Introduction to groups

Many large businesses consist of several companies controlled by one central or administrative
company.

Together these companies are called a group. The controlling company, called the parent or
holding company, will own some or all of the shares in the other companies, called
subsidiaries.

The Accounting Standards embodying

 IFRS 3 Business Combinations

 IFRS 10 Consolidated Financial Statements
 IFRS 13 Fair Value Measurement
 IAS 28 Investments in Associates and Joint Ventures*
 IAS 27 Separate Financial Statements

*Joint ventures are not examinable in Financial Reporting.

Definitions
 Control. An investor controls an investee when the investor is exposed, or has rights,
to variable returns from its involvement with the investee and has the ability to affect
those returns through power over the investee.
 Power. Existing rights that give the current ability to direct the relevant activities of the
investee
 Subsidiary. An entity that is controlled by another entity.
 Parent. An entity that controls one or more subsidiaries.
 Group. A parent and all its subsidiaries.
 Associate. An entity over which an investor has significant influence and which is
neither a subsidiary nor an interest in a joint venture.
 Significant influence. The power to participate in the financial and operating policy
decisions of an investee but it is not control or joint control over those policies.

Consolidated financial statements present the assets, liabilities, equity, income, expenses
and cash flows of the parent and its subsidiaries as if they were a single economic entity.
Basic consolidation
The parent company must prepare consolidated financial statement if it has control over one or
more subsidiaries.

The underlying principles of consolidation are:

 Substance over legal form

 Control and ownership

Exemptions

A parent company need not to prepare a consolidated statements if and only if

 The parent itself is a wholly or partially owned and its owners including those without
voting rights have been informed about and not object the decision of the parent not
preparing a consolidated financial statements.
 The parent debts and equity instrument is not traded in the public market.

Types of investment and the required accounting for them as follows

Investment Criteria Required treatment

Subsidiary Control (> 50% rule) Full consolidation (IFRS 10)

Associate Significant influence Equity accounting (IAS 28)

(20%+ rule)

Investment Asset held for accretion of As for single company accounts

wealth IFRS 9
Consolidated financial statements (Subsidiary)
Basic Principle

 Show all assets and liabilities of parent and subsidiary

 Intra-group items such as receivables and payables are excluded. Only include amount
of receivables and payables with third parties.
 Any investments in the subsidiary shown in the Parent’s statement of financial position
is replaced by the Net Asset of the Subsidiary
 The cost of the investment in the subsidiary is cancelled with the ordinary share capital
and reserves of the subsidiary, leaving goodwill as a balance

Thus

Net Assets of the Group is that of the Parent + Subsidiary

Share Capital of the Group = Share Capital of the Parent only

Retained Earnings = Profit earned by the Group (Parent’s Retained Earnings +Post
Acquisition profit made by the Subsidiary)

Illustration 1

Peter acquired 100% of the equity share capital of Steven on 31 December 20X4 for
$1,000,000.

The financial statements of the two companies at that date were as follows:

Peter Steven

$000 $000

Investment in Steven Co 1,000 -

Other assets 1,500 1,200

Total assets 2,500 1,200

Equity share capital 1,000 250

Retained earnings 1,100 750

 2,100 1,000

Liabilities 400 200

Total equity and liabilities 2,500 1,200

Prepare the consolidated statement of financial position for the Peter Group at 31
December 20X4.

Solution

Peter Group

$000

Other assets (1,500 + 1,200) 2,700

Total assets 2,700

Equity share capital 1,000

Retained earnings 1,100

2,100

Liabilities (400 + 200) 600

Total equity and liabilities 2,700

Illustration 2

Following Peter’s acquisition of the 100% of Steven’s equity share capital of Steven on 31
December 20X4, both companies continued to trade. The financial statements of the two
companies at the end of the following year 31 December 20X5 were as follows:

Peter Steven

$000 $000

Investment in Steven Co 1,000 -

Other assets 1,900 1,450

Total assets 2,900 1,450

Equity share capital 1,000 250

Retained earnings 1,400 900

2,400 1,150

Liabilities 500 300

Total equity and liabilities 2,900 1,450

Prepare the consolidated statement of financial position for the Peter Group at 31
December 20X5.

