Groups: Revision and update

Question 1

Groups: Shareholding types and accounting implications

Answer 1

1. Control
Subsidiary
Consolidation

2. Significant influence
Associate
Equity accounting

3. Joint control
Joint venture
Equity accounting

4. Held for wealth accretion
Trade investment
Financial asset

Question 2

Groups: Control (i.e. subsidiaries)

Answer 2

Per IFRS 10 Consolidated Financial Statements, group accounts are required when
one entity has control over another entity.
Control is presumed to exist when the parent owns > 50% of the voting
power of an entity.
IFRS 10 Consolidated Financial Statements states that ‘an investor controls an
investee if and only if the investor has all the following:
(a) power over the investee […]
(b) exposure, or rights, to variable returns from its involvement with the
investee […], and
(c) the ability to use its power over the investee to affect the amount of the
investor’s returns.’ (IFRS 10, para 7)
Power is defined as existing rights that ‘give the current ability to direct the
relevant activities, i.e. the activities that significantly affect the investee’s
returns.’ (IFRS 10, para 10)
If control exists, then consolidated financial statements should be prepared showing
the results of the parent and all its subsidiaries as a single entity.

Investors should consider:
 whether they exercise the majority of votes
 rights to appoint a majority of directors
 agreements with other investors
 a contract giving control over the key activities of the investee
 whether other shareholdings are dispersed
 whether they hold potential voting rights resulting from convertible
debt or options that are currently capable of being exercised. The
holder must have the practical ability to exercise the right (i.e.
funds must be available) for the rights to be considered

Question 3

Groups: 1.2 Significant influence (I.e. associates)

Answer 3

IAS 28 Investments in Associates and Joint Ventures defines significant
influence as ‘the power to participate in the financial and operating
policy decisions of the investee but is not control or joint control
of those policies.’ (IAS 28, para 3)
Significant influence is presumed to exist if an investor holds 20% or more of the
voting power of the investee, unless it can be clearly shown that this is not the case.
However, the existence of significant influence can also be evidenced in other ways:
(a) ‘representation on the board of directors or equivalent governing body of
the investee
(b) participation in policy-making processes, including participation in
decisions about dividends or other distributions
(c) material transactions between the entity and its investee
(d) interchange of managerial personnel, or
(e) provision of essential technical information.’ (IAS 28, para 6)

Question 4

Groups: 1.3 Joint control (i.e. joint ventures)

Answer 4

‘Joint control is 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.’ (IFRS 11, para 7

Question 5

Groups: 1.3 Joint control 1.4 Exemptions from preparing group accounts

Answer 5

A parent is exempt from preparing group financial statements ‘if it meets all the following conditions:

1. it is a wholly-owned subsidiary or is a 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, the parent not presenting consolidated financial statements
2. its debt or equity instruments are not traded in a public market (a domestic or foreign stock exchange or an over-thecounter market, including local and regional markets)
3. it did not file, nor is it in the process of filing, 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
4. its ultimate or any intermediate parent produces financial statements 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 this IFRS.’ (IFRS 10, para 4)

A parent that does not present consolidated financial statements must comply with the IAS 27 Separate Financial Statements rules. Although a parent may not have to prepare consolidated financial statements, it may wish to provide qualitative information about the nature and size of ownership of unconsolidated subsidiaries as this could be beneficial to the users of the financial statements.

1. Parent consilidates
2. Private company

Question 6

Groups: 1.5 Other matters
Where one or more subsidiaries prepare accounts to a different
reporting date from the parent and the bulk of other subsidiaries in the
group:

Answer 6

For consolidation purposes the subsidiary may prepare additional
statements to the reporting date of the rest of the group.

Or, if this is not possible, the subsidiary’s accounts may still be
used for consolidation provided that the gap between the reporting
dates is three months or less and that 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

Groups: Consolidated statement of financial
position

Answer 7

Goodwill (W3) X
Investments in associates X
Assets (100% P + 100% S) X
––––
Total assets X
––––
Equity
Share capital (P only) X
Retained earnings (W5) X
Non-controlling interest (W4) X
––––
X
Liabilities (100% P + 100% S) X
––––
Equity and liabilities X
–––

