Complex Groups Masterclass Questions

Complex groups and changes in structure

• Recap on basic rules of consolidation

• Vertical groups

• Changes in group structure

o Control to control

o Non-control to control

o Control to non-control

Consolidation – the basics

Parent

Subsidiary

Control Group

Consolidation process

• >50% ownership => control over 100% of subsidiary

o Impact: consolidate 100% of subsidiary’s assets, liabilities, income

and expenses

• Need to reflect two types of owner

o In Consolidated SFP – within equity section

o In Consolidated SCI – analysis of profit and TCI at bottom of

statement

o In Consolidated SoCE – separate column for each type

• Recognise goodwill acquired in the subsidiary

Goodwill

• Only calculated at one point in time (per subsidiary)

o When control is gained by the parent (the date of acquisition)

• Reflects values at the date of acquisition

o Based on fair values

• Only subsequent adjustment to value would be deduction of

impairment

• Goodwill derecognised when parent loses control of subsidiary

Goodwill calculation

$

Parent’s investment in subsidiary P% X

Value of NCI’s investment in subsidiary NCI% X

–––– ––––

Reflects value for 100% of shares in subsidiary 100% X

Fair value of net assets of subsidiary (100%) (X)

–––– ––––

Goodwill at acquisition 100% X

–––– ––––

Vertical groups

P

S

Q

Control

Control

P controls S and S controls Q, therefore P has

indirect control of Q and should consolidate it.

Vertical groups

Things to consider:

• When did Parent gain control of Q?

o This is the point at which goodwill should be calculated

• What is the effective holding?

o The basis for splitting post-acquisition reserves between Parent

shareholders and NCI

• Additional adjustment – the indirect holding adjustment

(IHA)

o Calculation = NCI% of direct subsidiary (S) x cost of investment in

sub-subsidiary (Q)

o Deduct in Goodwill calculation (for Q) and NCI calculation (for S)

Vertical group example - Alpha

Alpha acquired 70% of Beta’s 1 million $1 equity shares on 1 February 2012 for $4.5 million when Beta’s retained

earnings were $2.3 million.

Beta acquired 60% of Charlie’s 500,000 $1 equity shares on 1 February 2011 for $1.8 million when Charlie’s

retained earnings were $700,000. On 1 February 2012 the retained earnings of Charlie were $900,000.

The carrying value of both Beta’s and Charlie’s net assets was considered to be the same as their fair value at the

dates of acquisition.

The retained earnings of Alpha, Beta and Charlie at 31 January 2013, the reporting date, were $6.8 million, $3.5

million and $1.1 million respectively.

The group policy is to measure non-controlling interest at fair value at the acquisition date. The fair value of the

non-controlling interest in Beta at acquisition was $1.3 million and the non-controlling interest in Charlie, based

on Alpha’s effective holding, was $1.5 million.

Vertical group example – Alpha solution

W1 – Group structure

Establish date that control gained by Parent (Alpha) and

effective holding for calculations

W2 – Net assets of subsidiaries

Beta Charlie

Acquisition Reporting date Acquisition Reporting date

$000 $000 $000 $000

Share capital 1,000 1,000 500 500

Retained earnings 2,300 3,500 1,100

––––– ––––– ––––– –––––

3,300 4,500 1,600

––––– ––––– ––––– –––––

Post-acquisition reserves 1,200

Check the date of acquisition carefully, when did the parent (i.e.

Alpha) gain control of Charlie? Look back at W1.

W3 – Goodwill

Beta Charlie

Parent (Alpha)’s investment in subsidiary $000 $000

Cost of investment 4,500 1,800

IHA: -

–––– ––––

4,500

Value of NCI 1,300 1,500

Less: NA at acquisition (W2) (3,300)

–––– ––––

2,500

–––– ––––

Remember the basics of the goodwill calculation:

Goodwill = Parent (Alpha)’s investment + NCI – net assets

W4 – NCI

Beta Charlie

$000 $000

Value at acquisition (repeat of figure from W3) 1,300 1,500

Share of post-acquisition reserves:

