Financial Accounting and Reporting in Malaysia

Financial Accounting and Reporting in Malaysia

Volume 2Fourth Edition

TAN LIONG TONGDip. Agriculture, B.S. Agribusiness, MBA, CA, CPA

Financial Accounting and Reporting in Malaysia, Volume 2

xi

TABLE OF CONTENTS

About CCH ......................................................................................................iii

About the Author ............................................................................................ iv

Dedication ........................................................................................................ vi

Preface ............................................................................................................vii

Index of Referenced Financial Reporting Standards ................................. xvii

CHAPTER 1 Financial Instruments – Recognition and Derecognition ............................................................ 1

1.1 Introduction .................................................................................... 3

1.2 Definitions ....................................................................................... 4

1.3 Categories of Financial Assets ..................................................... 12

1.4 Categories of Financial Liabilities ............................................... 29

1.5 Recognition .................................................................................... 33

1.6 Accounting for Derivative Instruments ....................................... 34

1.7 Embedded Derivatives ................................................................. 63

1.8 Derecognition ................................................................................ 76

CHAPTER 2 Financial Instruments – Measurement and Reclassification ....................................................... 99

2.1 Measurement .............................................................................. 101

2.2 Fair Value Measurement Considerations .................................. 120

2.3 Reclassifications .......................................................................... 130

2.4 Gains and Losses on Remeasurement ....................................... 134

2.5 Impairment of Financial Assets ................................................. 144

2.6 MFRS 9, Financial Instruments – Classification and Measurement .............................................................................. 155

CHAPTER 3 Hedging and Hedge Accounting ................................173

3.1 Introduction to Hedging and Hedge Accounting ....................... 175

3.2 Identification of a Hedge ............................................................ 176

xii Table of Contents

CCH Asia Pte Limited

3.3 Conditions for the Specified Hedge Accounting Treatments .............................................................. 180

3.4 Fair Value Hedge Accounting ..................................................... 181

3.5 Cash Flow Hedge Accounting .................................................... 193

3.6 Accounting for Hedges of Net Investments ............................... 228

3.7 Assessing Hedge Effectiveness .................................................. 235

CHAPTER 4 Financial Instruments – Presentation and Disclosures .............................................................251

4.1 MFRS 132, Financial Instruments: Presentation ..................... 253

4.2 Presentation of Liabilities and Equity ...................................... 253

4.3 Classification of Compound Instruments by the Issuer ........... 261

4.4 Accounting for Free Warrants with Rights Issue ...................... 278

4.5 Treasury Shares ......................................................................... 279

4.6 Interest, Dividends, Losses and Gains ...................................... 280

4.7 Offsetting a Financial Asset and a Financial Liability ............ 289

4.8 MFRS 7, Financial Instruments: Disclosures ........................... 292

4.9 Classes of Financial Instruments and Level of Disclosure ...... 293

4.10 Other Disclosures ....................................................................... 303

4.11 Nature and Extent of Risks Arising from Financial Instruments ................................................................ 310

CHAPTER 5 Earnings Per Share ......................................................327

5.1 Introduction ................................................................................ 329

5.2 The Measurement and Presentation Standards ....................... 329

5.3 Basic Principles .......................................................................... 333

5.4 Basic Earnings Per Share .......................................................... 334

5.5 Changes in Capital Structure .................................................... 342

5.6 Diluted Earnings Per Share ....................................................... 360

5.7 Sundry Issues in EPS Calculation ............................................. 383

5.8 Disclosure .................................................................................... 390

5.9 Some Limitations of EPS Information ...................................... 392

Table of Contents xiii


CHAPTER 6 Business Combinations ...............................................393

6.1 Introduction ................................................................................ 395

6.2 Identifying a Business ................................................................ 397

6.3 Identifying a Business Combination ......................................... 400

6.4 Application of the Acquisition Method ...................................... 404

6.5 Business Combination Achieved in Stages ............................... 475

6.6 Business Combination Achieved Without Transfer of Consideration .......................................................... 495

6.7 Business Combination Achieved by Contract Alone ................. 500

6.8 Measurement Period .................................................................. 502

6.9 Determining What is Part of the Business Combination Transaction ........................................................... 507

6.10 Subsequent Measurement and Accounting ............................... 514

6.11 Tax Effects Arising in a Business Combination ........................ 515

6.12 Disclosure Requirements ........................................................... 520

6.13 Reverse Acquisition Accounting ................................................. 528

CHAPTER 7 Consolidated and Separate Financial Statements ...................................................553

7.1 Introduction ................................................................................ 555

7.2 Background to the Standards on Consolidation ....................... 555

7.3 Application of MFRS 10 ............................................................. 565

7.4 Consolidation Procedures ........................................................... 578

7.5 Allocating Losses to Non-controlling Interest ........................... 616

7.6 The Separate Financial Statements of the Parent ................... 626

7.7 Complex Group Structures ........................................................ 639

CHAPTER 8 Advanced Consolidation Principles .........................667

8.1 Introduction ................................................................................ 669

8.2 Reduction in Stake Without Loss of Control ............................. 669

8.3 Subsidiaries Held for Sale and Discontinued Operations ........ 677

8.4 Loss of Control and Derecognition of a Subsidiary ................... 689

xiv Table of Contents


8.5 Reorganisations and Other Changes in Group Structure ........ 726

8.6 Reciprocal Shareholdings between Parent and Subsidiaries ............................................................. 750

8.7 Mutual Holdings Amongst Subsidiaries in a Group ................. 759

CHAPTER 9 Joint Arrangements and Associates .........................765

9.1 Summary of the Requirements of MFRS 11 and MFRS 128 (Revised) .................................................................. 767

9.2 Principles of Investments in Joint Arrangements .................... 771

9.3 Principles of Investments in Associates .................................... 776

9.4 The Equity Method of Accounting ............................................. 778

9.5 Transactions with an Associate or Joint Venture ..................... 795

9.6 Goodwill and Impairment Test .................................................. 802

9.7 When the Associate or Joint Venture is a Group ...................... 803

9.8 Separate Financial Statements of an Investor Without Subsidiaries................................................................................. 808

9.9 Share of Losses in Associates and Joint Ventures .................... 810

9.10 Mutual Holdings of Shares ........................................................ 814

9.11 Discontinuation of Equity Method of Accounting .................... 822

CHAPTER 10 Disclosures of Interests in Other Entities and Fair Value Measurement .............................................829

10.1 MFRS 12, Disclosures of Interests in Other Entities ............... 831

10.2 MFRS 13, Fair Value Measurement .......................................... 840

CHAPTER 11 The Effects of Changes in Foreign Exchange Rates .............................................................861

11.1 Foreign Currency Transactions and Operations ....................... 863

11.2 Functional Currency and Presentation Currency .................... 865

11.3 Reporting Foreign Currency Transactions in the Functional Currency ................................................................... 868

11.4 Use of a Presentation Currency Other Than the Functional Currency ...................................................................................... 885

Table of Contents xv


11.5 Translation of Financial Statements of Foreign Operations ..................................................................... 889

11.6 Foreign Branches, Associates and Joint Ventures ................... 925

11.7 Disposal of a Foreign Operation ................................................ 931

CHAPTER 12 Consolidated Statement of Cash Flows ...................939

12.1 Theoretical Considerations of Statements of Cash Flows ........ 941

12.2 Group Statement of Cash Flows ................................................ 942

12.3 Consolidating Separate Cash Flows of Parent and Subsidiaries ............................................................. 965

12.4 Foreign Currency Cash Flows .................................................... 968

CHAPTER 13 Segment Reporting and Related Party Disclosures ...........................................987

13.1 Introduction ................................................................................ 989

13.2 Statutes and Accounting Standards on Segment Information .................................................................. 989

13.3 Statutes and Accounting Standards on Related Parties .......... 992

13.4 Principles of Segment Reporting ............................................. 1001

13.5 MFRS 8, Operating Segments ................................................ 1003

13.6 Principles of Related Party Disclosures .................................. 1023

CHAPTER 14 Specialised Industries in Malaysia – I ...................1041

14.1 Accounting and Reporting by Banks and Similar Financial Institutions ............................................................... 1043

14.2 Accounting and Reporting by Insurance Entities ................... 1093

14.3 Accounting and Reporting by Unit Trust Funds..................... 1129

CHAPTER 15 Specialised Industries in Malaysia – II ..................1149

15.1 Accounting for Plantation Operations ..................................... 1151

15.2 Accounting for Aquaculture ..................................................... 1174

15.3 Accounting for Agriculture ....................................................... 1186

xvi Table of Contents


15.4 Accounting Issues of Extractive Industries............................. 1220

15.5 IC Int. 20, Stripping Costs in the Production Phase of a Surface Mine ............................................................................. 1235

CHAPTER 16 Interim Reporting, Corporate Governance, Social and Voluntary Reporting ..............................1239

16.1 Reasons for Interim Financial Reporting ................................ 1241

16.2 MFRS 134, Interim Financial Reporting ................................. 1243

16.3 Regulatory Requirements on Interim Reporting .................... 1264

16.4 Corporate Governance and Reporting ..................................... 1274

16.5 Corporate Social Reporting and Voluntary Disclosures ......... 1278

16.6 Reporting of Profit Forecasts and Projections ......................... 1281

16.7 Likely Future Accounting and Reporting Practices ................ 1283

Index ............................................................................................................ 1285


553

CONSOLIDATED AND SEPARATE FINANCIAL

STATEMENTS

CHAPTER 7

CONSOLIDATED AND SEPARATE FINANCIAL

STATEMENTS

The Chapter will help you in the following areas:• to understand the background to the Standards on

consolidation;• tounderstandthechangesintheprinciplesmadeinthenew

MFRS10andtherevisedMFRS127;• tobeabletoapplythestandardsprescribedinthenewand

therevisedStandards;• to be able to deal with the consolidation procedures in

preparinggroupfinancialstatements;and• to be able to deal with consolidation of complex group

structures.

Chapter 7: Consolidated and Separate Financial Statements 555

Financial Accounting and Reporting in Malaysia, Volume 2 7.2

7.1 Introduction

InMay 2011, the IASB simultaneously issued six IFRSs, five ofwhichrelatetoconsolidationandoneonfairvaluemeasurement.TheIFRSsrelatedtoconsolidationare:

IFRS10,Consolidated Financial Statements;

IFRS11,Joint Arrangements;

IFRS12,Disclosures of Interests in Other Entities;

IAS27(r),Separate Financial Statements;and

IAS28(r),Investments in Associates and Joint Ventures.

IFRS10replacestheconsolidationpartoftheformerIAS27.IAS27(r)deals onlywith accounting for investments in subsidiaries, joint venturesandassociates in theseparatefinancialstatementsofan investor (retainsthe part on separate financial statements in the former IAS 27). IFRS11 supersedes the former IAS 31 on accounting for joint arrangements.Disclosurerequirementsonsubsidiaries,jointarrangements,associatesandinvolvementinunconsolidatedstructuredentitiesareprescribedinIFRS12.TheFlowcharttotheBackgroundsectionofthischapterprovidesguidanceontheapplicationofthevariousIFRSsforareportingentity’sinvolvementwithotherentities.

7.2 Background to the Standards on Consolidation

7.2.1 Reasons for Issuing IFRS 10, Consolidated Financial Statements

TheformerIFRSsdealingwithconsolidationwereIAS27,Consolidated and Separate Financial Standards,andSIC12,Consolidation – Special Purpose Entities. The first version of former IAS 27 was issued by thethenIASCinApril1989,subsequentlyrevisedbytheIASBinDecember2003andasecondrevisioninJanuary2008.Inbetweenthosedates,therewere also amendments for improvements, the last before the currentIAS27(r)wasmadeinJuly2010.TheformerSIC12wasfirstissuedinNovember1998bythethenSICandwassubsequentlyamendedbyIFRICinNovember2004.

ThereweresomeinconsistenciesandconflictswhenapplyingthosetwoStandards.IntheformerIAS27,controlwasdefinedas“thepowertogovernthefinancialandoperatingpoliciesofanentitysoastoobtainbenefitsfromitsactivities”.However, theStandarddidnotelaborateon themeaningof

556 Chapter 7: Consolidated and Separate Financial Statements

7.2 CCH Asia Pte Limited

powerandbenefitsanddidnotexplainhowthosetwocomponentshavetobelinkedtoconstitutecontrol.Also,thecriterionof“toobtainbenefits”tendedtobeinterpretedaspositivereturnsandrelatedtoownershipinterestonly.

SIC12,althoughreferringtoIAS27,useda“risksandrewards”modeltoidentifyindicatorsofcontrolindecidingwhetheraspecialpurposeentity(SPE)shallbeconsolidated.Thoseindicatorsdidnotnecessarilyidentifyacontrolrelationship.Also,SIC12appearedtofocusprimarilyonvehiclesthatwerestructuredtooperateon“auto-pilot”mechanismforspecificpurpose.

Conceptually,eachofthetwoformerIFRSswasbasedonadifferentmodelandthisgaverisetostructuringopportunities,inconsistenciesanddiversityinpractice.ThepotentialconflictwaswhenaninvestorinapplyingIAS27mightconsolidateaninvesteethatwouldnotbeconsolidatedinaccordancewith SIC 12, or not consolidate an investee that would be consolidatedin accordancewith SIC 12.The IASB noted the divergence in practice intheapplicationof the former IAS27’s control concept, for example, in thefollowingcircumstances:(a) whenan investor controls an investeebut the investorhas less than

amajority of the voting rights of the investee (and voting rights areclearlythebasisforcontrol);

(b) involving special purpose entities (where the notion of “economicsubstance”inSIC12applied);

(c) involvingagencyrelationships;and(d) involvingprotectiverights.

Theglobalfinancial crisiswhich started in2007 saw the emergence ofnewerentitiesthatdonottaketheconventionalform.Assetsandliabilitiesof reporting entities are transferred to, or securitised in, special purposevehicles.Troubleddebtsoffinancialinstitutionsarerestructuredandsoldtostructuredentities,butatransferor-entitycontinuestobeinvolvedinthosestructuredentities.Somereportingentitiesalsoprovidesocialandfinancialsupporttotroubledentitiesduringthefinancialcrisisalthoughthereportingentitiesdonothavealegalorconstructiveobligationtodoso(theymayhavea reputationat stake i.e.a reputational risk rather thanafinancial risk).Involvementinthosenon-conventionalentitiesexposesareportingentitytorisks,whetherfinancialorreputational.

TheformerIAS27andSIC12wereunabletoprovidesufficientguidanceon the accounting for these newer entities, resulting in many resources(assets) and claims (liabilities and equity) beingunrecognised (off-balancesheet). Users, particularly existing and potential investors and lenders,haveexpressedconcernthatithasbecomeincreasinglydifficulttoanalyseproperly an entity’s returns and exposure to riskswhen those assets and



liabilitieswere parked in separate vehicles.This created the need for theIASBtorespondtothechangingbusinessphenomenonofstructuredentities.

Inresponsetotheimpactoftheglobalfinancialcrisis,theIASBwasalsoaskedtoconsiderreputationalriskasabasisindecidingwhetheraninvestorshouldconsolidateaspecialpurposeorstructuredentitywhichtheinvestorhas sponsored or provided financial and other support, and whether theconsolidationrequirementsofthethencurrentstandards(IAS27andSIC12)weresufficientforstructuredentities,asmanysuchnewerentitiesemergedinthecurrentglobalfinancialcrisistocaterforfinancialreorganisationorreengineeringoftroubledentities.

TherationaleofthesinglecontrolmodelforconsolidationinIFRS10isbasedontheviewthatallassetsandliabilitiesunderthecontrolofaninvestorshallbeconsolidated,regardlessofhowthoseassetsandliabilitieshavebeenstructuredinotherentities.Thischangeinapproachisnecessarytoreflectproperlyagroup’sfinancialposition (particularly itsfinancialstructure intermsofgearing)andfinancialperformance. Itwouldprovidemoreusefulinformationtousersoffinancialstatementsinmakingeconomicdecisions.

TheprojectonconsolidationwasinitiatedbytheIASBinApril2002,theexposure draft ED 10, Consolidated Financial Statements, was issued inDecember2008,andthecurrentIFRS10Consolidated Financial Statements, waspublishedinMay2011.InMalaysia,thisIFRStakesthenomenclatureofMFRS10.

7.2.2 The Salient Features of MFRS 10MFRS10requiresaninvestor,regardlessofthenatureofitsinvolvement

with an entity (the investee), shall determine whether it is a parent, byassessingwhetheritcontrolstheinvestee[MFRS10.5].InthisnewStandard,thenatureofinvolvementneednotnecessarilyrequireaninvestmentintheinvestee. Itmaybean involvementby sponsorship, byprovidingfinancialsupport,includingprovidingguarantees,orsocialsupporttoanotherentity.

MFRS 10 introduces a new single control model to identify a parent-subsidiaryrelationshipbyspecifyingthat“aninvestorcontrolsaninvesteewhen the investor is exposed, or has rights, to variable returns from itsinvolvementwith the investee and has the ability to affect those returnsthroughitspowerovertheinvestee”[MFRS10.6].

The Control Model

Inthisnewcontrolmodel,aninvestorcontrolsaninvesteeif,andonlyif,theinvestorhasallofthefollowingthreeelements:(a) powerovertheinvestee(thePower);



(b) exposure,orrights, tovariablereturns fromits involvementwith theinvestee(theReturns);and

(c) theabilitytouseitspowerovertheinvesteetoaffecttheamountoftheinvestor’sreturns(theLinkbetweenPowerandReturns)”.[MFRS10.7]

Thediagrambelowdepictsthenewcontrolmodel.

POWER LINK RETURNS

Inthissinglecontrolmodel,powerisnotdefinedasalegalorcontractualrighttodirectrelevantactivities,butisbasedontheabilitytodirectrelevantactivitiesunilaterally.Theconsolidationmodel isnotaquantitativemodel(based on risks and rewards) but a qualitative model (based on power,returnsandalinkbetweenthetwoelements).Thecontrolmodelisbuiltontheprinciples(ofthreeelements)ratherthanonbright lines.Assuch,theapplicationofthismodelwillrequirejudgements,byconsideringtherelevantfacts and circumstances in making consolidation decisions. In the IASBview,thisconsolidationmodelwillbetterreflecttheeconomicsubstanceofrelationshipswithotherentities.

The Power Element

Aninvestorhaspoweroveran investeewhenthe investorhasexistingrights that give it the current ability to direct the relevant activities, i.e.theactivities thatsignificantlyaffect the investee’sreturns [MFRS10.10].Powercanarisefromvotingrights(suchasbyholdingequityinstruments)or contractual arrangements, or a combination of both. An investor canhavethepowerevenifitsrightstodirecthaveyettobeexercised(apassiveparent).Similarly,aninvestorcanhavethepowerevenifotherpartieshaveexistingrights,toparticipateinthedirectionoftherelevantactivitiesorholdprotectiverights,includingspecialrights,tovetocertaindecisions.Protectiverightsheldbyotherpartiesmayrestrictbutdonotprecludeaninvestorfromhavingthepowertodirect.

The Returns Element

TheStandardclarifiesthataninvestormustbeexposed,orhaverights,tovariablereturnsfromitsinvolvementwithaninvesteetocontroltheinvestee.The formerFRS127used the term“toobtainbenefits from itsactivities”,whichmight imply only positive returns. In thisMFRS, the returnsmusthavethepotentialtovaryasaresultoftheinvestee’sperformanceandcanbeonlypositive,onlynegative,orwhollypositiveandnegative[MFRS10.15].Thus,returnsincludenotonlydividendsandotherdistributionsfromholdingequityinstrumentsintheinvestee,butmayalsoincludeupfrontfees,access



tocash,servicingfee,returnsnotavailabletonon-controllinginterest,costsavings,etc.

Forexample,aninvestormaytransfera“loanreceivable”toastructuredentityandreceivesaservicingfeeformanagingtheloanreceivable.Similarly,apropertydevelopermaytransfera landtoaspecialpurposevehicleandreceivesincomefromthelanddevelopment,eventhoughitmayholdlittleornoequityinterestinthespecialpurposevehicle.

The Link Element

Aninvestormustnotonlyhavepoweroveraninvesteeandexposureorrightstovariablereturnsfromitsinvolvementwiththeinvestee.Itmustalsohavetheability touseitspowerovertheinvesteetoaffectitsreturnfromitsinvolvementwiththeinvestee[MFRS10.17].Inotherwords,theremustbealinkbetweenthetwocomponentsofpowerandreturns.Forexample,ifaninvestoristhemajorityshareholderofaninvestee,itreceivesthemostdividends (returns) but if the investor does not have the power to directtherelevantactivities(forexample,duetoacontractualarrangement),theinvestee isnot a subsidiary of the investor.Similarly, an entitymayhavedecision-makingrightsdelegatedtoitwhenactingasanagent,butitdoesnothaveexposureorrightstovariablereturns,andaccordingly,itdoesnotcontroltheinvestee.Forexample,afundmanagerofaunittrustfundmayhavedecision-makingrightswithrespecttoinvestmentsofthefund,butitdoesnothavetheabilitytodirecttherelevantactivities(buyingorsellinginvestments)unilaterallyanditisneitherexposednorhaverightstovariablereturns.Itreceivesafeeactingasanagentoftheunitholdersofthefund.

7.2.3 Application of the Control ModelTheIFRSsetsouttherequirementsonhowtoapplythiscontrolmodelin:

(a) circumstances when voting rights or similar rights give an investorpower,includingsituationswheretheinvestorholdslessthanamajorityof the voting rights, and in circumstances involving potential votingrights;

(b) circumstanceswhenan investee isdesignedso thatvotingrightsarenot the dominant factor in deciding who controls the investee, suchaswhenanyvotingrightsrelatetoadministrativetasksonlyandtherelevantactivitiesaredirectedbymeansofcontractualarrangements(forexample,indeterminingcontrolofastructuredentity);

(c) incircumstancesinvolvingagencyrelationships;and(d) incircumstanceswhentheinvestorhascontroloverspecifiedassets(a

silo)ofaninvestee.



Control by Voting Rights

If the relevant activities of an investee are directed through votingrights, an investor considers whether it has the current ability, throughvoting or similar rights, todirect the relevantactivities.MFRS10 retainsthepresumption inthe formerFRS127thatan investorwhocanexercisemore than a majorityofthevotingrightshascontroloftheinvestee(unlesscircumstancesindicateotherwise).The“morethanamajority”criterioncanbeattainedbyholding,directlyorindirectly,morethanhalfthevotingequityinstrumentsofaninvestee,orbyholdingvotingequityinstrumentsandhavingcontractual arrangements with other investors. For example, an investorowns40%equitysharesofaninvestee.Itentersintoanarrangementwithanothershareholderoftheinvesteetohavethepowertoexercisetheothershareholder’s11%votingrights.Inthiscase,theinvestor’sownshareholdingsandthearrangementwiththeothershareholdergiveitthecurrentabilitytoexercisemorethanamajorityofthevotingrightsintheinvestee.

Whennopartyholdsamajorityofthevotingrightsinaninvestee,andvotingrightsareclearlytheonlybasisforassessment(intheabsenceofanyadditionalarrangementsalteringdecision-making),theassessmentofcontrolwill focusonwhichparty, ifany, isable toexercisevoting rights sufficient to directtherelevantactivitiesoftheinvesteeunilaterally[MFRS10.B41].Whenassessingwhetheraninvestor’svotingrightsaresufficienttogiveitpower,aninvestorconsidersallfactsandcircumstances,suchas:(a)thesizeofitsholdingofvotingrightsrelativetothesizeanddispersionofholdingsofothervoteholders;(b)potentialvotingrights,regardlessofwhethertheyarecurrentlyexercisableornot(theformerIAS27requiredthatthepotentialvotingrightsmustbecurrentlyexercisable);and(c)rightsfromcontractualarrangements.

TheMFRSclarifiesthatwhenthedirectionoftherelevantactivities isdeterminedbyamajorityvoteandaninvestorholdssignificantlymore voting rightsthananyothervoteholdersororganisedgroupofvoteholders,andtheothershareholdingsarewidelydispersed,itmaybeclear,afterconsideringtherelevantfactsandcircumstancesalone,thattheinvestorhaspowerovertheinvestee[MFRS10.B43].

Forexample,aninvestorcanhavethepowertodirecttherelevantactivitiesofapubliclistedcompanyiftheinvestoristhedominantshareholderwhoholds voting rights and all the other shareholders with voting rights arewidelydispersedandarenotorganisedinsuchawaythattheyactivelyco-operatewhentheyexercisetheirvotessoastohavemorevotingpowerthantheinvestor.Insuchacase,theinvestor,beingthedominantshareholder,issaidtohave“defacto”controlovertheinvestee.ThisdominantshareholderconceptwasimplicitintheformerFRS127.



Control by Contractual Arrangements

Whenaninvesteeisdesignedorstructuredinamannerthatvotingrightsrelatetoadministrativetasksonlybuttherelevantactivitiesaredirectedbycontractualarrangements,theassessmentofcontrolwouldneedtoconsiderthosecontractualarrangementstodecidewhoisabletodirecttherelevantactivities.

Formorecomplexcasesofcontractualarrangements(forexample,whenassessingcontrolof structuredentitiesorspecialpurposeentities), itmaybenecessary to considermanyorall of the following factors todeterminewhetheraninvestorcontrolsaninvestee:(a) whattherelevantactivitiesare,andhowdecisionsaboutthoseactivities

aremade;(b) whether therightsof the investorgive it thecurrentability todirect

thoseactivities;(c) whethertheinvestorisexposed,orhasrights,tovariablereturnsfrom

itsinvolvementwiththeinvestee;and(d) whethertheinvestorhastheabilitytouseitspowerovertheinvesteeto

affecttheamountoftheinvestor’sreturns.

Thisassessmentshouldincludetheconsiderationofrisksthattheinvesteewasdesignedtocreate, therisks itwasdesignedtopassontothepartiesinvolved in the transaction, andwhether the investor is exposed to some,orallofthoserisks.Theinvestorshouldconsiderthedecisionsmadeattheinvestee’sinceptionaspartofitsdesign,includingcallrights,putrightsorliquidationrights.Ifthesecontractualarrangementsinvolveactivitiesthatarecloselyrelatedtotheinvestee,thentheyare, insubstance,anintegralpartoftheinvestee’srelevantactivities.

Theinvesteemaybedesignedsothatthedirectionofitsactivitiesanditsreturnsarepredeterminedunless,anduntil,thoseparticularcircumstancesarise or events occur. In this case, only the decisions about the investee’sactivitieswhenthosecircumstancesoreventsoccur,cansignificantlyaffectitsreturns,andarethusconsideredasrelevantactivities.

Beinginvolvedinthedesignofaninvestee,althoughnotsufficient,mayindicate that the investor had the opportunity to obtain rights that aresufficienttogiveitpowerovertheinvestee.Similarly,aninvestor’sexplicitor implicitcommitmenttoensurethataninvesteecontinuestooperateasdesigned,mayincreasetheinvestor’sexposuretothevariabilityofreturnsandthusthelikelihoodthatithaspower.Thecommitmentalone,however,neithergiveaninvestorpowernordoesitpreventsanotherpartyfromhavingpower.