Question 8

Groups (Consol): 2.1 Standard workings

Answer 8

(W1) Group structure

(W2) Net assets of the subsidiary

(W3) Goodwill

(W4) Non-controlling interest

(W5) Group retained earnings

(W6) Group reserves

Question 9

Groups: (W2) Net assets of the subsidiary

Answer 9

@ period end @ acquisition post-acquisition
Share capital x x
Share premium x x
Revaluation surplus x x x (W6)
Retained earnings x x x (W5)
––– –––
x x
(W4) (W3)

Question 10

Groups: (W4) Non-controlling interest

Answer 10

Fair value approach:
FV NCI at acquisition X
NCI % of post-acquisition RE and reserves (W2) X
NCI share of goodwill impairment (X)
–––
X
–––

Share of net assets/proportionate approach:
NCI % × S’s NAs @ y/e (W2) X

Question 11

Groups: (W3) Goodwill

Answer 11

Fair value of consideration X
NCI at acquisition (FV or share of NA) X
S’s NA at acquisition (W2) (X)
–––
Goodwill at acquisition X
Impairments (X)
–––
Carrying amount of goodwill X
–––
Note: If there is a gain on bargain purchase, this is immediately credited to the
consolidated profit or loss.

Question 12

Groups: (W5) Group retained earnings

Answer 12

100% P’s RE X
P’s % × S’s post-acquisition RE (W2) X
Impairment of goodwill (if FV approach only deduct P’s share) (X)
Gain on bargain purchase X
–––
X

Question 13

Groups: (W6) Group reserves

Answer 13

100% P’s reserves X
P’s % × S’s post-acquisition reserves (W2) X
–––
X

Question 14

Groups: 2.2 Intra-group adjustments

Answer 14

At the year-end, current accounts may not agree, owing to the existence of in transit items such as cash or goods in transit. The usual rules are as follows:

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 adjusting entry:
 Dr Cash
 Cr Receivables current account

– goods in transit adjusting entry:
 Dr Inventory
 Cr Payables current account

(This 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.)

Pretend everything moves instantaniously

Question 15

Groups: Mid-year acquisitions

Answer 15

You may not be given the subsidiary’s reserves at acquisition. In which case
you will need to pro-rate S’s profit for the year and either add it to the opening
reserves or subtract from the year end reserves.

Just pro rate profit (reasonable thing to do anyway)

Question 16

Groups: Unrealised profits – ‘PURP’ adjustments: Inventory

Answer 16

1. 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.
2. Adjust profit of the seller
   P selling to S:
   Dr P’s retained earnings (W5)
   Cr Group inventory (on CSFP)
   S selling to P:
   Dr S’s retained earnings (W2)
   Cr Group inventory (on CSFP)

Just remove unrealised profit via retained earlings & inventory

Question 17

Groups: Unrealised profits – ‘PURP’ adjustments: PPE

Answer 17

If PPE sold between group members, adjust to reflect situation if transfer had not occurred:
- no profit on the sale
- depreciation based on the original cost of the asset to the group.

Work out the PURP:
Carrying Amount of NCA at y/e after transfer X
Carrying Amount at y/e if transfer had not taken place (X)
–––
Non-current asset PURP X
–––

Consolidation adjustment:
P → (W5) Dr RE of seller
S → (W2) Cr NCA on CSFP

Because it’s a PURP the adjustment has to be with retained eranings

Question 18

Groups: Unrealised profits – ‘PURP’ adjustments: 2.3 Fair value of net assets

Answer 18

IFRS 3 Business Combinations requires that the acquirer should
recognise:
 the identifiable assets, liabilities and contingent liabilities of the
acquire:
 at fair value
 at the date of acquisition.

Question 19

Groups: Unrealised profits – ‘PURP’ adjustments: 2.3 Fair value of net assets To process a fair value adjustment in a consolidation question

Answer 19

To process a fair value adjustment in a consolidation question, you must consider the
impact both at the acquisition date and the reporting date in (W2)
.
 At acquisition, put an adjustment into the net asset working (W2) to bring the
net assets to fair value (affecting the goodwill working).

 At the reporting date account on both the face of the CSFP and in the net
assets working (W2) (affecting the NCI working)

Question 20

Groups: Unrealised profits – ‘PURP’ adjustments: 2.4 Adjustments to provisional fair values of the subsidiary’s net assets

Answer 20

(Ideally the fair value of net assets will be ascertained by the first year
end after the acquisition. In practise this may not be possible, e.g. if the acquisition is in the last
month of the year. IFRS 3 Business Combinations allows the use of provisional fair values.)

