Chapter 2 Groups

Question 1

1.1 Types of investment and control

Answer 1

Per IFRS 10 Consolidated Financial Statements, group account are required when one entity has control over another entity. Control is presumed to exist when the parent owns more than 50% of the voting power of an entity.
Significant influence is deemed at 25%-50%. This will be deemed as an associate; equity accounting is needed. Joint control could be a joint venture, equity accounting is needed.
Power is defined as existing rights that give the current ability to direct the relevant activities.

Question 2

1.2 Significant influence (20-50%)

Answer 2

Significant influence is the power to participate in the financial and operating policy decisions of the investee but is not control or joint control of those policies. The existence of significant influence can also be evidenced by:
- Representation on the board of directors or equivalent
- Participation in policymaking, including dividends or other distributions.
- Material transactions between the entity and its investee
- Interchange of managerial personnel, or
- Provision of essential technical information

Question 3

1.2 Joint control

Answer 3

This is the contractually agreed sharing of control of an arrangement which exists only when decisions about the relevant activities require unanimous consent of the parties sharing control.

Question 4

1.3 Exemptions from preparing group accounts.

Answer 4

A parent is exempt from group financial statements if all the following are met:
- Wholly owned subsidiary or partially owned subsidiary of another entity and all its other owners, including those not otherwise entitled to vote, have been informed about, and do not object to, parent not presenting consolidated accounts.
- Its debt or equity instruments are not traded in a public market.
- Did not file or in the process of filling its financial statements with a securities commission or other regulatory organisation for the purpose of issuing any class of instruments in a public market, and
- Its ultimate or any intermediate parent produces accounts that are available for public use and comply with IFRSs, in which subsidiaries are consolidated or are measured at fair value through profit or loss in accordance with IFRS.

Question 5

2.1 Consolidated statement of financial position

Answer 5

At year end, current accounts may not agree, owing to the existence of in transit items. The usual rules are:
- Make the consolidation adjustment to the statement of financial position of the recipient, as if the in-transit item had been received before year end.
- Cash in transit is adjusted by: Dr Cash Cr Receivables current account.
- Goods in transit is adjusted by: Dr Inventory Cr Payable current account.
The adjustment is for the purpose of consolidation only. Once in agreement, the receivable and payable should be cancelled as for intra-group loans. Cancel the receivable in one company with the payable in the other.

Question 6

1.4 Other matters

Answer 6

Where one or more subsidiaries prepare accounts to a different reporting date from the parent and the bulk of other subsidiaries in the group:
- For consolidation purposes the subsidiary may prepare additional statements to the reporting date of the rest of the group
- If this is not possible, the subsidiary accounts may still be used for consolidation provided the gap between reporting dates is three months or less and the adjustments are made for the effects of significant transactions or other events that occur between that date and the parent’s reporting date.
Uniform accounting policies should be used by all entities in the group.

Question 7

2.2 PURP Adjustments

Answer 7

For inventory:
Calculate profit included in closing inventory: determine the value of closing inventory purchased from another company in the group. Use mark-up/margin to calculate how much of that value represents profit earned by the selling company.
The next step is to adjust the profit of the seller. If P sells to S: Dr P’s retained earnings Cr Group inventory.
For PPE:
If PPE is sold between group members, adjust to reflect situation if transfer had not occurred: no profit on sale and depreciation based on the original cost of the asset to the group.
To calculate the unrealised profit adjustment for non-current asset transfers, compare:
CA of NCA at y/e after transfers – CA of NCA at y/e if transfer had not taken place = NCA PURP
The consolidation adjustment is Dr RE of seller Cr NCA on CSFP

Question 8

2.3 Fair value of net assets

Answer 8

The acquirer should recognise the identifiable assets, liabilities and contingent liabilities of the acquiree, at fair value at the date of acquisition.
To process a fair value adjustment in a consolidation question, you must consider the impact at the acquisition date and the reporting date in:
- At acquisition, put an adjustment (of the difference in FV) into the net asset working to bring the net assets to fair value.
- At the reporting date account on both the face of the CSPF and in the net assets working