Agency Relationships

Aninvestorneedstoassesswhetheritsrelationshipwithotherpartiesissuchthatthoseotherpartiesareactingontheinvestor’sbehalfi.e.theyare“de facto agents”.Apartyisadefactoagentwhentheinvestorhas,orthosethatdirecttheactivitiesoftheinvesteehave,theabilitytodirectthatpartytoactontheinvestor’sbehalf.Thus,aninvestorcancontrolaninvesteebyappointingagentstoactonitsbehalf.Butiftheinvestorisactingonlyasanagent,itdoesnotcontroltheinvestee.

TheMFRSprovidesexamplesofsuchotherparties that,by thenatureof their relationship,mayactasde factoagentsof the investor,and theseinclude the investor’s related parties, a party that received its interest intheinvesteeasacontributionorloanfromtheinvestor;apartythatcannotfinance its operations without subordinated financial support from theinvestor;aninvesteeforwhichthemajorityofthemembersofitsgoverningbodyorforwhichitskeymanagementpersonnelisthesameasthatoftheinvestor;andapartythathasaclosebusinessrelationshipwiththeinvestor,suchastherelationshipbetweenaprofessionalserviceproviderandoneofitssignificantclients.

Control Over Specified Assets (A Silo)

Sometimes,aninvestormayonlyhavepoweroverspecifiedassets(oroveraportion)ofaninvestee.Insuchcases,theIFRSrequiresthattheinvestorshalltreattheportionofthatinvesteeasaseparateentityifandonlyifthefollowingconditionissatisfied: “Specified assets of the investee (and related credit enhancements, if any)

are the only source of payments for specified liabilities of, or specified other interests in, the investee. Parties other than those with the specified liabilities do not have rights or obligations related to the specified assets or to residual cash flows from those assets. In substance, none of the returns from the specified assets can be used by the remaining investee and none of the liabilities of the deemed separate entity are payable from the assets of the remaining investee. Thus, in substance all of the assets, liabilities and equity of that deemed separate entity are economically ringed-fenced from the overall investee. Such a deemed separate entity is often called a “silo”.

Ifaninvestorcontrolsa“silo”inaninvestee,itconsolidatesaportionofan investeeasaseparateentity.Otherpartiesexclude thatportionof theinvesteewhenassessingcontrolof,andinconsolidatingtheinvestee.



Reassessment of Control

TheMFRSrequiresthataninvestorshallreassesswhetheritcontrolsaninvesteeonlyif factsandcircumstancesindicatethattherearechangestooneormoreofthethreeelementsofcontrol.

A change inpower overan investee canoccurwhen thereare changestodecision-makingrights, forexample,whentherelevantactivitiesarenolongerdirectedthroughvotingrights,butinsteadbyotheragreements,suchasacontract,thatgiveanotherpartyorpartiesthecurrentabilitytodirecttherelevantactivities.

An investormay also gain or lose power over an investeewithout theinvestor being involved in that event. For example, an investor can gainpoweroveraninvesteebecausedecision-makingrightsheldbyanotherpartyorpartiesthatpreviouslypreventedtheinvestorfromcontrollinganinvesteehavelapsed.

Changestoexposure,orrights,tovariablereturnsfromitsinvolvementmayalsocauseaninvestortolosecontrolofaninvestee,forexamplewhentheinvestorceasestobeentitledtoreceivereturnsortobeexposedtoobligations,suchaswhenacontracttoreceiveperformance-relatedfeesisterminated.

7.2.3.1 Other Requirements of MFRS 10

TherequirementsforconsolidationandtheconsolidationproceduresoftheformerFRS127remainunchangedinMFRS10.ThedisclosurerequirementsoftheformerFRS127aredealtwithinthenewMFRS12.

7.2.4 Implications of MFRS 10 on PracticeMFRS10maybringaboutfundamentalchangestothecurrentpractice

ofsomereportingentities.It isnot justaboutlearningandunderstandingtheMFRSasthenewrequirementsmayrequirechangesintheaccountingprocessesandproceduresofareportingentity.

Contractualarrangementswithotherpartieswouldneedtobereassessedtodeterminewhethervotingrightsaretransferredtoaninvestor,whetheraninvestorholdsspecialrightsbystatute(suchaswhenagoldenshareownedbyagovernmentispassedtotheinvestorforcontrolofaninvestee),orwhetheraninvestorcontrolsaninvesteebyacontractwithamajorshareholder.

Areportingentitywouldalsoneed toreassess its involvementwithallotherentities,regardlessofwhethertheyaretheconventional typeorthestructuredtype,anddeterminethenatureoftherelationship.ApplyingthenewcontrolmodelmightresultinsomesubsidiariesconsolidatedundertheformerFRS127failingthecontroltest,andthusrequiringdeconsolidation.



The new control model would more probably result in some investeesnot consolidated under the former FRS 127meeting the control test, andhenceforth shall be consolidated. For example, the requirements on thedominant shareholder concept may result in some investees previouslytreated as associates becoming subsidiaries under the new controlmodel.Evenifareportingentityisapassiveinvestor(i.e.haveyettoexerciseitsvotingrights)insuchinvestee,theinvestorwouldstillneedtotestwhetheritwouldhavethat“currentandpracticalability”todirecttherelevantactivitiesoftheinvesteeifitwantstodoso.

Areportingentitywouldalsoneedtoreassessitsinvolvementinstructuredentities (SEs) as the scope iswider than the guidance on special purposeentities(SPEs)inSIC12.TheconditionsforSPEsinSIC12werenarrowlyfocussed onvehicles established for specificpurposes.The requirement onSEsinMFRS10appliestoanyentitythatisnotmanagedbythetraditionalmeans. These may include vehicles created for transfers of assets andliabilities,entitiesthataninvestorsponsorsorprovidesfinancial(includingguarantees) and other support, and involvement in clubs, trusts andnon-profitorganisations.

Althoughthecontrolmodelispremisedonthethreeelementsofpower,returns and link between power and returns, a reporting entity needs toconsider all relevant facts and circumstances. Significant judgements arerequiredindecidingwhetherareportingentityhasthepowertodirectandgenerate returnswhen the voting rights held are less than amajority, orwhen the power to direct the relevant activities are based on contractualarrangements.

Thechangesinaccountingwillprobablybeinthefollowingfoursituations:(a) some current subsidiariesmay fail the control test and thus require

deconsolidation;(b) some current investees may meet the control test and thus require

consolidation;(c) structured entities that an investor controls shall henceforth be

consolidated;and(d) “silos” (ringed-fenced assets, liabilities and equity) that an investor

controlsshallhenceforthbeconsolidated.



Appendix: ADecisionFlowchartforInvolvementwithOtherEntities

An investor shall assess its involvement with each other entity

Has control?

Has joint control?

Has significant influence?

Hold equity and debt

instruments?

Apply MFRS 132, MFRS 139 and MFRS 7

Apply MFRS 12 for disclosures

Unconsolidated structured entity

Apply MFRS 128, equity accounting

Joint venture?

Joint operation?

Apply MFRS 11, account for assets, liabilities, revenues & expenses directly

Apply MFRS 10, consolidate investee

No

No

No

Yes

Yes

Yes

7.3 Application of MFRS 10

7.3.1 The Main Principles of MFRS 10There are no changes to the consolidation requirements and the

consolidationprocedures inthenewMFRS10.Themainprinciples,whicharethesameasthoseintheoriginalFRS127(2008),aresummarisedasfollows:(a) Changesintheparent’sownershipinterestthatdonotresultintheloss

of control of a subsidiary shall be accounted for as transactionswith



equityholders in theircapacityasequityholders.Consequently, suchchangeswould not result in a gain or loss being recognised in profitorloss.Forexample,ifaparentlistsitswholly-ownedsubsidiaryinastockexchangeandtheparent’sequitystakeafterthelistingisdilutedto60%,thedecreaseinstakeof40%istreatedasanequitytransaction(ratherthanasadeemeddisposalundertheformerpractice)withthegainorlossrecogniseddirectlyinequity.

(b) ThenewMFRSspecifieshowanentitymeasuresagainorlossarisingonlossofcontrolofasubsidiary,anditrequiresthatanysuchgainorlosstoberecognisedinprofitorloss.Thegainorlossarisingonlossofcontrolincludestheparent’sshareofpost-acquisitiongainsorlossesofthesubsidiarythatwerepreviouslyrecognisedinothercomprehensiveincome(anddeferred inequity). Inotherwords, theparent’sshareofany post-acquisition fair value reserve, exchange reserve and hedgedreserve,shallbereclassifiedtoprofitorlossaspartofthegainorlossarisingonlossofcontrol.

(c) The new MFRS requires that any remaining non-controlling equityinvestmentinaformersubsidiaryshallberemeasuredtoitsfairvalueintheconsolidatedfinancialstatementsonthedatecontrolofitislost.Forexample,iftheremainingequitystakebecomesaninvestmentinanassociate,thatstakeshallbemeasuredtofairvalueatthedatecontrolis lost and the difference between fair value and carrying amount isincludedinthecalculationofthegainorlossarisingonlossofcontrol.

(d) The newMFRS also provides guidance on determining when two ormoretransactionsorarrangementsthatresultinalossofcontrolofasubsidiaryshallbetreatedasasingletransaction.Forexample,whenadisposalarrangementhasbeenstructuredinaseriesoftransactionstonullifytheimpactonprofitorloss,thoseseriesoftransactionsshallbeaccountedasasingletransactiontoreflecttheeconomicsubstanceofthearrangementasawhole.

(e) ThenewMFRS requires that lossesapplicable to thenon-controllinginterest shallbeallocated to thenon-controlling interest, even if thisresults inadeficit to theamountof thenon-controlling interest.Anyguaranteesorothersupportarrangementsfromthecontrollingandnon-controllinginterestsshallbeaccountedforseparately.ThepreviousFRS127didnotpermitallocationoflossestonon-controllinginterestthatwasinexcessoftheircapitalcontributionexceptwhennon-controllingshareholdershavegivenaguaranteetosharelossesinexcessoftheircapitalcontribution.



7.3.2 ObjectiveTheobjectiveofMFRS10remainsthesameastheoriginalFRS127inthat

itestablishesprinciplesforthepreparationandpresentationofconsolidatedfinancialstatementswhenanentitycontrolsoneormoreotherentities.Tomeettheobjective,theMFRS:(a) requiresanentity(theparent)thatcontrolsoneormoreotherentities

(subsidiaries)topresentconsolidatedfinancialstatements;(b) definestheprincipleofcontrolandestablishescontrolasthebasisfor

consolidation;(c) sets out how to apply the principle of control to identifywhether an

investor controls an investee and therefore must consolidate theinvestee;and

(d) setsouttheaccountingrequirementsforthepreparationofconsolidatedfinancialstatements.

7.3.3 ScopeThe Standard requires that an entity that is a parent shall present

consolidatedfinancialstatements.ThisMFRSappliestoallentitiesexceptfor:(a) aparentneednotpresentconsolidatedfinancialstatementsifitmeets

allofthefollowingconditions:(i) itisawholly-ownedsubsidiary,orisapartially-ownedsubsidiaryof

anotherentityanditsotherowners,includingthosenototherwiseentitledtovote,havebeeninformedabout,anddonotobjectto,theparentnotpresentingconsolidatedfinancialstatements;

(ii) itsdebtorequityinstrumentsarenottradedinapublicmarket(adomesticorforeignstockexchangeoranover-the-countermarket,includinglocalandregionalmarket);

(iii) itdidnotfile,norisitintheprocessoffiling,itsfinancialstatementswithasecuritiescommissionorotherregulatoryorganisationforthepurposeofissuinganyclassofinstrumentsinapublicmarket;and

(iv) its ultimate or any intermediate parent of the parent producesconsolidated financial statements available for public use thatcomplywithMFRSs[MFRS10.4].

Inpractice,thisexemptionisnormallyonlyavailedwhentheparentisitselfawholly-ownedsubsidiaryofanotherparent (i.e. its immediateparent).This is because there is no other shareholder, other than itsimmediateparent,andtheshareholdersofitsimmediateparentwouldbebetterservedbyconsolidatingattheimmediateparent’slevel.Fora



partially-ownedsubsidiary,itmaybepracticabletoavailtheexemptionif there are only a few non-controlling shareholders (for example,corporateminorityshareholders)andconsenthasbeenobtainedfromthem fornotpresenting consolidatedfinancial statements. It shallbenoted that in some jurisdictions, the local lawspermit theexemptiononlyiftheintermediateorultimateparentisincorporatedinthatlocaljurisdiction. Thus, for a wholly-owned parent that is a subsidiary ofanother parent incorporated outside that jurisdiction, the exemptiondoes not apply. It must produce consolidated financial statements inthatlocaljurisdiction.

(b) post-employment benefit plans or other long-term employee benefitplanstowhichMFRS119,Employee Benefitsapplies.

7.3.3.1 Scope of Consolidated Financial Statements

ThereisnochangemadetothescopeofconsolidationintheformerFRS127astheMFRScontinuestorequirethatconsolidatedfinancialstatementsshallincludeallsubsidiariesoftheparent.

Theexceptionsinsomepaststandards,whichrequiredthatasubsidiaryshall be excluded from consolidation on the grounds of temporary controland severe restrictions, have been removed in the former FRS 127. TheStandardclarifiesthatifasubsidiaryisacquiredexclusivelywiththeviewtodisposalwithin12months,itshallbeconsolidated,andthenpresentedasnon-currentassetsheldforsaleanddiscontinuedoperationwhenthecriteriaofMFRS5,Non-Current Assets Held for Sale and Discontinued Operations,aremet.Similarly,asubsidiaryisnotexcludedfromconsolidationbecauseitsbusinessactivitiesaredissimilarfromthoseoftheotherentitieswithinthegroup.TheStandardclarifies that relevant information isprovidedbyconsolidatingsuchsubsidiariesanddisclosingadditionalinformationintheconsolidatedfinancialstatementsaboutthedifferentbusinessactivities inaccordancewithMFRS8,Operating Segments.

Asubsidiaryisalsonotexcludedfromconsolidationonthegroundthatit operates under conditions of severe long-term restrictions in its abilityto transfer funds to the parent. So long as control continues to exist, thesubsidiary shall be consolidated although additional information may bedisclosedaboutthelong-termrestrictions.Similarly,non-controllinginterestsandotherpartiesmayholdprotectiverightsinasubsidiarythatlimit,butdonotpreclude,theparentfromexercisingitspowertodirecttheactivitiesofthesubsidiary.Forexample,anon-controllingshareholdermayholdvetopower for approval of capital expenditure of a subsidiary but this is notsufficienttoprecludetheparentfromcontrollingthesubsidiary.



It has been argued that for venture capital entities andmutual funds,themainpurposeoftheir investmentsinsubsidiaries istoachievewealthor value creation for those investments. Thus, some commentators havesuggestedthattheinvestmentsinsubsidiariesmadebysuchentitiesshouldbe measured on the fair value model (for example, in accordance withMFRS9),ratherthanbyconsolidation.TherevisedStandardclarifiesthatasubsidiaryisnotexcludedfromconsolidationsimplybecausetheinvestorisaventurecapitalorganisation,mutualfund,unittrustorsimilarentity.Note that in August 2011, the IASB issued Exposure Draft ED/2011/4Investment Entities,toproposeexemptionforsuchinvestmententitiesfromthe consolidation requirement of IFRS 10 provided their investments insubsidiariesaremeasuredatfairvaluethroughprofitorloss.

Thus,forasubsidiarytobeexcludedfromconsolidation,theparentmusthave lost control.Aparent loses controlwhen it loses thepower to directthe relevant activities of the investee orwhen it ceases to be exposed, orhaverights,tovariablereturnsfromtheinvestee.Forexample,whensharesinasubsidiaryaredisposedand theparent loses control.Also, the lossofcontrolcanoccurwithorwithoutachangeinabsoluteorrelativeownershiplevels. It could occur, for example,when a subsidiary is subject to controlofagovernment,court,administratororregulator.Itcouldalsooccurasaresultofacontractualagreement.Forexample,anagreementthatpreviouslyallowedtheentitytogaincontrolinaninvesteebutisnotrenewedonexpiryoftheagreement.

7.3.4 DefinitionsIn general, consolidated financial statements shall be presented when

thereisagroupofentitiesunderthecontrolofaparent.AgroupisdefinedintheStandardas“aparentanditssubsidiaries”.Theremustthereforebeaparent-subsidiaryrelationshipforagrouptoexist.Thetestoftheexistenceofaparent-subsidiaryrelationshiprestsonthecriterionofcontrol.Asubsidiary isdefinedas“anentitythatiscontrolledbyanotherentity”.

Itshallbeemphasisedthatascontrolisthecentralcriterion,itneednotnecessarilybeaccompaniedbyanownershipinterestinaninvestee,toqualifythelattertobeasubsidiary.TheIFRSdefines controlofaninvesteeas“aninvestorcontrolsaninvesteewhentheinvestorisexposed,orhasrights,tovariablereturnsfromitsinvolvementwiththeinvesteeandhastheabilitytoaffectthosereturnsthroughitspowerovertheinvestee.

Inaparent-subsidiaryrelationship,controlisexercisedwithbenefitsandrisksattached,andthiswillnormally (thoughnotnecessarily)arise if theinvestorhassubstantialownershipinterestatstake.Thus,whenanentityhasthepowertodirecttherelevantactivitiesandpoliciesofanotherentity



purely by virtue of amanagement contract, there areno risks or benefitsattachedtotheexerciseofpower(apartfromperhapsanagreedmanagementfeeforactingasanagent),andaccordingly,noparent-subsidiaryrelationshiparises.Thecontrolexercisedbytheparentmustalsobeaunilateralorsolecontrol,which is thepower todirect the relevantactivitiesandpoliciesoftheinvesteewithouthavingtomakereferenceto,ortoseektheconcurrenceof, another third party, or to share control with another party. In somesituations, benefits and risks can arise in arrangements other than theholdingofownershipinterest,suchasinthecaseofanentity’sinvolvementinastructuredentityandtheentityholdslittleornoequityinterestinthestructuredentity.

Themostcommonlyusedtestofaparent-subsidiaryrelationshipisthe“more than 50 per cent” ownership interest. In the case of a subsidiarycompany, this interest is satisfied if the parent holds“50%plus onemoreshare”ofthesubsidiarycompany.Notethatitisnotnecessaryfortheparenttoowndirectly,morethan50%oftheequitysharecapitalofanothercompanyfor the existence of a parent-subsidiary relationship. Control is presumedto existwhen theparent owns,directly or indirectly through subsidiaries,more thanonehalf of thevoting rightsofanentityunless, inexceptionalcircumstances,itcanbeclearlydemonstratedthatsuchownershipdoesnotconstitutecontrol.Inotherwords,whenagroupasawholeownsmorethan50%oftheequitysharecapital,controlisgenerallypresumed.

An investormaysometimesholdmore than50%ownership interest inan investeebutdoesnothaveunilateral control.Such is the casewhenalocal investor may have entered into a joint venture agreement with aforeignpartner to setupa joint venture company.The local investormayholdmorethan50%ownershipinterestinthejointventurecompany,butiftheagreementprovidesforajointcontrol,thejointventurecompanyisnotasubsidiaryofthelocalinvestorbecauseitdoesnothaveunilateralcontrol.Aninvestormayholdmorethan50%ownershipinterestinaninvestee,butifithasenteredintoanagreementwithanotherinvestorthatprovidestheother investorvetorightstoallstrategicdecisionsthataffecttherelevantactivitiesoftheinvestee,theinvestorhasnounilateralpower.However,iftheotherinvestoronlyholdsvetorightstosomestrategicdecisions(protectiverights),theydonotprecludetheinvestorfromhavingthepowertodirecttherelevantactivitiesoftheinvestee.

Controlmayexistincertaincircumstances,evenwhenthemorethan50%equityinterestisnotmet.Thismayarisewhen:(a) thepowertodirectisobtainedbyoperationoflaworbyagreementwith

otherinvestors;



(b) theinvestoristhesinglelargestshareholderandtheothershareholdersarethinlyspreadoutamongmanyinvestors(thedominantshareholderconcept);

(c) the investor holds potential voting rights that enable it to have thecurrentabilitytodirecttherelevantactivitiesofaninvestee;and

(d) bycontractualarrangement,suchascontrolofastructuredentity

7.3.4.1 Control by Operation of Law or by Agreement with Other Investors

The following group structures illustrate how control exists when theequityinterestisnotmorethan50%butthepowertodirectisobtainedbyoperationoflaworbyagreementwithotherinvestorsthatallowstheinvestortohavemorethanamajorityofthevotingrights.

P Bhd

40% Control by law

S Bhd

P Bhd owns 40% equity shares in S Bhd and controls it by operation of law.

P Bhd Agreement Mr. X

40% 11%

S Bhd

Agreement with Mr. X allows P Bhd to control 51% of the voting rights in S Bhd

7.3.4.2 Control by Holding Sufficient Voting Rights

The following cases illustrate how to assess whether an investor hassufficientvotingrightstohavethepowertodirecttherelevantactivitiesofaninvestee(i.e.theapplicationofthedominantshareholderconcept).

Example 1 (Cases on Investor’s Voting Rights that are 50% or less)

Case 1

EntityPholds40%oftheordinarysharesofEntityQ.Thenexttwolargestshareholdings of Entity Q are 10% and 5% respectively and the remainingordinarysharesareheldbythousandsofshareholders,noneindividuallymorethan1%.Noneoftheshareholdershasanyarrangementtoconsulteachotherortomakecollectivedecisions.

Inthiscase,onthebasisoftheabsolutesizeofitsholdingandtherelativesizeoftheholdingsofothershareholders,EntityPhassufficientdominantvotingrightstomeetthepowercriterionwithouttheneedtoconsideranyotherevidenceofpower.



Case 2

Entity P holds 30% of the ordinary shares of Entity Q and seven othershareholderseachhold10%of theordinarysharesofEntityQ.AshareholderagreementbetweenEntityPandalltheothershareholdersgrantsEntityPtherighttoappoint,removeandsetthecompensationofmanagementresponsiblefortherelevantactivitiesofEntityQ.However,EntityPhasyettoexercisethisrightandchoosestoremainasapassiveinvestor.

Inthiscase,consideringtheabsolutesizeofitsholdingandtherelativesizeoftheothershareholdingsaloneisnotconclusivetodeterminethatEntityPhasrightssufficienttogiveitpoweroverEntityQ.However,thefactthatEntityPhas the contractual right to appoint, remove and set the compensation of keymanagement is sufficient to conclude that Entity P has power. The fact thatEntityPhasnot exercised this rightyet or the likelihoodof it exercising thisrightshouldnotbeconsideredwhenassessingifithasthepower.

Case 3

EntityPholds40%oftheordinarysharesofEntityQ.Threeotherinvestorseachhold20%oftheordinarysharesofEntityQ.EntityPhastworepresentationsontheboardofdirectorsofEntityQwhilsttheotherthreeinvestorseachhaveonerepresentation.Therearenootherarrangementsthataffectdecision-makingpoliciesofEntityQ.

Inthiscase,consideringtheabsolutesizeofEntityP’svotingrightanditsrelativesizetotheotherthreeshareholdingsissufficienttoconcludethatEntityPdoesnothavepoweroverEntityQ.ThisisbecauseonlythreeotherinvestorswouldneedtocooperatetobeabletopreventEntityPfromcontrollingEntityQunilaterally.

Case 4

EntityPholds40%oftheordinarysharesofEntityQ.Twelveotherinvestorseachhold5%oftheordinarysharesofEntityQ.Noneoftheothershareholdershas any contractual arrangement to consult each other or to make collectivedecisions.

Inthiscase,consideringtheabsolutesizeofEntityP’sholdingandtherelativesizeoftheothershareholdingsaloneisnotconclusivetodetermineifEntityPhasrightssufficienttogiveitpoweroverEntityQ.AdditionalfactsandcircumstancesthatindicatethatEntityPhas,ordoesnothavepowershouldbeconsidered.

7.3.4.3 Potential Voting Rights

An entity may hold warrants, share options or convertible securitiesthat are exercisable or convertible into ordinary shares, or other similar



instruments thathave the potential, if exercised or converted, to give theentityvotingpowerorreduceanotherparty’svotingpoweroverthefinancialandoperatingpoliciesofanotherentity(potential voting rights).TheIFRSrequiresthattheexistenceandeffectsofpotentialvotingrights, includingpotentialvotingrightsheldbyanotherentity,areconsideredwhenassessingwhetheranentityhasthepowertodirecttherelevantactivitiesofaninvestee.Inassessingwhetherpotentialvotingrightscontributetocontrol,theentityexaminesallfactsandcircumstances(includingthetermsoftheexerciseofthepotentialvotingrightsandanyothercontractualarrangementswhetherconsideredindividuallyorincombination)thataffectpotentialvotingrights,excepttheintentionofmanagementandthefinancialabilitytoexerciseorconvert.Theconditionof“currentlyexercisable”intheformerFRS127hasbeenremoved.

Example 2XBhdandYBhdeachholdsa30%interestinthe100millionordinaryshares

of S Bhd.The remaining shareholders are spread out evenly among the publicinvestors.XBhdalsoholds50millionwarrantsofSBhd,whichareexercisableinto50millionnewordinarysharesofSBhd.

Inthiscase,ifXBhdweretoexercisethewarrantsitholdsinSBhd,itseffectiveownershipinSBhdwouldbe[30m+50m]/[100m+50m]=53.3%.ThiswouldgiveXBhdavotingpowerofmorethanhalf.Thus,withthepotentialvotingrightsandconsideringallotherrelevantfactors,itisprobablethatXBhdwouldhavecontrolofSBhd,andshouldthereforetreatSBhdasasubsidiary.

Example 3 (Cases on Potential Voting Rights)

Case 1 – Potential voting rights that are not substantive

EntityAandEntityBcurrentlyhold60%and40%respectivelyofthevotingordinarysharesofEntityC.However,EntityBhasacalloptiontoacquirehalfofEntityA’svotingordinarysharesofEntityC.Theoptionisexercisableatanytimeinthenextthreeyearsatafixedpricethatisdeeplyoutofthemoney(andisexpectedtoremainsoforthatthree-yearperiod).EntityAhasbeenexercisingitsvotesandisactivelydirectingtherelevantactivitiesofEntityC.

Inthiscase,EntityAismorelikelytomeetthepowercriterionbecauseithasthecurrentabilitytodirecttherelevantactivitiesofEntityC.AlthoughEntityBhasacurrentexercisablecalloptiontopurchaseadditionalvotingrightsthatifexercisedwouldgiveitamajorityofthevotingrightsinEntityC,thetermsandconditionsassociatedwiththeoption(thefactthattheoptionisdeeplyoutofthemoneyandlikelytoremainsointhenextthreeyears)aresuchthattheoptionisnotconsideredtobesubstantive.



Case 2 – Potential voting rights that are substantive

EntityOhasthreeshareholders,EntityL,EntityMandEntityN,eachholdingone third of the ordinary shares of Entity O. Entity L also holds convertibleloanstocksofEntityOwhichareexercisableatafixedconversionpriceatanytimeinthenexttwoyears.Ifexercised,EntityLwouldhaveamajorityofthevotingrightsinEntityO.Theconversionoptionintheloanstocksiscurrentlyoutofthemoney(butnotdeeplyoutofthemoney).

