complex accounting

8/13/2019 complex accounting

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Groups, Subsidiaries, Associates andMinority InterestApplicable Standards

GROUP ACCOUNTI NG

Note that the following applies to international accounting standards (IFRS and IAS).

SUBSIDIARIES

Applicable Standards

IFRS 3: Business Combinations

IAS 27: Consolidated and Separate Financial Statements

Consolidated Balance Sheet

Key Components

NCI can be measured in two ways:o Measured as share of the net assets of the Subo At fair value

Method #1: Share of net assets at reporting date+ NCI goodwill

share of goodwill impairment loss

Method #2: FV of NCI at acquisition+ share of post-acquisition change in net assets

share of goodwill impairment loss

Goodwill= Cost of investment+ NCI at acquisition

FV of net assets of Sub at acquisition

o If NCI is measured as METHOD #1


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the goodwill calculated is just the goodwill attributed to the parents share. There

is no goodwill attributed to the NCIs share.

o If NCI is measured METHOD # 2a portion of the goodwill is attributed to the parent, and a portion is attributed to

the NCI.

Details on Cost of Investment

Professional fees are expensed to P&L in the period the acquisition occurs. Changes in the value of contingent consideration after the acquisition would result in

any liability being remeasured, with the change recognised in P&L. Goodwill and the

cost of investment remain unchanged.

Adjustments for Intra-Group Transactions

Cash-in-transit and inventory-in-transit can cause group receivables and payables notto balance. To fix, adjust the recipient companys accounts as though the cash /

inventory has been received. For example,

o For cash in transit, Dr Cash, Cr Receivableso For inventory in transit, Dr Inventory, Cr Payables

Profits made from intra-group transactions need to be reversed since you cant makeprofits from yourself.

o Reduce inventory / non-current assets of buyer by the amount of URP embeddedin goods sold by group entities.

o Reduce retained earnings of seller by the amount of URP.o URP is only calculated for items that are still remaining within the group, not

items that have been further sold to external parties.

o URP for non-current assets at a reporting date is the difference between (A) thecarrying value of the asset by the buyer, and (B) the carrying value of the asset by

the seller had it not been sold.

Intra-group receivables and payables need to be cancelled out and they should bematching.

Intra-group loanso The matching asset and liability for the loan needs to be removed.o

Accrued interest payable at the borrower needs to be cancelled out with thematching interest receivable at the lender.

o NCI is calculated as per normal in both Consolidated Balance Sheet andConsolidated Income Statement (i.e. both loan amount and loan interest are still

included as it is from the perspective of the Sub).

Dividends are handled in Consolidated Income Statement, no adjustment inConsolidated Balance Sheet required because the full Consolidated Income Statement

(without dividends) matches the accounts in the Consolidated Balance Sheet.


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Preparing Consolidated Balance Sheet

Make any fair value adjustments required (note that Retained Earnings need not beadjusted even if the FV of assets increased because any change in FV is matched and

cancelled out by Goodwill within Assets, because Goodwills less net assets would

have included that additional FV). Make adjustments for intra-group transactions per above. Adjust the Investments line

o Subtract from Investments (under Parent), the original cost of investment in theSub.

o Note that any loan notes that the Parent bought from the Sub should be included aspart of the original cost of investment in the Sub, and is already part of the

Investments line in the Parents separate balance sheet.

o Note that the Investments (under Parent) does not increase when the sub makesprofits, the benefits only show up when the statements are consolidated.

Add a Goodwill itemo Under Non-Current Assets which either shows the Parents goodwill (if NCI is

measured as share of net assets) or the full goodwill (if NCI is measured at FV).

Share capitalo Note that only the Parents share capital is included if the share capital of the Subs

have not changed. This is because the conversion of Investments to Goodwill

would have eliminated the Subs share capital that existed at acquisition.

Compute Retained Earningso Equals to Parents retained earnings + Parents share of post acquisition change in

net assetsParents share of goodwill impairment (which is full if NCI is

measured as share of net assets, or proportionate if NCI is measured at FV).o Note that Parents share of Subs net assets at acquisition is cancelled out with the

Parents Investmentsitem, with the excess classified as Goodwill.

o Note that any increase in net assets post acquisition is proportionately splitbetween the Parents retained earnings and the NCI.

Add a NCI itemo Under Equity. Value is based on how NCI is measured (see above).o Note that this NCI item includes the NCIs share of Subs net assets at acquisition.

Consolidated Income Statement

Adjustments for Intra-Group Transactions

Eliminate sales and purchases (reverse the sellers revenue and the buyers COGS bythe same amount)

Eliminate interest paid and received (reverse the payers interest paid and the payeesinterest received)

For the URP of goods that remain within the group, increase the sellers COGS by theURP to reverse the profit.


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For URP due to non-current assets transferredo The depreciation charge needs to be adjusted if the depreciation charge after

transfer is different from depreciation charge had it not been transferred.

o If the transfer occurred in the current period, reverse any profit/loss on transfer. Dividends from the Sub to the Parent are reversed because that is an intra-group

transfer.