Question 9

2.4 Adjustments to provisional fair values of the subsidiary’s net assets

Answer 9

Any adjustments to those provisional fair values will be dealt with differently depending on whether the adjustments are made in the measurement period or not.
- If the adjustments are made within the measurement period (less than 12 months from the acquisition date), an adjustment is made retrospectively and goodwill is recalculated.
- If the adjustments are made outside of the measurement period (more than 12 months from the acquisition date) the adjustments are treated as a change in accounting estimate and adjusted for prospectively.

Within the measurement
period (< 12m of acquisition)
Outside the measurement period (>
12m from acquisition)
Do recalculate goodwill using
the revised FV Do not recalculate goodwill (leave it
using the provisional FV)
Restate comparatives
Do not restate comparatives (treat
as a change in estimate per IAS 8)

Question 10

2.5 Fair value of consideration

Answer 10

Consideration can be in the form of cash or shares, which could be paid immediately, could be deferred or even contingent on future conditions.
Acquisition costs: directly attributable to the acquisition of a subsidiary should be recognised in the profit or loss of the group accounts.
Deferred consideration: this should be discounted to its PV and recorded in the acquirer’s accounts by: Dr Investment (amount included in consideration in goodwill) Cr liability (on CSFP). The consideration will unwind annually over time by: Dr Finance costs Cr Liability
Deferred share consideration: deferred share consideration is valued using the share price at the date of acquisition. Recorded as Dr Investment (amount included in consideration in goodwill) Cr Shares to be issued.
Contingent consideration: this is an amount which may be payable at a future date, dependant on events. This should be included as part of the cost of the investment and measured at FV at the date of acquisition (this is given in the exam). For cash: Dr Investment (included in consideration in goodwill) Cr Provision (liability).

Question 11

2.6 Changes in fair value of consideration

Answer 11

The fair value of the contingent consideration at acquisition could be different to the actual consideration paid. Do not change goodwill. Differences are treated as a change in accounting estimate and adjusted prospectively in accordance with IAS 8. Dr or Cr Provision (gain/loss in the future) and Cr or Dr SPL.

Question 12

2.7 Goodwill impairments

Answer 12

Goodwill cannot be considered in isolation when performing an impairment review. The carrying amount per the financial statements is greater than the recoverable amount which is the higher of the value in use and the FV less costs to sell.
The recoverable amount can only be established for the subsidiary as a whole, so the carrying amount must also consider the entire subsidiary. This creates an additional problem when considering the two methods for valuing NCI. Per IAS 36, if goodwill has been allocated to a subsidiary in which:
- There is NCI (i.e., it is not wholly owned subsidiary) and
- The NCI has been measured using the share of net assets method, and hence total goodwill calculated only represents the parent’s goodwill.
Then goodwill allocated for the subsidiary should be grossed up to include goodwill attributable to NCI for the purposes of the CGU impairment review. This ensures the recoverable amount and carrying amount are compared on a like-for-like basis.
The additional goodwill is known as notional goodwill and is not recognised in the accounts.

Question 13

3.1 Consolidated statement of profit or loss - adjustments

Answer 13

Mid-year acquisitions: If a subsidiary is acquired mid-year, the results should only be consolidated from the date of acquisition.
Sales and purchases (intra-group): consolidated sales revenue = P’s revenue +S’s revenue – intra group sales. The consolidated cost of sales = P’s COS + S’s COS – intra group sales
The deduction of intra-group sales in both cases should be shown in the adjustment’s column of the consolidation schedule. We reduce the revenue and reduce the cost of sales.

Inventory PURPs: calculate intra-group profit on goods still in inventory at year end. The required adjustment is Dr Closing inventory in selling company’s cost of sales – unrealised profit figure (shown as an increase to the COS) and Cr Closing inventory in consolidated statement of financial position – unrealised profit figure.