Inthiscase,EntityLislikelytohavethepowerbecauseitholdsvotingrightsintheinvesteetogetherwithrightstoobtainvotingrights,togiveitthecurrentability todirect therelevantactivitiesofEntityO.Thepotentialvotingrightsin this case is substantive.However, to concludewhetherEntityLhas powerover the investee, itneeds to consideradditional evidence, suchaswhether itcan appoint or approve the investee’s key management personnel, whetherit candirect the investee toenter into, or canvetoanychanges to, significanttransactions that affect its returns, whether it can dominate the nominationprocessofelectingmembersoftheinvestee’sgoverningbodyorwhetherthekeymanagementpersonnelorboardmembersareitsrelatedparties

7.3.4.4 Control of Structured Entities

Astructuredentity isdefinedintheMFRSas“anentitythathasbeendesigned so that voting or similar rights are not the dominant factor indecidingwho controls theentity, suchaswhenanyvoting rights relate toadministrativetasksonlyandtherelevantactivitiesaredirectedbymeansofcontractualarrangements”.

Featuresorattributesofastructuredentitymayincludesomeorallofthe following:(a) restrictedactivities.(b) a narrow and well-defined objective, such as to effect a tax-efficient

lease,carryoutresearchanddevelopmentactivities,provideasourceofcapitalorfundingtoanentityorprovideinvestmentopportunitiesforinvestorsbypassingrisksandrewardsassociatedwiththeassetsofthestructuredentitytoinvestors.

(c) insufficientequitytopermitthestructuredentitytofinanceitsactivitieswithoutsubordinatedfinancialsupport.

(d) Financingintheformofmultiplecontractuallylinkedinstrumentstoinvestorsthatcreateconcentrationsofcreditorotherrisks(tranches).

Examplesofstructuredentitiesare:(a) Securitisationvehicles;(b) Asset-backedfinancings(c) Someinvestmentfunds



Aninvestorneedstoassess its involvementwithastructuredentitytodeterminewhetherithasthepowertodirecttherelevantactivitiesandisexposed, or have rights, to variable returns of the structured entity. If itsinvolvementmeetsthecontrolmodel,itshalltreatthestructuredentityasitssubsidiary.OtherwisetheinvesteeistreatedasanunconsolidatedstructuredentityandthedisclosurerequirementsofMFRS12wouldapply.

Example 4On1January20x0SetiaBhd,apropertydevelopmentcompany,createsDamai

TrustforthesolepurposeofdevelopingashoppingcomplexthatwillbeleasedtoJuscoBhd.Thecosttodeveloptheshoppingcomplex,includinglandcost,isestimatedatRM500million.Toprovide thenecessaryfinancing for thedevelopmentof theshoppingcomplex,twobanksareinvitedtoeachtakeupa40%stakeintheequityofDamaiTrustandthebalanceofthe20%stakewillbeinvestedbySetiaBhd.

Forits20%stake,SetiaBhdwilltransferitslandtoDamaiTrustandundertaketheentiredevelopmentoftheshoppingcomplex.DamaiTrustwillthenenterintoanoperatingleasearrangementwherebyuponcompletion,theshoppingcomplexwill be leased to Jusco Bhd for a lease period of 20 years at aminimum leasepaymentofRM50millionperyear.Theleasepaymentsreceivedineachyear,afterdeductingoperatingexpensesofDamaiTrust,willbepaidoutasdividendstothestakeholders(thebankersandSetiaBhd).ThegoverningboardofDamaiTrustwillconsistofrepresentationsfromthetwobankersandSetiaBhdbutitsfunctionsarelimitedtoensuringthatthepaymentsfordevelopmentareinaccordancewiththestageofdevelopment,theleasearrangementwithJuscoBhdissetoutproperly,andtheapprovaloftheannualdividendstothestakeholders.

Attheendofyear20,theshoppingcomplexwillbetakenoverbySetiaBhd.DamaiTrustwillbedissolvedandtheinitialcapitalprovidedbythebankerswillbereturnedtothem.

RequiredExplain whether Setia Bhd should consolidate the financial statements of

DamaiTrust.

Solution 4AlthoughSetiaBhdonlyholdsa20%stakeintheequityofDamaiTrust,the

substanceof thearrangement is thatDamaiTrust isa structuredentity that iscontrolled by Setia Bhd.Accordingly, Setia Bhd should consolidate the financialstatements ofDamaiTrust.DamaiTrust operates on an “autopilot”mechanismwherebyitspoliciesarepredetermined.ThecontrolisevidentbecauseSetiaBhdisthecreatoroftheTrustanditderiveseconomicbenefitsdirectlybytransferringitslandandundertakingtheentiredevelopmentactivitiesoftheshoppingcomplexandreceivingdividenddistributionfromits20%equitystakeintheTrust.Furthermore,itbearstheresidualorownershiprisk inthatattheendofyear20,theinitialcapitalprovidedbythebankersmustbereturnedintheirentirety(aformofguaranteeforreturn of capital) even if themarket value of the shopping complexwere to fallsubstantiallybelowthecapitalprovidedbythebankers.



7.3.5 Requirement for Group AccountsIngeneral,whenagroupexists, theStandardrequires that theparent

must,inadditiontoitsownseparatefinancialstatements,prepareasetofgroup financial statements comprising itself and all its subsidiaries.Notethat the parent’s separate financial statementswould normally record itsinvestments in subsidiaries based on the cost principle, and hence wouldonly account for dividends received and receivable from its subsidiaries.Thiscostbasisofaccountingforsubsidiariesisnotanappropriatemeasureof the group’s performance and financial position because the dividendsrecognisedmaybearlittlerelationshiptotheperformanceofthesubsidiaries.Furthermore,itdoesnotindicatetheextentoffinancialresources(assetsandliabilities)controlledbytheparent.Thus,withoutpresentinggroupaccounts,itcanbearguedthattheparent’sseparatefinancialstatementswouldnotreflectatrueandfairviewoftheoperationsandfinancialpositionofaparentanditssubsidiaries.

Theobjectiveofthegroupfinancialstatementsisdesignedforshareholdersoftheparentinparticularandtheusersofaccountsingeneral.Shareholdersand users are usually concernedwith and need to be informed about theperformance,financialpositionandchangesinfinancialpositionofthegroupasawhole.Thus,groupfinancialstatementsarepresentedtoreflectfinancialinformationofthegroupasawhole,asifthegroupisasingleentityalthoughseparatelegalentitiesexistforentitieswithinthegroup.

7.3.6 Basic Concepts of Group AccountsGroupaccountsareusuallypreparedintheformofconsolidatedfinancial

statementswhichtreattheparentanditssubsidiariesasasingleeconomicunit. Consolidation is basically a method of accounting under which theinformationcontainedintheseparatefinancialstatementsofaparentanditssubsidiariesispresentedasthoughforasingleentity.Theconsolidatedfinancial statements record the results and assets and liabilities of theentitieswhichcompriseagroup,aggregatedonthebasisthatthoseentitiesallformpartofasingleeconomicunit.

The views of consolidation differ and these can affect the way certainitemsare treated in theconsolidatedaccounts.Onesuchview isbasedonthe proprietary concept which stresses on ownership interest rather thancontrol.This conceptassumes that the shareholders of theparentare theonlyrelevantusersandthattheyareinterestedsolelyintheequitysharesthattheyowned.Accordingly,onlytheproportionateinterestoftheparentintheassets,liabilities,revenuesandexpensesofpartly-ownedsubsidiarieswouldbeaddedtotheconsolidatedaccounts(proportionateconsolidation).



Anopposingview to consolidation is based on the entity conceptwhichstresses on common control regardless of ownership.This concept, thoughfocussing on the group itself as being a single entity, does not make adistinctionbetweenthedifferentshareholdersintheentitiesthatcompriseagroup.Interestofshareholdersoftheparentisnotseparatelyidentified.Controllingandnon-controllingshareholdersarealltreatedasshareholderswithinthegroup’seconomicentity.

Inpractice,consolidatedfinancialstatementsarepreparedonthebasisofacombinationofthetwoconcepts.Theproprietaryconceptalonedoesnotprovide sufficient relevant information for the parent’s shareholders as itundermines the economic resources controlled by the group.On the otherhand,theentityconceptalonedoesnotmakeadistinctionbetweeninterestsof the shareholders of the parent and the non-controlling shareholders ofthesubsidiariesinthegroup.Suchadistinctionisgenerallyconsideredasimportanttothegroupparent’sinvestorsastheyneedinformationnotonlyonthegroupasawhole,butalsoonthedistinctionbetweenwhattheyownandwhatothersown.

In itsdeliberationonthissubjectofconsolidation,theIASBconsideredthefollowingbasesforconsolidation:(a) thecontrolling entity model,wheretheconsolidatedfinancialstatements

comprisethecontrollingentityandotherentitiesunderitscontrol;(b) the common control model, where the combined financial statements

comprise entities under the control of the same controlling entity orbody;and

(c) the risks and rewards model, where two entities are included in theconsolidatedfinancialstatementswhentheactivitiesofoneentityaffectthewealthof theresidualshareholders (or residual claimants)of theotherentity.

TheIASBrejectedtherisksandrewardsmodelasabasisforconsolidationonthegroundsthat it isnotconceptuallyrobust.TheIASBobservedthatthereareoccasionswhenthecombinedfinancialstatementsandthereforetheapplicationofthecommoncontrolmodel,wouldprovideusefulinformationtousersoffinancialstatements.However,itconcludedthattheIFRSshouldusethecontrollingentitymodelastheprimarybasisofconsolidation.

MFRS 10 defines consolidated financial statements as “the financialstatements of a group in which the assets, liabilities, equity, income andexpensesandcashflowsoftheparentanditssubsidiariesarepresentedasthoseofasingleeconomicentity”.Inotherwords,thenetassetsandresultsof all entities that comprise a group are first aggregatedusing the entityconcept,onthebasisthatthoseentitiesall frompartofasingleeconomicentity.Theresultsandnetassetsaggregatedarethenallocatedtointerests



ofnon-controllingshareholders leavingthebalancesasattributable to theshareholders or owners of the parent entity (the proprietary concept isappliedwithintheentityconcepttoseparatetheresultsandnetassets).

7.4 Consolidation Procedures

TheStandardexplainsthatinpreparingconsolidatedfinancialstatements,anentitycombinesthefinancialstatementsoftheparentanditssubsidiaries,linebylinebyaddingtogethertheitemsofassets,liabilities,equity,incomeand expenses. In order that the consolidatedfinancial statements presentfinancialinformationaboutthegroupasthatofasingleeconomicentity,thefollowingstepsarethentaken:(a) thecarryingamountoftheparent’sinvestmentineachsubsidiaryand

theparent’sportionoftheequityofeachsubsidiaryareeliminated(seeMFRS3,whichdescribesthetreatmentfortheresultantgoodwill);

(b) non-controllinginterestsintheprofitorlossandothercomprehensiveincomeofconsolidatedsubsidiariesforthereportingperiodareidentified;and

(c) non-controllinginterestsinthenetassetsofconsolidatedsubsidiariesareidentifiedseparatelyfromtheparent’sownershipinterestsinthem.Non-controllinginterestsinthenetassetsconsistof:(i) the amount of those non-controlling interests at the date of the

originalcombinationcalculatedinaccordancewithMFRS3;and(ii) thenon-controllinginterests’shareofchangesinequitysincethe

dateofthecombination.

The profit or loss, other comprehensive income and the net assetsallocatedtotheparentandnon-controlling interestsshallbebasedonthepresentownershipinterestsanddonotreflectpossibleexerciseorconversionofpotentialvotingrights.Forexample,assumethatthepresentownershipinterests of the parent and non-controlling interests are 60% and 40%respectively.Theexerciseorconversionofpotentialordinaryshareswouldchangetheirownershipintereststo80%and20%respectively.Theallocationof the current period profit, other comprehensive income and net assetsshouldbebasedonthepresent60%and40%ownershipinterests.

The Standard further requires that non-controlling interests shall bepresentedintheconsolidatedstatementoffinancialpositionwithinequity,separately fromtheequityof theownersof theparent.Asnon-controllinginterests represent equity not held by the parent, they would includeordinaryequityshares,preferencesharesthatareclassifiedasequityandothercomponentsofequity(suchasshareoptionreserves)notattributabletotheparent.



7.4.1 Other Intragroup BalancesApartfromtheinvestmentinequitysharesofasubsidiary,otherintragroup

balances may include investment in preference shares, intragroup bondholdings,intragrouploansandadvances,intragroupgroupcurrentaccounts(such as amount due from or due to a subsidiary), intragroup dividendreceivableandpayable,andintragroupbillsreceivableandbillspayable.

Inaccordancewith theconcept thatallentities inagroupareasingleeconomicentity,allintragroupbalancesmustbeeliminatedonconsolidation.The elimination of intragroup loans and advances, current accounts anddividendisusuallyastraightforwardprocedureofreversingentriesattheconsolidationlevel.Inpractice,theintragroupcurrentaccountsoftentonotagree,eitherduetoitemsintransitand/orerrorsinrecording.Inprinciple,thecurrentaccountsshouldbeadjustedfortheseitemsand/orerrorsbeforetheyareeliminatedonconsolidation.

Ifapartly-ownedsubsidiaryhasdeclaredadividend,theparent’sshareof that dividend is eliminated in the consolidated statement of financialposition.Theportionofthatdividendpayabletonon-controllinginterestisnoteliminatedbutincludedinotherpayables.

Ifaparenthasprovidedafinancialguaranteetoalenderforaloantakenbyitssubsidiary,thefinancialguaranteeisdisclosedasacontingentliabilityinitsseparatefinancialstatements.Onconsolidation,thiscontingentliabilitymustbeeliminatedastheloantakenbythesubsidiarywouldbeincludedintheconsolidatedstatementoffinancialposition.

7.4.1.1 Preference Shares in a Subsidiary

A subsidiary may have issued redeemable preference shares or non-redeemablepreference shares thatare classifiedasfinancial liabilities.Totheextentthatthepreferencesharesareheldbytheparent,theyshallbeeliminatedwiththeparent’sinvestmentonconsolidationastheyrepresentintragroupbalances.Thebalanceof thepreference sharesnotheldby theparentshallremainasfinancialliabilitiesintheconsolidatedstatementoffinancialposition.

If a subsidiary has preference shares that are classified as equity,the extent of thepreference sharesnotheldby theparent is classifiedasnon-controlling interests. The Standard clarifies that if a subsidiary hasoutstandingcumulativepreferencesharesthatareclassifiedasequityandareheldbynon-controllinginterests,theparentcomputesitsshareofprofitor loss after adjusting for the dividends on such shares, whether or notdividendshavebeendeclared.



Example 5On1January20x1,HappyBhdacquired75%oftheordinarysharesand30%of

thepreferencesharesofLuckyBhd.Thepreferencesharesareclassifiedasequityand they carry a cumulative preference dividend of 10%per year.The paymentof dividend is discretionary and conditional on the companyachieving sufficientprofitsineachyear.However,dividendsonordinarysharescanonlybepaidafterallarrearsofpreferencedividendshavebeenpaid.

Fortheyearended31December20x4,LuckyBhdreportedaprofitaftertaxofRM70million.Itsequityconsistsofthefollowingcomponents:

RM’000CumulativepreferencesharesofRM1each 100,000OrdinarysharesofRM1each 200,000Retainedprofitsbroughtforward 80,000Profitaftertaxfortheyear20x4 70,000 450,000

Required(a) Compute the amount of profit for the year that shall be allocated to non-

controllinginterests;and(b) Determinetheamountofnon-controllinginterestthatshallbeshowninthe

financialposition.

Solution 5(a) Allocationofprofitfortheyear

Total Non-controlling

Interest

Parent

RM’000 RM’000 RM’000

Profitaftertax 70,000

10%preferencedividend (10,000) 7,000 3,000

Profitafterpreferencedividend 60,000 15,000 45,000

Allocationofprofit 70,000 22,000 48,000



(b) Non-controllinginterestinfinancialposition

Total Non-controlling

Interest

Parent

RM’000 RM’000 RM’000

Preferenceshares 100,000 70,000 30,000

Ordinaryshares 200,000 50,000 150,000

Retainedprofitsbroughtforward 80,000 20,000 60,000

Profitfortheyear 70,000 22,000 48,000

450,000 162,000 288,000

7.4.1.2 Intragroup Bond Holdings

Whilst the Companies Act, 1965 prohibits reciprocal shareholdingsbetweenaparent companyand its subsidiarycompanies, there isnosuchequivalent restriction on intragroup bond holdings. Thus, companies in agroupmayholdbondsoftheparentoranyofitssubsidiaries.Also,acompanymayretireitsownbondsbypurchasingthemintheopenmarket.

Bonds,whicharecommonlycalledloanstocksordebenturesinMalaysia,are debt instruments, which the issuer must recognise as a long-termfinancialliabilityinitsfinancialposition.ThefinancialliabilityisnormallycarriedattheamortisedcostbasisinaccordancewithMFRS139,Financial Instruments: Recognition and Measurement. The liability instrumentgivesrisetointerestexpense,whichmayconsistofthecouponinterestrateplusaccretionofbonddiscount,andlessamortisationofbondpremium.Undertheamortisedcostbasis,theeffectiveinterestexpenserecognisedwouldbeequaltotheeffectivemarketinterestrateprevailingatthetimeofthebondissue(i.e.ahistoricalinterestrate)

Whenanentitypurchasesabondofitsaffiliate(whichcanbeanyotherentityinthegroup),theentityneedstoaccountforthebondasaninvestment.Theinvestmentinbondisafinancialasset,whichinaccordancewithMFRS139, shall be classified as either: (i) held-to-maturity (HTM) investment,(ii) available-for-sale (AFS) investment, or (iii) investment at fair valuethroughprofitorloss.WhenclassifiedasaHTMinvestment,thebondwouldbemeasured at amortised cost using effective interest basis,wherein theinitialcostoftheinvestmentisadjustedforamortisationofbondpremiumoraccretionofbonddiscount.Itsinterestincomemaythusconsistofcouponinterestrateplusaccretionofbonddiscount,andlessamortisationofbondpremium, to provide an effective yield based on themarket interest rate



prevailing at the time the investmentwasmade (i.e. a historical interestrate). If the bond is classified as anAFS investment, the interest incomeshallcontinuetobebasedontheeffective interestbutchanges inmarketorfairvalueofthebondshallbetakendirectlytoequity(forexample,fairvalue reserve).Similarly, if thebond is classifiedasat fair value throughprofit or loss, the interest income is also based on interest received, butthechangesinmarketorfairvaluearerecognisedasgainsorlossesintheincomestatement.

Thebasicprincipleofeliminatingallintragroupbalancesandtransactionsremains the same for intragroup bond holdings. On consolidation, anadjustment is required to eliminate the purchaser’s investment in bondaccountwiththeissuer’sbondliabilityaccount,leavingonlybondsheldbythirdpartiesasbondliabilityintheconsolidatedfinancialposition.Similarly,an adjustment is required to eliminate the purchaser’s interest incomewith the issuer’s interest expense,with the resultingnet interest expenseattributabletobondsheldbythirdpartiesbeingreflectedintheconsolidatedincomestatement.

Inter-company Bonds Purchased as at the Date of the Issue

Wheretheintragroupbondsarepurchaseddirectlyfromtheissueratthedateoftheissue,thereisusuallynocomplicationintheeliminationprocessifboththeissuerandthepurchaserapplytheamortisedcostbasis.Thisisbecause thepurchasepriceof the investment inbondwillbeequal to theissuepriceof thebond liability.Nodifferencewillarise in theeliminationprocessasatthedateoftheissueandsubsequently,becausetheintragroupbondaccountswilloffseteachotherexactly.Conceptuallythen,theportionof thebondpurchasedbyanycompanywithinthegroupasat thedateoftheissue,reducestheextentofthebondliabilityoftheconsolidatedentity.Forexample,ifaparentissuesaRM50millionbond,andoutofthisamount,RM20millionispurchasedbyitssubsidiaries,effectivelythen,thegrouphasraisedabondliabilityofonlyRM30million.

Thus,inthecasewherethebondsarepurchasedatthedateoftheissue,thepricepaidbythepurchaserforthebondswillbeequaltothefairvalueof thebondof the issuer.Onconsolidation,the investment inbondsof thepurchaserwill cancel out the fairvalueof thebondsof the issuer,andnodifferenceonconsolidationwillarise.Similarly,theinterestexpense(couponinterest plus accretion of discountminusamortisation of premium) of theissuershouldcancelouttheinterestincomeofthepurchaser.



Example 6PBhdownsa75%interestintheequitycapitalofSBhd.On1January20x7,

SBhdissuedaRM100,000,000unsecuredbondthatcarriesacouponinterestrateof6%perannum.ThebondwasissuedatRM848.50perunitofRM1,000nominalvalue.Theeffectivemarketinterestrateforsimilarriskclassbondsatissuedatewas10%.Interestispayableannuallyon31December.Thebondisfullyredeemableatitsnominalvalueafterfiveyears.

PBhdacquired40%ofthetotalbondissueofSBhd.BothPBhdandSBhdusetheamortisedcostmethodtocarrythebondintheaccounts.

RequiredForthefinancialyearended31December20x7:

(i) ExplainhowSBhdshouldaccountforthebondissueandtheinterestexpense;(ii) ExplainhowPBhdshouldaccountforitsinvestmentinthebondofSBhd;

and(iii) ExplaintheconsolidationadjustmentsrequiredatthePBhdgrouplevel.

Solution 6(i) On1January20x7,SBhdshouldrecordtheissuanceofthebondasfollows:

RM RMDrBankaccount 84,850,000DrBonddiscount–contratobondaccount 15,150,000

CrBondaccount–nominalvalue 100,000,000 On31December20x7,SBhdshouldrecognisetheinterestexpense,asfollows:

RM RMDrInterestexpense–10%x84,850,000 8,485,000

CrBankaccount–couponinterest 6,000,000CrBonddiscount-amortisation 2,485,000

At31December20x7,thecarryingvalueofthebondliabilityintheaccountsofSBhdwouldbe=RM100,000,000–RM12,665,000=RM87,335,000.

(ii) On1January20x7,PBhdshouldrecorditsinvestmentinthebondofSBhdas follows: RM RMDrHTMinvestmentinbondofSBhd 33,940,000

CrBankaccount(40mx.8485) 33,940,000 On31December20x7,PBhdshouldrecognisetheinterestincomeasfollows:

RM RMDrBankaccount-couponinterest6%x40m 2,400,000DrHTMinvestmentinbondofSBhd-accretion 994,000

CrEffectiveinterestincome(10%x33,940,000) 3,394,000



At31December20x7,thecarryingvalueofPBhd’sHTMinvestmentinbondisthus=RM33,940,000+994,000=RM34,934,000.

(iii) OnconsolidationofPBhdandSBhd,thefollowingadjustmentsarerequiredto eliminate the intergroup bond holding in the financial position and theintergroupincomeandexpense: RM RMDrBondaccountofSBhd 40,000,000

CrBonddiscountofSBhd 5,066,000CrHTMinvestmentinBondofSBhd 34,934,000

Thenetcarryingamountofthebondliabilityasat31December20x7intheconsolidated financial positionwill be RM52,401,000 (i.e. nominal value ofRM60,000,000lessbonddiscountofRM7,599,000). RM RMDrEffectiveinterestincomeofPBhd 3,394,000

CrEffectiveinterestexpense 3,394,000 Thenet interestexpense intheconsolidatedprofitandlossaccountwillbe

RM5,091,000(i.e.couponinterestexpenseofRM3,600,000plusamortisationofbonddiscountofRM1,491,000).

Note that when transaction costs are involved, the intragroup bondaccountsmaynotoffseteachotherexactly.BasedonFRS139,transactioncosts are included in the initial measurement of a financial asset or afinancial liability (exceptwhenafinancial instrument ismeasuredat fairvalue through profit or loss, inwhich case, the transaction costs shall beexpensed).To the issuer, the transactioncostswould includeunderwritingfeesandotherchargesincurredintheissue.Inclusionofthetransactioncoststhusreducesthecarryingamountoftheliabilityonitsinitialmeasurement.Tothepurchaser,transactioncostsaremostlycommissionspaidtobrokers.Inclusionofthetransactioncoststhusincreasesthecarryingamountoftheasset on initialmeasurement. For example, an intragroup bondfloated inthemarketatRM10,000,000iscarriedintheissuer’sbookatRM9,800,000netofunderwritingfee.Thesamebondiscarriedinthepurchaser’sbookatRM10,080,000inclusiveofdealers’orbrokers’commissions.Wheneliminatingtheintragroupbondonconsolidation,adebitdifferenceofRM280,000wouldarise.Fromtheviewpointof theconsolidatedentity, such intragroupbonddoes not exist. Accordingly, the debit difference shall be expensed in theconsolidatedincomestatement.

If thepurchaserofan intragroupbondtreats itasanAFSinvestment,the change in fairvalueof thebond that is taken toother comprehensiveincome in its individual accounts shall be reversed on consolidation. Forexample, an intragroup bond in the issuer’s books is carried at amortisedcostofRM9,500,000.Inthebooksofthepurchaser,thebondistreatedasan



AFSinvestmentandcarriedatfairvalueofRM10,100,000withRM600,000creditedtoothercomprehensiveincomeandretainedinafairvaluereserve.Onconsolidation,thefairvaluechangerecognisedintheothercomprehensiveincomeshallbereversedbeforetheintragroupbondiseliminated.Similarly,ifthepurchaserofanintragroupbondtreatsitasatfairvaluethroughprofitorloss,thechangeinfairvaluethatisrecognisedasgainorlossinitsincomestatementshallbereversedonconsolidation.

Inter-company Bonds Purchased from Market After Issue Date

In the case where the intragroup bonds are purchased in the openmarketfromthirdpartiesaftertheirissuancedate,thepurchasepriceofthebondsmaydifferfromthecarryingamountofthebondliabilityaccountbecausemarketinterestratecouldhavechangedsincetheissuancedate.Forexample,ifthemarketinterestrategoesupafterthedateoftheissue,themarket value of the bondwould decrease. Conversely, a decrease inmarketinterestratewouldhavetheoppositeeffectonthemarketpriceofthebond.Thus,whentheinvestmentaccountandthebondliabilityaccountarecompared,adifferencewillariseintheeliminationprocessdependinguponthepricepaidforthebondandthecarryingamountoftheboldliability.Adebitdifferencewillariseintheeliminationprocessifthepricepaidforthebond ismorethan itscorrespondingcarryingamount inthebooksoftheissuer,andconversely,acreditdifferencewillresultintheeliminationprocessifthepricepaidforthebondislessthanitscorrespondingcarryingamount.

Forexample,assumethatanissuer’sbondhasacarryingvalueofRM900perunitofRM1,000nominalvalue.IfanaffiliatedcompanypurchasedthebondintheopenmarketatapriceofRM950perunit,thenonconsolidationadebitdifferenceofRM50perunitwillarisewhenthecostofinvestmentinbondiscancelledwiththecorrespondingcarryingvalueofthebond.Conversely,iftheaffiliatedcompanyhadpurchasedthebondatamarketpriceofRM800perunit,acreditdifferenceofRM100perunitwillariseintheconsolidationadjustment.Theissuecentresontheappropriateaccountingtreatmentforthedebitorcreditdifferencearisingintheeliminationprocess.

