GROUP ACCOUNTS

OBJECTIVES
When you have studied this chapter you should be able to do the following:
• Describe the concept of the group as a single economic unit
• Explain the objective of consolidated financial statements
• Prepare a consolidated statement of financial position for a simple group  Deal with pre and post acquisition
profits.
• Deal with non –controlling interest
• Describe the required accounting treatment of consolidated goodwill
• Apply the required accounting treatment of consolidated goodwill
• Explain the consolidation of other reserves (e.g. share premium and revaluation)
• Account for the consolidation of the other reserves
• Accounts for the effects on intra-group trading in the statement of financial position
• Explain why it is necessary to use fair values
• Accounts for the effects on intra-group divided in the statement of financial position
• Acquisition of subsidiaries part way through the financial year
Introduction

Many large companies consist of several companies controlled by one central or

administrative company. Together these companies are called a group .The controlling
company called a parent or the holding company will own some or all of the shares in the
other companies called subsidiaries.
There are many reasons why business operates as groups among them are the good
names w associated with the names of parent companies and subsidiaries or for tax or
legal purposes
Investments can be classified into two

1. Subsidiary –were a company controls(owns more than 50% of shares) in another

entity, the required treatment in group accounts is full consolidation.
2. Associate –were a company has significant influence( owns more than 20% but
less than 50% of shares)over another entity ,the required treatment in group accounts
is equity accounting. We will start with the first one were a company controls
another .This is considered by International Financial Reporting Standards 3 and 10 (IFRS 3
business combination, IFRS 10 Consolidated Financial statement).
The concept of group accounts

If one company owns more than 50% of the ordinary shares of another company:
• This will usually give the first company ‘control’ of the second company
• The first company (the parent company P) has enough voting power to appoint all the directors of the second company
(the subsidiary company S)
• P is, in effect able to manage S as if it were merely a department of P rather than a separate entity
• In strict legal term P and S remain distinct, but in economic substance they can be regarded as a single unit (a‘ group’).
Definitions
IFRS 10 Consolidated Financial l Statements uses the following definitions
Consolidated financial statements –Financial statements of the group in which the assets ,liabilities ,equity ,income ,expenses
and cash flows of the parent and its subsidiaries are presented as those of a the single economic entity

A group-is a parent and its subsidiaries

Parent-An entity that controls one or more subsidiaries
Subsidiary- an entity that is controlled by another entity (known as the parent)
Control-the power to govern the financial and operating policies of an entity so as to obtain benefits from the activities
IFRS 10 states that an investor controls an investee “when the investor is exposed or has rights to variable returns through its
power over the investee. Aninvestor should have existing rights that enable it to direct relent activities of the investee e.g.
selection, acquisition or disposal of assets.
Rights which may give power include
Voting rights
Right to appoint or remove members of the investees key management personnel
Requirements for consolidated financial statements
IAS 27 outlines the circumstances in which a group is required to prepare
consolidated financial statements Consolidated financial statements should
be prepared when the parent company has control over the subsidiary.
Control is usually established based on ownership e.g. more than 50% of
voting power, but other forms of control are possible.
IAS 27 gives four other situations in which control exists- when the parent
has power.
• Over more than half of the voting rights by virtue of an agreement
with other investors
• To govern the financial and operating policies of the entity under a
statute or an agreement
• To appoint or remove the majority of the members of the board of
directors
To cast the majority of votes at a meeting of the board of directors
Exemption from preparing group accounts
A parent is required to prepare consolidated financial statement. However a parent need
not present consolidated financial statements if and only if;
1. The parent is itself a wholly –owned subsidiary or is a partially –owned subsidiary of
another entity and 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. The parents debt or equity instrument are not traded in a public market (domestic or
foreign stock exchange or an over the counter market including local and regional
markets)
3. The parent did not file, nor is it in the process of filing its financial statement with a
securities commission or other regulatory bodies for the purposes of issuing any class
of instruments in a public market.
The ultimate or any intermediate parent of the parent produces consolidated financial
statements available for public use that comply with International Financial Reporting
Standards(IFRSs) disclosures made relating to fair values, goodwill ,non controlling interest
and match them to the requirement of IAS 27,28 and IFRS 3
Consolidation Procedures