NCA PURPs: any profit or loss arising on the transfer must be deducted from the category within the seller’s column in the year of transfer only. The depreciation charge must be adjusted (again in sellers’ column) so it is based on the cost of the asset to the group in all years from transfer until end of asset’s useful life.

Intra-group dividends: the payment of a dividend by S to P will need to be cancelled. The effect of this on the consolidated SPL is to reduce the investment income in P’s column by the amount of the dividend paid to P.

Intra group interest and management charges: interest payable should be cancelled against the interest or management charges receivable in the parent company’s SPL.

Goodwill impairments: once impairment has been identified during the year, the charge for the current year will be passed through the consolidated SPL. If the proportionate basis, take the impairment charge through P’s column. If the fair value method, take the impairment charge through S’s column.

Fair value adjustments: when a FV uplift on PPE or an internally generated intangible in S are recognised on consolidation, the uplift will give rise to extra FV depreciation/amortisation. The charge for the year will go through S’s column.

Question 14

4.1 Joint Ventures

Answer 14

IAS 28 requires associates and joint ventures are equity-accounted in the group financial statements. An associate exists where an investor has a significant influence over the financial and operating policies of an entity.
In the SFP the investment in the associate or joint venture is made up of:
Cost of investment (P accounts) X
P% x post-acquisition movement in net assets X
Impairment losses to date (X)

The SPL and OCI includes the group’s share of the associate/JV’s profit after tax and OCI:
P% x profit after tax X
Impairment loss in year (X)

Income from associate/joint venture:
- Transactions between the group and the associates/JVs should be cancelled out, but any unrealised profits on these transactions should be eliminated.
- FV adjustments: reduce the investment in associate and group retained earnings by P% of the FV depreciation on any FV uplifts.
- Any dividends recognised in the parent’s SPL should be removed.

Question 15

6.1 Joint Arrangements

Answer 15

A joint arrangement is an arrangement of which two or more parties have joint control. This will only apply if the relevant activities require unanimous consent of those who collectively control the arrangement. There are two main types of joint arrangements per IFRS 11, joint operations and joint ventures.
Joint operations:
- Normally no separate entity is set up.
- Parties with joint control have rights to the assets and obligations for the liabilities.
- Parties to the transaction share the activities.
- Each operator will recognise the asset it controls, liabilities and expenses it incurs and its share of the revenue from the sale of goods or services. This treatment is applicable in both the separate and consolidated financial statements of the joint operator.
- Unanimous decision making
Joint ventures:
- Separate entity set up.
- Parties with joint control have rights to the net assets of the arrangement.
- Equity accounted under IAS28 in the consolidated financial statements.
- Any individual joint venture party will recognise the cost of the investment and returns in the form of dividends.

Question 16

2.5 Disposals: whole subsidiary

Answer 16

The SFP does not include the subsidiary after the date of disposal. In the P+L, time apportion the results of the subsidiary up to the date of disposal. The non-controlling interest must be time apportioned. The gain or loss on disposal is included within consolidated profit for the year. If the sale of a subsidiary represents a discontinued operation under IFRS5, then the CSPL will show the profits or losses earned from the subsidiary and the gain or loss of the subsidiary as one line.

Question 17

2.6 Full disposal of an associate

Answer 17

At the year-end the shares in the associate have been sold and therefore, no investment in the associate is included in the consolidated statement of financial position.
In the SPL, the disposal does not normally meet the definition of a discontinued operation, therefore the presentation does not change. Pro-rate the profit after tax up to the date of disposal and present this on the line share of profits of associate.

Question 18

2.7 Part disposal from a subsidiary holding.

Answer 18

There are a number of situations that can occur from the part disposal of a subsidiary:
- Sell shares but still retain control – subsidiary to smaller subsidiary.
- Sell shares but still retain a significant influence – subsidiary to associate.
- Sell shares but still retain an investment – subsidiary to investment.

