D. FINANCIAL STATEMENTS OF GROUPS OF ENTITIES - CHANGES

Question 1

separate financial statements of the parent company (IAS 27)

Answer 1

Under IAS 27 Separate financial Statements the investment in a subsidiary, associate or joint venture can be carried in the investor’s separate financial statements either:
 At cost
 At fair value (as a financial asset under IFRS 9); or
 Using the equity method as described in IAS 28
If investment is carried at fair value under IFRS 9, both the investment and the revaluation gains or losses on the investment must be cancelled on consolidation.

Question 2

The equity method in the individual financial statements

Answer 2

The equity method will apply in the individual financial statements of the investor when the entity has investments in associates and joint ventures but does not prepare consolidated financial statements as it has no investments in subsidiaries.
Consequently, the profit or loss on disposal is different from the group profit or loss on disposal:
Fair value of consideration received X
Less carrying amount of investment disposed f (X)
Profit/(loss) X/(X)
This calculation would be the same for any disposal of shares in a subsidiary (regardless of whether control is lost) as the treatment in the parent’s separate financial statements follows legal form (shares have been sold) rather than substance.

Question 3

IAS 27 dividends

Answer 3

IAS 27 will require all dividends received to be shown in the income statement. However, if the dividend exceeds the total comprehensive income of the subsidiary in the period the dividend is declared; or the carrying amount of the investment exceeds the amount of net assets (including associated goodwill) recognised - then impairment should be checked for.
The distinction between pre- and post-acquisition profits is no longer required. Recognising dividends received from subsidiaries as income will give rise to greater income being recognised. Care will need to be taken as to what constitutes a dividend (defined as a distribution of profits).

Question 4

Internal group reorganizations.

Answer 4

Internal group reorganizations. A group may restructure itself internally to achieve a desired effect. Companies move around within the group but typically:
 The ultimate shareholders remain the same.
 No cash leaves the group
 There is no change in non-controlling interests
In substance, the group has remained the same so there is no impact on the consolidated financial statements. However, the accounts of the individual entities within group will be affected.

Question 5

Sub-subsidiary moved up

Answer 5

Method. P could buy S2 for cash or other assets.
S1 could pay a dividend to P in the form of the shares in S2.
Reasons:
 S1 can be sold off (perhaps to reduce group gearing) without selling S2
 Potential tax advantages (eg loss relief)
 Divisionalisation so that S1 and S2 report independently to P

Question 6

Sub-subsidiary moved across

Answer 6

Method. S2 could buy S3 for cash or other assets.
Reasons:
 To be able to sell S1 without selling S3
 To create a tax group
 For divisionalisation (so S3 report to S2)

Question 7

Sub-subsidiary moved down

Answer 7

Method. S1 could buy S2 for cash or other assets
S1 could issue additional shares in itself to P to pay for S2
Reasons:
 To create a tax group
 For divisionalisation (so S2 reports to S1

Question 8

Accounting treatment Internal group reorganizations.

Answer 8

Accounting treatment. Such reorganizations (entities under common control) are excluded from the scope of IFRS 3 at the present time and there are therefore no specific accounting requirements. The substance of the transaction from the shareholders’ point of view is that no sale has occurred as they own the same assets before and after the transaction (assuming ownership of each subsidiary is 100%). However, a gain or loss may be made in the separate financial statements of S1. This is unrealised from the group point of view and would need to be eliminated in the consolidated financial statements.

Question 9

New parent.

Answer 9

New parent. A group may restructure itself by adding a new parent to the group.Where an entity (an individual entity or an existing parent) does this, if the new parent chooses to measure the investment in the original parent at cost per IAS 27 Separate financial statements, cost is measured at its share of the carrying amount of the original entity’s equity (shown in the separate financial statements of the original parent at the date of reorganization), providing all of the following are met:
 The new parent obtains control of the original entity by issuing equity instruments in exchange for existing equity instruments of the original entity;
 The assets and liabilities of the new and original group are the same immediately before and after the reorganization
 The owners of the original entity before the reorganization have the same absolute and relative interests in the net assets of the original and new group immediately before and after the reorganization.
If any of the above is not met, then the reorganisation must be accounted for as normal at FV (rather than CV).

Question 10

De-mergers.

Answer 10

De-mergers. As a company or group grows they sometimes diversify into other areas. This can cause problems. For example:
 If each division has a different risk profile it could be commercially desirable to reduce the overall risk profile.
 If different shareholders/managers are involved in different areas of the business, they may wish to split the business (sometimes known as a partition) so that they each own only the business area they are involved in.

Question 11

Statutory demerger

Answer 11

Shareholders cannot just divide up a company or group and set up separate enterprises without incurring significant tax liabilities unless the separation falls within the conditions for either a statutory demerger, or a company reconstruction using a members’ voluntary liquidation. A statutory demerger is the simpler of the two alternatives but the circumstances in which they can be used are limited and the conditions which need to be met are more stringent. It can only be used to split two or more trades. It cannot be used to split out a trade from, say, a property investment business.
The mechanics of a statutory demerger are relatively straightforward, either:
 The shares in a subsidiary are distributed out to the members or
 The trade is transferred to a new company and shares in the new company are issued to the members of the old company.