Whenanaffiliate’sbondsarepurchased in theopenmarket, thebondsareviewedashavingbeen“constructively retired”fromtheviewpointoftheconsolidated entity. Thus, the accounting for this constructive retirementofthebondsisthesameastheaccountingtreatmentaccordedifanentityweretobuybackitsownbondsintheopenmarket.MFRS132,Financial Instruments: Presentation, requires that any gain or loss arising from aninstrumentclassifiedasafinancialliabilityshouldbereportedasagainorlossintheincomestatement.Notethattheterm“constructive”isused,whichmeansthattheintragroupbondsareviewedashavingbeenretiredfromthe



viewpointoftheconsolidatedentityonly,butlegallythetotalbondsarestilloutstandinginsofarastheissuerisconcerned.

Whilstthereisageneralagreementontherecognitionofthegainorlossonaconstructiveretirementofintragroupbondsintheconsolidatedincomestatement,thereisnogeneralconsensusonhowthegainorlossshouldbeallocatedbetweenthemajority(parent)andnon-controllinginterests.PastpracticesintheUSAsuggestedatleastfouralternativetreatments:(1)thattheentiregainorlossisassignedtothepurchasingcompany;(2)thattheentiregainorlossisassignedtotheparentcompany,(3)thatthegainorlossisallocatedratablybetweenthepurchasingcompanyandtheissuingcompany; and (4) that the entire gain or loss is assigned to the issuingcompany.

Assigning the entire gain or loss to the purchasing company appearstobeinconsistentwiththeprinciplethatagainorlosscannotarisewhentheinvestmentisfirstacquired.Inotherwords,thepurchasingcompanyrecordstheinvestmentinbondsat its fairvalueatthedateofpurchase,and thus no gain or loss can possibly arise in its accounts at that date.Accordingly,theconsolidationadjustmentshouldnotresultinthegainorlossbeingallocatedentirelytothepurchasingcompany.Forexample,ifthepurchasing company isaparent,allocating theentiregain to theparentwouldresultinthenon-controllinginterest?inthesubsidiary?nothavinga share of that gain. Conversely, if the purchasing company is a partly-ownedsubsidiary,allocatingtheentiregaintothesubsidiarywouldresultin the non-controlling interest in that subsidiary having a share of thatgain.Thiswouldover-statethenon-controllinginterest’sshareofnetassetsinthatsubsidiary.

Assigningtheentiregainor losstotheparentcompany(regardlessofwhetheritistheissuerorthepurchaseroftheintragroupbonds)isoftenarguedonthegroundsofpracticalexpediencyalthoughthistreatmentisnotsupportedwithanytheoreticalmerits.Allocatingthegainorlossratablybetweenthepurchasingcompanyandtheissuingcompanyissupported,onthegroundsthatitisconsistentwiththeallocationofunrealisedprofitsorlossestoparentandnon-controllinginterestsarisingonotherintragrouptransactions. The practical difficulty of this treatment is in deciding onthe ratable allocation, such as, should it be allocated equally or shouldit bebased on the ownership interests of theparentandnon-controllingshareholders.

Assigningtheentiregainorlosstotheissuingcompanyisbasedonthenotionthataconstructiveretirementofabondfromthegroup’sviewpointis similar, in substance, toanactual retirementof thebond.Thus, if theissuingcompanyweretoactuallyretireitsbondbyarepurchaseintheopen



market, theentiregainor losswouldhavebeenrecognised in its incomestatement. The current thinking on fair value accounting for financialinstrumentswouldappeartolendfurthersupporttothistreatment.Ifallfinancial assets and liabilities, including bonds, are carried at their fairvalues,anychangesinfairvalueswouldberecognisedasgainsorlossesinincome.Thus,theissuingentitywouldrecogniseanychangeinthemarketvalueofitsbondintheincomestatement.Sinceitsbondismarkedtomarketvalue,anypurchasebyitsaffiliatewouldalsobeatthemarketvalue,andthusnofurthergainorlosswillariseontheconstructiveretirementintheconsolidation adjustment.The author considers this treatment to be themostappropriateinthelightofthecurrentdevelopmentsinaccountingforfinancialinstruments.

Whenthegainorlossisattributedtotheissuingentity,inthecalculationofthenon-controllinginterest’sshareofprofitforaperiod,thegainorlossisattributabletothemonlyifthesubsidiaryistheissuingentity.Inthiscase,aratableportionof thegainor lossrecognisedat thegroup levelshallbeincludedinthecalculationofthenon-controllinginterest’sshareofprofit.Inthecasewhenthebondisissuedbytheparent,thegainorlossisattributedtotheparentonly(asiftheparentitselfhadrepurchasedthebondorhadfairvaluedthebond),andthusnot included inthecalculationof thenon-controllinginterest’sshareofprofit.

Example 7Papa Bhd acquired a 60% interest in the equity capital ofMama Bhd on 1

January20x1foraconsiderationofRM20,000,000.Atacquisitiondate,theretainedprofitsofMamaBhdwereRM10,000,000.

On1January20x4,MamaBhdissuedRM20,000,0006%unsecured5-yearbondatadiscountandreceivedanetproceedofRM16,970,000.Themarketinterestrateatthetimeofissuewas10%.Thebondiscarriedattheamortisedcostbasisusingtheeffectiveinterestrateof10%initsaccounts.

On1January20x6,PapaBhdpurchased50%ofMamaBhd’soutstandingbondintheopenmarketatamarketpriceofRM7,757,600.Onthisdate,thecarryingvalueofthetotalbondintheaccountsofMamaBhdwasRM18,013,600.Onthisdate,themarketinterestrateofMamaBhd’sbondwasquotedat16%.PapaBhdaccountsforthebondasHTMinvestmentandcarriesthebondattheamortisedcostmethodusingtheeffectiveinterestrateof16%.

Thesummarisedaccountsofthetwocompaniesfortheyearended31December20x6areasfollows:



Statements of Comprehensive Income & Retained Profits

PapaBhdRM’000

MamaBhdRM’000

Operatingprofit 10,600 8,600

Add:Bondinterestreceivable 600 –

Accretionofbonddiscount 1,241 –

Less:Bondinterestpayable – (1,200)

Amortisationofbonddiscount – (601)

Profitbeforetaxation 12,441 6,799

Taxation (3,961) (2,299)

Profitaftertaxationandretained 8,480 4,500

Retainedprofitsbroughtforward 11,520 17,500Retainedprofitscarriedforward 20,000 22,000

Statements of Financial Position

PapaBhdRM’000

MamaBhdRM’000

SharecapitalofRM1each 40,000 20,000

Retainedprofits 20,000 22,000

8%unsecuredbonds-nominalvalue – 20,000

-bonddiscount – (1,385)

60,000 60,615

InvestmentinMamaBhd:

12,000,000sharesofMamaBhd,atcost 20,000 –

10,000,000unitsofMamaBhd’sbond-

Costadjustedforaccretionofbonddiscount 8,999 –

Sundrynetassets 31,001 60,61560,000 60,615

Required(a) AsatthedateofthepurchaseoftheintragroupbondbyPapaBhd,calculate

thegainorlossonconstructiveretirementofthebond.(b) PreparetheconsolidatedaccountsofPapaBhdforthefinancialyearof20x6.



Solution 7(a) Constructivegainorloss:

RM’000Costofinvestmentinbond 7,757.6Shareofcarryingvalueofbondat1January20x650%x18,013,600 9,006.8Creditdifferencebeinggainonconstructiveretirement 1,249.2

(b)Papa Bhd

Consolidated Statement of Comprehensive Income & Retained Profits

For the year ended 31 December 20x6

PapaBhd MamaBhd Adjustments GroupRM’000 RM’000 RM’000 RM’000

Operatingprofit 10,600 8,600 19,200

GainonconstructiveretirementofMamaBhd’sbond – 1,249 1,249

Interestincomereceivable 600 – (600) –

Accretionofbonddiscount 1,241 – (1,241) –

Interestexpensepayable – (1,200) 600 (600)

Amortisationofbonddiscount – (601) 301 (300)

Profitbeforetaxation 12,441 8,048 (940) 19,549

Less:Taxation (3,961) (2,299) – (6,260)

Profitaftertaxation 8,480 5,749 (940) 13,289

Non-controllinginterest – (2,300) 376 (1,924)

Retainedprofitfortheyear 8,480 3,449 (564) 11,365

Retainedprofitsbroughtforward 11,520 4,500 – 16,020

Retainedprofitscarriedforward 20,000 7,949 (564) 27,385



Consolidated Statement of Financial Position

As at 31 December 20x6

RM’000SharecapitalofRMeach 40,000Retainedprofits 27,385 67,385Non-controllinginterest40%(42,000+1,249-940)+1,333 18,2578%Unsecuredbond–Nominalvalue 10,000Unamortisedbonddiscount (693) 9,307 94,949Goodwilloncombination(20,000/.60-30,000) 3,333Sundrynetassets(31,001+60,615) 91,616 94,949

7.4.2 Intragroup Transactions and Unrealised ProfitsMany types of intragroup transactions can arise in a group.Themore

commontypesareasfollows:(i) saleofinventoriesbetweenentitiesinagroup;(ii) saleortransferofproperty,plantandequipment;(iii) intragrouploansthatgiverisetointerestincomeandinterestexpense;

and(iv) managementfeeschargedbytheparent.

In accordance with the view that a group of companies is a singleeconomicentity,theeffectsofallsuchintragrouptransactionsinagroupmustbe eliminatedas thegroup cannotpossibly tradeandmakeprofitsfromitself.TheStandardrequiresthatintragroupbalances,transactions,incomeandexpensesshallbeeliminatedinfull.Consequently,unrealisedprofitsandlossesresultingfromintragrouptransactionsthatareincludedinthecarryingamountofassets,suchas inventoriesandproperty,plantand equipment, are eliminated in full. Intragroup losses may indicatean impairment that requires recognition in the consolidated financialstatements.

The Standard’s requirement for full elimination reflects that fact thatan intragroup transaction is a control issue, i.e., the transaction can bemade without reference to any external third party. The non-controllingshareholders are treated as internal to the group for the purpose of theelimination of unrealised profits or losses, and it is thus not sufficient to



adjustonlyforthatportionofthetransactionthatrelatestothecontrollinginterest.Adjustmentsforthewholetransactionandthefullamountofanyunrealisedprofitor lossshallbemadeandallocatedsuitablybetweenthecontrollinginterestandthenon-controllinginterest.

Note that legally, the profits or losses are realised in the accounts ofthesellingcompanyandarethereforesubjecttotax.Thus,whenthefullunrealisedprofitsor lossesareeliminatedon consolidation, their relatedtax effectsmust also be recognised and carried forwarduntil the profitsor losses are realised.TheStandard requires that temporary differencesthat arise from the elimination of unrealised profits or losses resultingfromintragrouptransactionsbedealtwithinaccordancewithMFRS112,Income Taxes.

Intragroup Sale of Inventories

The consolidation adjustments to eliminate intragroup sales andunrealisedprofitsareasfollows:

•DrSales(ofseller)CrPurchases(ofbuyer)

–toeliminateintragroupsales.•DrClosinginventoriesinthetradingaccount

CrClosinginventoriesinthefinancialposition –toeliminatetheunrealisedprofitinclosinginventoriescarriedforward.•DrDeferredtaxationinthefinancialposition

CrTaxationexpenseintheincomestatement –toaccountforthetaxeffectoftheprofitdeferred.

In general, it is presumed that the profits eliminated on consolidationarerealisedonthefirst-in-first-outbasis,unlesstheinventoriesarecarriedonthespecificidentificationcostingmethod.Inotherwords,anyunrealisedprofitinthecurrentyearisassumedtobefullyrealisedinthefollowingyear,unlessevidenceindicatesotherwise.Theconsolidationadjustmenttoaccountforthissubsequentrealisationisasfollows:

•DrOpeningretainedprofits DrTaxationexpense

CrOpeninginventoriesinthetradingaccount –toreinstateunrealisedprofitbroughtforwardandtoaccountforits

subsequentrealisation.



Example 8PBhdisaparentcompanywithafewsubsidiaries.Thefollowingintragroupsales

wererecordedforthefinancialyearsended31December20x6and20x7respectively:(i) Year 20x6: Intragroup sales at invoice prices amounted to RM2,000,000 of

whichRM800,000remainedintheclosinginventoriesofthebuyingcompanies.(ii) Year20x7:IntragroupsalesatinvoicepricesamountedtoRM3,200,000ofwhich

RM1,200,000remainedintheclosinginventoriesofthebuyingcompanies.Theprofitelementonintragroupsalestothesellingcompanieswasat20%of

theinvoiceprices.Incometaxratewasat25%forbothfinancialyears.

RequiredShow the consolidationadjustments to eliminate the intragroup transactions

andunrealisedprofitsforbothfinancialyears20x6and20x7.

Solution 8Year20x6:

(i) DrSales(ofsellers) RM2,000,000CrPurchases(ofbuyers) RM2,000,000

–toeliminateintragroupsales.(ii) DrClosinginventoriesinthetradingaccount RM160,000

CrClosinginventoriesinthefinancialposition RM160,000 –toeliminateunrealisedprofitinclosinginventoriescarriedforward.(iii)DrDeferredtaxliabilityinthefinancialpositionRM40,000

CrTaxationexpenseintheincomestatement RM40,000 –toaccountfortherelatedtaxeffectoftheprofiteliminated.

Year20x7:(i) DrOpeningretainedprofits RM120,000 DrTaxationexpense RM40,000

CrOpeninginventoriesinthetradingaccount RM160,000 –toreinstateopeningretainedprofitsandtoaccountforthe

realisationoftheprofitdeferredintheprioryear.(ii) DrSales(ofsellers) RM3,200,000

CrPurchases(ofbuyers) RM3,200,000 –toeliminateintragroupsales.(iii)DrClosinginventoriesinthetradingaccount RM240,000

CrClosinginventoriesinthefinancialposition RM240,000 –toeliminateunrealisedprofitinclosingprofitcarriedforward.(iv)DrDeferredtaxliabilityinthefinancialpositionRM60,000

CrTaxationexpenseintheincomestatement RM60,000 –toaccountfortherelatedtaxeffectoftheprofiteliminated.



7.4.2.1 Effects of the Elimination on Non-Controlling Interests

IntheExampleabove,wehavespecificallyignoredthedirectionsoftheintragroup sales by not identifying the selling companies or the buyingcompanies. This is because the consolidation adjustments for eliminatingintragroup sales and unrealised profits are the same regardless of thedirectionsoftheintragroupsales.

Inallocatingthegroup’sprofitsandnetassetstonon-controllinginterests,theresultingunrealisedprofitsorlossesshallbeallocatedtonon-controllinginterests based on their respective interests in the subsidiaries that haverecordedtheunrealisedprofitsorlosses.Thus,itisonlyinthecalculationofthenon-controllinginterest’sshareofprofitandnetassetsthatthedirectionsoftheintragroupsalesmatterandshouldbeidentifiedcorrectly.

When the sales are downstream(i.e.salesbyaparenttoitssubsidiaries),theprofitsarerecordedbytheparent.Theamountsofthesubsidiaries’profitsarenotaffectedbytheeliminationoftheunrealisedprofits.Accordingly,noadjustment shall be made in the calculation of non-controlling interest’sshareofprofitandnetassetsintheconsolidatedaccounts.

When the sales are upstream(i.e.salesbysubsidiariestotheirparent)or horizontal (i.e. sales amongst subsidiaries in a group), the profits arerecorded by the selling subsidiaries.Accordingly,when the full unrealisedprofits are eliminated on consolidation, the non-controlling interests shallbeallocatedfortheirshareoftheunrealisedprofits.Inotherwords,thenon-controlling interests’ share ofprofits in the consolidatedaccounts shall bebasedonthesubsidiaries’profitsthathavebeenrealisedintransactionswithpartiesexternaltothegroup.

Thus,inbothupstreamandhorizontalsales,thenon-controllinginterests’shareofprofitsshallbecalculatedasfollows:

NCIs’percentholdinginthe

sellingsubsidiaryX

Subsidiary’sprofitaftertax +Unrealisedprofitbroughtforward –Unrealisedprofitcarriedforward

Example 9On1January20x6,HBhdacquireda60%interestintheequitycapitalofSBhd

foracashconsiderationofRM12,000,000.OnthisdatetheretainedprofitsofSBhdwereRM6,000,000.ThenetassetsofSBhdattheacquisitiondatewerestatedintheaccountsattheirfairvalueofRM14,000,000.Basedonanincomeapproach,thefairvalueofSBhdasawholewasmeasuredatRM20,000,000attheacquisitiondate.

Thesummarisedaccountsofthetwocompaniesfortheyearended31December20x7areasfollows:




HBhd SBhdRM’000 RM’000

Sales 24,000 12,000Cost of sales:

Openinginventories (8,000) (5,000)Purchases (18,000) (9,000)Closinginventories 10,000 6,000

(16,000) (8,000)Gross profit 8,000 4,000Expenses (2,000) (1,000)Profitbeforetaxation 6,000 3,000Taxexpense (1,800) (900)Profitaftertaxation 4,200 2,100Retainedprofitsbroughtforward 10,800 8,900Retainedprofitscarriedforward 15,000 11,000

Statements of Financial PositionHBhd SBhd

RM’000 RM’000SharecapitalofRM1each 22,000 8,000Retainedprofits 15,000 11,000Totalliabilities 14,000 8,000

51,000 27,000Property,plantandequipment 21,000 17,000InvestmentinSBhd 12,000 –Current assets:

Inventories 10,000 6,000Othercurrentassets 8,000 4,000

51,000 27,000

Additionalinformation:(a) During the year ended 31December 20x7, SBhd sold goods toHBhd for

invoices totalling RM3,000,000. Of these sales, RM800,000 remained inthe closing inventories of B Bhd at 31 December 20x7.The correspondingintragroup sales and closing inventories for the 20x6 financial year wereRM2,000,000andRM500,000 respectively.Theprofitmargin toSBhdwas25%onsellingprices.

(b) Thegroupcarriesgoodwilloncombinationatcostlessaccumulatedimpairmentlosses.Incometaxrateis30%forbothfinancialyears.Non-controllinginterestismeasuredatacquisition-datefairvalue.



Required(i) Showtheconsolidationadjustmentsandeliminationsrequiredtopreparethe

consolidatedaccountsforthe20x7financialyear;and(ii) Using a consolidated worksheet, derived the group accounts for the 20x7

financialyear.

Solution 9(i) Consolidationadjustmentsandeliminations:

RM’000 RM’000(a) DrGoodwilloncombination(20,000–14,000) 6,000

CrRevaluationreserve 6,000 –torecognisegoodwilloncombination.(b) DrSharecapitalofSBhd 4,800 DrRevaluationreserve–goodwill 3,600 DrPre-acquisitionprofits 3,600

CrInvestmentinSBhd 12,000 –toeliminatecostofinvestment.(c) DrSharecapitalofSBhd 3,200 DrRevaluationreserve-goodwill 2,400 DrRetainedprofitsbroughtforward 3,560

CrNon-controllinginterestinfinancialposition 9,160 –toallocateopeningnetassetsandgoodwilltoNCI.(d) DrRetainedprofitsbroughtforward 52.5 DrNon-controllinginterestinfinancialposition 35.0 DrTaxexpense 37.5

CrOpeninginventoriesinprofitorloss 125 –torestateunrealisedprofitinopeninginventories.(e) DrSales 3,000

CrPurchases 3,000 –toeliminateintragroupsalesfortheyear.(f) DrClosinginventoriesinfinancialposition 200 DrDeferredtaxinfinancialposition 60

CrClosinginventoriesinprofitorloss 200CrTaxexpenseinprofitorloss 60

–toeliminateunrealisedprofitinclosinginventories.(g) DrNon-controllinginterestinprofitorloss 819

CrNon-controllinginterestinfinancialposition 819 –toallocateprofittoNCI(2,100+87.5–140)x40%.



(ii) Consolidationworksheet

Consol.AdjustmentsHBhd

RM’000SBhd

RM’000(Dr)

RM’000Cr

RM’000HGroupRM’000

Sales 24,000 12,000 (3,000)e 33,000Cost of sales

Openinginventories (8,000) (5,000) 125d (12,875)Purchases (18,000) (9,000) 3,000e (24,000)Closinginventories 10,000 6,000 (200)f 15,800

(16,000) (8,000) (21,705)Gross profit 8,000 4,000 11,925Expenses (2,000) (1,000) (3,000)Profitbeforetaxation 6,000 3,000 8,925Taxexpense (1,800) (900) (37.5)d 60f (2,677.5)Profitaftertaxation 4,200 2,100 6,247.5Non-controllinginterest (819)g (819)Profitattributableto

owners 4,200 2,100 5,428.5Retainedprofitsb/forward 10,800 8,900 (3,600)b

(3,560)c(52.5)d

12,487.5

Retainedprofitsc/forward 15,000 11,000 17,916Sharecapital 22,000 8,000 (4,800)b

(3,200)c22,000

Revaluationreserve – – (3,600)b(2,400)c

6,000a –

Non-controllinginterest – – (35)d 9,160c819g

9,944

Totalliabilities 14,000 8,000 (60)f 21,940TotalEquityand

Liabilities 51,000 27,000 71,800

Property,plantandequipment (21,000) (17,000) (38,000)

Goodwilloncombination – – (6,000)a (6,000)InvestmentinSBhd (12,000) – 12,000b –Inventories (10,000) (6,000) 200f (15,800)Othercurrentassets (8,000) (4,000) (12,000)TotalAssets (51,000) (27,000 (31,364) 31,364 (71,800)



Workings:

(i) Proofofnon-controllinginterest: RM’000 NetassetsofSBhd 19,000 Goodwilloncombination 6,000 Unrealisedprofitscarriedforward (140) 24,860 Non-controllinginterestat40% 9,944(ii) Proofofconsolidatedretainedprofits: RM’000 Parent’sretainedprofits 15,000 Shareofpost-acquisitionprofitsofSBhd60%x5,000 3,000 Shareofunrealisedprofitscarriedforward (84) 17,916

7.4.2.2 Intragroup Sale or Transfer of Property, Plant and Equipment

Theprincipleoffulleliminationofintragrouptransactionsandunrealisedprofitsorlossesisalsoapplicableinanintragroupsaleortransferofproperty,plantandequipment. In theyearof thesaleor transfer,anadjustment isrequired to eliminate the gain or loss on the transfer and to restate thecarryingamountoftheitemofproperty,plantandequipmenttocostorbookvalue.Forexample,ifthetransferofanitemofproperty,plantandequipmentresultsinaprofittothetransferor,theconsolidationadjustmentwouldbeasfollows:

DrGainonsaleofproperty,plantandequipmentCrProperty,plantandequipment,atcost

Afterthesale,thepurchasingcompanywillcalculatedepreciationonthebasis of its purchased price.The depreciation recorded by the purchasingcompanywillbeexcessivefromthegroup’sviewpointandaccordinglymustbecorrectedonconsolidation.

Fromthegroup’sviewpoint,theintragroupprofitorlossisconsideredtoberealisedasaconsequenceoftheuseoftheproperty,plantandequipmentinthegenerationofrevenue.Asusageofaproperty,plantandequipmentismeasuredbydepreciation,therecognitionoftherealisationoftheintragroupprofitorlossisaccomplishedthroughthedepreciationadjustmentsovertheremainingusefullifeoftheproperty,plantandequipmenttransferred.

As in the case of intragroup sale of inventories, the direction of thetransferofaproperty,plantandequipmentmattersonlyinthecalculationofthenon-controllinginterest’sshareofprofitandnetassets.Inthecaseofa



downstream transfer(i.e.saleortransferbytheparenttoitssubsidiary),nomodificationinthecalculationofnon-controllinginterests’shareofprofitsandnetassetsshallbemade.However,inthecaseofanupstream transfer (i.e.saleortransferbythesubsidiarytoitsparent)orahorizontal transfer (i.e.saleortransferbyonesubsidiarytoafellowsubsidiaryinthegroup),modificationsarerequiredinthecalculationofnon-controllinginterests.Thenon-controllinginterests’shareofprofitinthesellingsubsidiaryshallbeasfollows:• Intheyearofsaleortransfer:


sellingsubsidiaryX

Subsidiary’sprofitaftertax –Fullunrealisedprofit +Depreciationadjustment

• Inthesubsequentyearsandovertheremainingusefullife:


sellingsubsidiaryX Subsidiary’sprofitaftertax

+Depreciationadjustment

Example 10On1January20x1,AnakBhdtransferredmachinerywithanetbookvalueof

RM400,000to itsparentcompany,BapaBhd.ThetransferpricewasRM800,000andthemachinehadaremainingusefullifeof4yearsasatthedateofthetransfer.Depreciationiscalculatedonthestraightlinemethod.

BapaBhdholdsa75%equityinterestinAnakBhd.AssumethatAnakBhd’sprofitaftertaxforeachyearinthe20x1–20x4periodisRM1,000,000.Incometaxrateis 25%.

Required(a) Showtheconsolidationadjustmentsrequiredinrespectoftheaboveintragroup

transferofproperty,plantandequipment;and(b) Calculatethenon-controllinginterest’sshareofprofitineachyear.

Solution 10(a) Consolidationadjustments:

RM RMYear20x1: DrGainonsaleofproperty,

plantandequipment 400,000CrProperty,plantandequipment,atcost 400,000

–toeliminategainonsaleofproperty,plantandequipment andtorestatecarryingamountofproperty,plantandequipment.



DrDeferredtaxassetinthe financialposition 100,000CrDeferredtaxincomeinprofitorloss 100,000

–torecognisedeferredtaxassetofunrealisedprofit DrAccumulateddepreciationinthe

financialposition 100,000CrDepreciationexpenseinprofitorloss 100,000

–tocorrectforthedepreciationover-provided. DrDeferredtaxexpense 25,000

CrDeferredtaxassetinthefinancialposition 25,000 –toaccountforthereversalofdeferredtaxasset.Year20x2: DrOpeningretainedprofits 225,000 DrDeferredtaxassetinthe

financialposition 75,000 DrAccumulateddepreciationinthe

financialposition 100,000CrProperty,plantandequipment,atcost 400,000

–torestateopeningbalancesrelatingtotransferof property,plantandequipment.

DrAccumulateddepreciationinthe financialposition 100,000CrDepreciationexpenseintheincomestatement 100,000

–tocorrectfordepreciationover-provided. DrDeferredtaxexpense 25,000

CrDeferredtaxassetinthefinancialposition 25,000 –toaccountforthereversalofdeferredtaxasset.Year20x3: DrOpeningretainedprofits 150,000 DrDeferredtaxassetinthe





–tocorrectfordepreciationover-provided.



DrDeferredtaxexpense 25,000CrDeferredtaxassetinthefinancialposition 25,000

–toaccountforthereversalofdeferredtaxasset.Year20x4: DrOpeningretainedprofits 75,000 DrDeferredtaxassetinthe





–tocorrectfordepreciationover-provided. DrDeferredtaxexpense 25,000

CrDeferredtaxassetinthefinancialposition 25,000 –toaccountforthereversalofdeferredtaxasset.