Beta: 30% x 1,200 (W2) 360

Charlie:

Less: IHA (repeat of figure from W3)

–––– ––––

–––– ––––

Remember the basic calculation:

NCI = value at acquisition (as included in W3) + share (W1) of

post-acquisition reserves (W2)

W5 – Group retained earnings

$000

Alpha (100% of parent) 6,800

Parent (Alpha)’s share of post-acquisition reserves in subsidiaries:

Beta: 70% x 1,200 (W2) 840

Charlie:

––––

––––

All post-acquisition reserves are split between NCI (W4) and

parent shareholders (W5), so you can use W4 to help you

complete W5.

Changes in group structure

Things to consider:

• When has control been gained?

o This is the point at which goodwill should be calculated and the

subsidiary should start to be consolidated

• Has control subsequently been lost?

o Subsidiary should be derecognised (consolidation ceases)

o Gain/loss on disposal calculated

• If control has not been lost:

o No change in goodwill

o Transfer between two types of owner – will affect NCI (W4) and

parent reserves (W5) only

Change in group structure example 1 - Delta

Delta acquired 60% of the 1 million $1 equity shares of Epsilon on 1 January 2012 for $8.5 million when Epsilon’s

retained earnings were $9.1 million. The group policy is to measure non-controlling interest at the date of

acquisition at its proportionate share of the fair value of the net assets.

The carrying value of Epsilon’s net assets was considered to be the same as their fair value at the date of

acquisition.

Delta acquired an additional 10% of Epsilon’s equity share capital on 31 October 2012 for $1.5 million.

The retained earnings of Delta and Epsilon at 31 December 2012, the reporting date, were $27.5 million and

$10.2 million respectively.

Delta solution


Establish when control gained, if control has subsequently been lost or %

changed and percentages before and after change in structure

W2 – Net assets of subsidiary

Acquisition Change in % Reporting date

$000 $000 $000

Share capital 1,000 1,000 1,000

Retained earnings 9,100 10,200

––––– ––––– –––––

10,100 11,200

––––– ––––– –––––

Post-acquisition reserves

Check the date of acquisition carefully, when did the parent gain control of

the subsidiary? Look back at W1.

Also need to calculate net assets at date percentage control changes or date

control is lost and at the reporting date (if control still exists at this date).

W3 – Goodwill

$000

Parent’s investment in subsidiary 8,500

Value of NCI: 40% x 10,100 (W2) 4,040


––––

Goodwill 2,440

––––

Calculate at date of acquisition, no further amendment (unless

impairment has occurred).

Not affected by change in % when control exists before and

after.

W4 – NCI

$000

Value at acquisition (repeat of figure from W3) 4,040


Think about NCI in chronological order and use W1 to help.

W5 – Group reserves

Retained

earnings

Other

components

$000 $000

Delta (100% of parent) 27,500

Parent’s share of post-acquisition reserves in subsidiary:

Impact of transfer is in other components of equity.

If figure deducted in W4, it is added in W5 (and vice-versa).

Figure in other components then netted off against cash effect of transfer.

Change in group structure example 2 - Gamma

Gamma acquired 75,000 of the 100,000 $1 equity shares of Theta on 1 January 2008 for $1.1 million when the

balance on Theta’s reserves was $900,000. It is group policy to measure non-controlling interest at the date of

acquisition at fair value and the fair value of the non-controlling interest in Theta on 1 January 2008 was

$350,000.

On 1 July 2012, Gamma disposed of 40,000 of the shares in Theta for $950,000. The fair value of the shareholding

retained at 1 July 2012 was $800,000. There had been no impairment of goodwill since the date of acquisition.

The reserves of Theta at 1 July 2012 were $1.8 million and the profit of Theta for the year ended 31 December

2012 was $600,000.

Gamma solution





Acquisition Disposal

$000 $000

Share capital 100 100

Reserves 900 1,800

––––– –––––

1,000 1,900

––––– –––––

Post-acquisition reserves 900





W3 – Goodwill

$000

Parent’s investment in subsidiary 1,100

Value of NCI (fair value method) 350


––––

Goodwill at acquisition and disposal 450

––––

Calculate at date of acquisition, no further amendment (unless impairment

has occurred).

