BR Workbook 8: Group Accounting

Parent

Entity that controls one or more entities and has bought the controlling interest.

Control of an investee

Arises 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 its power over the investee.

Subsidiary

Entity controlled by another entity (parent)

Group

A parent and all of its subsidiaries

Consolidated Financial Statements

The financial statements of a group in which the assets, liabilities, equity, income, expenses and cash flows of the parent and its subsidiaries of the parent and its subsidiaries are presented as those of a single economic entity.

Basic 6 steps of group accounts

1. Establish group structure

2. Set out net assets of subsidiary

3. Calculate goodwill on acquisition

4. Calculate NCI

5. Calculate group retained earnings

6. Consolidate

Goodwill

An asset representing the future economic benefits arising from other assets acquired in a business combination that are not individually identified and separately recognised.

Is goodwill amortised?

No, but it is checked for impairment annually.

How is an impairment loss of goodwill treated?

As an expense

When does negative goodwill arise?

When consideration is less than fair value of identifiable net assets acquired.

What must the acquirer do first if negative goodwill arises (IFRS 3)?

Review the fair values of the identifiable net assets to ensure no errors.

How is remaining negative goodwill recognised?

As other income

Why must fair values be checked when negative goodwill occurs?

It's unusual for a business to sell for less than the fair value of its net assets.

What is another way a parent can acquire a subsidiary?

Through a share exchange.

When calculating goodwill in a share exchange, what value of shares should be used?

The market value of the shares issued

What value should NOT be used when calculating goodwill in a share exchange?

The nominal value of the shares

IFRS 3

Business Combinations

What does IFRS 3 require at the date of acquisition?

Identifiable assets and liabilities must be measured at their fair value.

What effect does a fair value uplift on non-current assets often create?

Additional depreciation on consolidation.

In consolidation with fair value adjustments, what is the impact on Step 1 of the five-step approach?

No impact

In consolidation with fair value adjustments, what must be included in Step 2?

The fair value adjustment at acquisition and extra depreciation in the reporting date column.

In consolidation with fair value adjustments, how do fair value adjustments affect Steps 3 and 4?

The adjusted fair value net assets from Step 2 are used in these steps.

In consolidation with fair value adjustments, what happens in Step 5?

Reduce the subsidiary's post-acquisition retained earnings by the extra depreciation.

In consolidation with fair value adjustments, what must be included in Step 6?

The fair value adjustment and subsequent depreciation in the non-current assets of the consolidated SFP.

What is the purpose of cancelling intra-group balances on consolidation?

Because group accounts show the group as a single entity, and a single entity cannot owe itself money.

What is the consolidation step for intra-group loans?

Cancel the receivable in one company against the payable in the other.

After cancelling intra-group loans, what remains in the consolidated SFP?

Only debentures/loan stock held by third parties.

What is the consolidation step for inter-company trading balances?

Cancel the intra-group receivable against the intra-group payable.

How do you adjust for cash in transit in inter-company balances?

Increase consolidated cash by the amount in transit.

How do you adjust for goods in transit in inter-company balances?

Increase consolidated inventory by the amount in transit.

When P sells to S, where is the seller's unrealised profit removed from?

P's retained earnings (Step 5).

When P sells to S, where is the inventory adjustment made?

Reduce closing inventory in the consolidated SFP.

When S sells to P, where is the seller's unrealised profit removed from?

S's retained earnings (Step 2 - reporting date column).

When S sells to P, where is the inventory adjustment made?

Reduce closing inventory in the consolidated SFP.

How do you calculate unrealised profit when given a gross profit margin?

Unrealised profit = closing inventory × % margin.

How do you calculate unrealised profit when given a mark-up?

Unrealised profit = closing inventory × (mark-up ÷ (100% + mark-up)).

How do you calculate unrealised profit when a profit figure is given?

Unrealised profit = given profit × % of goods unsold.

What are the two methods of calculating goodwill under IFRS 3?

- The proportionate method

- The gross/full goodwill method.

What does the proportionate method measure?

Only the goodwill attributable to the parent.

What is another name for the proportionate method?

Traditional goodwill or partial goodwill.

What does the full goodwill method measure?

Goodwill attributable to both the parent and the non-controlling interest (NCI).

How is full goodwill calculated?

Compare the fair value of the whole subsidiary (consideration + fair value of NCI) with the fair value of the subsidiary's net assets.

Why is the full goodwill method considered conceptually consistent?

Because goodwill is an asset and should reflect the entire subsidiary, not just the parent's share.

What information allows the use of the full goodwill method?

Goodwill attributable to the NCI.

What information allows the use of the full goodwill method?

The fair value of the NCI at the date of acquisition.

How is impairment allocated when goodwill is calculated using the full goodwill method?

Between the parent and NCI in their normal profit-sharing proportions.

How are income and expenses consolidated?

100% line by line for both parent and subsidiary.

Why are dividends receivable from subsidiaries excluded from consolidated profit or loss?

Because the subsidiary's profits are already fully consolidated—dividends would double count.

What underlying concept governs consolidation adjustments?

The single entity concept—internal transactions must be eliminated.

What is the consolidation adjustment for intra-group sales?

Eliminate the sale:

DR Revenue

CR Cost of Sales.