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:

1. 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.
2. If the adjustments are made outside of the measurement period (i.e. more than 12 months from the acquisition date)
   The adjustments are treated as a change in accounting estimate and adjusted for prospectively.

Question 21

Groups: 2.5 NCI measurement

Answer 21

IFRS 3 Business Combinations allows a choice of how to measure NCI:
 Fair value method.
 Share of net assets/proportionate method.
The choice is made on an acquisition by acquisition basis.
The value of goodwill and NCI will be affected by the method chosen.

Question 22

2.6 Fair value of consideration

Answer 22

Consideration could be in the form of cash or shares, which could be
paid immediately, could be deferred or even contingent on future
conditions.

Question 23

Groups: 2.6 Fair value of consideration
Acquisition costs

Answer 23

Costs directly attributable to the acquisition of a subsidiary should be
recognised in the profit or loss of the group accounts.

Question 24

Groups: 2.6 Fair value of consideration
Share consideration

Answer 24

Shares issued as consideration on the day of acquisition are recorded at their market
value at that time.

Dr Investment X (amount included in ‘consideration’ in goodwill)
Cr Share capital X
Cr Share premium X

Question 25

Groups: 2.6 Fair value of consideration Cash consideration

Answer 25

Dr Investment X (amount included in ‘consideration’ in goodwill)
Cr Cash X

Question 26

Groups: 2.6 Fair value of consideration
Deferred cash consideration

Answer 26

(Deferred consideration is consideration which is payable at a future date.)

Deferred cash consideration should be discounted to its present value and is
recorded in the acquirer’s accounts by:
Dr Investment X (amount included in ‘consideration’ in goodwill)
**Cr Liability **X

Remember that deferred consideration will unwind annually over time:
Dr Finance costs X
Cr Liability X

Question 27

Groups: 2.6 Fair value of consideration
Deferred share consideration

Answer 27

Deferred share consideration is valued using the share price at the date of
acquisition. It is recorded in the acquirer’s accounts by:

Dr Investment X (amount included in ‘consideration’ in goodwill)
Cr Shares to be issued X (included in equity)

Question 28

Groups: 2.6 Fair value of consideration
Contingent consideration

Answer 28

(Contingent consideration is an amount which may be payable at a future date,
dependent upon certain events.
E.g. an extra amount may be paid for an investment in a subsidiary if it achieves a
certain level of sales growth over 5 years.)

Contingent consideration should be included as part of the cost of the investment and
measured at fair value at the date of acquisition

Contingent cash
Dr Investment X (amount included in ‘consideration’ in goodwill)
Cr Provision X

Contingent shares
Dr Investment X (amount included in ‘consideration’ in goodwill)
Cr Shares to be issued X

Question 29

Groups: 2.7 Changes in fair value of consideration

Answer 29

(The fair value of the contingent consideration at acquisition could be
different to the actual consideration paid. )

Any differences are normally treated as a change in accounting estimate and
adjusted prospectively in accordance with IAS 8 Accounting Policies, Changes in
Accounting Estimates and Errors:

Dr or Cr Provision X
Cr or Dr SPL X

Question 30

Groups: 2.8 Goodwill impairments Impairment Review Process

Goodwill cannot be considered in isolation when performing an impairment review

Answer 30

To assess if goodwill is impaired, you compare the carrying amount with the recoverable amount. If the carrying amount exceeds the recoverable amount, an impairment loss is recognized.

Carrying Amount: This is the value of goodwill as recorded in the financial statements.

Recoverable Amount: This is the higher of two values:
Value in Use: The present value (PV) of future cash flows expected to be derived from the asset.
Fair Value Less Costs to Sell: The current market value of the asset minus any costs associated with selling it.

Question 31

Groups: 2.8 Goodwill impairments Notional Goodwill

Answer 31

Impairment review for sub with proportional NCI? Gross up.

The recoverable amount can only be established for the subsidiary as a whole, and as such, 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 Impairment of Assets, if goodwill has been allocated to a subsidiary in which:
 there is NCI (i.e. it is not a 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 impairment review. This ensures that 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, but merely calculated for the purposes of arriving at the impairment figure.

Question 32

Groups: Consolidated statement of profit or loss (2 extra ones?)