Question 19

2.8 Subsidiary to subsidiary (disposal)

Answer 19

There is no loss of control and as a result, no gain on disposal is calculated, no adjustment is made to the carrying amount of goodwill and the difference between the proceeds received and the change in non-controlling interest is accounted for in shareholders equity. Dr Cash (proceeds) Cr NCI (increase in NCI) and Dr or Cr Other components in equity.
Consolidated statement of financial position: consolidate as normal with the NCI calculated by reference to the year-end %. Calculate goodwill as at the original acquisition date less any subsequent impairment and record the difference between NCI and proceeds in shareholders’ equity.
Consolidated statement of profit and loss: consolidate the subsidiary’s results for the year and calculate the NCI on a pro rata basis.

Question 20

2.9 Subsidiary to associate (disposal)

Answer 20

There is a loss of control and there is a gain or loss on the disposal. This is calculated as sales proceeds at FV, add fair value of interest retained. Less the net assets at disposal and goodwill subtracted by the non-controlled interest at disposal.
Consolidated statement of financial position: equity account by reference to the year-end holding. Initial recognition of the associate is based on the fair value of the interest as included within the gain calculation.
Consolidated statement of profit or loss: consolidate results up until the date of disposal. Equity account results after date of disposal based on the post-disposal holding. Include gain or loss on disposal.

Question 21

2.10 Subsidiary to investment (disposal)

Answer 21

Gain or loss on disposal is calculated exactly the same as for the associate. In the statement of financial position, the interest retained is initially recorded at fair value. The statement of profit or loss, consolidate results up until the date of disposal, include dividend income after the date of disposal and include gain or loss on disposal.

Question 22

2.11 Part disposal from an associate holding.

Answer 22

Shares in an associate may be disposed of so that the investment is retained. There is a gain/loss on disposal calculated as:
Sales proceeds at FV plus the fair value of interest retained. Less the cost of investment, share of post-acquisition movement in A’s net assets at disposal plus impairment of investment to date.
Statement of financial position: interest retained is initially recorded at fair value.
Statement of comprehensive income: equity account for results up until date of disposal. Include dividend income after date and disposal and include gain or loss on disposal.

Question 23

3.1 Step acquisitions within group

Answer 23

A step acquisition occurs when the parent acquires control over a subsidiary in stages, buying shares at different times. On the date on which control is achieved, the acquirer should recognise the identifiable net assets and any goodwill. The pre-existing interest is treated in accordance with IFRS 9 for investments and IAS 28 for associates and joint ventures.

Question 24

3.2 Achieving control on 2nd acquisition (40%-60%)

Answer 24

When control is achieved, any previously held shareholding is treated as having been disposed of, and then reacquired at the fair value at the acquisition date. Therefore, any gain or loss on re-measurement to fair value is recognised in the profit or loss, or OCI as appropriate. Goodwill is calculated using the fair value at the date of acquisition.
Goodwill is calculated as consideration transferred plus fair value of previously held equity interest at acquisition date plus non-controlling interest at acquisition date less total fair value of identifiable net assets of the acquiree.

Question 25

3.3 Acquisitions that do not result in a change in control (60%-80%)

Answer 25

Where an entity increases its investment in an existing subsidiary no gain or loss is recognised, and goodwill is not measured. The difference between fair value of the consideration paid and the change in the non-controlling interest is recognised directly in the equity attributable to the owners of the parent: Dr NCI Cr Cash Dr/Cr Equity.

Question 26

3.4 Achieving significant influence (10%-40%)

Answer 26

When significant influence is achieved, the investment is classified as an associate and equity accounted. Any previously held shareholding is treated as having been disposed of, and then reacquired at the fair value at the acquisition date. Therefore, any gain or loss on re-measurement is recognised in the P+L or OCI as appropriate. The investment in the associate is calculated as: consideration transferred plus fair value of previously held equity interest at acquisition date plus share of post-acquisition movement in A’s net assets less impairments.