When preparing consolidated financial statements, an entity

combines the financial statements of the parent and its
subsidiaries line by line by adding together like items of assets,
liabilities, equity, income and expenses. In order to ensure that the
financial statements present financial information about the group,
as that of a single economic entity, the following steps are taken.
• The carrying amount of the parent s investment in each
subsidiary and that of the parent’s portion of equity of each
subsidiary are eliminated.
• Non –controlling interests in the profit or loss of
consolidated subsidiaries for the reporting period are identified
• Non-controlling interests in the assets of consolidated
Consolidated Statement of Financial Position (SFP)
Steps in consolidation of the statement of financial position
A standard group accounting question will provide the accounts of
P and the accounts of S and will require the preparation of
consolidated accounts. The best approach is to use a set of
standard workings.
Always follow the following standard workings before you
start adding assets for Parent & Subsidiary
1.Establish the Group structure
2.Calculate the Net asset of the subsidiary
3.Calculate Goodwill
4.Calculate Non controlling interest
5.Calculate Retained earnings
Below is the explanation of the above consolidation workings needed.

Group structures
There are two types of group structure, a direct interest and an indirect holding

65% 100% 70%

S3
S1 S2

NOTE: S2 is the wholly owned subsidiary of P while S1 and S3 are partially owned
 Indirect holding
This is where a parent has indirect holding through the subsidiary

80%

55%

SS

P co owns 80% equity shares of the equity shares in S therefore S is a direct subsidiary of P.S in turn owns 55% equity
shares in SS .SS is therefore a subsidiary of S and consequently a subsidiary of P.SS would describe S has its parent
(or holding) company and P Co as its ultimate parent company. SS is the sub subsidiary of P.P ‘s equity interest in SS
is 44% (80% x55%) but can control SS through its chain of control of S
It is important to start with finding the group structure because this will help in establishing the type
investment ,whether it is a Subsidiary were a company controls another entity or Associate were a company h
significant influence over another entity. Establishing this is very important because the two investments a
accounted for differently. For a subsidiary the required treatment in group accounts is full consolidation (this were
owns more than 50% of S).
While for the Associate were a company has significant influence over another entity, the required treatment
group accounts is equity accounting (owns more than 20% but less than 50% of shares)

Exercise

a) P acquired all the shares in S on 31 December 2004

b) P acquired 75% of the shares in S on 31 December 2004

c) P acquired 40% the shares in S on 31 December 2004 Required:
Find the net assets of subsidiary

The net assets of the subsidiary refer to the assets less the liabilities of the subsidiary.

From the accounting equation discussed in previous accounting courses we know that. Assets =Capital + liabilities
therefore Assets – liabilities = Capital. Hence instead of examining net assets by analyzing assets less liabilities the
capital side is analyzed.
Net assets at Acquisition and at reporting date are analyzed so that increase or decrease in retained earnings is
established.

Below is the format for calculating the Net assets at acquisition and at reporting date.

Net assets
At the date of At the reporting
Acquisition date
K K
Share capital X X
Reserves
Share premium X X
Retained earnings X X
X X
Example
Below are the Statements of financial position as at 31 December 20X4 for P and S

P S

K K

Non –current assets 3,000 2,500

Investment in S at cost 2,500
Current assets 2,000 2,000
7.500 4,500

Ordinary share capital (K1 shares) 5,000 2,000

Retained earnings 1,500 500
Current liabilities 1,000 2,000
7,500 4,500

P acquired all the shares in S on 31 December 20X4 for a cost of K2, 500.When the retained earnings of S
were K250
Required
a) Show the group structure and
b) Calculate the net asset for S at acquisition and at Reporting date
1. Group structure

2. Net assets

At the date of At the reporting

Acquisition date
K K
Share capital 2,000 2,000
Share premium 0 0
Retained earnings 250 500
2,250 2,500

It is important that the net asset working is accurately calculated because it is the basis for calculating the other consolidation workings like
Goodwill, Non Controlling Interest and Group reserves
3. Goodwill
International Financial Reporting Standard 3 (IFRS 3) defines goodwill as future economic benefits arising
from assets that are not capable of being individually identified and separately recognized. Or Goodwill is an
asset representing the future economic benefits arising from another asset acquired in a business
combination that are not individually identified and separately recognized.