Answer 32

Revenue (W2) X
Cost of sales (W2) (X)
–––
Gross profit X
Operating expenses (W2) (X)
–––
Operating profit X
Finance costs (W2) (X)
Investment income (W2) X
Share of profit of associate X
–––
Profit before tax X
Tax expense (W2) (X)
–––
Profit for the year Y
–––
Attributable to parent company X
Attributable to non-controlling interest (W3) X

Question 33

Groups: Consol SPL: Workings

Answer 33

(W1) Group structure

(W2) Consolidation schedule

Revenue
COS
Inventory PURP (seller column) (P)
Expenses
Impairment (proportionate) (P)
Impairment (FV) (S)

NCA PURP (seller column) (S)
Tax
–––– ––––
PAT (W3)

(W3) Non-controlling interest
NCI% × S’s PAT (W2)

Question 34

Groups: Consol SPL: Mid-year acquisitions

Answer 34

If a subsidiary is acquired mid-year, then the subsidiary’s
results should only be consolidated from the date of
acquisition, i.e. the date on which control is obtained.
 Time apportionment of the results of S in the year of
acquisition is required for this purpose. Unless indicated
otherwise, assume that revenue and expenses accrue
evenly.

Question 35

Groups: Consol SPL: Intra-group transactions
Sales and purchases

Answer 35

Such trading will be included in the sales revenue of one group company and
the purchases of another.
– Consolidated sales revenue = P’s revenue + S’s revenue – intra-group
sales
– Consolidated cost of sales = P’s COS + S’s COS – intra-group sales
 The deduction of the intra-group sales in both cases should be shown in the
adjustments column of the consolidation schedule (W2).

Question 36

Groups: Consol SPL: Inventory PURPs

Answer 36

1. Calculate intra group profit on goods still in inventory at year end
2. The required adjustment is:
   – Dr Closing inventory in selling company’s cost of sales – unrealised profit
   figure
   – Cr Closing inventory in consolidated statement of financial position –
   unrealised profit figure

In practise, the debit entry should be shown as an increase to cost of sales in
the seller’s column in the consolidation schedule (W2)

Increase seller’s COS for unrealised profit element

Question 37

Groups: Consol SPL: NCA PURPs

Answer 37

If one group company sells a non-current asset to another group company the
following adjustments are needed in the CSPL:

– Any **profit or loss arising **on the transfer must be deducted from the
appropriate category within the seller’s column in the consolidation
schedule (W2) in the year of transfer only

– The depreciation charge must be adjusted (again in the seller’s column of
the schedule) so that it is based on the cost of the asset to the group in all
years from transfer until end of asset’s useful life

In most cases the profit on disposal and the depreciation charge are included in
the same expense line in the SPL and, therefore, only one adjustment is
needed

Question 38

Groups: Consol SPL: Intra-group dividends (paid to parent)

Answer 38

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 of (W2) by the amount of the dividend paid to P.

Question 39

Groups: Consol SPL: Intra group interest and management charges

Answer 39

Interest or management charges payable in the SPL of the subsidiary should be
cancelled against the interest or management charges receivable in the parent
company’s SPL.

Make this adjustment in the ‘adjustments’ column of (W2).

Question 40

Groups: Consol SPL:Goodwill impairments

Once impairment has been identified during the year, the charge
for the current year will be passed through the consolidated SPL.

Answer 40

Depends on NCI method

If the proportionate basis has been used to calculate NCI
Take the impairment charge through P’s column of (W2) (usually
operating expenses, unless told otherwise).

If the fair value method has been used to calculate NCI
Take the impairment charge through S’s column of (W2).

Question 41

Groups: Consol SPL: Fair value adjustments (uplift)

Answer 41

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 of (W2).

Question 42

Groups: Consolidated statement of changes in
equity

Answer 42

Columns:
B/F
TCI
Dividends
C/F

Rows:
Share capital
Retained earnings
Total
NCI
Total

1. B/f share cpaital is the P’s share capital
2. Dividends in RE = 100% of P’s dividend
3. Dividends in NCI = NCI% of S’s dividend
4. RE b/f is calculated as follows:
   100% of P’s RE at start of year
   P’s% of S’s post-acquisition RE to start of year
   Less: impairments at the start of year

5a.NCI b/f (proportionate method):
NCI % × S’s NAs b/f

5b. NCI b/f (FV method):
FV of NCI @ acqn
NCI % of post-acquisition RE and reserves to start of year
NCI share of impairment b/f

Question 43

Groups: IAS 28 Investments in Associates and
Joint Ventures

*IAS 28 Investments in Associates and Joint Ventures requires that associates and joint ventures are equity-accounted in the group financial statements. Joint ventures are defined in IFRS 11 Joint Arrangements. An associate exists where an investor has a significant influence over the financial and operating policies of an entity.

