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4 Example: Subsidiary acquired first: non-controlling interest at fair value

4 Example: Subsidiary acquired first: non-controlling interest at fair value

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Solution

The group’s policy on measurement of the non-controlling interest at acquisition does not change the

steps we follow in the consolidation.

P CO

CONSOLIDATED STATEMENT OF FINANCIAL POSITION AT 30 JUNE 20X7



$



Assets

Non-current assets

Tangible assets

Goodwill (W2)

Current assets



410,000

27,000

210,000

647,000



Equity

Ordinary shares of $1 each fully paid

Retained earnings (W3)

3

Non-controlling interest (W4)



80,000

330,200

410,200

146,800

557,000

90,000

647,000



Payables

1



Group structure



P

1.7.20X4



80%



Effective interests in SS:

P Group (80% × 60%)

NCI



S

1.7.20X5



= 48%

= 52%



60%



SS



2



Goodwill

P in S

$

Consideration transferred

Non-controlling interests (at FV)

Fair value of identifiable

net assets acquired

Share capital

Retained earnings



S in SS

$



$



$



120,000



($110,000

× 80%)



88,000



29,000



100,000

40,000



100,000

50,000

(140,000)

9,000



$27,000



402



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



80,000



(150,000)

18,000



3



Retained earnings



P Co

$

195,000



Per question

Pre-acquisition

Post-acquisition

Group share:

In S Co ($130,000  80%)

In SS Co ($65,000  48%)

Group retained earnings

4



S Co

$

170,000

(40,000)

130,000



SS Co

$

115,000

(50,000)

65,000



104,000

31,200

330,200



Non-controlling interests

The non-controlling interest working in this example has one extra step: adding on the noncontrolling interest in goodwill as calculated in working 2. The cost of investment in SS is again

deducted as the NCI is being calculated on the net assets that have been consolidated (see note

above).

S

$

At acquisition (W2)

Share of post acquisition retained earnings ($130,000(W3) ×

20%)/ ($65,000(W3)  52%)

Less NCI in investment in SS ($110,000 × 20%)



29,000



SS

$

80,000



26,000



33,800



(22,000)

33,000





113,800



$ 146,800



Question



Sub-subsidiary



The statements of financial position of Antelope Co, Yak Co and Zebra Co at 31 March 20X4 are

summarised as follows.

Antelope Co

Yak Co

Zebra Co

$

$

$

$

$

$

Assets

Non-current assets

Freehold property

100,000

100,000



Plant and machinery

210,000

80,000

3,000

310,000

180,000

3,000

Investments in subsidiaries

Shares, at cost

110,000

6,200



Loan account

3,800





Current accounts

10,000

12,200



120,000

22,200

3,000

Current assets

Inventories

170,000

20,500

15,000

Receivables

140,000

50,000

1,000

Cash at bank

60,000

16,500

4,000

370,000

87,000

20,000

800,000

289,200

23,000

Equity and liabilities

Equity

Ordinary share capital

200,000

100,000

10,000

Retained earnings

379,600

129,200

(1,000)

579,600

229,200

9,000



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



403



Antelope Co

$

$

Current liabilities

Trade payables

Due to Antelope Co

Due to Yak Co

Taxation



Yak Co



Zebra Co



$



160,400





60,000



$



40,200

12,800



7,000





$



$



800

600

12,600







220,400

800,000



60,000

289,200



14,000

23,000



Antelope Co acquired 75% of the shares of Yak Co in 20X1 when the credit balance on the retained

earnings of that company was $40,000. No dividends have been paid since that date. Yak Co acquired

80% of the shares in Zebra Co in 20X3 when there was a debit balance on the retained earnings of that

company of $3,000. Subsequently $500 was received by Zebra Co and credited to its retained earnings,

representing the recovery of an irrecoverable debt written off before the acquisition of Zebra's shares by

Yak Co. During the year to 31 March 20X4 Yak Co purchased inventory from Antelope Co for $20,000

which included a profit mark-up of $4,000 for Antelope Co. At 31 March 20X4 one half of this amount was

still held in the inventories of Yak Co. Group accounting policies are to make a full allowance for unrealised

intra-group profits.

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

the subsidiary's net assets.

Prepare the draft consolidated statement of financial position of Antelope Co at 31 March 20X4. (Assume

no impairment of goodwill.)