Goodwill on acquisition
Goodwill on acquisition arises when the consideration transferred by the parent company is not equal to the
group share of net assets at acquisition. It is calculated as the excess of the consideration transferred by the
Parent and amount of any non-controlling interest (if it’s partial acquisition) over the net assets of the
acquisition date identifiable assets acquired and liabilities assumed)

Good will =Consideration paid (by both P and NCI) -net assents
 The standard working for good will is as below

The parent holding (investment) at fair value XX

Non-Controlling Interest (NCI) values at acquisition XX
Less:
Fair value of net assets at acquisition (W2) (XX)
Goodwill on acquisition XX

Therefore to calculate goodwill, you need to know,

(1) The amount paid to acquire the company (Purchase consideration .and
(2) the net assets of the company being acquired on the acquisition date
Purchase consideration

The consideration paid by the company can either be cash or in other forms such exchange of shares. If
the consideration is by exchange of shares P will issue new shares in the agreed number and allot them
to S. This kind of deal might be attractive to P since it avoids the need for a heavy cash outlay .The
former shareholders of S co would retain an indirect interest in the company’s profitability via their new
holding in its parent company. The double entry in P s books would be;

Dr Investment in S at cost
Cr Bank (if consideration is by Cash)

Or
Dr Investment in S at cost
Cr Share capital (if consideration is by shares exchange)
If the consideration is by share exchange and the share price is above the par value .Then there will be a share premium. The double entry will
then be
Dr Investment in S cost
Cr Share capital
Cr Share premium
Example
a) Suppose P purchased all 50,000 shares in S company and paid a K100, 000 by cheque to S share holders
b) Suppose P purchased all 50,000 shares in S company in exchange for 2 shares in P for each share in S. The par value of P
shares is K1 per share but they are currently trading at K4 per share.
Required
Calculate the purchase consideration in both( a) and (b) and show the journal entries in P s books.
Solution
a) Purchase consideration is the cash paid for the shares =K100,00
Dr Investment in S co at cost K100, 000
Cr Bank (consideration is by Cash) K100, 000
100,000 (50,000x2) shares at the cost of K 4 will be received from P. Purchase consideration will be K400, 000(100,000 shares x 4)
(b)

Dr Investment in S at cost

K400
K100, 000(K1x 100,000)
Cr Share capital
K300, 000
Cr Share premium
'

Example

D acquired 100% of the ordinary share capital of C on 31 December 20x6 for K 200,000. At this date C had
the Share capital K140, 000 and reserves 30,000.Calculate the good will on acquisition).
The parent holding (investment) at fair value 200,000
Non-Controlling Interest (NCI) values at acquisition 0 200,000
Less:
Fair value of net assets at acquisition
Share Capital 140,000
Reserves 30,000 (170,000)

Goodwill on acquisition 30,000

Note that the NCI value is 0 as P owns S 100%

Good will and Non-Controlling interest (P less than 100% shares of S)
Where less than 100% of the subsidiary is acquired, the value of the subsidiary comprises two elements:
 The value of the part acquired by the parent
 The value of the part not acquired by the parent, known as the non-controlling interest

There are two methods in which Goodwill may be calculated when you have non-controlling interest:
1) Proportion of net assets method
2) Fair value method

The proportional of net assets method calculates the portion of goodwill attributable to the parent only, while
the fair value method calculates the goodwill attributable to the group as a whole. This is known as the gross
goodwill i.e. goodwill is shown in full as this is the asset that the group controls.
IFRS 3, revised gives an option for companies to use either of the methods.
(In the exam you will be given the company policy. (Fair value or net assets) then answer the question
according to company policy)
Proportion of net assets method
The proportion of net assets method calculates the portion of goodwill attributable to the parent only. The NCI figure is based on the historical
value of their interest at the point of acquisition

Parent holding (investment) at fair value X

Less:
Fair value of net assets at acquisition attributable to P only (X)
Goodwill on acquisition XX

Fair value method

Under this method the NCI is valued at their fair value at the date of Acquisition. The value is normally given. IFRS3 (revised)
suggests that the closest approximation to fair value will be the market price of the shares held by NCI shareholders just before
acquisition.