Answer 43

In the statement of financial position the investment in the associate or joint venture is made up of:

1. Cost of investment (P’s accounts)
2. P% × post-acquisition movement in net assets
3. Less: Impairment losses to date (X)

The statement of profit or loss and other comprehensive income includes the group’s share of the associate/JV’s profit after tax and other comprehensive income:

1. P% × profit after tax
2. Less: Impairment loss in year (X)

A. Transactions between the group and the associates/JVs should not be cancelled out, but any unrealised profits on these transactions should be eliminated.

B. Fair value adjustments are required and the group share of intra-group unrealised profits must be excluded.

C. Any dividends recognised in the parent’s statement of profit or loss should be removed.

Question 44

Groups: IFRS 11 Joint Arrangements

Answer 44

‘A joint arrangement is an arrangement of which two or more
parties have joint control.’(IFRS 11, para 4)
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 Arrangements.
 Joint operations
 Joint ventures.

Question 45

Groups: 6.1 Joint operations

Answer 45

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 assets 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.
Example of a joint operation
A and B enter into a joint operation to produce a new product. A undertakes one
manufacturing process and B undertakes the other. A and B have agreed that
decisions regarding the joint operation will be made unanimously and that each will
bear their own expenses and take an agreed share of the sales revenue.

Question 46

Groups: 6.2 Joint ventures

Answer 46

Separate entity set up.
 Parties with joint control have rights to the net assets of the
arrangement.
 Equity accounted under IAS 28 Investments in Associates and
Joint Ventures in the consolidated financial statements.
 Any individual joint venture party will recognise the cost of the
investment and returns in the form of dividends (note that a party
to a joint venture also has the choice to account for this investment
using the equity method or at fair value per IFRS 9 Financial
Instruments (see chapter 4)).
Example of a joint venture
A and B set up a separate entity, C. Shares are owned 55% and 45% respectively.
A and B have agreed that decision-making regarding the joint venture will be
unanimous. Neither party will have a direct right to the assets, or direct obligations for
the liabilities of the joint venture. Instead, A and B will have an interest in the net
assets of the joint venture, C.

Question 47

Groups: Disposals within group accounts 7.1 Disposals: disposal of a whole subsidiary

Answer 47

Profit on disposal – subsidiary
Sale proceeds @FV
Less: Amounts recognised prior to disposal
Net assets of subsidiary @ disposal
Goodwill @ disposal
Non-controlling interest @ disposal

The consolidated statement of financial position does not include the subsidiary as the parent no longer has control at the reporting date.
Consolidated statement of profit and loss and other comprehensive income
1. Time apportion the results of the subsidiary up to the date of disposal & NCI
2. 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 IFRS 5, then the consolidated statement of profit or loss and other comprehensive income will show the profits or losses earned from the subsidiary and the gain or loss on disposal of the subsidiary as one line.
Note: In the FAR exam it always states that a disposal of a whole subsidiary would qualify as a discontinued operation. At advanced level this will not always be the case. As per IFRS 5 Discontinued Operations, to qualify as discontinued the disposed of subsidiary must represent a separate major line of business or geographical area of operations to the group.

Workings will be needed to calculate the net assets, goodwill and non-controlling interest at the disposal date.

Goodwill is the original goodwill less any impairments to date.

Question 48

Groups: 7.2 Full disposal of associate

Answer 48

SFP
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.

P&L
The disposal of an associate does not normally meet the definition of a
discontinued operation, therefore, presentation of the statement does not
change.

Pro-rate A’s profit after tax and equity account up to the date of disposal
and present this as a single line being ‘Share of profits of associate’.