Answer

A

20X1



75%



Effective interests in Z:

A Group (75% × 80%)

NCI



Y

20X3



= 60%

= 40%



80%



Z

Workings

1



Goodwill



A in Y

$



Consideration transferred

Non-controlling interests



Fair value of identifiable NA acquired:

Share capital

Retained earnings: ($3,000) +

$500



(25% ×

140,000)



Y in Z

$

110,000

35,000



100,000

40,000



$

(75% ×

6,200)

(40% ×

7,500)



( 7,500)

150

$5,150



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



45

4,650

3,000



10,000

(2,500)

(140,000)

5,000



404



$



2



Retained earnings

Per question

Adjustment irrecoverable recovery

Pre-acquisition profit/losses

Post-acquisition profits

Group share

In Yak ($89,200  75%)

In Zebra ($1,500  60%)



Yak

$

129,200

(40,000)

89,200



Zebra

$

(1,000)

(500)

3,000

1,500



Yak



Zebra



66,900

900



Unrealised profit in inventories

sitting in parent

($4,000)  ½)

Group retained earnings

3



Antelope

$

379,600



(2,000)

445,400



Non-controlling interests



NCI at acquisition (W1)

NCI in post acquisition retained earnings ($89,200 (W2) × 25%)/

($1,500 (W2) × 40%)

Less NCI share of investment in Zebra ($6,200 × 25%)



$

35,000

22,300



$

3,000

600



(1,550)

55,750





3,600

59,350



ANTELOPE CO

CONSOLIDATED STATEMENT OF FINANCIAL POSITION AS AT 31 MARCH 20X4

$

Assets

Non-current assets

Freehold property

Plant and machinery



200,000

293,000

493,000

5,150

498,150



Goodwill (W1)

Current assets

Inventories $(205,500 – 2,000)

Receivables

Cash at bank



$



203,500

191,000

80,500

475,000

973,150



Equity and liabilities

Equity

Ordinary share capital

Retained earnings (W2)

Shareholders' funds

Non-controlling interests (W3)

Current liabilities

Trade payables

Taxation



200,000

445,400

645,400

59,350

704,750

201,400

67,000

268,400

973,150



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



405



2.5 Section summary

You should follow this step by step approach in all questions using the single-stage method. This applies

to Section 3 below as well.



Step 1

Step 2



Sketch the group structure and check it to the question.



Step 3



Draw up a proforma for the statement of financial position.



Step 4



Work methodically down the statement of financial position, transferring figures to

proforma or workings.



Step 5



Use the notes in the question to make adjustments such as eliminating intra-group balances

and unrealised profits.



Step 6



Goodwill working. Compare consideration transferred with effective group interests

acquired.



Step 7



Reserves working. Include the group share of subsidiary and sub-subsidiary postacquisition retained earnings (effective holdings again).



Step 8

Step 9



Non-controlling interests working: total NCI in subsidiary plus total NCI in sub-subsidiary.



Add details to the sketch of dates of acquisition, holdings acquired (percentage and

nominal values) and cost.



Prepare the consolidated statement of financial position (and statement of profit or loss

and other comprehensive income if required).



3 Direct holdings in sub-subsidiaries

FAST FORWARD



6/13



'D shaped' groups are consolidated in the same way as a typical sub-subsidiary situation. It is the

structure and non-controlling interest calculations that are important.

Consider the following structure, sometimes called a 'D-shaped' group.

P



80%

20%

(NCI direct)



10%



S



75%

15%

(NCI direct)



SS



In the structure above, there is:

(a)

(b)

(c)



406



A direct non-controlling share in S of

A direct non-controlling share in SS of

An indirect non-controlling share in SS of 20%  75% =



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



20%

15%

15%

30%



The effective interest in SS is:

Group 80%  75%

Direct holding



=



60% interest

10%

70%

30%

100%



 NCI



Having ascertained the structure and non-controlling interests, proceed as for a typical sub-subsidiary

situation.



Question



'D' shaped group



The draft statements of financial position of Hulk Co, Molehill Co and Pimple Co as at 31 May 20X5 are as

follows.

Hulk Co

Molehill Co

Pimple Co

$

$

$

$

$

$

Assets

Non-current assets

Tangible assets

90,000

60,000

60,000

Investments in

subsidiaries(cost)

Shares in Molehill Co

90,000





Shares in Pimple Co

25,000

42,000



115,000

42,000



205,000

102,000

60,000

Current assets

40,000

50,000

40,000

245,000

152,000

100,000

Equity and liabilities

Equity

Ordinary shares $1

100,000

50,000

50,000

Revaluation surplus

50,000

20,000



Retained earnings

45,000

32,000

25,000

195,000

102,000

75,000

Non-current liabilities

12% loan

Current liabilities

Payables





195,000



10,000

112,000





75,000



50,000

245,000



40,000

152,000



25,000

100,000



(a)



Hulk Co acquired 60% of the shares in Molehill on 1 January 20X3 when the balance on that

company's retained earnings was $8,000 (credit) and there was no share premium account.



