Week 7 - Group Accounting: IFRS10 Control & Disposals

Question 1

IFRS 10: De Facto control

Answer 1

Control even if you have less than 50%

e.g. if past voting rights suggest the remaining investors rarely votes, you could say this is de facto control

Question 2

Joint Control

Answer 2

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. We call entities
under joint control joint ventures.

Question 3

Business arrangements:

Answer 3

Joint Control: Decisions require unanimous agreement between the equal shared partners
Associate 20-50% ownership
Subsidiary: >50% ownership
Investment: <20% ownership

Question 4

Structured Entities

Answer 4

If control exists, even if <50%, then need to consolidate whole asset as if its a subsidiary.

If there is a significant influence it should be accounted for as an associate

Question 5

Accounting for disposal:
SoFP

Answer 5

the disposed subsidiary is not consolidated:
o remove goodwill related to the subsidiary
o remove NCI related to the subsidiary
o do not consolidate the assets and liabilities of the subsidiar

Question 6

Accounting for disposal:
Income Statement

Answer 6

consolidate the results of the subsidiary up to the date of disposal
* report NCI of the subsidiary up to the date of disposal
* show the group profit or loss on disposal of the subsidiary (in Income Statement)

Question 7

Full Disposal: Group Profit or Loss
MUST LEARN

Answer 7

Calculating group profit(loss) on disposal of a subsidiary (important to learn)

Fair value of proceeds received X

Less Carrying value of net assets at date of disposal X
Less Goodwill at date of disposal X
Less: non-controlling interests at date of disposal (X)
(X)
Group profit (loss) on disposal (Consolidated I/S) X/(X)

Goodwill at disposal = consideration + NCI at acquisition - FVNA at acquisition

Question 8

Disposal in parent co’s individual statements

Answer 8

Proceeds: £3,100
Carrying Value of Investment: (£2,500)
Profit on disposal: £600

Question 9

Calculating group profit(loss)on disposal of an associate

Answer 9

Fair value of proceeds received X
Less: Investment in associate as at disposal date (X)
Less: Group share of post acquisition reserves (difference in starting reserves and closing reserves) %
Group profit (loss) on disposal (I/S) X/(X)

Example photos 31/10/24

Question 10

Calculating group profit(loss)on disposal of an associate

EXAMPLE

Mello Group acquired 40% of Yello Ltd on 30 March 20X3 for £700,000 obtaining significant
influence. The reserves of Yello Ltd were £950,000 on this date. The group financial
statements have a 31 December year end.
On 30 September 20X8 Mello Group disposed of its entire holding in Yello Ltd for
£1,800,000 when the reserves of Yello Ltd stood at £2,100,000.
In Mello Ltd’s individual financial statements the investment in Yello Ltd had been carried at
fair value through profit and loss and stood at £1,200,000 as at the previous year end.
Required
a) Calculate the group profit/loss on disposal arising from the disposal of Yello Ltd as
reported in the Mello Group Consolidated Statement of Comprehensive Income for
the year to 31 December 20X8.
b) Summarise the impact of the disposal on the consolidated financial statements of
Mello Group for the year to 31 December 20X8
c) Calculate the profit/loss on disposal that would be reported in parent company Mello
Ltd’s individual financial statements for the year to 31 December 20X8.

Answer 10

a) Fair value of proceeds received: £1,800
Less: investment in associate at disposal date
Cost of investment: £700
Group share of post acquisition reserves: £460 (2,100-950) x 40%
= (1,160)

Group Profit on disposal: £640

b) CSoFP No investment in associate
CSoCI: 9/12 share of profits of associate
Group profit on disposal of £640k

c) Proceeds £1,800
Carrying value of investment at 1/7/X7 (1,200)
Profit on disposal: £600

Question 11

Typical fatures of structured entity

Answer 11

Activities not directed using voting rights, directed by a contract
Activities are restrited, narrow objective
Financial support - e.g. parent guarantees loan/losses

Question 12

Goodwill working

Answer 12

Consideration + NCI at Acqsn. - FVNA at Acqn.

Question 13

Where to take URP from int he statements?

Answer 13

Inventories (or current assets)

Cost of Sales (IS)

Retained Earnings

Question 14

All entity structures using IFRS 10 & 12

Answer 14

If control exists (through >51% or de facto control) then its a subsidiary

Significant influence (>20%) its an Associate

Holding but no control or significant influence, IFRS 12 says it must be disclosed an Investment, and the nature and risks must be disclosed.

Question 15

What’s a structured entity and how does IFRS require accounting of them

Answer 15

Structured entities are set up to carry out a specific narrowly
defined objective. They are tightly controlled legally and entities can transfer assets and liabilities to them. Problems
could arise if entities can hide liabilities in these SPEs (off balance sheet accounting). IFRS attempt to prevent this by
requiring SPEs to be consolidated if the relationship is such that the entity controls the SPE. Substance of control is
emphasized as the overriding factor rather than legal ownership.

Question 16

What happens when assets are revalued

Answer 16

The gains recognised in IS when sold, but if it loses value we recognise this expense in the income statement even though its not been sold