Include group profit or loss on disposal:
Sale proceeds @FV
Less: Cost of investment
Share of post-acquisition movement in A’s net assets at disposal
Less: Impairment of investment to date
Less: Carrying amount of associate at disposal

Question 49

Groups: 7.3 Part disposal from a subsidiary holding

Answer 49

There are a number of situations that could occur with 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 50

Groups: 7.3 Part disposal from a subsidiary holding 7.4 Subsidiary to subsidiary (e.g. 80% – 60%) What to do on CSFP?

Answer 50

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.

The difference between the proceeds received and the change in noncontrolling interest is accounted for in shareholders’ equity.
Dr Cash (proceeds)
Cr NCI (Increase in NCI)
Dr or Cr Other components in equity (β)

Question 51

Groups: 7.3 Part disposal from a subsidiary holding Consolidated statement of financial position

Answer 51

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.
 Record the difference between NCI and proceeds in shareholders’ equity.

Question 52

Groups: 7.3 Part disposal from a subsidiary holding Consolidated statement of profit and loss and comprehensive income

Answer 52

 Consolidate the subsidiary’s results for the whole year.
 Calculate the NCI on a pro rata basis.

Question 53

Groups: 7.3 Part disposal from a subsidiary holding 7.5 Subsidiary to associate (e.g. 80% – 40%)

Answer 53

Consolidated statement of profit and loss and comprehensive income
Consolidate results up until the date of disposal.
Equity account results after date of disposal based on the post-disposal holding.
With this situation there is a loss of control and there will be a gain or loss on disposal in the consolidated profit or loss.

Sale proceeds @FV
Add: Fair value of interest retained
Less investment in subsidiary recognised prior to disposal:
Net assets @ disposal
Goodwill @ disposal
Less: Non-controlling interest @ disposal

This is the same as the pro-forma for a full disposal, but with the
inclusion of fair value of interest retained. This represents the value of
the holding remaining after the 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.

Question 54

Groups: 7.3 Part disposal from a subsidiary holding 7.6 Subsidiary to investment (e.g. 80% – 10%)

Answer 54

Gain or loss on disposal is calculated exactly the same as for the associate.

Statement of financial position
The interest retained is initially recorded at fair value (as included within the gain
calculation).

Statement of profit and loss and comprehensive income
Consolidate results up until the date of disposal.
Include dividend income after the date of disposal.
Include gain or loss on disposal as calculated above.

Question 55

Groups: 7.3 Part disposal from a subsidiary holding 7.7 Part disposal from an associate holding (e.g. 40% – 10%)

Answer 55

Statement of comprehensive income
Equity account for results up until date of disposal.
Include dividend income after date of disposal.

Shares in an associate may be disposed of so that an investment is retained.
In this case there is a gain or loss on disposal, calculated as:

Sale proceeds @FV
Fair value of interest retained
Less: Cost of investment
Share of post-acquisition movement in A’s net assets at disposal
Less: Impairment of investment to date

Statement of financial position
The interest retained is initially recorded at fair value (as included within the gain
calculation).

Question 56

Groups: Step acquisitions within group

Answer 56

As per IFRS 3 Business Combinations, 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.
Until this point, the pre-existing interest is treated in accordance with:
 IFRS 9 for investments
 IAS 28 for associates and joint ventures.

Question 57

Groups: Step acquisitions within group 8.1 Achieving control on 2nd acquisition (e.g. 40% – 60%)

Answer 57

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:

1. Any gain or loss on re-measurement to fair value is recognised in the profit or loss, or OCI as appropriate
2. Goodwill is calculated using the fair value at the date of acquisition:

Consideration transferred
Fair value of previously held equity interest at acquisition date
Non-controlling interest at the acquisition date
Less: total fair value of identifiable net assets of the acquiree

Question 58

Groups: Step acquisitions within group 8.2 Acquisitions that do not result in a change in control (e.g. 60% – 80%)

Answer 58

Where an entity increases its investment in an existing subsidiary:
 No gain or loss is recognised
 Goodwill is not remeasured.
The difference between the 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 β

Question 59

Groups: Step acquisitions within group 8.3 Achieving significant influence (e.g. 10% – 40%)

Answer 59

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 profit and loss or OCI
as appropriate

 The investment in the associate is calculated as:

Consideration transferred
Fair value of previously held equity interest at acquisition date
Share of post-acquisition movement in A’s net assets
Less: impairments

Question 60

Groups: IFRS 12 Disclosure of
Interests in Other Entities

Answer 60

IFRS 12 requires disclosure of a reporting entity’s interests in other entities to help
identify the profit and loss and cash flows available to the reporting entity.

