E-14 Advanced Accounting and Financial Reporting Lecture 09 & 10 Complex Groups, Piecemeal...

E-14 Advanced Accounting and Financial Reporting

Lecture 09 & 10Complex Groups, Piecemeal Acquisition and Disposal of

SubsidiaryIAS 7 Consolidated Statement of Cash Flows

Sajid Shafiq, ACA

CSCF and Complex Groups 2

Consolidated Statement of Cash Flow

The method of preparation is the same as for the individual company statement of cash flow but additional cash flows may arise as follows:

• Dividends paid to Non Controlling Interest• Dividends received from Associate• Cash consequences of Acquisition or Disposal

of Subsidiaries


Non Controlling Interest

Rs Rs

Dividend to NCI(Balancing figure)

xxx B/f (NCI- as per CSFP) (Dividend Payable to NCI-as per CSFP)

xxx

B/f (NCI- as per CSFP) (Dividend Payable to NCI-as per CSFP)

xxx % age of S’s Total Comprehensive Income* (as per CSCI)

xxx

* Profit, revaluation, translation reserve etc.

Investment in Associate (IIA)

Rs Rs

B/f (IIA- as per CSFP) (Dividend Receivable from A)

Xxx Dividend from A(Balancing figure)

xxx

% age of S’s Total Comprehensive Income* (as per CSCI)

xxx C/f (IIA- as per CSFP) (Dividend Receivable from A)

Xxx

* Profit, revaluation, translation reserve etc.


Acquisition and disposal of Subsidiary

Cash flows are reported net of cash given up or acquired with the subsidiary


• Each of the individual net assets of a subsidiary acquired/disposed of during the period must be excluded when comparing group balance sheets for CF calculations.

Subsidiary acquired in the period Subsidiary sold in the period

SUBTRACT inventory, receivables, payables etc. at the date of acquisition from the movement on these items when calculating the cash flows

ADD inventory, receivables, payables etc. at the date of disposal from the movement on these items when calculating the cash flows

Acquisition and disposal of Subsidiary


Example: acquisition during the year


Disposal during the year


Consolidation of Complex Group

• Multiple Subsidiaries• Groups involving Sub-subsidiaries• Groups involving Sub-Associates



Multiple Subsidiaries• The fundamental technique remains same

except that– Now there will be multiple calculations of

• Goodwill• Non-Controlling Interest, &• Share in Post acquisition retained earnings for

Consolidated Retained earnings

– CSFP will show a single(combined) figure of GW and NCI. A NGW will not be off set against GW, however.


Consolidation of Complex GroupMultiple SubsidiariesExample

P acquired 80% shareholding in S two years ago when S’s reserves stood 700. P also acquired 90% shares in T when its reserves stood 400 one year ago.Required: Prepare Consolidated SFP at 31 Dec 08

31 December 2008P S T

Cost of investment –S –T

800400

Other net assets 600 1,100 6001,800 1,100 600

Share Capital 200 100 100Retained Earnings 1,600 1,000 500

1,800 1,100 600



Multiple SubsidiariesSolution P Group Consolidated SFP at 31 December 2008



Multiple SubsidiariesSolution Subsidiaries’ Net assets summary



Multiple SubsidiariesSolution Goodwill

Non Controlling Interest

Consolidated Retained Earnings


Consolidation of Complex GroupGroups involving Sub-subsidiaries-Vertical



Groups involving Sub-subsidiaries-Mixed(‘D’)



Groups involving Sub-subsidiaries-Rules

-For control, Actual %ages-For GW, NCI, Consolidated RE, effective SH

-Cost of Investment in Sub-subsidiary is %age investment in Subsidiary

-Acquisition date with reference to “Ultimate” Parent is relevant

Dividend by Sub-subsidiary is accounted for using ‘Actual’ and not effective SH


Consolidation of Complex GroupGroups involving Sub-subsidiaries-Example

1. P bought 70% of S 2 years ago when S’s reserves stood 500. Later(1 year ago) S bought 60% of T when T’s retained earnings were 200.