Solution

Peter Group

$000

Other assets (1,900 + 1,450) 3,350

Total assets 3,350

Equity share capital 1,000

Retained earnings (=1,400 + (100% x (900 – 750)) 1,550

2,550

Liabilities (500 + 300) 800

Total equity and liabilities 3,350

Solving or Preparing a Consolidated Statement of Financial Position (CSFP)

(W1) Group structure

Parent

Date of Acquisition 50+% (E.g. 80%) This means that the Parent Co. owns
80% of the Subsidiary Ordinary shares when they bought
them

Subsidiary

This working is useful to decide the status of any investments. If one entity is controlled by
another entity then it is a subsidiary and must be consolidated.

In numerical exam questions, control is normally presumed to exist if one company owns more
than half of the voting capital of another entity.

Once the group structure has been determined, set up a proforma statement of financial
position.

(W2) Net assets of each subsidiary

This working sets out the fair value of the subsidiary's identifiable net assets at acquisition date
and at the reporting date.

At acquisition At reporting date

$000 $000

Equity/Share capital X X

Reserves;

Share premium X X

Other components of equity (RS) X X

Retained earnings X X

Goodwill in the accounts of the sub. (X) (X)

Fair value adjustments (FVA) X X

Post acq'n dep'n/amort. on FVA (X)

PURP if the sub is the seller (X)

X (to W3) X

Remember to update the face of the statement of financial position for adjustments made to the
net assets at the reporting date (such as fair value uplifts and provisions for unrealised profits
(PURPS)).

The fair value of the subsidiary's net assets at the acquisition date are used in the calculation of
goodwill.

The movement in the subsidiary's net assets since acquisition is used to calculate the non-
controlling interest and group reserves.

(W3) Goodwill

Goodwill

On acquisition of a subsidiary, the parent will usually pay more for the subsidiary than the
value of the net assets (assets less liabilities). This is because of

 Customer loyalty

 Good reputation

The difference between what the parent pays and what the net assets are truly worth is referred
to as goodwill. It represents assets not shown in SoFP of the acquired company

Where 100% of Subsidiary is acquired, Goodwill is given by

Cost of Investment XX

Less Net assets of Subsidiary (XX)

Goodwill XX

Where less than 100% is acquired,

$000

Fair value of purchase consideration X

Non-Controlling Interest (NCI) at acquisition** X

Less: fair value of identifiable net assets at acquisition

(per net assets working) (from W2) (X)

Goodwill at acquisition X

Less: impairment to date (X)

Goodwill to consolidated SFP X

Note

Positive Goodwill

Positive Goodwill is treated as non-current asset

Tested annually for impairment (Amortisation of Goodwill is not allowed by IFRS standard)

 **if full goodwill method adopted, NCI value = FV of NCI at date of acquisition. This
will normally be given in a question.
 **if proportionate goodwill method adopted, NCI value = NCI % of the fair value of
the net assets at acquisition (per W2).
 If there are a post-acquisition revaluation surplus, the group share of the post-
acquisition revaluation surplus would be part of the revaluation surplus and not taken
to retained earnings.

Negative Goodwill is regarded as a Gain on a bargain purchase and is included as gain in the
retained earnings in workings 5
Illustration 3

A parent company buys 75% of the equity shares in a subsidiary company for $156,000.

The remaining shares were valued at $52,000 and the net assets at acquisition were $170,000.

Calculate the goodwill arising on acquisition assuming that:

• Non-controlling interest is measured using the proportionate share of net assets method

• Non-controlling interest is measured using the fair value method.

Solution

(i) Proportionate share of net assets method

FV of consideration 156,000

NCI at acquisition (25% x 170,000) 42,500

FV of net assets at acquisition (170,000)

Goodwill at acquisition 28,500

(ii) Fair value method

FV of consideration 156,000

NCI at acquisition 52,000

FV of net assets at acquisition (W2) (170,000)

Goodwill at acquisition 38,000

(W4) Non-controlling interest

Control is exerted through a shareholding of greater than 50%, so therefore it is not always
necessary to fully own a subsidiary.