(b)



Hulk acquired 20% of the shares of Pimple Co and Molehill acquired 60% of the shares of Pimple

Co on 1 January 20X4 when that company's retained earnings stood at $15,000.



(c)



There has been no payment of dividends by either Molehill or Pimple since they became subsidiaries.



(d)



There was no impairment of goodwill.



(e)



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 consolidated statement of financial position of Hulk Co as at 31 May 20X5.



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



407



Answer



Effective interests in Pimple:

Hulk (60% × 60% + 20%) = 56%

 NCI

= 44%



(NCI



(NCI



Note. Pimple comes into Hulk's control on 1 January 20X4. As the investments in Pimple by Hulk and

Molehill both happened on the same date, only one goodwill calculation is needed in respect of Pimple.

The direct non-controlling interest in Molehill Co is

The direct non-controlling interest in Pimple Co is

The indirect non-controlling interest in Pimple Co is (40% of 60%)

The total non-controlling interest in Pimple Co is

The group share of Molehill Co is 60% and of Pimple Co is (100 – 44)% = 56%



40%

20%

24%

44%



Workings

1



Goodwill

Hulk in Molehill

$



Consideration transferred –direct



$



90,000



– indirect

Non-controlling interests ($58,000 ×

40%)/ ($65,000 × 44%)

Fair value at NA acquired

Share capital

Retained earnings



Hulk and Molehill in Pimple

$

$

25,000

(60% 

42,000)



23,200

50,000

8,000



25,200

28,600



50,000

15,000

(58,000)

55,200



(65,000)

13,800

$69,000



2



Retained earnings

Per question

Pre-acquisition profits

Post-acquisition retained earnings

Group share:

In Molehill ($24,000 × 60%)

In Pimple ($10,000 × 56%)

Group retained earnings



3



Revaluation surplus

Hulk Co

Molehill Co: all post-acquisition ($20,000  60%)



408



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



Hulk

$

45,000



Molehill

$

32,000

(8,000)

24,000



Pimple

$

25,000

(15,000)

10,000



14,400

5,600

65,000

$

50,000

12,000

62,000



4



Non-controlling interests

Molehill

$



NCI at acquisition (W1)



Pimple

$



23,200



28,600



9,600



4,400



8,000

(16,800)

24,000







33,000



NCI in post acquisition retained earnings ($24,000 (W2) ×

40%)/ ($10,000 (W2) × 44%)

NCI in post-acquisition revaluation surplus ($20,000

(W3) × 40%)

Less NCI share of investment in Pimple ($42,000 × 40%)



$57,000

HULK CO

CONSOLIDATED STATEMENT OF FINANCIAL POSITION AS AT 31 MAY 20X8

$

Assets

Non-current assets

Tangible assets

Goodwill (W1)



210,000

69,000

279,000

130,000

409,000



Current assets

Equity and liabilities

Equity

Ordinary shares $1

Revaluation surplus (W3)

Retained earnings (W2)

Shareholders' funds

Non-controlling interests (W4)



$



100,000

62,000

65,000

227,000

57,000

284,000



Non-current liabilities

12% loan

Current liabilities

Payables



10,000

294,000

115,000

409,000



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



409



4 IFRS 11 Joint arrangements

FAST FORWARD



6/12, 12/14



IFRS 11 classes joint arrangements as either joint operations or joint ventures.

The classification of a joint arrangement as a joint operation or a joint venture depends upon the rights

and obligations of the parties to the arrangement.

Joint arrangements are often found when each party can contribute in different ways to the activity. For

example, one party may provide finance, another purchases or manufactures goods, while a third offers its

marketing skills.

IFRS 11 Joint arrangements covers all types of joint arrangements. It is not concerned with the accounts

of the joint arrangement itself (if separate accounts are maintained), but rather how the interest in a joint

arrangement is accounted for by each party.



4.1 Definitions

The IFRS begins by listing some important definitions.



Key terms



Joint arrangement. An arrangement of which two or more parties have joint control.

Joint control. The contractually agreed sharing of control of an arrangement, which exists only when

decisions about the relevant activities require the unanimous consent of the parties sharing control.

Joint operation. A joint arrangement whereby the parties that have joint control of the arrangement have

rights to the assets and obligations for the liabilities relating to the arrangement.

Joint venture. A joint arrangement whereby the parties that have joint control of the arrangement have

rights to the net assets of the arrangement.