Notethatbytheendof20x4,themachinewouldbefullydepreciatedandtheintragroupprofitwouldbefullyrealised.Inyear20x5andsubsequentyears,ifthemachinecontinuestobeinuse,thentheopeningadjustmentwouldbeas follows:DrAccumulateddepreciationinthe

financialposition RM400,000CrProperty,plantandequipment,atcost RM400,000

Summary of Adjustments

Year Unrealisedprofit

Taxeffect Depreciation Adjustment

Taxeffect Unrealisedprofitc/forward

RM RM RM RM RM

20x1 (400) 100 100 (25) (225)

20x2 100 (25) (150)

20x3 100 (25) (75)

20x4 100 (25) –(400) 100 400 (100)



(b) Non-controllinginterest’sshareofprofit:

20x1RM’000

20x2RM’000

20x3RM’000

20x4RM’000

Subsidiary’sprofitaftertax 1,000 1,000 1,000 1,000

Less:Unrealisedprofit (300) – – –

Add:Depreciationadjustment 75 75 75 75

Adjustedprofitaftertax 775 1,075 1,075 1,075

Non-controllinginterestat25% 193.75 268.76 268.75 268.75

7.4.2.3 Other Intragroup Transactions

Other intragroup transactions may include interest on loans andadvances, intragroup rental charges, and management and other feeschargedbytheparentcompany.Theseintragroupprofitandlossitemsmustalso be eliminated on consolidation by reversing the entriesmade by therespectivecompaniestothetransactions.Theconsolidationadjustmentscanbesummarisedasfollows:

DrInterestincomeofthelendingaffiliateCrInterestexpenseoftheborrowingaffiliate

–toeliminateintragroupinterestincomeandinterestexpense.DrRentalincomeoftheowner

CrRentalexpenseofthetenant–toeliminateintragrouprentalincomeandexpense.DrManagement(oranyother)feeincome

CrManagement(oranyother)feeexpense–toeliminateintragroupmanagement(oranyother)feeincomeandexpense.

Note that if these transactionsgive rise to receivablesandpayables inthe financial positions of the companies in the group, the receivables andpayables shall also be eliminated on consolidation as they are effectivelyintragroupbalances.

Also note that in the consolidation adjustments above, the issue ofunrealisedprofitdoesnotarise.Inotherwords,theyarerealisedtransactionsand thus the adjustments have no net effect on the group’s profit or loss(because elimination of an income item is matched by an elimination ofthecorrespondingexpenseitem).Thus,irrespectiveofthedirectionsofthetransactions,non-controllinginterestshallnotbeadjustedfortheeffectsofsucheliminations.



7.4.2.4 Intragroup Dividends

Dividendspaidorpayablebyasubsidiaryarereceivedorreceivablebyitsparent.Fromthegroup’sviewpoint,thereisnochangeintheamountofgroup’sprofit,becausesuchintragroupdividendsmerelyrepresentshiftingofprofitsfromonelocation(thepayingsubsidiary)toanotherlocation(thereceivingparent)butallwithintheboundaryofthesingleeconomicentity.Thus, on consolidation, dividend income received/receivable by the parentshall be eliminated against dividends paid/declared by the subsidiary intheconsolidatedretainedprofits.Similarly,anydividendreceivablebytheparentshallbecancelledagainstthedividendpayableofthesubsidiaryintheconsolidatedstatementoffinancialposition.

Notethatintheconsolidatedstatementoffinancialposition,thedividendpayablereflectedundercurrentliabilitiesshallstrictlybethedividendpayableoftheparentwhich,whenapprovedinashareholders’generalmeeting,arelegallypayabletotheshareholdersoftheparent.Thus,anydividendpayableof thesubsidiary that isattributable tonon-controlling interests,which isnoteliminated,isnormallyclassifiedunderotherpayables.Theconsolidationadjustmentsareasfollows:

DrDividendincomeoftheparentCrDividendpaid/payableofthesubsidiary

–toeliminateintragroupdividendinprofitorloss.DrNon-controllinginterestinthefinancialposition

CrDividendpaid/payableofthesubsidiary–tochargenon-controllinginterestsfortheirshareofthesubsidiary’s

dividends.DrDividendpayableinthesubsidiary’sfinancialposition

CrDividendsreceivableintheparent’sfinancialpositionCrOtherpayables–non-controllinginterests’shareofdividendpayable

–toeliminateintragroupdividendinthefinancialposition.

7.4.2.5 Dividend Income in the Separate Financial Statements of the Parent

When a parent receives dividends from its subsidiaries, the issue thatarises iswhether theentireamount receivedcanbe recognisedas incomeinprofitorloss(asareturnoninvestment),oraportionthereofshouldberegardedasreturnofinvestment(creditedtothecostofinvestment).

On a year to year basis, the identification of dividend as to income orreturnofinvestmenttotheparentshallnotnormallyposeaproblem.Mostdividendspaidordeclaredbysubsidiarieswouldberegardedasincomebytheparent,unlessintherarecircumstancewheretheamountofthedividend



paidordeclaredbyasubsidiaryissolargethatitutilisespart,orall,ofthepre-acquisitionprofits(inwhichcase,theportionwhichrelatestothepre-acquisitionprofitshallberegardedasareturnofinvestment).

The identification of dividend as to income or return of investmentcan be an accounting issue in the yearwhen the acquisition takes place.This issue canbecome complicatedwhen thereareboth interimandfinaldividendspaidanddeclaredrespectivelybythesubsidiary.Ifdividendsarepaid or declared by the subsidiary after the acquisition date, in principle,thedividendsreceivedbytheparentshouldbeanalysedandsplitintotheirrespective pre-acquisition and post-acquisition portions in the separatefinancialstatementsoftheparent,withthepre-acquisitionportiondeductedagainstthecostofinvestment,andthepost-acquisitionportionrecognisedinprofitorloss.However,inpractice,itisoftendifficultandarbitrarytosplitupthedividendsintoincomeandreturnofinvestment.Furthermore,itmaybearguedthattheentiredividendsreceivedhavebeendeclaredoutofpost-acquisitionprofitsofthesubsidiary,solongastheyaresufficienttocoverthedividendspaid.

InMay2008,theIASBissuedanamendmenttoIAS27toaddressthisissue.Theamendmentdeletedreferencetothecostmethodandtherequirementthatthedividendreceivedbytheparentbeanalysedintothepre-acquisitionandpost-acquisitionportions,hasbeenremoved.Itprescribesthatanentityshallrecogniseadividendfromasubsidiary,jointventureoranassociateinprofitorlossinitsseparatefinancialstatementswhenitsrighttoreceivethedividendisestablished[IAS27.12].

7.4.2.6 Dividend Received and Impairment Test

ConcernswereexpressedthatremovingthedefinitionofthecostmethodinMFRS 127 and treating all dividend received as income could lead tothe investment in a subsidiary being overstated in the separate financialstatementsoftheparent.Toovercomethispotentialconflict,aconsequentialamendmentwasmadetoMFRS136,Impairment of Assets,onthespecificindicatorsofimpairmentfortheinvestmentwhenadividendisrecognised.

Thus,impairmenttestinthisregardisonlyrequiredforaninvestmentinasubsidiary,jointventureoranassociate,whenaninvestorrecognisesadividendfromtheinvestmentandevidenceisavailablethat:(a) the carrying amount of the investment in the separate financial

statementsexceedsthecarryingamountsintheconsolidatedfinancialstatementsoftheinvestee’snetassets,includingassociatedgoodwill;or

(b) thedividendexceedsthetotalcomprehensiveincomeofthesubsidiary,jointventureorassociateintheperiodthedividendisdeclared[MFRS136.12(h)].



Example 11On1January20x1,HatiBhdacquireda100%interestintheequitycapitalof

SaguBhdpayingaconsiderationofRM400million.Ontheacquisitiondate,thenetassetsofSaguBhd,statedattheir fairvalue,wereRM300million(consistingofsharecapitalofRM100mandretainedprofitsofRM200million).

Forthecurrentyearended31December20x1,thetotalcomprehensiveincomeofSaguBhdwasRM100million(consistingofprofitofRM40millionandrevaluationsurplusofRM60million).SaguBhddeclaredandpaidadividendofRM200milliontoitsparent.

RequiredExplaintheaccountingrequirementsintheabovecase.

Solution 11IntheseparatefinancialstatementsofHatiBhd,thecostofinvestmentinSagu

Bhd is recordedatRM400million.A goodwill on combination ofRM100millionarisesonconsolidation.

HatiBhdshall recognise theRM200milliondividendas incomewhen ithasbeen appropriately authorised i.e. when its right to receive dividend has beenestablished,suchaswhenthedividendisapprovedinashareholders’meeting.

Thepaymentofdividendbythesubsidiarytriggersanindicationofimpairmentof the investment (either the carrying amount of investment being higher thanthecarryingamountsofthenetassetsandgoodwillintheconsolidatedfinancialstatements,orthetotaldividendbeinghigherthanthetotalcomprehensiveincomefortheyear).Thus,HatiBhdshallperformanimpairmenttestasfollows:

RM’m RM’m

Carryingamountofinvestmentinseparatefinancialstatements 400

Carryingamountsintheconsolidatedfinancialstatements:

Net assets:

Sharecapital 100

Pre-acquisitionprofits 200

Totalcomprehensiveincomefortheyear 100

Dividendspaid (200)

200

Goodwilloncombination(400–300) 100

300

Impairmentlossinprofitorloss 100



In itsseparatefinancialstatements,HatiBhdshallrecognisean impairmentlossofRM100millioninprofitorlossandreducethecostofinvestmentinSaguBhdbythesameamount.

In the consolidatedfinancial statements, thedividendpaid isRM100millionmore than the total comprehensive income for theyear.This shallbe treatedasbeing paid out of the pre-acquisition profit.Thus, on consolidation, the goodwillremainsthesameasshownbytheanalysisbelow:

RM’m

Originalcostofinvestment 400

Less:Impairmentloss (100)

Revisedcarryingamount 300

Dividendspaid (200)

Net assets:

Sharecapital 100

Balanceinpre-acquisitionprofits(200–100) 100

Adjustednetassets 200

Goodwilloncombination 100

Example 12 (A Comprehensive Case)On1January20x1,HartaBhdacquireda75%interestintheequitycapitalof

SetiaBhdforacashconsiderationofRM10million.Onthisdate,thenetassetsofSetiaBhdwerestatedintheaccountsatfairvalueofRM12millionandthebalanceintheretainedprofitswasRM2million.Onthisdate,thefairvalueofSetiaBhdasawholewasRM13million.

Thesummarisedaccountsofthetwocompaniesfortheyearended31December20x4wereasfollows:


HartaBhd SetiaBhdRM’000 RM’000

Revenue 25,000 18,000Cost of sales (15,000) (9,200)Gross profit 10,000 8,800Dividendincome 1,575 –Interestincome 160 –Rentalincome 120 –Managementfee 60 –Expenses (5,400) (4,200)



Profitbeforetaxation 6,515 4,600Taxation (1,482) (1,380)Profitaftertaxation 5,033 3,220Dividendpayable (2,500) (2,100)Retainedprofitfortheyear 2,533 1,120Retainedprofitsbroughtforward 6,227 5,360Retainedprofitscarriedforward 8,760 6,480


HartaBhd SetiaBhdRM’000 RM’000

SharecapitalofRM1each 20,000 10,000Retainedprofits 8,760 6,480LoanfromHartaBhd – 2,000Deferredtaxes 2,000 1,000Tradepayables (3,135) (2,420)Taxation (2,200) (1,600)Dividendpayable (2,500) (2,100)

38,595 25,600

Property,plantandequipment 18,580 17,970InvestmentinSetiaBhd,atcost 10,000 –LoantoSetiaBhd 2,000 –Inventories 4,300 3,500Tradereceivables 2,000 2,500Dividendreceivable 1,575 –Bankaccount 140 1,630

38,595 25,600

Additionalinformation:(a) Duringtheyearended31December20x4,HartaBhdsoldgoodstoSetiaBhd

forinvoicestotallingRM2,000,000.Ofthisamount,RM500,000remainedintheclosing inventoriesofSetiaBhdatyearend.ThecorrespondingclosingstockamountintheprioryearwasRM800,000.TheprofitmargintoHartaBhdwas20%onsellingprice.

(b) Intheprioryear20x3,SetiaBhdcompletedtheconstructionofawarehouseat a cost ofRM1,000,000 for theuse ofHartaBhd.The transferpricewasRM2,000,000andthisamountwasrecordedasaproperty,plantandequipmentbyHartaBhd.Thewarehousewasdepreciatedat10%perannumstraightlinebasisinaccordancewiththegroup’spolicy,chargingafullyear’sdepreciationintheyearofpurchase.



(c) HartaBhdprovidedaloanofRM2milliontoSetiaBhdataninterestrateof8%perannum.HartaBhdalsoletoutoneofitsbuildingstoSetiaBhdchargingamonthlyrentalofRM10,000.Also,HartaBhdprovidedmanagementservicestoSetiaBhdandtheagreedmanagementfeewasRM60,000perannum.

(d) Assumeanincometaxrateof25%.Non-controllinginterestismeasuredatacquisition-datefairvalue.

Required(i) Calculatethegoodwilloncombinationandshowtheallocationofgoodwillto

parentandnon-controllinginterest(ii) Showtheconsolidationadjustmentsrequiredtopreparethegroupaccountsof

HartaBhd.(iii) Usingaconsolidationworksheet,derivethegroupaccountsofHartaBhd.

Solution 12(i) Goodwillonconsolidation:

RM’000Aggregateof:Considerationtransferred 10,000Non-controllinginterestatfairvalue(25%x13,000) 3,250 13,250Fairvalueofidentifiablenetassets 12,000Goodwilloncombination 1,250Allocatedto:Parent(10,000–75%x12,000) 1,000Non-controllinginterest 250 1,250

(ii) Consolidationadjustments: RM’000 RM’000

Permanent adjustment(a) DrGoodwilloncombination 1,250

CrRevaluationreserve 1,250 –torecognisegoodwilloncombination.(b) DrSharecapitalofSetiaBhd 7,500 DrRevaluationreserve–goodwill 1,000 DrPre-acquisitionprofits 1,500

CrInvestmentinSetiaBhd 10,000 –toeliminatecostofinvestment.



Opening adjustments(c) DrSharecapitalofSetiaBhd 2,500 DrRevaluationreserve–goodwill 250 DrRetainedprofitsbroughtforward 1,340

CrNon-controllinginterestinfinancialposition 4,090 –torestateNCI’sshareofopeningnetassetsandgoodwill.(d) DrRetainedprofitsbroughtforward 120 DrDeferredtaxexpense 40

CrCostofsales 160 –torestateunrealisedprofitinopeninginventories.(e) DrRetainedprofitsbroughtforward 506 DrNon-controllinginterestinfinancialposition 169 DrDeferredtaxesinfinancialposition 225 DrAccumulateddepreciationofPPE 100

CrProperty,plantandequipment,atcost 1,000 –torestateopeningbalancesrelatingtotransferofwarehouse.

Current year adjustments(f) DrRevenueofHartaBhd 2,000

CrCostofsalesofSetiaBhd 2,000 –toeliminateintragroupsales.(g) DrCostofsalesofSetiaBhd 100

CrInventoriesinfinancialposition 100 DrDeferredtaxesinfinancialposition 25

CrDeferredtaxincomeinprofitorloss 25 –toeliminateunrealisedprofitinclosinginventories.(h) DrAccumulateddepreciationinfinancialposition 100

CrDepreciationexpense 100 DrDeferredtaxexpense 25

CrDeferredtaxesinfinancialposition 25 –tocorrectforthedepreciationover-provided.(i) DrNon-controllinginterestinprofitorloss 824

CrDividendpayableinequity 525CrNon-controllinginterestinfinancialposition 299

–toallocatecurrentyearprofittoNCI.(j) DrDividendincomeofparent 1,575

CrDividendpayableinequity 1,575 –toeliminateintragroupdividend.



(k) DrDividendpayableinfinancialposition 2,100CrDividendreceivableofparent 1,575CrOtherpayables 525

–toeliminateintragroupbalances.(l) DrInterestincome 160 DrRentalincome 120 DrManagementfee 60

CrExpensesofsubsidiary 340 –toeliminateintragroupincomeandexpenses.(m)DrLoanfromHarta 2,000

CrLoantoSetia 2,000 –toeliminateintragrouploan.

(iii) ConsolidationWorksheet:

HartaBhdRM’000

SetiaBhdRM’000

(Dr)RM’000

CrRM’000

GroupRM’000

Revenue 25,000 18,000 (2,000)f 41,000Cost of sales (15,000) (9,200) (100)g 160d

2,000f(22,140)

Gross profit 10,000 8,800 18,860Dividendincome 1,575 (1,575)j –Interestincome 160 (160)l –Rentalincome 120 (120)l –Managementfee 60 (60)l –Expenses (5,400) (4,200) 100h

340l(9,160)

Profitbeforetax 6,515 4,600 9,700Taxexpense (1,482) (1,380) (40)d

(25)h25g (2,902)

Profitaftertax 5,033 3,220 6,798Non-controlling

interest – – (824)i (824)Attributabletoowners 5,974Retainedprofitsb/

forward6,227 5,360 (1,500)b

(1,340)c(120)d(506)e

8,121

Dividendpayable (2,500) (2,100) 525i1,575j

(2,500)



Retainedprofitsc/forward 8,760 6,480 11,595

Sharecapital 20,000 10,000 (7,500)b(2,500)c

20,000

Revaluation – – (1,000)b(250)c

1,250a –

Non-controllinginterest

– – (169)e 4,090c299i

4,220

LoanfromHarta – 2,000 (2,000)m –Deferredtaxes 2,000 1,000 (225)e

(25)g25h 2,775

Tradepayables 3,135 2,420 5,555Otherpayables – 525k 525Taxation 2,200 1,600 3,800Dividendpayable 2,500 2,100 (2,100)k 2,500TotalEquityand

Liabilities 38,595 25,600 50,970

Property,plantandequipment

(18,580) (17,970) (100)e(100)h

1,000e (35,750)

Goodwilloncombination

– – (1,250)a (1,250)

InvestmentinSetia (10,000) – 10,000b –LoantoSetia (2,000) – 2,000m –Inventories (4,300) (3,500) 100g (7,700)Tradereceivables (2,000) (2,500) (4,500)Dividendreceivable (1,575) – 1,575k –Bank (140) (1,630) (1,770)TotalAssets (38,595) (25,600) (25,589) 25,589 (50,970)

ProofofNon-controllingInterest: RM’000Sundrynetassets 16,480Less:Unrealisedprofitonupstreamtransfer(1,000–200)x.75 (600)Adjustednetassets 15,880Non-controllinginterest’sshareofnetassets25% 3,970Goodwillallocatedtonon-controllinginterest 250Closingnon-controllinginterestinfinancialposition 4,220



7.4.3 Subsidiary that has a Different Reporting Date MFRS10generallyrequiresthatthefinancialstatementsoftheparent

and its subsidiaries used in the preparation of the consolidated financialstatementsshallhavethesamereportingdate.Whentheendofthereportingperiod of a parent is different from that of a subsidiary, the subsidiaryprepares,forconsolidationpurposes,additionalfinancialstatementsasofthesamedateasthefinancialstatementsoftheparentunlessitisimpracticabletodoso[MFRS10.B92].

Ifimpracticabletodoso,theMFRSpermitsconsolidationofasubsidiary’sfinancial statements with a different reporting date, provided that thedifferencebetweenreportingdatesoftheparentandanyofitssubsidiariesshall be no more than 3 months.Forexample,ifthefinancialyearendedofaparentis31December20x6,itmayconsolidatetheaccountsofasubsidiarywith a financial year ended 30 September 20x6 orwith a financial yearended31March20x7oranyfinancialyearendedinbetweenthosedates.However, the Standard requires that appropriate adjustments shall bemadefortheeffectsofsignificanttransactionsoreventsthatoccurbetweenthosedates,andthedateof theparent’sfinancialstatements [seeMFRS10.B93].

In practice, one way of consolidating the financial statements of asubsidiary with a different reporting date is to adjust the subsidiary’sfinancial statements (for purpose of the consolidation only) so that itsrevisedfinancial statementshave afinancial year that coincideswith theyearendoftheparent.Forthispurpose,managementaccountsfortheperiodofthedifferenceindatesmayberequiredtomakethoseadjustments.Thealternativewayistoconsolidatethesubsidiary’saccountsastheystand,andadjustonlyfortheeffectsofsignificanteventsortransactionsthatoccurredintheperiodofthedifferenceindates.Irrespectiveofwhichwaythefinancialstatementsofthesubsidiaryaretobeconsolidated,itisimportantthatthelengthofthereportingperiodandanydifferenceinreportingdatesshallbethesamefromperiodtoperiod.

Example 13AjexBhdpreparesitsfinancialstatementsto31Decembereachyear.BajaBhd

preparesitsfinancialstatementsto30Septembereachyear.On1January20x7,AjexBhdacquireda100% interest in theequity capital

of Baja Bhd. Ajex Bhd is in the process of preparing its consolidated financialstatementsfortheyearended31December20x7andthesummarisedindividualfinancialstatementsareasfollows:



Statement of Comprehensive Income and Retained Profits

AjexBhd BajaBhdYearended31/12/20x7 Yearended30/09/20x7

RM’000 RM’000

Profitbeforetaxation 20,000 12,000

Taxation (6,000) (3,600)

Profitaftertaxation 14,000 8,400

Retainedprofitsbroughtforward 26,000 12,600Retainedprofitscarriedforward 40,000 21,000


AjexBhd BajaBhdAsat31/12/20x7 Asat30/09/20x7

RM’000 RM’000

SharecapitalofRM1.00each 100,000 40,000

Retainedprofits 40,000 21,000

140,000 61,000

InvestmentinBajaBhd 60,000 –

Sundrynetassets 80,000 61,000140,000 61,000

TheprofitsofBajaBhdaccruedevenlyinthefinancialyearended30September20x7. The management accounts of Baja Bhd showed a profit before tax ofRM4,500,000forthefirstquarterofits20x8financialyear.

Required(a) ExplainhowthefinancialstatementsofBajaBhdmaybeconsolidatedforthe

financialyearended31December20x7andpreparetheconsolidatedfinancialstatementsforthe20x7financialyear;and

(b) SupposetheprofitforthefirstquarterofBaja’s20x8financialyearincludedan exceptional gain of RM2,000,000 on sale of a property, prepare theconsolidatedfinancialstatementsofAjexBhdfortheyearended31December20x7,byadjustingfortheeffectsofsignificantitems.



Solution 13(a) ThefirstwaytoconsolidatethefinancialstatementsofBajaBhdistoadjust

itsfinancialstatements(forconsolidationonly)sothatitsyearendcoincideswiththeyearendofAjexBhd.Inthiscase,theprofitforthefirstquarterofits20x7financialyear (i.e. the1October20x6 -31December20x6period)shallbedeductedwhiletheprofitofthefirstquarterofits20x8financialyear(i.e.the1October20x7-31December20x7period)shallbeadded.Forthefinancialposition,however, theassetsand liabilitiesat30September20x7shallbeadjusted individually fortheirmovementsto31December20x7sothattheirnetincreaseisequaltothenetprofitofthefirstquarterofthe20x8financialyear.Inpractice,thefinancialpositionasat31December20x7basedonmanagementaccountsmayalsobeusedforthispurpose.

Consolidated Statement of Comprehensive Income & Retained Profits


RM’000 RM’000Profitbeforetaxation

–AjexBhd 20,000 –BajaBhd[12,000–3,000+4,500] 13,500

33,500Less:Taxation

–AjexBhd 6,000 –BajaBhd[3,600–900+1,350] 4,050 10,050Profitaftertaxation 23,450Retainedprofitsbroughtforward 26,000Retainedprofitscarriedforward 49,450



RM’000 RM’000SharecapitalofRM1.00each 100,000Retainedprofits 49,450 149,450Goodwillarisingonconsolidation(W.1) 5,300Sundrynetassets(80,000+61,000) 141,000IncreaseinnetassetofBajato31.12.20x7 3,150 144,150 149,450



W.1. Goodwilloncombination RM’000 RM’000 InvestmentinBaja 60,000 Netassetsacquired: Sharecapital 40,000 Retainedprofitsbroughtforward 12,600 Pre-acquisitionprofit(8,400/4) 2,100 54,700 Goodwilloncombination 5,300

TheotherwayistoconsolidatethefinancialstatementsofBajaBhdastheystand.TheresultsofBajaBhdwouldbeincludedintheconsolidatedstatementof comprehensive incomewitheffect from1January20x7 to30September20x7.Theeffectswouldbeasfollows:

Consolidated Statement of Comprehensive Income & Retained ProfitsFor the year ended 31 December 20x7

RM’000Profitbeforetaxation[20,000+12,000–3,000] 29,000Less:Taxation [6,000+3,600–900] 8,700Profitaftertaxation 20,300Retainedprofitsbroughtforward 26,000Retainedprofitscarriedforward 46,300

Consolidated Statement of Financial PositionAs at 31 December 20x7

RM’000SharecapitalofRM1.00each 100,000Retainedprofits 46,300 146,300Goodwilloncombination 5,300Sundrynetassets[80,000+61,000] 141,000 146,300

(b) Usingthefirstway,theeffectofanysignificantitemwouldhavebeenincludedintheadjustmentandthereforeconsolidatedinthegroupaccounts.Underthesecondway,theaccountsshallbeadjustedfortheexceptionalgainarisingonthe sale of the property as follows:



Consolidated Statement of Comprehensive Income and Retained ProfitsFor the year ended 31 December 20x7

RM’000Profitbeforetaxation[20,000+12,000–3,000] 28,000Gainonsaleofproperty 2,000Profitbeforetaxation 30,000Less:Taxation[6,000+3,600–900] 8,700Profitaftertaxation 22,300Retainedprofitsbroughtforward 26,000Retainedprofitscarriedforward 48,300


RM’000 RM’000SharecapitalofRM1.00each 100,000Retainedprofits 48,300 148,300Goodwillarisingonconsolidation 5,300Sundrynetassets[80,000+41,000] 141,000Increaseinnetassetofexceptionalgain 2,000 143,000 148,300

7.4.4 Uniform Accounting PoliciesIngeneral,Standardrequiresthatconsolidatedfinancialstatementsshall

bepreparedusinguniformaccountingpoliciesforliketransactionsandothereventsinsimilarcircumstances[MFRS10.19].Thus,allentitiesinthegroupshallideallyusethesameaccountingpoliciesforliketransactionsandotherevents.Forexample,onthemeasurementofproperty,plantandequipment,ifthegroupusestherevaluationmodel,thenallentitiesinthegroupshallusethesamerevaluationmodeltomeasuretheirproperty,plantandequipment.