Shareholdings of 75% will still give the parent the power to direct the activities of the
subsidiary and therefore it must prepare consolidated financial statements.

As the parent’s 75% holding still maintains control, the assets and liabilities of the subsidiary
are consolidated 100% on a line-by-line basis.

It is necessary to account for 25% ownership interest in the subsidiary which is referred to as
the non-controlling interest. It is shown in the equity section of the consolidated statement of
financial position.

The non-controlling interest is measured using either of the following methods:

 Proportionate share of net assets

 Fair value

Workings

$000

NCI value at acquisition (W3) X

NCI % of post-acquisition movement in net assets (W2) X

Less: NCI % of goodwill impairment (fair value method only) (X)

NCI to consolidated SFP X

This shows the value of the subsidiary that is not owned by the Parent at year end

Illustration 4

Pierre acquired 80% of Stefan’s equity share capital on 31 December 20X4 when Stefan’s
retained earnings were $750,000.

The financial statements of the two companies at the end 31 December 20X5 were as follows:
 Pierre Stefan

$000 $000

Investment in Stefan Co 800 -

Other assets 1,900 1,450

Total assets 2,700 1,450

Equity share capital 1,000 250

Retained earnings 1,200 900

2,200 1,150

Liabilities 500 300

Total equity and liabilities 2,700 1,450

Prepare the consolidated statement of financial position for the Pierre Group at 31
December 20X5 assuming the non-controlling interest is measured using the
proportionate share of net assets method

Solution

Pierre Group

$000

Other assets (1,900 + 1,450) 3,350

Total assets 3,350

Equity share capital 1,000

Retained earnings (1,200 + (80% x (900 – 750)) 1,320

2,320

Non-controlling interest (25% x (250 + 750)) + (25% x (900– 750)) 230

2,550

Liabilities (500 + 300) 800

Total equity and liabilities 3,350

(W5) Group reserves

Retained earnings $000

Parent's retained earnings (100%) X

For each subsidiary: group share of post-acquisition

retained earnings (W2) X

Add: gain on bargain purchase (W3) (Negative Goodwill) X

Less: goodwill impairment** (W3) (X)

Less: PURP if the parent was the seller (X)

Retained earnings to consolidated SFP X

Illustration 5

Matthews purchased 80% of Jones for $600,000 two years ago when Jones’s retained earnings
showed a balance of $100,000.

Matthews Jones

$000 $000

Non-current assets 1,000 500

Investment in Jones 600 -

Current assets 800 600

Total assets 2,400 1,100

Equity share capital ($1) 500 200

Retained earnings 800 400

1,300 600

Liabilities 1,100 500

Total equity and liabilities 2,400 1,100

Additional information:

Matthews measures the non-controlling interest using the fair value method.

The fair value of Jones’s equity shares acquired was $200,000 at acquisition

Prepare the consolidated statement of financial position for the Matthews group for the
year-ended 31 December 20X5.

Solution

Workings

W1) Group Structure

Matthews

Date of Acquisition 80%

Jones

W2) Net assets of subsidiary

At reporting date At acquisition Post acquisition

Equity shares 200 200

Ret. earnings 400 100

600 300 300

W3) Goodwill

FV of consideration (shares/cash) 600

NCI at acquisition (FV) 200

800

FV of net assets at acquisition (W2) (300)

Goodwill at acquisition 500

W4) Non-controlling interests

NCI @ acqn (W3) 200

Add: 20% x 300 (W2) 60

260

W5) Group retained earnings

100% P 800

Add: 80% x 300 (W2) 240

1,040

Matthews Group

$000

Non-current assets (1,000 + 500) 1,500

Goodwill (W3) 500

Current assets (800 + 600) 1,400

Total assets 3,400

Equity share capital ($1) 500

Retained earnings (W5) 1,040

1,540

Non-controlling interest (W4) 260

1,800

Liabilities (1,100 + 500) 1,600

Total equity and liabilities 3,400