Parent holding (investment) at fair value X

NCI value at acquisition X

Less: Fair value of net assets at acquisition (X)

Goodwill on acquisition X
Example
D acquired 80% of the ordinary share capital of C on 31 December 20x6 for K 390,000. At this date the net
assets of C were K425, 000.
Required.
a) Calculate good will if net asset method is used
b) Calculate good will if NCI is valued using fair value method and the fair value of the NCI on the acquisition date is K95, 000

Net assets method

Parent holding (investment) at fair value 390,000

Less: P % Fair value of net assets at acquisition (425,000x0.8) (340,000)

Goodwill on acquisition 50,000
 Fair value method

Parent holding (investment) at fair value 390,000

95,000
NCI value at acquisition
485,000
Less: Fair value of net assets at acquisition
(425,000)
Goodwill on acquisition 50,000

Treatment of good will

Positive goodwill should be capitalized as an intangible non –current asset and should be tested annually
for possible impairment. Amortization of goodwill is not permitted by the standards
Impairment of positive goodwill

IAS 36 defines impairment loss as the amount by which the carrying amount of an asset or cash generating
unit exceeds its recoverable amount If goodwill is considered to have been impaired during the post acquisition period it must be reflected in the
group financial statements. Accounting for the impairment differs according to the policy followed to value the non-controlling interests and to
calculate good will

If it’s the Proportion of net assets method:

Dr Group reserves (subtract from the working for group reserves (W5)
Cr Goodwill (subtract from the goodwill calculation W3)

If it’s the Fair value method:

Dr Group reserves with the % of impairment attributable to the parent subtract from the working for group
reserves (W5)
Dr NCI with the % of impairment attributable NCI subtract from NCI working - W4)
Cr Goodwill (W3)
Note the difference in the treatment of good will between two methods the proportion of net assets affects
only the parent reserves because it calculates the portion of goodwill attributable to the parent only .While
under the fair value method good will impairment is split between the parent and NCI as the good will
relates to both
Negative goodwill
Arises were the cost of the investment is less than the value of net asset purchased. IFRS 3 does not refer
to this as negative goodwill instead it is referred to as a bargain purchase; however negative good will is a
commonly used term. Most likely reasons for this to arise are a misstatement of the fair values of assets and
liabilities accounting standard requires that the calculation is reviewed. After such a review, any negative
goodwill remaining is credited directly to the income statement .

4 Group reserves /Group Retained earnings

The group reserves are found by adding the total reserves for P and the post acquisition reserves
for S. When looking at the reserves of S at the year end e.g. revaluation reserves, a distinction
must be made between pre and post acquisition profits (reserve)
Pre- acquisition reserves or profits are the reserves which exist in a subsidiary company at the
date when it is acquired. They are capitalized at the date of acquisition by including them in the
goodwill calculation
Post –acquisition reserves or profits are profits made and included in the retained earnings of
the subsidiary company following acquisition. They are included in the group retained earnings
Group retained earnings
P’s retained earnings (100%) X

P’s % of sub’s post-acquisition retained earnings

X
X
X
Example 1
The following statements of financial position were extracted from the books of two companies at 31December 20X9

D C
K K
Non- current assets:
300,000 44,000
Property, plant & equipment investment
Shares in C 108,000
Current assets 856,000 132,000

Equity:

Share capital 320,000 16,000

Share premium 80,000 24,000

Retained earnings 160,000 36,000
560,000 76,000
Current liabilities 704,000 100,000
1,264,000 176,000
D acquired 80% of the share capital of C one year ago, the retained earnings of C stood at
K8 000 on the day of acquisition. There has been no impairment of goodwill since
acquisition.