2. The companies declared following dividends:– P---150, S---100, T—80

Required: Prepare Consolidated SFP

31 December 2008

P S TCost of investment –S –T

700450

Other net assets 1,100 900 6001,800 1,350 600

Share Capital 200 100 100Retained Earnings 1,600 1,250 500

1,800 1,350 600



Groups involving Sub-subsidiaries-Solution

Group Structure:



Groups involving Sub-subsidiaries-Solution P Group Consolidated SFP as at 31 December 2008



Groups involving Sub-subsidiaries-Solution Net Assets Summary



Groups involving Sub-subsidiaries-Solution Goodwill:

Non Controlling Interest:

Consolidated Retained Earnings:



Groups involving Sub-AssociatesHere two tier approach is followed i.e.• First consolidate sub-associate under equity

method in the books of Subsidiary• Then consolidate as normal

Piecemeal acquisition and Disposal



• Piecemeal acquisition– Where acquisition does not change control– Where acquisition does change control– A business combination achieved without the

transfer of consideration• Disposal– Where disposal does not change control– Where disposal does change control– Deemed Disposal



Piecemeal acquisition- Where acquisition does not change control e.g. earlier 60%, later 80%• Goodwill – will NOT be re-measured due to subsequent acquisition– The difference between change in NCI at the date of

subsequent acquisition and Cost of subsequent investment will be taken directly to equity

• CSFP will be prepared as per shareholding existing at consolidation date

• CSCI will be prepared having regard to status of investment


Piecemeal acquisition and DisposalPiecemeal acquisition- Where acquisition does not change control Example 31 December 2008

P(000) S(000)Cost of investment –S 400

Other net assets 600 5501,000 550

Share Capital 200 100Retained Earnings 800 450

1,000 550

Date Prop acq Cost of inv S’s ret earngs30 Sep 2007 60% 255,000 300,0001 July 2008 20% 145,000 390,000

1. P acquired its holding in S as follows:

2. The PAT for year ended 31 Dec 2008 of P and S were 200,000 and 120,000 respectively

Required: Prepare Consolidated SFP and CSCI extract


Piecemeal acquisition and DisposalPiecemeal acquisition- Where acquisition does not change control Solution P Group Consolidated SFP at 31 December 2008


Piecemeal acquisition and DisposalPiecemeal acquisition- Where acquisition does not change control Solution Net Asset’s summary


Piecemeal acquisition and DisposalPiecemeal acquisition- Where acquisition does not change control Solution Goodwill

Non Controlling interest

Consolidated Retained Earnings• P’s Retained earnings • Share in S’s post acquisition retained

earnings• 60% of post(1st) acquisition• 20% of post(subsequent) acq.

• Cost of subsequent investmentLess

• Change in NCI (including attributable GW) at subsequent acq date


Piecemeal acquisition and DisposalPiecemeal acquisition- Where acquisition does not change control Solution P Group Consolidated SCI for year ended 31 Dec 2008(extract)

Profit after Tax

Attributable to:• Owners of the Parent• Non Controlling Interest


Piecemeal acquisition and DisposalPiecemeal acquisition-Where acquisition does change control

• Possible Scenarios:– From simple investment(10%) TO Subsidiary (60%)

– From Associate (30%) TO Subsidiary (60%)

• CSFP and CSCI will be prepared as usual.• Goodwill, however, be calculated as follows:– The previous investment will be re-measured at FV

with resulting gain-loss in profit and loss– Goodwill will now be calculated with reference to

combined Cost of investment (FV of previously held plus cost paid for subsequent investment)



Piecemeal acquisition-Where acquisition does change control

Example P acquired following shares in S on different dates

Required: Calculate goodwill the above case.

Date Prop acq Cost of inv S’s net assets30 Sep 2007 40% 200,000 300,0001 July 2008 20% 160,000 400,000


Piecemeal acquisition and DisposalPiecemeal acquisition-A business combination achieved without the transfer of consideration• Circumstances include:

a. The acquiree repurchases a sufficient number of its own shares for an existing investor (the acquirer) to obtain control.

b. Minority veto rights lapse that previously kept the acquirer from controlling an acquiree in which the acquirer held the majority voting rights.

c. The acquirer and acquiree agree to combine their businesses by contract alone. The acquirer transfers no consideration in exchange for control of an acquiree and holds no equity interests in the acquiree, either on the acquisition date or previously.