Derecognise when control lost => above figure not included in CSFP (but

required for gain/loss on disposal calculation).

W4 – NCI

$000

Value at acquisition (repeat of figure from W3) 350

Share of post-acquisition reserves: 25% x 900 225

––––

NCI at date of disposal 575

––––

Calculate NCI at date of disposal for gain/loss on disposal calculation. Do not

reflect on face of CSFP as not a subsidiary at the year end.

Gain/loss on disposal calculation

$000 $000

Sale proceeds 950

Fair value of remaining holding 800

––––

Value of all shares held in subsidiary at disposal date 1,750

Less: carrying value of subsidiary at date of disposal:

Net assets (W2)

Goodwill (W3)

NCI (W4)

––––

––––

Gain / loss of disposal

Treatment of gain/loss on disposal and subsequent treatment of investment in Theta

Change in group structure example 3 - Omega

Omega acquired 15% of the 2.5 million $1 equity shares in Sigma on 1 August 2011 for $1.2 million. The

investment was measured at fair value in Omega’s individual financial statements with any associated gains or

losses recorded within other comprehensive income.

On 1 December 2012, Omega acquired an additional 60% of the equity share capital of Sigma at a cost of $5.2

million. The fair value of the original 15% investment at 1 December 2012 was $1.5 million.

The fair value of the net assets acquired was assessed to be the same as their carrying value.

It is group policy to value non-controlling interest at fair value at the date of acquisition. The fair value of the non-

controlling interest at 1 December 2012 was $2.7 million.

The profit for the year of Sigma was $2.4 million and profits are assumed to accrue evenly throughout the year.

The reserves of Sigma at 31 January 2013, the reporting date, were $4 million.

The retained earnings of Omega at 31 January 2013, the reporting date, were $25 million and the balance on

other components of equity at this date, representing the change in fair value of Omega’s investment in Sigma,

was $1.1 million.

Omega solution





Acquisition Reporting date

$000 $000

Share capital 2,500 2,500

Reserves 4,000

––––– –––––

6,500

––––– –––––

Post-acquisition reserves





W3 – Goodwill

$000 $000

Parent’s investment in subsidiary:

Value of NCI (fair value method) 2,700

Less: NA at acquisition (W2)

––––

Goodwill

––––

Remember the basics of the goodwill calculation:

Goodwill = Parent (Omega)’s investment + NCI – net assets

Parent’s investment must reflect the % of shares held at date of acquisition.

W4 – NCI

$000

Value at acquisition (repeat of figure from W3) 2,700


––––

NCI at reporting date

––––

Remember the basic calculation:

NCI = value at acquisition (as included in W3) + share (W1) of post-acquisition

reserves (W2).

There has been no change in the NCI% since the date of acquisition.

W5 – Group reserves

Retained

earnings

Other

components

$000 $000

Omega (100% of parent) 25,000 1,100

Parent’s share of post-acquisition reserves in subsidiary

Reverse any gains held in other components of equity relating to the

investment (as investment is restated to cost upon consolidation).

Then reflect the change in fair value of the original investment up to date it

becomes a subsidiary (as updated FV used in goodwill calculation).

Changes in group structure in summary

Additional shares purchased Shares sold

Control to control NCI % decreases

=> deduct from W4

NCI % increases

=> add to W4

Parent % increases

=> add to W5

Net off against cash paid

Parent % decreases

=> deduct from W5

Net off against cash received

Control gained/lost on 2nd

transaction date

Calculate goodwill when control

gained (i.e. 2nd

date)

Derecognise goodwill when

control lost (i.e. 2nd

date)

Re-measure previous holding to

fair value

Re-measure remaining holding

to fair value

FV of original holding added to new

cost of investment (in goodwill

calculation)

FV of remaining holding added

to sale proceeds (in gain on

disposal calculation)

Reflect gain/loss on re-

measurement in W5

Reflect gain/loss on disposal in

W5

Complex Groups Masterclass Questions

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