Preparing Consolidated Income Statement

Only the Subs results after acquisition should be included in the ConsolidatedIncome Statement.

Make adjustments for intra-group transactions. Make adjustments for FV changes to non-current assets. Depreciation charge needs to

be adjusted to correspond with the new FV. The change in the FV goes into the

revaluation surplus account in Consolidated Other Comprehensive Income.

Goodwill impairment is charged to P&L, can be put under Admin Expenses of theParent.

Tax charges remain unchanged despite goodwill impairment or adjustments indepreciation because tax is assessed on the individual companies.

Profits attributable to NCI = NCI share * Subs profit[note: the Sub's profit here doesnot take into account adjustments to Revenue or COGS due to elimination of intra-

group sales/purchases, BUT it does take into account reduced Sub's profits due to

reversal of URP. It is not consistent treatment I know.]

Profits attributable to Owners of the Parent = Parents profit + Parents share * Subsprofit (or the balancing figure if lazy)

Preparing Consolidated Statement of Comprehensive Income

Total comprehensive income attributable to NCI =NCI share * Subs totalcomprehensive income

Total comprehensive income attributable to Owners of Parent = Parents totalcomprehensive income + Parents share * Subs total comprehensive income (or

balancing figure)

ASSOCIATES

Applicable Standard

IAS 28: Investments in AssociatesConsolidated Balance Sheet Equity method of accounting is used. Adjust the Investments line

o Subtract from Investments (under Parent), the original cost of investment in theAssoc.


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IAS 31: Interests in Joint Ventures IFRS 11: Joint ArrangementsTwo methods of accounting

Equity method: Same as accounting for Associates Proportionate consolidation: Both the Statement of Financial Position and the

Statement of Comprehensive Income will include the venturers share of JVs line

items, e.g. assets, liabilities, income, expenses.

DISPOSAL OF SUBSIDI ARIES


IFRS 3: Business Combinations IAS 27: Consolidated and Separate Financial Statements

Note that Subs that are completely disposed or classified as held for sale, are covered by

IFRS 5: Non current assets held for sale and discontinued operations.

Complete Disposal where Control is Lost

Gain on Disposal in Parents Separate Accounts

In P&Lo Gain on Disposal = Fair value of consideration received for the disposal - Carrying

value of investment disposed

In Balance Sheeto Gain on Disposal is added to Retained Earnings

Gain on Disposal in Group Accounts

In P&Lo Gain on Disposal =o Fair value of consideration received for the disposalo + Fair value of residual interest retained (i.e. FV of Associate)o + NCI at disposalo - Subs net assets at disposalo - Total goodwill at disposalo + Gains/(losses) previously recognised in Other Comprehensive Income (e.g. fair

value movements on available-for-sale assets, this is merely a reclassification toP&L of what was previously recorded in equity)

In Balance Sheeto Gain on Disposal is added to Groups Retained Earnings

Disposal where Control is Retained

No gain/loss on disposal recognised. All changes are recognised in Parents shareholders equity.


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The Fair value of consideration received for the disposal is split into 2 componentso Increase in NCI (because effectively the sale transferred more of the company to

NCI)

o Decrease in retained earnings due to the transfer to NCI and the actual gain/loss onthe Parents share that was sold

Adjustment to Parents equity equalso Fair value of consideration received for the disposalo - Share of net assets disposed (transfer to NCI)o - Share (by % share ownership) of goodwill disposed (transfer to NCI)

Accounting entrieso Dr Cash (with FV of consideration)o Cr Parents Retained Earnings (with the Adjustment to Parents equity calculated

above)

o Cr NCI (with the amounts transferred to NCI above)Disposal to Associate Status

Gain on Disposal in Parents Separate Accounts

In P&Lo Gain on Disposal = Fair value of consideration received for the disposal - Carrying

value of investment disposed

In Balance Sheeto Gain on Disposal is added to Retained Earnings

Gain on Disposal in Group Accounts

In P&Lo Add item Gain on Disposal =

Fair value of consideration received for the disposal + Fair value of residual interest retained (i.e. FV of Associate) + NCI at disposal - Subs net assets at disposal - Total goodwill at disposal + Gains/(losses) previously recognised in Other Comprehensive Income (e.g.

fair value movements on available-for-sale assets, this is merely a

reclassification to P&L of what was previously recorded in equity)

o Add item Share of profits of associate for the share of post-disposal profits ofassociate

o Still need to include into Group Accounts the results of the Sub until disposal date,and show profits attributable to NCI (i.e. for that portion of Sub profits until

disposal date) and Owners of Parent!

In Balance Sheeto Gain on Disposal is added to Groups Retained Earnings


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o Remaining Associate investment will be carried at fair value at disposal + groupshares of post-disposal earnings.

Disposal to Available-For-Sale Financial Asset (i.e. < 20% ownership) Status

In Balance Sheet (for both Separate and Group)

Remaining investment recognised at fair value at the date of disposal. Accounted for under IAS 39: Financial instruments, as an available-for-sale financial

asset.