Disclosures are required for entities which have interests in:
 Subsidiaries
 Joint arrangements
 Associates, and
 Unconsolidated structured entities.

A structured entity ‘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, Appendix A).

All disclosure requirements from other standards have been removed relating to group accounting.

To meet the objective of the standard ‘an entity shall disclose:
(a) the significant judgements and assumptions it has made in determining:
(i) the nature of its interest in another entity or arrangement
(ii) the type of joint arrangement in which it has an interest […]
(iii) that it meets the definition of an investment entity, if applicable […],
and
(b) information about its interests in:
(i) subsidiaries[…]
(ii) joint arrangements and associates […], and
(iii) structured entities that are not controlled by the entity
(unconsolidated structured entities)’ (IFRS 12, para 2)

Question 61

Groups: Consolidated statement of cash
flows

Answer 61

A group statement of cash flows adds four potential extra elements
:
 An extra outflow – cash dividend paid to non-controlling interest.
 An extra inflow – dividends received from associates.

 The impact of the acquisition and disposal of subsidiaries.
 The impact of the acquisition and disposal of associates.

Just dividands and acquisition/disposal

Question 62

Groups: Consolidated statement of cash
flows 10.1 Non-controlling interests

Dividends paid to non-controlling interests

Answer 62

Any dividends paid to non-controlling interests should be disclosed separately in
the statement of cash flow – usually under financing activities.

Method = reconcile non-controlling interest in the statement of financial position
from the opening to the closing balance using a T account → cash flow as
balancing figure.

NCI eliminated on disposal
Dividend paid (β)
Less: Profit (CSPL)
Less: NCI added on acquisition

Question 63

Groups: Consolidated statement of cash
flows 10.2 Associates

Answer 63

Cash flows from operating activities
 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.

Profit before tax
Less: Share of profit in associate

Dividends received from associates Dividends received from associates should be included as a separate item in the group statement of cash flows under investing activities.

Investment in associate:
Share of profits (CSPL)
Less: Dividend received (β)

Question 64

Groups: Consolidated statement of cash
flows 10.3 Acquisition and disposal of subsidiaries

Answer 64

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.’(IAS 7, para 39)
 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.

10.4 Acquisitions/disposals of associates
 The payment or receipt of cash is classified within investing activities.

Question 65

Groups:

As group auditors, we would have sole responsibility for the audit opinion on the
group financial statements.

Audit tests

Audit risk

Use of another auditor

Answer 65

Independence of component auditors.
 Professional competence of component
auditors. Includes review of any monitoring,
remediation or inspection process.
 Instructions issued to component auditors.
 Obtain confirmation that component auditor will
co-operate with group auditor.
 Review of component auditors’ work.

Question 66

Groups: Audit tests

Audit risk

Extent of work required on
components

Answer 66

If likely to include significant risks of material
misstatement of the group FS, the group auditors
will require one of the following:
 A full audit using component materiality.
 An audit of specified account balances related
to identified significant risks.
 Specified audit procedures relating to identified
significant risks.
Components that are not significant will be subject
to analytical review at a group level.

Question 67

Groups: Audit tests

Audit risk

Misclassification of
investments (subsidiary v
associate v financial asset)

Answer 67

 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
e.g. right of veto of third parties.

Question 68

Groups: Audit tests

Audit risk

Acquisition of new
subsidiary

Answer 68

 Review of valuation of assets and liabilities to
confirm fair value at acquisition (e.g. trade
journals or professional valuation reports).
 Confirm the valuation of consideration,
including deferred or contingent consideration
using appropriate discount rate.
 Recalculate goodwill.
 Impairment review of goodwill.
 Review purchase agreement to identify date of
control.
 Review consolidation schedules to ensure
amounts have been time apportioned if
appropriate.

Question 69

Groups: Audit tests

Audit risk

Incorrect calculation of
profit/loss on disposal or
classification of results of
subsidiaries disposed of
(continuing v discontinued)

Answer 69

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 e.g. income and expense
items.
 Whether continued/discontinued classification
is required/appropriate.

Question 70

Groups: Audit tests

Audit risk

Incorrect consolidation
adjustments, e.g. failure to
eliminate intra-group items
properly

Answer 70

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.