Sometimesduetostatutoryorotherregulatoryrequirements,asubsidiarymayhave toadoptanaccountingpolicy (orpolicies) that is (are)differentfrom those used by other entities in the group. In such cases and for thepurpose of consolidation, appropriate adjustments shall be made to thefinancialstatementsofthesubsidiarytoalignitspoliciestothoseusedintheconsolidatedfinancialstatements[seeMFRS10.B87].Forexample,aforeignsubsidiarymay have used the costmodel tomeasure its biological assetsbecause the jurisdiction inwhich it operates has not adoptedMFRS 141,



Agriculture. If the parent and its other subsidiaries all use the fair valuemodel for biological assets in accordance with MFRS 141, the biologicalassetsofthatforeignsubsidiaryshallbeadjustedfromthecostmodeltothefair valuemodel before they canbe included in the consolidatedfinancialstatementsoftheparent.

7.5 Allocating Losses to Non-controlling Interest

Unlike the previous FRS 127(2005) which did not allow a debit non-controllinginterest,MFRS10requiresthatprofitorlossandeachcomponentofothercomprehensiveincomeareattributedtotheownersoftheparentandtothenon-controllinginterests.Iftheparentandthenon-controllinginteresthaveenteredintoanarrangementthatdeterminestheattributionofprofitor lossandothercomprehensive income, theattributionshallbebasedonthetermsofthearrangement.Theeffectofthisrequirementisthatthetotalcomprehensiveincomeisattributedtotheownersoftheparentandtothenon-controllinginterestsevenifthisresultsinthenon-controllinginteresthavingadeficitbalance.

Note that as long as the parent still controls the subsidiary, it mustcontinuetoconsolidatethelossesofthesubsidiary,evenifthelossesexceedthe capital, or the subsidiaryhasnegativenet assets. In the casewhenaloss-makingsubsidiaryistechnicallyinsolvent,thelossesapplicabletonon-controllinginterestinthesubsidiarywouldexceedthenon-controllinginterestin theequityof thesubsidiary.ThepreviousFRS127(2005) required that insuchcases,“the excess, and any further losses applicable to the minority, are allocated against the majority interest except to the extent that the minority has a binding obligation and is able to make an additional investment to cover the losses”.ThepreviousFRS127generallydidnotpermitadebitnon-controllinginterestinthestatementoffinancialposition.However,MFRS10requiresthatthefulllossshallbeallocatedtonon-controllinginterestevenifitresultsinadeficittonon-controllinginterest.TherevisedStandardclarifiesthatallocationoflossestoboththecontrollingandnon-controllinginterestsis to reflect their participation proportionally in the risks and rewards oftheirrespectiveinvestmentsinthesubsidiary.

Note that this change in treatment is a consequence of treating non-controllinginterestsasacomponentofequityofthegroup.Carryingadebitnon-controlling interestsdoesnot implythat there isa legalobligationonthepartofthenon-controllingintereststomakegoodtheirshareoflosses.Ifthereareguaranteesorothersupportarrangementsfromthecontrollingandnon-controllinginterests,theyshallbeaccountedforseparately.



Example 14AbuBhdacquiredan80%equityinterestinBakarBhdanda75%equityinterest

inCumiBhdwhentheaccumulatedlossesofBakarBhdwereRM2,000,000andtheretainedprofitsofCumiBhdwereRM1,000,000.Ontheacquisitiondate,thenetassetsofBakarBhdandCumiBhdwerevaluedatRM8,000,000andRM11,000,000respectively.However,basedonanincomeapproach,thefairvaluesofBakarBhdandCumiBhdweremeasuredindependentlyatRM10,000,000andRM15,000,000respectively.

The summarised accounts for the three companies for the year ended 31December20x8areasfollows:

StatementsofFinancialPositionasat31December20x8

AbuBhd BakarBhd CumiBhdRM’000 RM’000 RM’000

Sundrynetassets/(liabilities) 20,100 14,000 (5,000)Investments,atcosts

8,000,000sharesinBakar 8,000 – –7,500,000sharesinCumi 11,250 – –

39,350 14,000 (5,000)SharecapitalofRM1each 20,000 10,000 10,000Retainedprofits/(losses) 19,350 4,000 (15,000)

39,350 14,000 (5,000)

StatementsofComprehensiveIncome&RetainedProfitsfortheyearended31December20x8

AbuBhd BakarBhd CumiBhdRM’000 RM’000 RM’000

Operatingprofit/(loss) 8,000 2,000 (12,000)Taxation (2,000) (800) –Profit/(loss)aftertax 6,000 1,200 (12,000)Dividends (1,000) – –Retainedprofit/(loss)fortheyear 5,000 1,200 (12,000)Retainedprofits/(losses)broughtforward 14,350 2,800 (3,000)Retainedprofits/(losses)carriedforward 19,350 4,000 (15,000)

AbuBhdcarriesgoodwillonacquisitionatcost lessaccumulatedimpairmentlosses. Each of the subsidiary forms a gash-generating unit for the purpose ofimpairment testing. Goodwill on acquisition has been allocated to each cash-generating unit at the acquisition date. In the prior years, no impairment losswasrecognisedastherecoverableamountsofthesubsidiariesthenexceededtheirrespectivelycarryingamounts.



Inthecurrentyear,itconsidersthelossesinCumiBhdtobepermanentandperformsanimpairmenttest.AnexternalpartyhadmadeanofferandiswillingtopayRM1toacquiretheentiresharecapitalofCumiBhd.Basedonmanagement’sbudgetedcashflows,thevalueinuseisdeterminedatnilamount.

Non-controllinginterestismeasuredatacquisition-datefairvalue.

Required(a) Determinethegoodwilloncombinationandallocatethegoodwilltothenon-

controllinginterestandtheparent;(b) Calculate the impairment loss required in the separate and consolidated

financialstatements;and(c) Usingaconsolidationworksheet,derivethegroupaccountsofAbuBhdandits

subsidiariesfortheyearended31December20x8.

Solution 14(a) Goodwilloncombination

Bakar Cumi RM’000 RM’000Aggregateof: Considerationtransferred 8,000 11,250 Non-controllinginterestatfairvalue 2,000 3,750 Fairvalueasawhole 10,000 15,000Fairvalueofidentifiablenetassets 8,000 11,000Goodwilloncombination 2,000 4,000Allocatedto: Parent 1,600 3,000 Non-controllinginterest 400 1,000 2,000 4,000

(b) Impairmentloss Company Group RM’000 RM’000Carryingamountofinvestment/goodwill 11,250 4,000Recoverableamount – –Impairmentlossrequired 11,250 4,000

In the separate financial statements of the Parent, the impairment lossrelatestothewrite-offoftheinvestmentwhilstintheconsolidatedfinancialstatements, the impairment loss relates to thewrite-off of the goodwill oncombination.



(c) ConsolidationWorksheet:

Consol.adjustments

AbuRM’000

BakarRM’000

CumiRM’000

(Dr)RM’000

(Cr)RM’000

GroupRM’000

Profit/(loss)beforetax 8,000 2,000 (12,000) (2,000)Impairmentloss (11,250) (4,000)j 11,250i (4,000)Profit/(loss)beforetax (3,250) 2,000 (12,000) (6,000)Taxation (2,000) (800) (2,800)Profit/(loss)aftertax (5,250) 1,200 (12,000) (8,800)Non-controllinginterests – – – (240)d 3,000h

1,000k3,760

Profittoownersofparent (5,250) 1,200 (12,000) (5,040)Retainedprofitsb/f 14,350 2,800 (3,000) (560)c

(750)f1,600b750g

15,190

Dividendspaid (1,000) (1,000)Retainedprofitsc/f 8,100 4,000 (15,000) 9,150Sharecapital 20,000 10,000 10,000 (8,000)b

(2,000)c(7,500)f(2,500)g

20,000

Revaluation (1,600)b(400)c

(3,000)f(1,000)g

2,000a

4,000e

–

Non-controllinginterests – – –

(3,000)h(1,000)k

2,960c240d

2,750g3,200

(1,250)Totalequity 28,100 14,000 (5,000) 31,100

Sundrynetassets (20,100) (14,000) 5,000 (29,100)Goodwilloncombination (2,000)a

(4,000)e 4,000j(2,000)

InvestmentinBakar (8,000) – – 8,000b –InvestmentinCumi – – – (11,250)f 11,250f –Total net assets (28,100) (14,000) 5,000 (52,800) 52,800 (31.100)



The consolidation adjustments are as follows:

RM’000 RM’000For Bakar Bhd:

(a)DrGoodwilloncombination 2,000CrRevaluationreserve 2,000

–torecognisegoodwilloncombination..(b)DrSharecapitalofBakar 8,000 DrRevaluationreserve–goodwill 1,600

CrPre-acquisitionloss 1,600CrInvestmentinBakar 8,000

–toeliminatecostofinvestment.(c) DrSharecapitalofBakar 2,000 DrRevaluationreserve–goodwill 400 DrRetainedprofitsbroughtforward 560

CrNon-controllinginterest 2,960 –toopeningnetassetsandgoodwilltoNCI.(d) DrNon-controllinginterestinprofitorloss 240

CrNon-controllinginterestinfinancialposition 240 –toallocateprofittoNCI.

For Cumi Bhd

(e) DrGoodwilloncombination 4,000CrRevaluationreserve 4,000

–torecognisegoodwilloncombination.(f) DrSharecapitalofCumi 7,500 DrRevaluationreserve–goodwill 3,000 DrPre-acquisitionprofitsofCumi 750CrInvestmentinCumi 11,250 –toeliminatecostofinvestment.(g)DrSharecapitalofCumi 2,500 DrRevaluationreserve–goodwill 1,000

CrRetainedlossesbroughtforward 750CrNon-controllinginterestinfinancialposition 2,750

–torestateopeningNCI’sshareofnetassetsandgoodwill.(h) DrNon-controllinginterestinfinancialposition 3,000

CrNon-controllinginterestinprofitorloss 3,000 –toallocatecurrentyearlosstoNCI.



(i) DrInvestmentinCumiBhd 11,250CrImpairmentlossofParent 11,250

–torestateinvestmentandreverse parent’simpairmentloss.

(j) DrGoodwillimpairmentlossinprofitorloss 4,000CrGoodwilloncombination 4,000

–torecognisegoodwillimpairmentloss.(k) DrNon-controllinginterestinfinancialposition 1,000

CrNon-controllinginterestinprofitorloss 1,000 –toallocategoodwillwrite-offtoNCI.

Theconsolidatedfinancialstatementsare presentedasfollows:Statement of Comprehensive Income


RM’000Operatinglossbeforeimpairmentofgoodwill (2,000)Goodwillimpairmentloss (4,000)Lossbeforetaxation (6,000)Less:Taxexpense (2,800)Lossfortheyear (8,800)Attributableto:Ownersoftheparent (5,040)Non-controllinginterests (3,760) (8,800)

Movements in Retained Profits and Non-controlling Interests:

RetainedProfits

Non-controllingInterests

RM’000 RM’000

Balanceat1January20x8 15,190 5,710

Lossfortheyear (5,040) (3,760)

Dividendspaid (1,000) –Balanceat31December20x8 9,150 1,950





RM’000Goodwilloncombination 2,000Sundrynetassets 29,100 31,100SharecapitalofRM1each 20,000Retainedprofits 9,150Equityattributabletoownersoftheparent 29,150Non-controllinginterests 1,950 31,100

Workings

1.ProofofNon-ControllingInterest: Bakar Cumi RM’000 RM’000 Sundrynetassets/(liabilities) 14,000 (5,000) Goodwilloncombination 2,000 – Totalnetassets&goodwill 16,000 (5,000) Non-controllinginterest 20% 25% NCI’sshareornetassets/(liabilities) 3,200 (1,250)2.ProofofConsolidatedRetainedProfits Group RM’000 Parent’sseparateprofit 8,100 Shareofpost-acquisitionprofitsinBakar80%x6,000 4,800 Shareofpost-acquisitionlossesinCumi75%x(16,000) (12,000) Add:Impairmentlossinseparatefinancialstatementsofparent 11,250 Less:Shareofgoodwillwrittenoff (3,000) Consolidatedretainedprofits 9,150

When losses of an insolvent subsidiary are consolidated in full, anysubsequent disposal of that subsidiary would result in a reversal ordeconsolidationofthoselosses.Therefore,againwouldariseondisposalevenifthesubsidiaryweresoldforanilconsideration.



Example 15On1January20x6,ABhdandBBhdestablishCBhd.ABhd’sstakeinCBhd

is60%andhascontrolofthelatter.CBhd reports losses since its incorporation. In order for CBhd to continue

itsoperations,ABhdandBBhdhaveenteredintoanagreementwithbankerstoguaranteealllossesofCBhd,whereBBhdwouldinjectfurthercashintoCBhdforupto20%ofanynetdeficitintheshareholders’equityandthebalancemadegoodbyABhd.

ThedraftsummarisedfinancialstatementsofABhdandCBhdforthecurrentfinancialyearended31December20x9areasfollows:

Statements of Comprehensive Income and Retained Profits

ABhd CBhdRM’m RM’m

Profit/(loss)beforetax 200 (100)Taxation (52) –Profit/(loss)aftertax 148 (100)Retainedprofits/(losses)broughtforward 152 (150)Recoverablefromshareholders – 150Retainedprofits/(losses)carriedforward 300 (100)

Statements of Financial PositionABhd CBhdRM’m RM’m

SharecapitalofRM1each 500 100Retainedprofit/(losses) 300 (100)PayabletoCumiBhd 120 –

920 –InvestmentinCumiBhd,atcost 60 –Recoverablefromshareholders – 150Sundrynetassets/(liabilities) 860 (150)

920 –

Additionalinformation:(a) The accounts of A Bhd have not recognised any impairment loss on the

investmentinCBhd.(b) ThebankershavedemandedthatABhdandBBhdshouldimmediatelyinject

cashintoCBhdtoclearthedeficitinshareholders’equity.

Required(a) PreparetheconsolidatedfinancialstatementsofABhdforthefinancialyear

ended31December20x9;



(b) Supposeon31December20x9,ABhdandBBhdselltheirstakesinCBhdforRM1eachtoa thirdparty (theRM1consideration is for thepurposeoflegalising theagreementof sale).Theagreementprovides thatbothABhdandBBhdwouldnothavetomakegoodtheirshareof thenetdeficit inCBhd.CalculatethegainorlossondisposalandpreparetheprimaryfinancialstatementsofABhd.

Solution 15(a)

Consolidated Statement of Comprehensive IncomeFor the year ended 31 December 20x9

RM’mProfitbeforetax(200–100) 100Taxation (52)Profitaftertax 48Attributableto:Non-controllinginterest40%x(100) (40)Shareholdersoftheparentcompany 88 48

Movements in Retained Profits and Non-controlling Interest

Retainedprofits


RM’m RM’mBalancebroughtforward[152–60%(150)] 62 (20)Profit/(loss)fortheyear 88 (40)Balancebeforecontribution 150 (60)Contributionbyshareholders(ratioof8:2) 120 30Dilutiononcontribution (30) 30Balancecarriedforward 240 –


RM’mSharecapitalofRM1each 500Retainedprofits(300–60%x100) 240 740Non-controllinginterests40%xnil –Totalequity 740Amountrecoverablefromnon-controllinginterest 30Sundrynetassets(860–150) 710 740



(c) Gainorlossondisposal RM’mConsiderationreceivable –Shareofsundrynetliabilities90%x150m (90)Gainondisposal 90Alternativecalculation: RM’mConsiderationreceivable –Carryingvalueofinvestment (60)Impairmentlossinseparatefinancialstatements (60)Post-acquisitionlossesdeconsolidated:(60%x250) 150Gainondisposalinprimaryfinancialstatements 90

Primary Statement of Comprehensive Income

RM’mProfitbeforetax(200–100) 100Gainondeconsolidationofsubsidiarydisposed 90 190Taxation (52)Profitaftertax 138Attributableto:Non-controllinginterests (40)Shareholdersoftheparentcompany 178 138

Movements in Retained Profits and Non-controlling Interest

Retainedprofits


RM’m RM’mBalancebroughtforward 62 (20)Profit/(loss)fortheyear 178 (40)

240 (60)Deconsolidationofsubsidiarydisposed 120 60Balancecarriedforward 360 –

Primary Statement of Financial Position

RM’mSharecapitalofRM1each 500Retainedprofits(300+120–60) 360 860Sundrynetassets 860



7.6 The Separate Financial Statements of a Parent

TherevisedMFRS127,Separate Financial Statements,dealsonlywiththeaccountingrequirementsintheseparatefinancialstatementsofaparentoraninvestorforitsinvestmentsinsubsidiaries,jointventuresandassociates.

Separate financial statements are those presented by a parent (i.e. aninvestorwith control of a subsidiary), or investorwith joint control of, orsignificantinfluenceover,aninvestee,inwhichtheinvestmentisaccountedfor at cost or in accordancewithMFRS 9,Financial Instruments (i.e. theinvestmentsareaccountedforonthebasisofthedirectequityinterestratherthanonthebasisofthereportedresultsandnetassetsoftheinvestees).TheStandard does notmandatewhich entity shall produce separate financialstatements.Thus,thepresentationofseparatefinancialstatementsiseitherrequiredbylaworregulation(mandatory),orbyelection(voluntary).Inmanyjurisdictions,aparent company is requiredby lawtoproduce its separatefinancial statements (company accounts) in addition to its consolidatedfinancialstatements(groupaccounts)

Whenanentitypreparesseparatefinancialstatementsitshallaccountforinvestmentsinsubsidiaries,jointventuresandassociateseither:(a) atcost,or(b) inaccordancewithMFRS9[MFRS127.10].

Thesameaccountingshallbeappliedforeachcategoryofinvestment.Forexample,ifthecostbasisisappliedtoasubsidiary,thenallinvestmentsinsubsidiariesshallbemeasuredonthesamecostbasis.Investmentsaccountedforat cost shallbeaccounted for inaccordancewithMFRS5Non-current Assets Held for Sale and Discontinued Operations,whentheyareclassifiedasheldforsale(orincludedinadisposalgroupthatisclassifiedasheldforsale).ThemeasurementofinvestmentsaccountedforinaccordancewithMFRS9isnotchangedinsuchcircumstances[MFRS127.10].Theimplicationofthisrequirementisthatifasubsidiary,measuredatcost,isclassifiedasheldforsale, itmustbetestedfor impairmentlossunderMFRS5.Forexample, ifthecostcarryingamountoftheinvestmentisRM10millionandtheparentexpectstoselltheinvestmentforRM8million(itsfairvaluelesscoststosell),animpairmentlossofRM2millionisrecognisedinprofitorlosswhentheinvestmentisclassifiedasheldforsale(eventhoughthedisposalisnotyetcomplete).Hadtheinvestmentbeenmeasuredatfairvalue,theimpairmentlossofRM2millionwouldhavebeenrecognisedinprofitorlossbythechangesinthefairvaluemeasurement.

If an entity elects to account for those investments in accordancewithMFRS 9, Financial Instruments, the investments shall be measured atfair value through profit or loss (the option of fair value through other



comprehensiveincomeisnolongerrelevantasthecategoryof“available-for-sale”financialassetshasbeenremovedinMFRS9).

TherevisedMFRS128permitscertaintypesofentities,suchasmutualfundsandventurecapitalentities,toaccountfortheirinvestmentsinjointventuresandassociatesatfairvalueratherthanbasedonshareofprofits.If any such entities elect this fair value option, the “investments in jointventuresandassociatesthatareaccountedforinaccordancewithMFRS9intheconsolidatedfinancialstatementsshallbeaccountedforinthesamewayintheinvestor’sseparatefinancialstatements”[MFRS127.11].

7.6.1 Valuation of Subsidiaries in the Separate Financial Statements of the Parent

IfinvestmentsinsubsidiariesareaccountedforinaccordancewithMFRS9,theyshallbemeasuredatfairvaluewithchangesinfairvaluerecognisedinprofitorloss.UnderMFRS13,Fair Value Measurement,thefairvalueofinvestmentsshallbebasedonthemarketpricesoftheinvestmentsiftheyareavailable.Otherwise,thefairvaluemaybedeterminedusingavaluationtechnique, suchas theP/E ratio valuationmethod or thediscounted cashflow (DCF)method. If the fair valuemeasurement principle is applied toinvestmentsinsubsidiaries, itcouldpotentiallyleadtothereservesintheseparate financial statements of the parent being larger than the groupreserves.Forexample,whenthemarketpriceofaninvestmentinasubsidiaryisgreater thanthecarryingvalueperordinaryshare, theretainedprofitsin the separatefinancial statementswouldbemore than the consolidatedretainedprofitsatthegrouplevel.

Example 16P Bhd paid RM1,000,000 to acquire a wholly owned subsidiary, S Bhd on

1January20x1.Thenet assets ofSBhdonacquisitiondatewereRM1,000,000(consistingofsharecapitalofRM500,000andretainedprofitsofRM500,000).

Asat31December20x5,theretainedprofitsofSBhdwereRM1,500,000.PBhdaccountsfortheinvestmentinSBhdatfairvaluethroughprofitorloss.Asat31December20x5,thefairvalueofitsinvestmentinthesubsidiarywasdeterminedusingtheP/EratiovaluationmethodatRM3,000,000.

On1January20x6,SBhdpaidadividendofRM1,000,000totheparentcompany.

Required(a) Explain how the fair value shall be incorporated in the separate financial

statementsofPBhdandshowthejournalentryrequired;and(b) ShowthejournalentryrequiredinthefinancialstatementsofPBhdinrespect

ofthedividendpaidbySBhd.



Solution 16(a) ThefairvalueofSBhdatthevaluationdatewasRM3,000,000.Uponvaluing

theinvestment,againofRM2,000,000arose.Thus,PBhdshallaccountforthefairvaluegainasfollows:DrInvestmentinsubsidiary RM2,000,000

CrFairvaluegaininprofitorloss RM2,000,000–toincorporatefairvaluegainofinvestmentinasubsidiary.

ThecarryingamountoftheinvestmentafterincorporatingthefairvaluegainwouldbeRM3,000,000,which isRM1,000,000higherthanthenet tangibleassetsofthesubsidiary.Notethatthecorrespondingpost-acquisitionprofitsconsolidatedinthegroupaccountsareRM1,000,000,whichislowerthanthegainrecognisedintheseparatefinancialstatementsoftheparent.

(b) On receipt of the dividend from the subsidiary, the following journal entryshallbemade:DrCashaccount RM1,000,000

CrDividendincomeinprofitorloss RM1,000,000–torecorddividendreceivedasincome.

Whentheinvestmentinasubsidiaryiscarriedatfairvalueintheparent’saccounts,theresultingfairvaluegainandthecorrespondingincreaseinthecarryingamountofinvestmentshallbereverseduponconsolidation,sothatthereisnoeffectatthegrouplevel.If,however,thefairvaluegainhadbeenutilisedbytheparent forbonus issueofshares, therehas ineffectbeenapermanentfreezingofthesubsidiary’spost-acquisitionprofits.Accordingly,thereversaloftheincreaseinthecarryingvalueoftheinvestmentshallbemadeagainstthepost-acquisitionprofitsofthesubsidiary.

As in past practices of using revaluation reserve for bonus shares, itappears that there isno legal restriction on theuse of fair valuegain forbonusshares.However, theauthorcautionstheuseof this fairvaluegainforbonussharesasitmaypotentiallyleadtoadeficitinthepost-acquisitionreserveatthegrouplevel.

Example 17AssumethesamecasefactsasintheExampleabove.Thefinancialpositionsas

at31December20x5areasfollows:



PBhd SBhdRM’000 RM’000

Sharecapital 2,000 500Retainedprofits – 1,500

(i) Fairvaluegain 2,000 –(ii) Otherprofits 2,000 –

6,000 2,000InvestmentinSBhd,atfairvalue 3,000 –Sundrynetassets 3,000 2,000

5,000 2,000

Required(i) Show the consolidationadjustments requiredandprepare the consolidated

financialstatementsofPBhdforthe20x5financialyear;(ii) Preparetheconsolidatedfinancialstatementsimmediatelyafterthepayment

ofdividendon1January20x6;and(iii) SupposePBhdhadon31December20x5issuedbonussharesbycapitalising

allthefairvaluegain,showtheconsolidationadjustmentsandpreparetheconsolidatedfinancialstatementsofPBhdforthe20x5financialyear.

Solution 17Consolidationadjustments:

RM’000 RM’000(a) DrFairvaluereserve 2,000

CrInvestmentinsubsidiary 2,000 –toreversefairvaluegainonconsolidation.(b) DrSharecapitalofSBhd 500 DrPre-acquisitionprofits 500

CrInvestmentinsubsidiary 1,000 –toeliminatecostofinvestmentagainstnetassetsacquired.

PBhd SBhd Consolidationadjustments

Group

RM’000 RM’000 (Dr) Cr RM’000Sharecapital 2,000 500 (500)b 2,000Fairvaluegain 2,000 – (2,000)a –Otherretainedprofits 2,000 1,500 (500)b 3,000

6,000 2,000 5,000InvestmentinSBhd (3,000) – 2,000(a) –

1,000(b)Sundrynetassets (3,000) (2,000) (5,000)

(6,000) 2,000 (3,000) 3,000 5,000



(ii) Consolidatedfinancialpositionon1January20x6


Group

RM’000 RM’000 (Dr) Cr RM’000Sharecapital 2,000 500 (500) 2,000Fairvaluegain 2,000 – (2,000) –Otherretainedprofits 3,000 500 (500) 3,000

7,000 1,000 5,000Investmentinsubsidiary (3,000) – 3,000Sundrynetassets (4,000) (1,000) (5,000)

(7,000) (1,000) (3,000) 3,000 (5,000)

NotethatthereisnoconsequentialeffectofthedividendpaymentbySBhdtoPBhdasthegroupretainedprofitsremainatRM3,000,000.

Consolidationadjustments: RM’000 RM’000DrSharecapitalofSBhd 500DrPre-acquisitionprofits 500DrFairvaluereserveofparent 2,000

CrInvestmentinsubsidiary 3,000–toeliminatecostofinvestmentagainstnetassetsacquired.

(iii) Fairvaluereservecapitalisedasbonusshares


Group

RM’000 RM’000 (Dr) Cr RM’000Sharecapital 4,000 500 (500)a 4,000Retainedprofits 2,000 1,500 (500)a

(2,000)b 1,0006,000 2,000 5,000

InvestmentinSBhd (3,000) – 1,000(a) –2,000(b)

Sundrynetassets (3,000) (2,000) (5,000)(6,000) (2,000) (3,000) 3,000 5,000

Note that in this case, RM2,000,000 post-acquisition profits are deemedcapitalisedforthebonusissueofshares.



Consolidationadjustments: RM’000 RM’000(a) DrSharecapitalofSBhd 500 DrPre-acquisitionprofit 500

CrInvestmentinSBhd 1,000 –toeliminatetheoriginalcostofinvestment.(b)DrPost-acquisitionprofits 2,000

CrInvestmentinSBhd 2,000 –toeliminatebalanceofcostofinvestment.

