 1 below), the

workings can be constructed. You should, however, note the following.

(a)



Group structure working (see working 1).



(b)



Goodwill working: compare the costs of investments with the effective group interests acquired

(80% of S Co and 48% of SS Co).



(c)



Retained earnings working: bring in the share of S Co's and SS Co's post-acquisition retained

earnings in the normal way.



(d)



Non-controlling interest working: calculate non-controlling interests in the usual way, using a 20%

NCI in S Co's post-acquisition retained earnings and a 52% non-controlling interests in SS Co’s

post acquisition retained earnings (52%). You will need to adjust this for the NCI share of S Co’s

cost of investment in SS Co.



Part C Group financial statements  13: Complex groups and joint arrangements



397



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