In P&L

Separate Accountso Future dividends after disposal recognised in P&L.

Group Accountso Gain/loss on disposal recognised, calculated in the same way as gain/loss on

disposal from Sub to Assoc.

STEP ACQUISITIONS


IFRS 3: Business Combinations IAS 27: Consolidated and Separate Financial StatementsSubsidiary to Subsidiary

Effect is recognised directly in Parents equity. No change in goodwill, and no impact on P&L. Adjustment to Parents equity

o Subtract Fair value of consideration paid (for the purchase)o Add Transfer from NCI

Proportion of NCI transferred * NCI at purchase (which includes both netassets and goodwill)

o [Note that this is different from disposal of Sub to Sub. Here the value of the NCIis computed, and the amount transferred is a share of the NCI. In the disposal

scenario, the amount transferred is the parent's share (by share ownership %)

of total net assets and total goodwill that was sold. If the parent's retained

earnings for the Sub is computed, and proportionately transferred, then answer

would be different. This is again because in the parent's retained earnings would

likely contain a higher proportion of total goodwill than what its share ownership%.]

Accounting entrieso Cr Cash (FV of consideration)o Dr NCI (with amount transferred)o Dr Retained Earnings (with adjustment to Parents equity)

Associate to Subsidiary


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Consolidated Income Statement

Recognise any gain/loss in P&Lo Gain/loss on derecognition of associate = FV of previously held interest

Carrying Value (not cost!) of previously held interest

Consolidated Balance Sheet

Remeasure the previously held equity interest at acquisition-date FV. Calculate Goodwill

o FV of consideration + FV of previously held interest + FV of NCIFV of netassets acquired

Reserveso Parents reserveso + Gain/loss on derecognition of associateo + Parents share of post-acquisition reserveso - total cumulative gains recognised in Other Comprehensive Income of Parents

separate statements (which is correspondingly matched in part of the Investment in

the Sub held under non-current assets, e.g. some items that are recognised in OCI

which also increased the Investment in the Sub line. This needs to be subtracted

because when consolidating, the Investment in the Sub is removed on the assets

side, so the corresponding item on the L+E side needs to be removed. Note that

the OCI gains/losses is already captured within Parentsreserves).

NCIo As per usual Sub.

Note that financial statements should be accounted to the date control was achievedbased on the Associate status, and only consolidate thereafter.

Available-for-sale Financial Asset to Subsidiary

Available-for-sale financial asset is remeasured to FV, with gain/loss recognised inP&L.

Other procedures are the same as Associate to Subsidiary.

COMPLEX GROUP ACCOUNTING

Vertical Groups

If the Sub-Sub is acquired by the Sub prior to the Sub being acquired by the Parent,the date of acquisition of both the Sub and the Sub-Sub is the same as the date of

acquisition of the Sub.

Parents effective interest in a Sub-Sub = Parents interest in a Sub * Subs interest ina Sub-Sub


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NCI (for Sub-Sub)s effective interesto = 1Parents effective interest, ORo = (1Subs interest) + (Subs interest * (1 Parents interest in Sub)), i.e. the

direct NCI of the Sub-Sub + the indirect NCI within the portion owned by the Sub

Goodwillo Goodwill for Sub-Sub

Groups cost of investment in Sub-Sub (i.e. groups share of Subs cost ofinvestment in Sub-Sub, e.g. 80% of Subs cost of investment in Sub-Sub)

- Groups share (using effective interest) of net assets of Sub-Subo Calculate Goodwill for Sub as per normal, add both Goodwills together.

NCIo Calculate NCI for Sub as per normalo Calculate NCI for Sub-Sub as per normal, but subtract the NCIs share of Subs

cost of investment in Sub-Sub (e.g. Parent owns 80% of Sub, so subtract 20% *

Subs cost of investment in Sub-Sub). This is because in the Goodwill

computation, the cost excludes the NCIs share of Subs cost of investment in Sub-Sub, so this amount needs to be correspondingly removed in the NCI for the Sub-

Sub.

o Add the two NCI answers together. Reserves

o Parents reserves + Parents share of Subs post-acquisition reserves + Parentsshare of Sub-Subs post-acquisition reservesParents share of Goodwill

impairment

D-shaped Groups

Same as Vertical Groups, just that Parent has a direct holding in the Sub-Sub as well. The computation for Goodwill in the Sub-Sub will need to include the cost of direct

and in-direct investments.

Vertical Group with Sub invested in an Assoc

Think of it as preparing the Subs separate financial statements, which would includeits share of the Assocs profits, then consolidating the Subs statements into the

Parents.

Consolidated Balance Sheeto Includes the Investment in associate based on Subs share in Assoc.o NCI includes share of Assocs post-acquisition reserves, share being (1Parents

share in Sub) * (Subs share in Assoc).

o Parents reserves includes share of Assocspost-acquisition reserves, sharebeing (Parents share in Sub) * (Subs share in Assoc).

Consolidated Income Statemento Includes the Share of profit after tax of associate, with the share being the

interest of the Assoc owned by the Sub.

o Profit attributable to


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