7.6.2 When the New Holding Company is the Parent of the Entity

A limited guidance is provided in MFRS 127 on the measurement ofthecostof investment inasubsidiarywhenaparent (theoriginalparent)reorganisesitsgroupstructurebyestablishinganewentitytobeitsparent(thenewparent).TheStandardclarifiesthatwhenaparentreorganisesthestructureofitsgroup,byestablishinganewentityasitsparentinamannerthatsatisfiesthefollowingcriteria:(a) thenewparentobtainscontroloftheoriginalparentbyissuingequity

instrumentsinexchangeforexistingequityinstrumentsoftheoriginalparent;

(b) theassetsandliabilitiesofthenewgroupandtheoriginalgrouparethesameimmediatelybeforeandafterthereorganisation;and

(c) theownersoftheoriginalparentbeforethereorganisationhavethesameabsoluteandrelative interests in thenetassetsof theoriginalgroupandthenewgroupimmediatelybefore,andafter,thereorganisation

andthenewparentaccountsforitsinvestmentintheoriginalparentunderthecostmethod in itsseparatefinancialstatements, thenewparentshallmeasure cost at the carrying amount of its share of the equity items intheseparatefinancialstatementsoftheoriginalparent,atthedateofthereorganization[MFRS127.13].

Similarly, a stand-alone entity that is not a parent might establish anewentityas itsparent inamannerthatsatisfiesthecriteriaabove.TherequirementsinMFRS127.13applyequallytosuchreorganisations[MFRS127.14].

Therequirementtomeasurethecostofinvestmentatnetassetsvalue(i.e.basedontheshareoftheequityitems),ratherthanatfairvalueistopreventrecognitionofaninherentgoodwilloftheoriginalparentorthestand-aloneentity.



Forexample,astand-aloneentityhasanetassetsvalueofRM100million(sharecapitalofRM40millionandreservesofRM60million).ThefairvalueoftheentitybasedontheP/EratiomethodofvaluationisRM200million.The entity establishes a new holding company to be its parent.The newparentissuesequitysharestotheoriginalownersofthestand-aloneentityinexchangeforexistingequitysharesofthestand-aloneentity.

Theanalysisbelowshowsthedifferenceonconsolidationifthenewparentrecordsthecostofinvestmentat:(i)netassetvalueand(ii)atfairvalue:

(i)AtNAV (ii)FairValueRM’m RM’m

Costofinvestment 100 200Shareofnetassets:

Sharecapital (40) (40)Pre-acquisitionreserve (60) (60)

Goodwilloncombination – 100

Notice that if the fair value basis ofmeasurementwere to be allowed,itwouldhaveresulted inrecognisingagoodwilloncombinationofRM100million. This would have been an equivalent of capitalising the inherentgoodwillofthestand-aloneentity.

Example 18On 1 January 20x1, Q Bhd acquired a 75% equity interest R Bhd for a

considerationofRM225million.OnthisdatethenetassetsofRBhd,measuredatfairvalue,wereRM200million.ThefairvalueofRBhdontheacquisitiondatewasRM300million.

ThesummarisedstatementsoffinancialpositionofQBhd,RBhdandtheQGroupat31December20x5areasfollows:

QBhd RBhd QGroupRM’m RM’m RM’m

Sharecapital 300 100 300Retainedprofits 500 400 725Non-controllinginterest – – 150

800 500 1,175InvestmentinRBhd,atcost 225 – –Goodwilloncombination – – 100Sundrynetassets 575 500 1,075

800 500 1,175



On1January20x6,QBhd reorganises its group structureby establishinganewholdingcompany,PBhd,asitsparent.Forthisreorganisation,PBhd,issuesitsequitysharestotheoriginalshareholdersofQBhdinexchangefortheexistingequitysharesofQBhd.

PBhdaccountsforitsinvestmentinQBhdunderthecostmethodinaccordancewithFRS127.ThefairvalueofQBhd’sordinaryshares,basedonitsquotedmarketpriceon1January20x6,isRM5pershare(totalfairvalueofRM1.5billion).PBhdassumesthelistingstatusofQBhdafterthereorganisation.

Required(a) ExplainhowPBhdshallaccountforitsinvestmentinQBhdinitsseparate

financialstatements;and(b) PreparetheconsolidatedfinancialpositionofthenewPGroupimmediately

afterthereorganisation.

Solution 18(a) In thisgroupreorganisation,PBhd is thenewholdingcompany formed to

betheparentoftheQGroup.Insubstance,therehasbeennochangetotheownershipstructureortheassetsandliabilitiesimmediatelybeforeandafterthereorganisation.Thus,inaccordancewithMFRS127.13,PBhdshallrecordits investment inQBhd based on the carrying amount of its share of theequityitemsshownintheseparatefinancialstatementsofQBhdi.e.atitsnetassetsvalueofRM800million.Consequentlynoadditionalgoodwillwouldariseinthisgroupreorganisation.

Notethat ifPBhdhadrecordedits investmentinQBhdbasedonthefairvalueoftheordinarysharesofQBhd,itwouldhaveresultedinanadditionalgoodwillofRM700millioninthisgroupreorganisation.Thiswouldnothavereflected fairly the substance of the group reorganisation (it would havebeentheequivalentofrecognisinganinherentgoodwill,whichisagainstthecurrentMFRSs).

(b) PGroup-ConsolidatedStatementofFinancialPosition(ImmediatelyAfter)

PBhd RM’m

QBhd RM’m

RBhd RM’m

(Dr) RM’m

(Cr) RM’m

PGroup RM’m

Sharecapital 800 300 100 (300)a(75)c(25)d

800

Retainedprofits – 500 400 (500)a(75)c

(100)d

225

Revaluation – – (75)c(25)d

100b –

NCI 150 150800 800 500 1,175



InvestmentinQ (800) 800a –InvestmentinR – (225) 225c –Goodwill (100)b (100)Sundrynetassets (575) (500) (1,075)

(800) (800) (500) (1,275) 1,275 (1,175)

Theconsolidationadjustmentsareasfollows: RM’m RM’m(a) DrSharecapitalofQBhd 300 DrRetainedprofitsofQBhd(pre-acquisition) 500

CrInvestmentinQBhd 800 –toeliminateinvestmentinQBhd.(b) DrGoodwilloncombination 100

CrRevaluationreserve–goodwill 100 –torecognisegoodwilloncombination.(c) DrSharecapitalofRBhd 75 DrPre-acquisitionofRBhd 75 DrRevaluationreserve–goodwill 75

CrInvestmentinRBhd 225 –toeliminateinvestmentinRBhd.(d) DrSharecapitalofRBhd 25 DrRetainedprofitsofRBhd 100 DrRevaluationreserve–goodwill 25

CrNCIinfinancialposition 150 –toallocatenetassetstoNCI.

7.6.3 When the New Holding Company is an Intermediate Parent of the Group

Some group reorganisations may involve a parent (ultimate parent)establishinganewsubsidiaryastheholdingcompany(intermediateparent)ofothersubsidiaries inthegroup.Althoughtheguidance inMFRS127.13relates to reorganisations that establish anewultimate parent, the sameaccountingrequirementsapplywhenanintermediateparentisestablished.

IntheBasisforConclusiontotheAmendmentofIAS27issuedinMay2008, the IASB clarifies that the requirements IAS 27.13 apply to thefollowingtypesofreorganisationswhentheysatisfiedthecriteriaspecifiedintheamendment:(a) reorganisations in which the new parent does not acquire all of the

equity instrumentsof theoriginalparent.Forexample,anewparent



mightissueequityinstrumentsinexchangeforordinarysharesoftheoriginal parent, but not acquire the preference shares of the originalparent. Inaddition,anewparentmightobtaincontrolof theoriginalparent,butnotacquirealloftheordinarysharesoftheoriginalparent.

(b) theestablishmentofanintermediateparentwithinagroup,aswellastheestablishmentofanewultimateparentofagroup.

(c) reorganisationsinwhichanentitythatisnotaparentestablishesanewentityasitsparent.(IAS27.BC66N)

TheIASBfurtherclarifiesthattheamendmentfocusesonthemeasurementofoneasset–thenewparent’sinvestmentintheoriginalparent,inthenewparent’sseparatefinancialstatements.Itdoesnotapplytothemeasurementof any other assets or liabilities in the separate financial statements ofeithertheoriginalparentorthenewparent,orintheconsolidatedfinancialstatements(IAS27.BC66O).

Thus,therequirementsapplyonlywhenthecriteriainthoseparagraphsaresatisfied.Theydonotapplytoothertypesofreorganisationsorforotherbusinesscombinationsundercommoncontrol.

Example 19PBhdacquireda75%interestintheequitycapitalofTBhdon1January20x3

fora considerationofRM15,000,000.Onthisdate, thenetassetsofTBhdwerestatedintheaccountsattheirfairvalue.ThesharecapitalandretainedprofitsofTBhdonthisdatewereRM8,000,000andRM4,000,000respectively.

Thestatementsoffinancialpositionof thetwocompaniesasat31December20x7areasfollows:

PBhd TBhdRM’000 RM’000

SharecapitalofRM1each 40,000 8,000Retainedprofits 30,000 10,000

70,000 18,000InvestmentinTBhd,atcost 15,000 –Sundrynetassets 55,000 18,000

50,000 18,000

On31December20x7,PBhdformedanewcompany,SBhdtotakeoverTBhd.Forthistake-over,TBhdwasvaluedindependentlyatRM30,000,000.SBhdissued18,000,000sharesofRM1eachtotheexistingshareholdersofTBhdinproportionto their respective ownership interests.This group reorganisation has not beenreflectedinthestatementsoffinancialpositionabove.



RequiredPrepare the consolidated statement of financial position of P Bhd as at 31

December20x7afterthecompletionofthegroupreorganisation.

Solution 19Theoriginalgoodwilloncombinationiscalculatedasfollows:

RM’000Considerationtransferred 15,000NCIatacquisition-datefairvalue(15,000/.75)x25% 5,000Aggregate 20,000Fairvalueofidentifiablenetassets(8,000+4,000) 12,000Goodwilloncombination 8,000

After the reorganisation, the effective ownerships of theparentand theNCIwouldbeasfollows:

SBhd TBhdParent–direct 75% –

–indirect75%x100% – 75%

NCI–direct 25% –

–indirect25%x100% – 25%100% 100%

Theparent’sandNCI’sownershipinterestsinTBhdremainunchangedat75%and25%respectively(albeitindirectly).

In the separate financial statements of S Bhd, it shall measure the cost ofinvestment at the net asset value of RM18,000,000 rather than at fair value.However,intheseparatefinancialstatementsofPBhd,itrecordstheconsiderationreceived,i.e.,theinvestmentinSBhd,atfairvalueofRM22,500,000,derecognisesitsinvestmentinTBhdandrecogniseagainondisposalofRM7,500,000

InthegroupaccountsofSBhd(thesub-group),itmayconsolidatetheaccountsofTBhdusingthenormalconsolidationproceduresandtheeliminationwouldbeas follows:

RM’000Considerationtransferred 18,000Netassetsacquired 18,000Goodwilloncombination nil



Ifthestage-by-stagemethodisapplied,thesecondstageconsolidationprocedureswouldbeasfollows:

PBhdRM’000

SGroupRM’000

(Dr)RM’000

CrRM’000

PGroupRM’000

Sharecapital 40,000 18,000 (13,500)c(4,500)d

40,000

Retainedprofits 30,000 – 4,500c 34,500

Gainondisposal 7,500 – (7,500)b –

Revaluationreserve (6,000)c(2,000)d

8,000a –

NCI 6,500d 6,500

77,500 18,000 81,000

InvestmentinSBhd (22,500) 7,500b15,000c

–

Goodwill – – (8,000)a (8,000)

Sundrynetassets (55,000) (18,000) (73,000)(77,500) (18,000) (41,500) 41,500 (81,000)

Theconsolidationadjustmentsare: RM’000 RM’000(a) DrGoodwilloncombination 8,000

CrRevaluationreserve 8,000 –torecognisetheoriginalgoodwilloncombination.(b) DrParent’sgainondisposal 7,500

CrInvestmentinSBhd 7,500 –toeliminateparent’sgainondisposal(c) DrSharecapitalofSBhd 13,500 DrRevaluationreserve–goodwill 6,000

CrRetainedprofitsofTBhd 4,500CrInvestmentinSBhd 15,000

–toeliminateinvestmentinSBhdand restorethegroup’sretainedprofits.

(d) DrSharecapitalofSBhd 4,500 DrRevaluationreserve 2,000

CrNCIinfinancialposition 6,500 –toallocatenetassetsandgoodwilltoNCI.



If the one-stagemethod is applied, the consolidationprocedureswould be asfollows:

PBhdRM’000

SBhdRM’000

TBhdRM’000

(Dr)RM’000

CrRM’000

PGroupRM’000

Sharecapital 40,000 18,000 8,000 (6,000)b(2,000)c

(13,500)d(4,500)e

40,000

Revaluation (2,000)c(6,000)d

8,000a –

Retainedprofits 30,000 – 10,000 (7,500)b(2,500)c

4,500d 34,500

Gainondisposal 7,500 (7,500)d –NCI (4,500)b 6,500c

4,500e6,500

77,500 18,000 18,000 81,000InvestmentinS (22,500) – 22,500d –InvestmentinT – (18,000) 18,000b –Goodwill (8,000)a (8,000)Sundrynetassets (55,000) – (18,000) (73,000)

(77,500) (18,000) (18,000) (64,000) 64,000 (81,000)

Theconsolidationadjustmentsare: RM’000 RM’000(a) DrGoodwilloncombination 8,000

CrRevaluationreserve–goodwill 8,000 –torecognisegoodwilloncombination.(b) DrSharecapitalofTBhd 6,000 DrRetainedprofitsofTBhd 7,500 DrNCIinfinancialposition 4,500

CrInvestmentinTBhd 18,000 –toeliminateinvestmentinTBhd(c) DrSharecapitalofTBhd 2,000 DrRetainedprofitsofTBhd 2,500 DrRevaluationreserve–goodwill 2,000

CrNCIinfinancialposition 6,500 –toallocatenetassetsandgoodwilltoNCI.



(d) DrSharecapitalofSBhd 13,500 DrRevaluationreserve–goodwill 6,000 DrParent’sgainondisposal 7,500

CrRetainedprofitsofTBhd 4,500CrInvestmentinSBhd 22,500

–toeliminateinvestmentinTBhd.(e) DrSharecapitalofSBhd 4,500

CrNCIinfinancialposition 4,500 –toallocatenetassetstoNCI

7.6.4 When a Parent accounts for its Investments in Subsidiaries at Fair Value

TherequirementsofMFRS127.13tousethenetassetsvaluetomeasurethecostofinvestmentinasubsidiaryapplyonlyifthenewparentusesthecostmethod in its separatefinancial statements.Theydonot apply if thenewparentuses the fairvaluemethodandaccount for its investments insubsidiariesatfairvalue,inaccordancewithMFRS9,Financial Instruments.

Thus,ifthefairvaluemethodisapplied,thenewparentrecordsthecostofinvestmentintheoriginalparentatitsfairvalueinitially,andsubsequentlyaccountsforthechangesinfairvalueoftheinvestmentthroughprofitorlossinaccordancewithMFRS9.

MFRS 127 does not deal with the consequential treatment at theconsolidation level when the fair value method is applied in a groupreorganisation. As mentioned earlier, when the new parent records theinvestmentintheoriginalparentatitsfairvalue,itwouldcreateanadditionalgoodwillattheconsolidationlevel.Theissueiswhetherornotthisadditionalgoodwillcanberecognised.

In theauthor’sview, thiswould tantamount torecognisingan inherentgoodwill inagroupreorganisation.Thus,toavoidcapitalisingan inherentgoodwill at thegroup level, the fair valuemeasurement recognised in theseparatefinancialstatementsofthenewparentisreversedtobookvalueonconsolidation,inthesamemannerasfairvaluechangesoftheinvestmentintheseparatefinancialstatementsarereversedonconsolidation.

7.7 Complex Group Structures

7.7.1 Indirect InterestsWheretheparent’sinterestinasubsidiaryisheldindirectlyviaoneor

more other subsidiaries, an indirect subsidiary is said to exist, insofar as



the parent is concerned. The following structures illustrate such indirectinterests.

H Bhd

60%

S Bhd

60%

T Bhd

S Bhd T BhdParent’s interest-direct 60% –

– indirect 60%x 60% – 36%NCI – direct 40% 40%

– indirect 40%x 60% – 24%100% 100%

H Bhd

80% 60%

P Bhd Q Bhd

30% 30%

R Bhd

P Bhd Q Bhd R BhdParent’s interest – direct 80% 60% –

– indirect 80x30+60x30 42%NCI – direct 20% 40% 40%

– indirect 20x30+40x30 18%100% 100% 100%

The consolidation principles are the same regardless of whether theinterestinasubsidiaryishelddirectlybytheparent,orindirectly,throughone or more subsidiaries. The consolidated financial statements wouldpresentrevenue,expenses,assets,liabilitiesandequityofallcompaniesinagroupasasingleentity.

However, the amount recognised for goodwill on combination in theparent’s group accounts would depend on its policy for measuring non-controllinginterestsattheacquisitiondate.Ifnon-controllinginterestsaremeasuredat theiracquisition-date fairvalue, thegoodwilloncombinationwouldincludeaportionattributabletonon-controllinginterest.Thegoodwillas awhole is recognised for each subsidiary, regardless ofwhether it is adirectsubsidiaryoranindirectsubsidiary.

If non-controlling interests aremeasured based on their proportionateshareofnetassetsattheacquisitiondate,thenthegoodwilloncombinationshall reflect only the parent’s effective ownership interest in the indirectsubsidiarysothatnogoodwillwillbeattributabletonon-controllinginterest,whether directly or indirectly.Thus, the goodwill that shall be recognisedintheparent’sgroupaccountsshallrelateonlytotheextentofitseffectiveownershipineachsubsidiary,soastoreflectitspurchase,directlyorindirectly,ineachsubsidiary.



Inpractice,whereasub-groupexistsinagroupstructure,morethanonesetofgroupaccountsmustbepreparediftheimmediateparentisnotwhollyownedbytheultimateparent.Insofarastheconsolidationoftheultimateparent’sgroupaccountsisconcerned,itcanbeaccomplishedeitherby:(i) the “stage by stage” (commonly called multiple stage) consolidation

method;or(ii) the“onestage”(commonlycalledtheshortcuttechnique)consolidation

method.

Underthemultiple-stagemethod,thesub-groupaccountsatthe lowesttier of the vertical group structure are prepared first, and subsequently,theconsolidationisrepeatedbyprogressingstagebystageupwarduntilitreachesthehighesttieroftheultimateparent’sgroupaccounts.Ifgoodwillon combination is attributed to non-controlling interests, the goodwill inthe consolidated accounts of a sub-groupwill be added on to the goodwillattheultimategrouplevelwithoutanyfurtheradjustment.However,ifnogoodwillisattributedtonon-controllinginterests,thenateachsubsequentconsolidationstage,anygoodwillattributabletotheindirectnon-controllinginterestisexcludedbydebitingthenon-controllinginterestintheconsolidatedfinancialpositionandcreditingthegoodwillaccount.

Under the one-stage method, consolidation adjustments are made byreference to the ultimate parent’s effective ownership interests in theindirectsubsidiaries.Inmatchingthecostofinvestmentwiththeultimateparent’seffectiveshareofnetassetsineachindirectsubsidiary,theportionof the cost that is attributable to minorities in the immediate parent isexcludedandchargedtothenon-controllinginterestaccount.Thisexclusionoftheportionofcostof investmentattributabletonon-controllinginterestisnecessary, if thegoodwillonconsolidation is toreflectonlytheultimateparent’sproportionateshare.

Example 20UltimateBhdacquireda60%interestintheequitycapitalofImmediateBhd

on1January20x1whenthenetassetsofthelatter,statedattheirfairvalue,wereRM300million (consistingof sharecapitalofRM200millionandpre-acquisitionprofits of RM100million). On 1 January 20x2, Immediate Bhd acquired a 75%interestintheequitycapitalofSubsistBhdandthenetassetsofthelatter,statedattheirfairvaluewereRM300million(consistingofsharecapitalofRM100millionandpre-acquisitionprofitsofRM200million).

The draft accounts of the three companies for the year ended 31December20x2areasfollows:




Ultimate BhdRM’m

Immediate BhdRM’m

Subsist BhdRM’m

SharecapitalofRM1each 400 200 100

Retainedprofits 200 300 300

600 500 400

Sundrynetassets 300 200 400

InvestmentinImmediateBhd 300 – –

InvestmentinSubsistBhd – 300 –600 500 400

Statement of Comprehensive Income & Retained Profits

Ultimate BhdRM’m

Immediate BhdRM’m

Subsist BhdRM’m

Profitbeforetaxation 180 170 180

Taxation (80) (70) (80)

Profitaftertaxationandretained 100 100 100

Retainedprofitsbroughtforward 100 200 200Retainedprofitscarriedforward 200 300 300

Goodwillonacquisitioniscarriedatcostlessaccumulatedimpairmentlosses.

Required(a) If non-controlling interests are measured at acquisition-date fair value,

preparetheconsolidatedfinancialstatementsofUltimateBhdusingthe:(i) two-stagemethod;and(ii) one-stagemethod.

(b) Ifnon-controllinginterestsaremeasuredbasedontheirproportionateshareof net assets at the acquisition date, prepare the consolidated financialstatementsofUltimateBhdusingthe:(i) two-stagemethod;and(ii) one-stagemethod

Solution 20(a) Non-controlling interests measured at acquisition-date fair value: Thegoodwilloncombinationisdeterminedasfollows:



RM’m(i) ImmediateBhdandSubsistBhd Considerationtransferred 300 Non-controllinginterest(300/.75)x25% 100 400 Fairvalueofidentifiablenetassets 300 Goodwilloncombination 100(ii) UltimateBhdandImmediateBhd Considerationtransferred 300 Non-controllinginterest(300/.60)x40% 200 500 Fairvalueofidentifiablenetassets 300 Goodwilloncombination 200 Totalgoodwilloncombination 300

Two-stage Consolidation Stage 1

Immediate

RM’m

Subsist

RM’m

(Dr)

RM’m

Cr

RM’m

ImmediategroupRM’m

Profitbeforetax 170 180 350Taxexpense (70) (80) (150)Profitaftertax 100 100 200Non-controlling

interest (25)d (25)Attributabletoowners 100 100 175Retainedprofitsb/

forward200 200 (150)b

(50)c 200Retainedprofitsc/

forward 300 300 375Sharecapital 200 100 (75)b

(25)c 200Revaluationreserve – – (75)b

(25)c100a –

Non-controllinginterest – –

100c25d 125

Totalequity 500 400 700



Sundrynetassets (200) (400) (600)Goodwillon

combination – (100)a (100)InvestmentinSubsist (300) 300bTotal net assets (500) (400) (525) 525 (700)

Consolidationadjustments: RM’m RM’m(a) DrGoodwilloncombination 100

CrRevaluationreserve 100 –torecognisegoodwilloncombination.(b) DrSharecapitalofSubsistBhd 75 DrRevaluationreserve–goodwill 75 DrPre-acquisitionprofits 150

CrInvestmentinSubsistBhd 300 –toeliminatecostofinvestment.(c) DrSharecapitalofSubsistBhd 25 DrRevaluationreserve–goodwill 25 DrPre-acquisitionprofits 50

CrNon-controllinginterestinfinancialposition 100 –torecogniseNCIatacquisition-datefairvalue.(d) DrNon-controllinginterestinprofitorloss 25

CrNon-controllinginterestinfinancialposition 25 –toallocatecurrentyearprofittoNCI.

Stage 2

Ultimate Immediategroup

(Dr) Cr Ultimategroup

RM’m RM’m RM’m RM’m RM’mProfitbeforetax 180 350 530Taxexpense (80) (150) (230)Profitaftertax 100 200 300Non-controlling

interest (25) (70)d (95)Attributabletoowners 100 175 205Retainedprofitsb/

forward100 200 (60)b

(80)c160

Retainedprofitsc/forward 200 375 365



Sharecapital 400 200 (120)b(80)c

400

Revaluationreserve – – (120)b(80)c

200a –


– 125 240c70d

435

600 700 1,200

Sundrynetassets (300) (600) (900)

Goodwilloncombination – (100) (200)a (300)

InvestmentinImmediate (300) 300b

(600) (700) (810) (810) (1,200)

Consolidationadjustments: RM’m RM’m(a) DrGoodwilloncombination 200

CrRevaluationreserve 200 –torecognisegoodwilloncombination.(b) DrSharecapitalofImmediate 120 DrRevaluationreserve–goodwill 120 DrPre-acquisitionprofits 60

CrInvestmentinImmediate 300 –toeliminatecostofinvestment.(c) DrSharecapitalofImmediate 80 DrRevaluationreserve–goodwill 80 DrRetainedprofitsbroughtforward 80

CrNon-controllinginterestinfinancialposition 240 –toallocateopeningnetassetsandgoodwilltoNCI.(d) DrNon-controllinginterestinprofitofloss 70

CrNon-controllinginterestinfinancialposition 70 –toallocatecurrentyearprofittoNCI(40%x175)



One-stage Consolidation Theeffectiveownership:

Immediate SubsistParent’sinterest–direct 60% –

indirect–.60x75% – 45%Non-controllinginterest–direct 40% 25%

indirect–.40x75% – 30%100% 100%

ConsolidationWorksheet

Ultimate

RM’m

Immediate

RM’m

Subsist

RM’m

(Dr)

RM’m

Cr

RM’m

UltimateGroupRM’m

Profitbeforetax 180 170 180 530Taxexpense (80) (70) (80) (230)Profitaftertax 100 100 100 300Non-controlling

interest– – – (40)d

(55)h(95)

Attributabletoowners 100 100 100 205

Retainedprofitsb/forward

100 200 200 (60)b(80)c(90)f

(110)g

160

Retainedprofitsc/forward 200 300 300 365

Sharecapital 400 200 100 (120)b(80)c(45)f(55)g

400

Revaluationreserve – – – (120)b(80)c(45)f(55)g

200a

100e

–


– – – (120)f 240c40d

220g55h

435

Totalequity 600 500 400 1,200



Sundrynetassets (300) (200) (400) (900)Goodwillon

combination– – – (200)a

(100)e(300)

InvestmentinImmediate

(300) – – 300b

InvestmentinSubsist (300) 300fTotal net assets (600) (500) (400) (1,455) 1,455 (1,200)

ProofofNCI: Immediate Subsist Total NCIRM’m RM’m RM’m

Owners’equity 500 400Less:InvestmentinSubsist (300) –Sundrynetassets 200 400Goodwilloncombination 200 100Netassetsandgoodwill 400 500NCI% 40% 55%NCI’sshare 160 275 435

Theconsolidationadjustments: RM’m RM’m(a) DrGoodwilloncombination 200


CrInvestmentinImmediate 300 –toeliminatecostofinvestment.(c) DrSharecapitalofImmediate 80 DrRevaluationreserve–goodwill 80 DrRetainedprofitsbroughtforward 80

CrNon-controllinginterestinfinancialposition 240 –toallocateopeningnetassetsandgoodwilltoNCI.(d) DrNon-controllinginterestinprofitorloss 40

CrNon-controllinginterestinfinancialposition 40 –toallocatecurrentyearprofittoNCI.(e) DrGoodwilloncombination 100

CrRevaluationreserve 100 –torecognisegoodwilloncombination.