What is the adjustment for unrealised profit in inventory in the SPL?

DR Cost of Sales;

CR Closing Inventory

(and CR Retained Earnings in SFP).

How is intra-group interest eliminated?

DR Finance Income;

CR Finance Costs.

How is NCI shown in the consolidated statement of profit or loss?

As the NCI's share of the subsidiary's profit after tax.

How is NCI calculated in the SPL?

NCI % × Subsidiary's profit after tax.

Why is NCI shown at the end of the consolidated SPL?

To show how the consolidated profit after tax is allocated between parent shareholders and NCI.

What happens to additional depreciation from fair value adjustments in the consolidated SPL?

It is added as an extra expense (in cost of sales or expenses).

What happens to additional depreciation from fair value adjustments when calculating NCI?

The subsidiary's profit must be reduced by the same amount.

In the SPL, what is the adjustment for intra-group profit on disposal of a non-current asset?

Increase cost of sales to remove the unrealised profit.

In the SPL, what is the adjustment for intra-group loss on disposal of a non-current asset?

Decrease cost of sales to remove the unrealised loss.

How is NCI affected when the subsidiary sold the asset and made a profit on disposal?

Reduce the subsidiary's profit used for NCI by the profit on disposal.

How is NCI affected when the subsidiary sold the asset and made a loss on disposal?

Increase the subsidiary's profit used for NCI by the loss on disposal.

How do you adjust SPL for excess depreciation caused by an intra-group transfer at a profit?

Decrease cost of sales to remove the excess depreciation.

How do you adjust SPL for additional depreciation caused by an intra-group transfer at a loss?

Increase cost of sales to include the extra depreciation.

How is NCI affected when the subsidiary bought the asset and charged excess depreciation?

Increase the subsidiary's profit used for NCI by removing the excess depreciation.

How is NCI affected when the subsidiary bought the asset and depreciation after transfer is lower?

Decrease the subsidiary's profit used for NCI by the lower depreciation adjustment.

IAS 28

Investments in Associates and Joint Ventures

What is an associate (IAS 28)?

An entity over which the investor has significant influence but not control.

What is significant influence (IAS 28)?

The power to participate in financial and operating policy decisions, but without control.

What is presumed when an investor holds more than 20% of ordinary shares?

The investor is presumed to have significant influence unless shown otherwise.

What is presumed when an investor holds less than 20% of ordinary shares?

The investor is presumed not to have significant influence unless shown otherwise.

Give indicators of significant influence under IAS 28.

- Representation on the board,

- participation in policy-making,

- material transactions,

- interchange of managerial personnel,

- provision of essential technical information.

Why does identifying an associate matter?

Because associates are accounted for using the equity method, not full consolidation.

what shareholding range indicates an associate?

20%-50% of ordinary shares.

If an investor has an associate but no subsidiary, must it prepare group accounts?

No — without a subsidiary there is no group, so no group accounts are required.

How would an investor account for an associate in individual financial statements?

Use the equity method in the individual statements if required by the reporting framework.

What is the equity method (IAS 28)?

Recognise the investment at cost, then adjust for the investor's share of post-acquisition changes in the associate's net assets.

What part of an associate's results appears in the consolidated financial statements?

The parent's share of the associate's profit or loss for the period.

How must investments in associates be accounted for in consolidated statements?

Using the equity method (IAS 28 requirement).

How is an associate shown in the investor's separate financial statements?

At cost.

How is an associate shown in the consolidated SFP?

As a single non-current asset line using the equity method.

What is shown in the consolidated SPL for an associate?

A single line: Income from associate.

Where is 'income from associate' presented?

Immediately before group profit before tax.

What does 'income from associate' represent?

The investor's share of the associate's profit after tax, less any current-year impairment.

How do you calculate 'income from associate' in the SPL?

Investor's % × Associate's profit after tax

minus impairment loss for the year.

Why is only one figure calculated for associates in the SPL?

Because equity accounting requires only the share of post-tax profit, presented as a single line.

What appears in the investor's separate SPL regarding an associate?

Dividend income receivable.

Why is dividend income removed in consolidation?

Because the associate's profits are already recognised through the equity method

How are intra-group balances treated between investor and associate?

They are not eliminated on consolidation.

Why aren't intra-group balances eliminated with an associate?

Because only one line (investment in associate) is included in the consolidated SFP — the associate's assets and liabilities are not consolidated.

Are sales and purchases between investor and associate eliminated in consolidation?

No, they are not eliminated.

What must be eliminated for intragroup transactions with an associate?

Only the investor's share of unrealised profit.

Why is only the investor's share of unrealised profit removed?

Because the investor does not control the associate — only holds a percentage share.

What adjustment is made to the consolidated SFP for dividends received from an associate?

Deduct dividends received from both investment in associate and group retained earnings.

Why are dividends deducted from the investment in associate in the SFP?

Because dividends reduce the associate's net assets, so the carrying value of the investment must also reduce.

IAS 27

Separate Financial Statements

What measurement options does IAS 27 allow for investments?

Cost, IFRS 9, or equity method.

IFRS 9

Financial Instruments

How are dividends treated under IAS 27 if the investment is measured at cost?

Dividends are recognised as income.

IFRS 10

consolidated financial statements

What triggers consolidation under IFRS 10?

Control