Required:

a) Establish the group structure

b) Calculate the net assets of C at acquisition and reporting date
c) Calculate the good will if the NCI are valued using the proportion of net assets
d) Calculate the good will if the NCI are valued using the fair value method .The fair value
of NCI was K10,000
e) Calculate the group retained earnings
Non- controlling interest
IAS 27 defines Non-Controlling Interest (NCI) as the equity in a subsidiary not attributable, directly or indirectly to a parent and all its subsidiaries.
This arise when the parent acquired less than 100% of shares in S.e.g if P owns only 70% of the ordinary shares of S; there is a non-controlling
interest of 30% Note, however that P still controls S.

Accounting treatment on non-controlling interest

As P controls S In the consolidated statement of financial position, include all of the net assets of S (to show control)‘give back’ the net assets of
S which belong to the non-controlling interest within the equity section of the consolidated statement of financial position Find the NCI of the net
assets in the subsidiary by multiplying the net assets by the % of holding of the NCI at acquisition plus the NCI share of the post –acquisition
reserves.
There are two ways of calculating the NCI depending on how they are valued i.e proportion of net assets and the Fair value method. The two
methods are described below
Non- controlling interest using the proportion of net assets method

NCI value at acquisition (Share capital +retained Earnings at acquisition X NCI %) X

NCI share of post-acquisition reserves ( Post-acquisition Reserves X % of NCI) X

. XX

XX

Non- controlling interest using the fair value method

NCI values at fair value X

NCI share of post-acquisition reserves ( Post-acquisition Reserves X % of NCI) X

.XX
In the statement of financial position NCI will appear after retained earnings but before liabilities

Example
Assuming that in the example 6 above D bought 80% of the shares in S .Calculate the Non controlling interest in C. Using
a) Net asset method
b) The fair value method assuming that the fair value of the NCI is K10,000

(a)Non- controlling interest using the proportion of net assets method

NCI value at acquisition (48,000 X0.2) 9,600

NCI share of post-acquisition reserves ( (76,000-48,000) X 0.2) 5,600

15,200

(b) Non- controlling interest using the fair value method

NCI values at fair value 10,000

NCI share of post-acquisition reserves Reserves X % of NCI) 5,600

( (76,000-48,000) X 0.2) 15,600
Consolidation
The preparation of the SFP is simple consisting of two procedures
1 Take the individual accounts of the parent company and each subsidiary and cancel out items which
appear as an asset in one company and a liability in another
2. Add together all uncancelled assets and liabilities throughout the group Items requiring cancellation my
include the following
 The asset “shares in the subsidiary company “which appears in the parent company’s account will be
matched with the liability “Share capital “in the subsidiaries account.
 There may be intra-group trading within the group. For example S may sell goods on credit to P.P would
then be a receivable in the accounts of S while S will be a payable in the accounts of P the two will cancel
out
 The investment in the subsidiary (S) shown in the parent (P’s) statement of financial position is replaced by
the net assets of S
 The cost of the investment in S is effectively cancelled with the ordinary share capital and reserves of the
subsidiary.This leaves a consolidated statement of financial position showing
 The net assets of the whole group (P+S)
 The share capital of the group which always equals the share capital of P only and
 The retained profits, comprising profits made by the group ( i.e all of P’s historical profits + profits made
 The following Statement of Financial Positions have been prepared at 31 December 20X

Non- current
: assets D J
Property, plant & equipment 255,000 54,000
Investment: Shares in J 180,000
Current assets 480,000 252,000
915,000 306,000
Equity:
195,000 60,000
Ordinary K1 share
Share premium 105,000 30,000
Retained earnings 210,000 75,000
510,000 165,000
Current liabilities 405,000 141,000
915,000 306,000

D acquired its 80% holding in J on 1 January 20X8, when Js’ retained earnings stood at K60, 000.on this date, the fair value of the 20% non-
controlling shareholding in J was K37, 500.The D group uses the fair value method to value the non-controlling interest.

Required
Prepare the consolidated statement of financial position of D group as at 31 December 20X8