(f) DrSharecapitalofSubsist 45 DrRevaluationreserve–goodwill 45 DrPre-acquisitionprofit 90 DrNon-controllinginterestin

financialposition(40%x300) 120CrInvestmentinSubsist 300

–toeliminatecostofinvestment.(g) DrSharecapitalofSubsist 55 DrRevaluationreserve–goodwill 55 DrRetainedprofitsbroughtforward 110

CrNon-controllinginterestinfinancialposition 220 –toallocatenetassetsandgoodwilltoNCI.(h) DrNon-controllinginterestinprofitorloss 55


(b) Non-controlling Interests Measured based on Proportionate Share of Net Assets

Thegoodwilloncombinationisdeterminedasfollows: RM’m(i) ImmediateBhdandSubsistBhd: Aggregateof: Considerationtransferred 300 Non-controllinginterest25%x300 75 375 Fairvalueofidentifiablenetassets 300 Goodwilloncombination–parentonly 75(ii) UltimateBhdandImmediateBhd: Aggregateof: Considerationtransferred 300 Non-controllinginterest40%x300 120 420 Fairvalueofidentifiablenetassets 300 Goodwilloncombination–parent 120

Part of the goodwill on combination in the sub-group belongs to the non-controllinginterestinImmediateBhd.Therefore,thegoodwillthatshouldberecognisedintheUltimategroupaccountsiscalculatedasfollows:



RM’mGoodwilloncombinationofImmediate 120Parent’sshareofgoodwilloncombinationofSubsist60%x75 45Goodwilloncombination 165

(i) Two-stageConsolidation

Stage 1

Immediate Subsist (Dr) Cr Immediategroup


interest (25)d (25)Attributabletoowners 100 100 175Retainedprofitsb/

forward200 200 (150)b

(50)c200



200

Revaluation – – (75)b 75a –Non-controlling

interest– – 75c

25d100

Totalequity 500 400 675


combination – – (75)a (75)InvestmentinSubsist (300) 300bTotal net assets (500) (400) (475) 475 (675)

Theconsolidationadjustmentsare: RM’m RM’m(a) DrGoodwilloncombination 75

CrRevaluationreserve 75 –torecognisegoodwilloncombination.(b) DrSharecapitalofSubsist 75 DrRevaluationreserve–goodwill 75



DrPre-acquisitionprofits 150CrInvestmentinSubsist 300

–toeliminatecostofinvestment.(c) DrSharecapitalofSubsist 25 DrPre-acquisitionprofits 50

CrNon-controllinginterestinfinancialposition 75 –toallocateacquisition-datenetassetstoNCI.(d) DrNon-controllinginterestinprofitorloss 25


Stage 2

Ultimate Immediategroup

(Dr) Cr Ultimategroup


interest (25) (70)e (95)Attributabletoowners 100 175 205Retainedprofitsb/

forward100 200 (60)b

(80)c160



400

Revaluationreserve – – (120)b 120a –Non-controlling

interest– 100 (30)d 160c

70e300

Totalequity 600 675 1,065


combination – (75) (120)a 30d (165)Investmentin

Immediate (300) 300bTotal net assets (600) (675) (680) 680 (1,065)





CrInvestmentinImmediate 300 –toeliminatecostofinvestment.(c) DrSharecapitalofImmediate 80 DrRetainedprofitsbroughtforward 80

CrNon-controllinginterestinfinancialposition 160 –toallocateopeningnetassetstoNCI.(d) DrNon-controllinginterestinfinancialposition 30

CrGoodwilloncombination 30 –toeliminategoodwillofsub-groupattributabletoNCI.(e) DrNon-controllinginterestinprofitorloss 70


(ii) One-stageConsolidation

Ultimate

RM’m

Immediate

RM’m

Subsist

RM’m

(DR)

RM’m

Cr

RM’m

UltimategroupRM’m

Profitbeforetax 180 170 180 530Taxexpense (80) (70) (80) (230)Profitaftertax 100 100 100 300Non-controlling

interest– – – (40)d

(55)h(95)

Attributabletoowners 100 100 100 205

Retainedprofitsb/forward

100 200 200 (60)b(80)c(90)f

(110)g

160

Retainedprofitsc/forward 200 300 300 365



Sharecapital 400 200 100 (120)b(80)c(45)f(55)g

400

Revaluationreserve

– – – (120)b(45)f

120a45e

–


– – – (120)f 160c40d

165g55h

300

Totalequity 600 500 400 1,065

Sundrynetassets

(300) (200) (400) (900)


– – – (120)a(45)e

(165)

InvestmentinImmediate (300) – – 300b –

InvestmentinSubsist (300) 300f

Total net assets (600) (500) (400) (1,185) 1,185 (1,065)

ProofofNCI: Immediate Subsist Total NCIRM’m RM’m RM’m

Owners’equity 500 400

Less:InvestmentinSubsist (300) –

Sundrynetassets 200 400

NCI% 40% 55%NCI’sshareofsundrynetassets 80 220 300


CrRevaluationreserve 120 –torecognisegoodwilloncombination.



(b) DrSharecapitalofImmediate 120 DrRevaluationreserve–goodwill 120 DrPre-acquisitionprofits 60

CrInvestmentinImmediate 300 –toeliminatecostofinvestment.(c) DrSharecapitalofImmediate 80 DrRetainedprofitsbroughtforward 80

CrNon-controllinginterestinfinancialposition 160 –toallocateopeningnetassetstoNCI.(d) DrNon-controllinginterestinprofitorloss 40

CrNon-controllinginterestinfinancialposition 40 –toallocatecurrentyearprofittoNCI.(e) DrGoodwilloncombination 45

CrRevaluationreserve 45 –torecognisegoodwilloncombination.(f) DrSharecapitalofSubsist 45 DrRevaluationreserve–goodwill 45 DrPre-acquisitionprofits 90 DrNon-controllinginterestinfinancialposition 120

CrInvestmentinSubsist 300 –toeliminatecostofinvestment.(g) DrSharecapitalofSubsist 55 DrPre-acquisitionprofits 110

CrNon-controllinginterestinfinancialposition 165 –toallocateacquisition-datenetassetstoNCI.(h) DrNon-controllinginterestinprofitorloss 55




7.7.2 Direct and Indirect Interests in a SubsidiaryAparentanditssubsidiarymaybothholdsharesinanothersubsidiary.

Examplesofsuchinterestsareshowninthegroupstructuresbelow.

Group Structure A Group Structure B

P Bhd

75%

60%

15%

Q Bhd R Bhd

Q Bhd R Bhd

Parent’s interest - direct 75% 15%

– indirect 75 x 60 – 45%

NCI – direct 25% 25%

– indirect 25 x 60 – 15%

100% 100%

P Bhd

60%

30%

30%

S Bhd T Bhd

S Bhd T Bhd

Parent’s interest – direct 60% 30%

– indirect 60 x 30 – 18%

NCI – direct 40% 40%

– indirect 40 x 30 – 12%

100% 100%

InapplyingMFRS3,thecriticalcriterionfortheconsolidationofthegroupstructuresaboveisthecontrolcriterionthatdetermineswhenanacquisitionoccurs.Forexample,intheGroupStructureAabove,ifQBhdwithits60%ownershipalreadycontrolsRBhdattheacquisitiondate,theadditional15%directinvestmentmadebyPBhdinRBhdonalaterdateshallbetreatedasanequitytransactioninaccordancewithMFRS3.Conversely,ifPBhd’s15%directinvestmentinRBhdwaspurchasedonanearlierdate(andtreatedasanAFSinvestment),aremeasurementoftheinvestmenttofairvalueisrequiredandchangesinfairvalue,includingthosepreviouslyrecognisedinothercomprehensiveincome,shallbereclassifiedtoprofitorlossonthedatewhenQBhdacquiresRBhd.

IntheGroupStructureBabove,astep-acquisitionoccursifPBhd’s30%stakeandSBhd’s30%stakeinTBhdarepurchasedondifferentdates.Inthiscase,itisnecessarytofairvaluethecarryingamountoftheearlier30%purchased stake on thedatewhenanacquisition occurs (i.e. thedate thelater30%purchasedstakeoccurs).InaccordancewithMFRS3,achangeinthefairvalueisrecognisedinprofitorlossonthatdatewhentheacquisitionoccurs.



Theconsolidationtechniquefordirectandindirectinterestsisexactlythesameasthetechniqueusedforconsolidatingindirectinterestinasubsidiary.Theimportantpointtoconsideriswhetherornotgoodwilloncombinationisattributabletonon-controllinginterest,andthisisanissueofaccountingpolicychoice.

Example 21On1January20x1,XBhdacquireda60%interestintheequitycapitalofYBhd

payingaconsiderationofRM8million,whichreflected60%ofthefairvalueofYBhd.Onthisdate,thepre-acquisitionprofitsofYBhdwereRM2million.

Onthesamedate,XBhdpurchaseda30%interest intheequitycapitalofZBhd,payingaconsiderationofRM4.7million.Thepre-acquisitionprofitsofZBhdonthatdatewereRM4million.XBhdwasrepresentedontheBoardofDirectorsofZBhdandtreatedtheinvestmentasanassociate.

On1January20x2ofthecurrentfinancialyear,YBhdacquireda40%interestintheequitycapitalofZBhd,payingaconsiderationofRM7.4million.TheretainedprofitsofZBhdonthatdatewereRM6,000,000.Onthatdate,theXGroupassumedcontrolofZBhd.ThefairvalueoftheordinarysharesofZBhdonacquisitiondatewasdeterminedatRM1.85pershare

Thedraftfinancialpositionsof the three companiesasat31December20x2were as follows:

XBhd YBhd ZBhd

RM’000 RM’000 RM’000

SharecapitalofRM1each 20,000 10,000 10,000

Retainedprofits 10,000 5,000 8,000

30,000 15,000 18,000

InvestmentinYBhd 8,000 – –

InvestmentinZBhd 4,700 7,400 –

Sundrynetassets 17,300 7,600 18,00030,000 15,000 18,000

Required(a) Calculatethegoodwilloncombination(b) Using a consolidation worksheet, derived the consolidated statement of

financialpositionofXBhdasat31December20x2.



Solution 21(a) Goodwilloncombination:

(i) AcquisitionofYBhd RM’000 Aggregateof: Considerationtransferred 8,000 Non-controllinginterestatacquisition-date

fairvalue(8,000/.60)x40% 5,333 FairvalueofYBhdasawhole 13,333 Fairvalueofidentifiablenetassets(10,000+2,000) 12,000 Goodwilloncombination 1,333 Allocatedtoparent(60%) 800 Allocatedtonon-controllinginterest(40%) 533 1,333

(ii) AcquisitionofZBhd Aggregateof: Considerationtransferred 7,400 Non-controllinginterestatacquisition-date

fairvalue(3,000xRM1.85) 5,550 Fairvalueofpreviouslyheldstake(3,000xRM1.85) 5,550 FairvalueofZBhdasawhole 18,500 Fairvalueofidentifiablenetassets(10,000+6,000) 16,000 Goodwilloncombination 2,500 Allocatedtoparent(54%) 1,350 Allocatedtonon-controllinginterest(44%) 1,150 2,500

Gainonremeasurementofpreviouslyheldstake: RM’000 CostofinvestmentinZBhd 4,700 Shareofpost-acquisitionprofit(6,000–4,000)x30% 600 Carryingamountatdateofcontrol 5,300 Fairvalueofpreviouslyheldstake 5,550 Gainonremeasurement 250



ConsolidationWorksheet:

XBhdRM’000

YBhdRM’000

ZBhdRM’000

(Dr)RM’000

CrRM’000

X GroupRM’000

Sharecapital 20,000 10,000 10,000 (6,000)b(4,000)c(5,400)g(4,600)h

20,000

Retainedprofits 10,000 5,000 8,000 (1,200)b(2,000)c(3,240)g(3,680)h

600e250f

13,730

Revaluationreserve – – – (800)b(533)c

(1,350)g(1,150)h

1,333a

2,500d

–

–


– – – (2,960)g 6,533c9,430h

13,003

TotalEquity 30,000 15,000 18,000 46,733

InvestmentinYBhd (8,000) – – 8,000b –InvestmentinZBhd (4,700) (7,400) – (600)e

(250)f12,950g –


– – – (1,333)a(2,500)d

(3,833)

Sundrynetassets (17,300) (7,600) (18,000) (42,900)TotalNetAssets (30,000) (15,000) (18,000) (41,596) 41,596 (46,733)

ProofofNCI:YBhd ZBhd Total NCI

RM’000 RM’000 RM’000Owners’equity 15,000 18,000Less:InvestmentinZltd (7,400) –Sundrynetassets 7,600 18,000Goodwilloncombination 1,333 2,500Totalsundrynetassetsandgoodwill 8,933 20,500EffectiveNCI% 40% 46%NCI’share 3,573 9,430 13,003



Theconsolidationadjustments: RM’000 RM’000(a) DrGoodwilloncombination 1,333

CrRevaluationreserve 1,333 –torecognisegoodwilloncombination.(b) DrSharecapitalofYBhd 6,000 DrRevaluationreserve–goodwill 800 DrPre-acquisitionprofit 1,200

CrInvestmentinYBhd 8,000 –toeliminatecostofinvestment.(c) DrSharecapitalofYBhd 4,000 DrRevaluationreserve–goodwill 533 DrRetainedprofits 2,000

CrNon-controllinginterest 6,533 –toallocatenetassetsandgoodwilltoNCI.(d) DrGoodwilloncombination 2,500

CrRevaluationreserve 2,500 –torecognisegoodwilloncombination.(e) DrInvestmentinZBhd 600

CrRetainedprofitsb/forward 600 –torestateopeningretainedprofitsofformerassociate.(f) DrInvestmentinZBhd 250

CrGainonremeasurement 250 –torecognisegainonremeasurementofpreviouslyheldstake.(g) DrSharecapitalofZBhd(54%x10,000) 5,400 DrRevaluationreserve–goodwill 1,350 DrPre-acquisitionprofit(54%x6,000) 3,240 DrNon-controllinginterestin

financialposition(40%x7,400) 2,960CrInvestmentsinZBhd 12,950

–toeliminatecostofinvestment.(h) DrSharecapitalofZBhd(46%x10,000) 4,600 DrRevaluationreserve–goodwill 1,150 DrRetainedprofits 3,680

CrNon-controllinginterestinfinancialposition 9,430 –toallocatenetassetsandgoodwilltoNCI.



Example 22UBhdacquireda75%interestintheequitycapitalofMBhdon1January20x1

foraconsiderationofRM53,500,000.OnthisdatethesharepremiumandretainedprofitsofMBhdwereRM10,000,000andRM8,000,000respectively.

Onthesameday,MBhdacquireda60%interestintheequitycapitalofSBhdforaconsiderationofRM23,600,000.ThesharepremiumandretainedprofitsofSBhdonthisdatewereRM5,000,000andRM6,000,000respectively.

On1January20x2,thebeginningofthecurrentyearended31December20x2,UBhdacquireda20%interestintheequitycapitalofSBhdforaconsiderationofRM8,080,000.

Thesummarisedaccountsofthethreecompaniesforthecurrentyearended31December20x2areasfollows:

Statements of Comprehensive Income

UBhdRM’000

MBhdRM’000

SBhdRM’000

Revenue 80,000 60,000 40,000Expenses (60,000) (48,000) (32,000)Profitbeforetaxation 20,000 12,000 8,000Taxation (6,000) (3,600) (2,400)Profitaftertaxation 14,000 8,400 5,600Retainedprofitsbroughtforward 36,000 14,600 10,400Retainedprofitscarriedforward 50,000 23,000 16,000


UBhdRM’000

MBhdRM’000

SBhdRM’000

SharecapitalofRM1each 80,000 40,000 20,000Sharepremiumaccount 40,000 10,000 5,000Retainedprofits 50,000 23,000 16,000Long-termloans 40,000 20,000 15,000Currentliabilities (39,000) (30,000) (11,000)

249,000 123,000 67,000Property,plantandequipment 118,420 54,400 41,000Investment,atcost:30,000,000sharesofMBhd 53,500 – –4,000,000sharesofSBhd 8,080 – –12,000,000sharesofSBhd – 23,600 –Current assets 69,000 45,000 26,000

249,000 123,000 67,000



AttheacquisitiondatesofMBhdandSBhd,theirnetassetswerestatedintheaccountsatfairvalues.Therewerenointragrouptransactionsduringtheyearended31December20x2.At the respectiveacquisitiondates, the considerationspaidbytheparentsarebasedonthefairvaluesofthesubsidiariesasawhole.Non-controllinginterestsaremeasuredatacquisition-datefairvalue.

Required(a) Using the two-stage method, firstly, prepare the consolidated accounts of

sub-groupMBhdandthenpreparetheconsolidatedaccountsoftheultimategroupUBhd.

(b) Usingtheone-stagemethod,preparetheconsolidatedaccountsoftheultimategroupUBhd.

Solution 22(a) Goodwilloncombination

(i) MBhdandSBhd: RM’000 Considerationtransferred 23,600 Non-controllinginterestatacquisitiondate fairvalue(23,600/.6)x40% 15,733 FairvalueofSBhdasawhole 39,333 Fairvalueofidentifiablenetassets(20,000+5,000+6,000) 31,000 Goodwilloncombination 8,333 AllocatedtoParent(60%) 5,000 Allocatedtonon-controllinginterest 3,333 8,333(ii) UBhdandMBhd: RM’000 Considerationtransferred 53,500 Non-controllinginterestatacquisition-date fairvalue(53,500/.75)x25% 17,833 FairvalueofMBhdasawhole 71,833 Fairvalueofidentifiablenetassets(40,000+10,000+8,000) 58,000 Goodwilloncombination 13,333 AllocatedtoParent(75%) 10,000 Non-controllinginterest(25%) 3,333 13,333



(iii) Changeinstakeasequitytransaction: RM’000 NetassetsofSBhdon 1January20x2(20,000+5,000+10,400) 35,400 GoodwilloncombinationW(i) 8,333 Totalnetassetsandgoodwill 43,733 Purchaseof20%additionalstake 20% Increaseinshareofnetassetsandgoodwill 8,747 Costofadditional20%stake 8,080 Accretionofnetassetandgoodwilladjustedtoequity 667

Two-stage ConsolidationStage 1 – M Bhd and S Bhd

MBhdRM’000

SBhdRM’000

(Dr)RM’000

CrRM’000

M GroupRM’000

Revenue 60,000 40,000 100,000Expenses (48,000) (32,000) (80,000)Profitbeforetax 12,000 8,000 20,000Taxexpense (3,600) (2,400) (6,000)Profitaftertax 8,400 5,600 14,000Non-controllinginterest (2,240)d (2,240)Attributabletoowners 8,400 5,600 11,760Retainedprofitsb/forward 14,600 10,400 (3,600)b

(4,160)c17,240

Retainedprofitsc/forward 23,000 16,000 29,000Sharecapital 40,000 20,000 (12,000b

(8,000)c40,000

Sharepremium 10,000 5,000 (3,000)b(2,000)c

10,000

Revaluationreserve (5,000)b(3,333)c

8,333a –

Non-controllinginterest 17,493c2,240d

19,733

Long-termloans 20,000 15,000 35,000Currentliabilities 30,000 11,000 41,000TotalEquity&Liabilities 123,000 67,000 174,733Property,plant&

equipment (54,400) (41,000) (95,400)Goodwilloncombination (8,333)a (8,333)InvestmentinSBhd (23,600) 23,600b –Current assets (45,000) (26,000) (71,000)TotalAssets (123,000) (67,000) (51,667) 51,667 (174,733)



Consolidationadjustments: RM’000 RM’000(a)DrGoodwilloncombination 8,333

CrRevaluationreserve 8,333 –torecognisegoodwilloncombination.(b) DrSharecapitalofSBhd 12,000 DrSharepremiumofSBhd 3,000 DrRevaluationreserve–goodwill 5,000 DrPre-acquisitionprofits 3,600

CrInvestmentinSBhd 23,600 –toeliminatecostofinvestment.(c) DrSharecapitalofSBhd 8,000 DrSharepremiumofSBhd 2,000 DrRevaluationreserve–goodwill 3,333 DrRetainedprofitsbroughtforward 4,160

CrNon-controllinginterestinfinancialposition 17,493 –toallocateopeningnetassetsandgoodwilltoNCI.(d) DrNon-controllinginterestinprofitorloss 2,240

CrNon-controllinginterestinfinancialposition 2,240 –toallocatecurrentyearprofittoNCI.

Stage2–UBhdandMGroup

UBhdRM’000

M GroupRM’000

(Dr)RM’000

CrRM’000

UGroupRM’000

Revenue 80,000 100,000 180,000

Expenses (60,000) (80,000) (140,000)

Profitbeforetax 20,000 20,000 40,000

Taxexpense (6,000) (6,000) (12,000)

Profitaftertax 14,000 14,000 28,000

Non-controllinginterest (2,240) (1,820)e (4,060)

Attributabletoowners 14,000 11,760 23,940

Retainedprofitsb/forward 36,000 17,240 (6,000)b(4,310)c

42,930

Accretiononchangeinstake 667d 667

Retainedprofitsc/forward 50,000 29,000 67,537



Sharecapital 80,000 40,000 (30,000)b(10,000)c

80,000

Sharepremium 40,000 10,000 (7,500)b(2,500)c

40,000

Revaluationreserve (10,000)b(3,333)c

13,333a –

Non-controllinginterest 19,733 (8,747)d 20,143c1,820e

32,950

Long-termloans 40,000 35,000 75,000Currentliabilities 39,000 41,000 80,000TotalEquity&Liabilities 249,000 174,733 375,487Property,plant&equipment (118,420) (95,400) (213,820)Goodwilloncombination (8,333) (13,333)a (21,667)InvestmentinMBhd (53,500) 53,500b –InvestmentinSBhd (8,080) 8,080d –Current assets (69,000) (71,000) (140,000)TotalAssets (249,000) (174,733) (97,543) 97,543 (357,487)


CrRevaluationreserve 13,333 –torecognisegoodwilloncombination.(b) DrSharecapitalofMBhd 30,000 DrSharepremiumofMBhd 7,500 DrRevaluationreserve–goodwill 10,000 DrPre-acquisitionprofits 6,000

CrInvestmentinMBhd 53,500 –toeliminatecostofinvestment.(c) DrSharecapitalofMBhd 10,000 DrSharepremiumofMBhd 2,500 DrRevaluationreserve–goodwill 3,333 DrRetainedprofitsbroughtforward 4,310

CrNon-controllinginterestinfinancialposition 20,143 –toallocateopeningnetassetsandgoodwilltoNCI.(d) DrNon-controllinginterestinfinancialposition 8,747

CrAccretiononchangeinstake 667CrInvestmentinSBhd 8,080

–torecogniseaccretiononchangeinstake.



(e) DrNon-controllinginterestinprofitorloss 1,820CrNon-controllinginterestinfinancialposition 1,820

–toallocatebalanceofcurrentyearprofittoNCI. [calculatedat25%x11,760–½x2,240=1,820]

One-stageConsolidation

UBhdRM’000

MBhdRM’000

SBhdRM’000

(Dr)RM’000

CrRM’000

UGroupRM’000

Revenue 80,000 60,000 40,000 180,000Expenses (60,000) (48,000) (32,000) (140,000)Profitbefore

tax 20,000 12,000 8,000 40,000Taxexpense (6,000) (3,600) (2,400) (12,000)Profitaftertax 14,000 8,400 5,600 28,000Non-controlling

interest(2,100)d(1,960)i

(4,060)

Attributabletoowners 14,000 8,400 5,600 23,940

Retainedprofitb/f

36,000 14,600 10,400 (6,000)b(3,650)c(2,700)f(5,720)g

42,930

Change in stake 667h 667

Retainedprofitsc/f 50,000 23,000 16,000 67,537

Sharecapital 80,000 40,000 20,000 (30,000)b(10,000)c(9,000)f

(11,000)g

80.000

Sharepremium 40,000 10,000 5,000 (7,500)b(2,500)c(2,250)f(2,750)g

40,000

Revaluation (10,000)b(3,333)c(3,750)f(4,583)g

13,333a

8,333e

–

–




(5,900)f(8,747)h

19,483c2,100d

24,053g1,960i

32,950

Long-termloans 40,000 20,000 15,000 75,000

Current liabilities 39,000 30,000 11,000 80,000

TotalEquity&Liabilities 249,000 123,000 67,000 375,847

Prop,plant&equipment (118,420) (54,400) (41,000) (213,820)

Goodwilloncomb.

(13,333)a(8,333)e

(21,667)

InvestmentinMBhd (53,500) 53,500b –

InvestmentinSBhd

(8,080) (23,600) 23,600f8,080h

–

Current assets (69,000) (45,000) (26,000) (140,000)TotalAssets (249,000) (123,000) (67,000) (155,110) 155,110 (375,487)

Proof of NCIMBhd SBhd Total NCIRM’000 RM’000 RM’000

Owners’equity 73,000 41,000Less:InvestmentinSBhd (23,600) –Sundrynetassets 49,400 41,000Goodwilloncombination 13,333 8,333Netassetsandgoodwill 62,733 49,333EffectiveNCI% 25% 35%NCI’sshare 15,683 17,267 32,950


CrRevaluationreserve 13,333 –torecognisegoodwilloncombination.(b) DrSharecapitalofMBhd 30,000 DrSharepremiumofMBhd 7,500 DrRevaluationreserve–goodwill 10,000 DrPre-acquisitionprofits 6,000

CrInvestmentinMBhd 53,500 –toeliminatecostofinvestment.



(c) DrSharecapitalofMBhd 10,000 DrSharepremiumofMBhd 2,500 DrRevaluationreserve–goodwill 3,333 DrRetainedprofitsbroughtforward 3,650

CrNon-controllinginterestinfinancialposition 19,483 –toallocateopeningnetassetsandgoodwilltoNCI.(d) DrNon-controllinginterestinprofitorloss 2,100

CrNon-controllinginterestinfinancialposition 2,100 –toallocatecurrentyearprofittoNCI.(e) DrGoodwilloncombination 8,333

CrRevaluationreserve 8,333 –torecognisegoodwilloncombination.(f) DrSharecapitalofSBhd(45%x20,000) 9,000 DrSharepremiumofSBhd(45%x5,000) 2,250 DrRevaluationreserve–goodwill(5,000x75%) 3,750 DrPre-acquisitionprofit(45%x6,000) 2,700 Dr NCI in financialposition25%x23,600 5,900

CrInvestmentinSBhd 23,600 –toeliminatecostofinvestment.(g) DrSharecapitalofSBhd 11,000 DrSharepremiumofSBhd 2,750 DrRevaluationreserve–goodwill 4,583 DrRetainedprofitsbroughtforward 5,720

CrNon-controllinginterestinfinancialposition 24,053 –toallocateopeningnetassetsandgoodwilltoNCI.(h) DrNon-controllinginterestinfinancialposition 8,747

CrAccretiononchangeinstake 667CrInvestmentinSBhd 8,080

–torecogniseaccretiononchangeinstake.(i) DrNon-controllinginterestinprofitorloss 1,960

CrNon-controllinginterestinfinancialposition 1,960 –toallocatecurrentyearprofittoNCI.

Financial Accounting and Reporting in Malaysia

Documents

Transcript of Financial Accounting and Reporting in Malaysia