• In a business combination achieved by contract alone, the acquirer shall attribute to the owners of the acquiree the amount of the acquiree’s net assets recognized in accordance with this IFRS. In other words, the equity interests in the acquiree held by parties other than the acquirer are a non-controlling interest in the acquirer’s post-combination financial statements even if the result is that all of the equity interests in the acquiree are attributed to the non-controlling interest.



Disposal Where disposal does not change control e.g. earlier 80%, later 60%• On disposal– No Gain or loss on disposal shall be calculated for group– GW will NOT be re-measured– The difference between change in NCI at the date of disposal

and disposal proceeds will be taken directly to equity• CSFP will be prepared as per shareholding existing at

consolidation date• CSCI will be prepared having regard to status of

investment


Piecemeal acquisition and DisposalDisposal Where disposal does not change controlExample 31 December 2008

P(000) S(000)Cost of investment –S (80%) 400Other net assets 600 550

1,000 550Share Capital 200 100Retained Earnings 650 450Suspense account 150

1,000 550

1. P acquired S two years ago when its reserves stood 300,000. 2. On 31 March 2008, it sold 20% shares (i.e. retaining 60%) for

150,000 which have been credited to suspense account.2. The PAT for year ended 31 Dec 2008 of P and S were 200,000

and 60,000 respectively.Required: Prepare Consolidated SFP and CSCI extract


Piecemeal acquisition and DisposalDisposal- Where disposal does not change control Solution P Group Consolidated SFP at 31 December 2008


Piecemeal acquisition and DisposalDisposal- Where disposal does not change control Solution Net Asset’s summary


Piecemeal acquisition and DisposalDisposal- Where disposal does not change control Solution Goodwill

Non Controlling interest

Consolidated Retained Earnings• P’s Retained earnings • Share in S’s post acquisition retained

earnings• 80% of post acquisition till

disposal date• 60% of RE subsequent to

disposal.• Sale proceed of investment

Less• Change in NCI (including attributable

GW) at disposal date


Piecemeal acquisition and DisposalDisposal- Where disposal does not change control Solution P Group Consolidated SCI for year ended 31 Dec 2008(extract)

Profit after Tax

Attributable to:• Owners of the Parent• Non Controlling Interest


Piecemeal acquisition and DisposalDisposal -Where disposal does change control

• Possible Scenarios:– From subsidiary TO full disposal– From subsidiary (60%) TO simple investment(10%) – From Subsidiary (60%) TO Associate (30%)

• CSFP and CSCI will be prepared as usual.• Gain-loss on disposal, measured as follows, shall be taken

to PL account:– Sum of [sale proceeds and FV of portion retained at disposal date]

LESS– Goodwill(combined i.e. including share of NCI)– Net assets of subsidiary at the date of disposal– NCI in subsidiary at the date of disposal including attributable GW



Disposal-Where disposal does change control

Example

P acquired 80% shares of S on 1 December 2007 for 800,000 when S’s net assets stood 800,000. 7 months later, P sold its 60% shares (i.e. retaining 20%) for 1,200,000 when S’s net assets were 1,000,000.

Required: Calculate gain-loss on disposal.



Disposal-Where disposal does change control

Solution

Sale Proceed ______FV of portion retained ______ _____Less:Goodwill (Combined) ______ Net assets of S on disposal ______Less Non Controlling Interest before

disposal date, including GW( ) _____



Disposal –Deemed Disposal• Circumstances include:

a. The acquiree issues a sufficient number of its shares to a new investor.b. Minority veto rights come into effect that keeps the acquirer from

controlling an acquiree in which the acquirer held the majority voting rights.

c. The acquirer and acquiree agree to end their business combination and quit the contract

• The rules relating to calculation of Gain-loss depend whether or not there is a change in control as discussed above.

E-14 Advanced Accounting and Financial Reporting Lecture 09 & 10 Complex Groups, Piecemeal...

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