Question 27

4.1 IFRS 12 Disclosure of interests in other entities

Answer 27

IFRS12 requires disclosure of a reporting entity’s interests in other entities to help identify the profit and loss and cash flows to the reporting entity. Disclosures are required for entities which have interests in subsidiaries, joint arrangements, associates and unconsolidated structured entities.
All disclosure requirements from other standards have been removed relating to group accounting. To meet the objective of the standard an entity shall disclosure:
The significant judgements and assumptions it has made in determining:
- The nature of its interest in another entity or arrangement
- The type of joint arrangement in which it has an interest.
- That it meets the definition of an investment entity, if applicable, and
Information about its interests in subsidiaries, joint arrangements and associates and structured entities that are not controlled by the entity.

Question 28

5.1 Consolidated statement of cash flows

Answer 28

A group statement of cash flows adds four potential extra elements:
- Extra outflow – cash dividend paid to non-controlling interest.
- Extra inflow – dividends received from associates.
- The impact of the acquisition and disposal of subsidiaries
- The impact of the acquisition and disposal of associates

Question 29

5.2 non-controlling interests

Answer 29

Any dividends paid to non-controlling interests should be disclosed separately in the statement of cash flow, usually under financing activities. To do this, reconcile non-controlling interest in the SPF from the opening to the closing balance using a T account, cash flow is the balancing figure.

Question 30

5.3 Associates

Answer 30

The group share of profit in associate must be deducted as an adjustment in the reconciliation of profit before tax and cash from operating activities.
Dividends received from associates should be included as a separate item in the group statement of cash flows under investing activities.

Question 31

5.4 Acquisition and disposal of subsidiary

Answer 31

Net cash flow from sale or purchase of subsidiary: the aggregate cash flows arising from obtaining or losing control of subsidiaries or other businesses shall be presented separately and classified as investing activities. Cash payments to acquire subsidiaries and cash receipts from disposals of subsidiaries must be reported separately in the consolidated statement of cash flows under investing activities. The cash balance in the subsidiary is considered and it is the net cash from the sale or purchase of the subsidiary which is shown on the statement of cash flows.
Acquisitions: all assets and liabilities acquired must be included in any workings to calculate the correct cash movement of an item. This applies to all assets and liabilities acquired and the non-controlling interest.
Disposals: when calculating the movement between the opening and closing balance of an item, the assets and liabilities that have been disposed of must be taken into account in order to calculate the correct cash figure. As with acquisitions, this applies to all assets, liabilities and NCI.

Question 32

5.5 Acquisitions/disposals of associates

Answer 32

The payment of receipt of cash is classified within investing activities.

Question 33

6.1 Audit and assurance implications of group accounting

Answer 33

Audit risks Audit tests
Use of another auditor Independence of component auditors. Professional competence of component auditors, including review of any monitoring, remediation or inspection auditors. Obtain confirmation that auditor will co-operate with group auditor. Review work
Extent of work required on components Group auditors will require one of the following if significant risks are involved: a full audit using component materiality, an audit of specified account balances related to identified risks and specified audit procedures relating to identified significant risks.
Misclassification of investments (subsidiary v associate v financial asset) Identify the total number of shares held to calculate % holding. Review contract or agreements between companies to identify key terms which may indicate control and any restriction on control.
Acquisition of new subsidiary Review of valuation of assets and liabilities to confirm fair value at acquisition. Confirm the valuation of consideration, including deferred or contingent consideration using appropriate discount rate. Recalculate goodwill. Review purchase agreement to identify date of control. Review consolidation schedules to ensure amounts have been time apportioned if appropriate.
Incorrect calculations of disposals Assessment of the remaining holding to determine the appropriate accounting treatment post-disposal. Identification of the date of the change in stake. Assessment of the fair value of any remaining stake. Whether the profit or loss on disposal has been calculated in accordance with IFRS Standards. Whether amounts have been appropriately time apportioned. Whether continued/discontinued classification is required/appropriate.
Incorrect consolidation adjustments Review consolidation schedules, purchase, sales ledger and intra-group accounts to identify any intra-group transactions or outstanding balances and ensure excluded from the group accounts.