(IFRS 11)



4.2 Forms of joint arrangement

IFRS 11 classes joint arrangements as either joint operations or joint ventures. The classification of a joint

arrangement as a joint operation or a joint venture depends upon the rights and obligations of the parties

to the arrangement.

A joint operation is a joint arrangement whereby the parties that have joint control (the joint operators)

have rights to the assets, and obligations for the liabilities, of that joint arrangement. A joint arrangement

that is not structured through a separate entity is always a joint operation.

A joint venture is a joint arrangement whereby the parties that have joint control (the joint venturers) of

the arrangement have rights to the net assets of the arrangement.

A joint arrangement that is structured through a separate entity may be either a joint operation or a joint

venture. In order to ascertain the classification, the parties to the arrangement should assess the terms of

the contractual arrangement together with any other facts or circumstances to assess whether they have:





Rights to the assets, and obligations for the liabilities, in relation to the arrangement (indicating a

joint operation)







Rights to the net assets of the arrangement (indicating a joint venture)



Detailed guidance is provided in the appendices to IFRS 11 in order to help this assessment, giving

consideration to, for example, the wording contained within contractual arrangements.

IFRS 11 summarises the basic issues that underlie the classifications in the following diagram.



410



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



Structure of the joint arrangement



Not structured through a separate



Structured through a separate



vehicle



vehicle



An entity shall consider:

(i) The legal form of the separate vehicle

(ii) The terms of the contractual

arrangement; and

(iii) Where relevant, other facts and

circumstances



Joint operation



Joint venture



4.2.1 Contractual arrangement

The existence of a contractual agreement distinguishes a joint arrangement from an investment in an

associate. If there is no contractual arrangement, then a joint arrangement does not exist.

Evidence of a contractual arrangement could be in one of several forms.









Contract between the parties

Minutes of discussion between the parties

Incorporation in the articles or by-laws of the joint venture



The contractual arrangement is usually in writing, whatever its form, and it will deal with the following

issues surrounding the joint venture.











Its activity, duration and reporting obligations

The appointment of its board of directors (or equivalent) and the voting rights of the parties

Capital contributions to it by the parties

How its output, income, expenses or results are shared between the parties



It is the contractual arrangement which establishes joint control over the joint venture, so that no single

party can control the activity of the joint venture on its own.

The terms of the contractual arrangement are key to deciding whether the arrangement is a joint venture

or joint operation. IFRS 11 includes a table of issues to consider and explains the influence of a range of

points that could be included in the contract. The table is summarised below.



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



411



Joint operation



Joint venture



The parties to the joint arrangement have rights

to the assets, and obligations for the liabilities,

relating to the arrangement.



The parties to the joint

arrangement have rights to the

net assets of the arrangement

(ie it is the separate vehicle, not

the parties, that has rights to the

assets, and obligations for the

liabilities).



The parties to the joint arrangement share all

interests (eg rights, title or ownership) in the

assets relating to the arrangement in a specified

proportion (eg in proportion to the parties’

ownership interest in the arrangement or in

proportion to the activity carried out through the

arrangement that is directly attributed to them).



The assets brought into the

arrangement or subsequently

acquired by the joint

arrangement are the

arrangement’s assets. The

parties have no interests (ie no

rights, title or ownership) in the

assets of the arrangement.



The parties share all liabilities, obligations, costs

and expenses in a specified proportion (eg in

proportion to their ownership interest in the

arrangement or in proportion to the activity

carried out through the arrangement that is

directly attributed to them).



The joint arrangement is liable

for the debts and obligations of

the arrangement.



The parties to the joint arrangement are liable for

claims by third parties.



Creditors of the joint

arrangement do not have rights

of recourse against any party.



Revenues,

expenses,

profit or loss



The contractual arrangement establishes the

allocation of revenues and expenses on the basis

of the relative performance of each party to the

joint arrangement. For example, the contractual

arrangement might establish that revenues and

expenses are allocated on the basis of the

capacity that each party uses in a plant operated

jointly.



The contractual arrangement

establishes each party’s share in

the profit or loss relating to the

activities of the arrangement.



Guarantees



The provision of guarantees to third parties, or the commitment by the parties to

provide them, does not, by itself, determine that the joint arrangement is a joint

operation.



The terms

of the

contractual

arrangement



Rights to

assets



Obligations

for liabilities



412



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



The parties are liable to the

arrangement only to the extent

of:

Their respective:

 Investments in the

arrangement, or

 Obligations to contribute

any unpaid or additional

capital to the arrangement,

or

 Both



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