Group Accounting & Consolidation F3

The Ace (ACCA, FIA, HDA, BBA, CAT, CIMA tuition provider in Chittagong, Bangladesh)

Accounting for Groups, Subsidiaries, Associates and Minority Interest (IAS 27, 28 and IFRS 3)

Applicable Standards IFRS 3: Business Combinations IAS 27: Consolidated and Separate Financial Statements IAS 28: Investments in Associates

GROUP ACCOUNTINGNote that the following applies to international accounting standards (IFRS and IAS).Terminology

FV = Fair value NCI = Non-controlling interest URP = Unrealized profit COGS = Cost of Goods Sold / Cost of Sales Sub = Subsidiary (with control, > 50%) Sub-Sub = Sub-Subsidiary (i.e. Subsidiary of a Subsidiary) Assoc = Associate (with significant influence, >= 20%) Reserves = Shareholder’s equity except for basic share capital (yes reserves include share

premiums)

SUBSIDIARIESApplicable Standards

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

Consolidated Balance SheetKey Components

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

Method #1: Share of net assets at reporting date + NCI goodwill – share of goodwill impairment loss

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

Goodwill Cost of investment + NCI at acquisition – FV of net assets of Sub at acquisition

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o If NCI is measured as share of net assets of sub, the goodwill calculated is just the goodwill attributed to the parent’s share. There is no goodwill attributed to the NCI’s share.

o If NCI is measured at fair value, a portion of the goodwill is attributed to the parent, and a portion is attributed to the NCI.

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

liability being remeasured, with the change recognised in P&L. Goodwill and the cost of investment remain unchanged.

Adjustments for Intra-Group Transactions Cash-in-transit and inventory-in-transit can cause group receivables and payables not to

balance. To fix, adjust the recipient company’s accounts as though the cash / inventory has been received. For example,

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

Profits made from intra-group transactions need to be reversed since you can’t make profits from yourself.

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

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

items that have been further sold to external parties.o URP for non-current assets at a reporting date is the difference between (A) the

carrying value of the asset by the buyer, and (B) the carrying value of the asset by the seller had it not been sold.

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

Intra-group loanso The matching asset and liability for the loan needs to be removed.o Accrued interest payable at the borrower needs to be cancelled out with the

matching interest receivable at the lender.o NCI is calculated as per normal in both Consolidated Balance Sheet and

Consolidated Income Statement (i.e. both loan amount and loan interest are still included as it is from the perspective of the Sub).

Dividends are handled in Consolidated Income Statement, no adjustment in Consolidated Balance Sheet required because the full Consolidated Income Statement (without dividends) matches the accounts in the Consolidated Balance Sheet.




Preparing Consolidated Balance Sheet Make any fair value adjustments required (note that Retained Earnings need not be

adjusted even if the FV of assets increased because any change in FV is matched and cancelled out by Goodwill within Assets, because Goodwill’s “less net assets” would have included that additional FV).

Make adjustments for intra-group transactions per above.

Adjust the Investments lineo Subtract from Investments (under Parent), the original cost of investment in the

Sub.o Note that any loan notes that the Parent bought from the Sub should be included

as part of the original cost of investment in the Sub, and is already part of the Investments line in the Parent’s separate balance sheet.

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

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

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

Share capitalo Note that only the Parent’s share capital is included if the share capital of the Subs

have not changed. This is because the conversion of Investments to Goodwill would have eliminated the Sub’s share capital that existed at acquisition.

Compute Retained Earningso Equals to Parent’s retained earnings + Parent’s share of post acquisition change in

net assets – Parent’s share of goodwill impairment (which is full if NCI is measured as share of net assets, or proportionate if NCI is measured at FV).

o Note that Parent’s share of Sub’s net assets at acquisition is cancelled out with the Parent’s Investments item, with the excess classified as Goodwill.

o Note that any increase in net assets post acquisition is proportionately split between the Parent’s retained earnings and the NCI.

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

acquisition.

Consolidated Income StatementAdjustments for Intra-Group Transactions

Eliminate sales and purchases (reverse the seller’s revenue and the buyer’s COGS by the same amount)




Eliminate interest paid and received (reverse the payer’s interest paid and the payee’s interest received)

For the URP of goods that remain within the group, increase the seller’s COGS by the URP to reverse the profit.

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

transfer is different from depreciation charge had it not been transferred.o If the transfer occurred in the current period, reverse any profit/loss on transfer.

Dividends from the Sub to the Parent are reversed because that is an intra-group transfer.Preparing Consolidated Income Statement

Only the Sub’s results after acquisition should be included in the Consolidated Income Statement.

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

adjusted to correspond with the new FV. The change in the FV goes into the revaluation surplus account in Consolidated Other Comprehensive Income.

Goodwill impairment is charged to P&L, can be put under Admin Expenses of the Parent. Tax charges remain unchanged despite goodwill impairment or adjustments in

depreciation because tax is assessed on the individual companies. Profits attributable to NCI = NCI share * Sub’s profit [note: the Sub's profit here does not

take into account adjustments to Revenue or COGS due to elimination of intra-group sales/purchases, BUT it does take into account reduced Sub's profits due to reversal of URP. It is not consistent treatment I know.]

Profits attributable to Owners of the Parent = Parent’s profit + Parent’s share * Sub’s profit (or the balancing figure if lazy)

Preparing Consolidated Statement of Comprehensive Income Total comprehensive income attributable to NCI = NCI share * Sub’s total

comprehensive income Total comprehensive income attributable to Owners of Parent = Parent’s total

comprehensive income + Parent’s share * Sub’s total comprehensive income (or balancing figure)

ASSOCIATESApplicable Standard

IAS 28: Investments in Associates

Consolidated Balance Sheet Equity method of accounting is used. Adjust the Investments line

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




o Note that dividends received do not decrease the original cost of investment in the Assoc, hence it doesn’t impact the Investments line (under Parent). It is simply booked as Dr Cash, Cr Income from shares in associates (P&L).

Add a non-current asset titled “Investment in Associate”o Cost of Investmento + Parent’s share of post-acquisition change in reserves of Assoco - Dividends paid to Parent from Assoco - Impairment losseso + Loans to Assoc (this is ‘rolled in’ from what is a separate line item in the

Parent’s separate balance sheet)o - URP if Parent sold to Assoc

Retained earningso Increased by the Parent’s share of post-acquisition reserves of associateo Less impairment loss in Assoco Less URP from purchases/sales between Parent and Assoc (this needs to be

specially adjusted here unlike the case for Subs because there is no consolidation of Assoc’s accounts into the Parent’s balance sheet)

Inventoryo Less URP if Assoc sold to Parent

Only the Parent’s share of the URP is eliminated above. E.g. if the Parent owns 30% of the Assoc, only 30% of the full URP is eliminated in the entries above. This is consistent with the treatment of Subs where there is 100% consolidation and 100% of the URP is eliminated.

Assets and liabilities items are not consolidated, hence no cancellation of any inter-company items (e.g. loans).

Consolidated Income Statement Add a line “Share of profits of associate” immediately before the group’s profit before

tax (Equity method)o Share of profits of associate = Group’s share of Assoc profit after tax –

Impairment of Assoc arising in the year Cancel any dividend income received from the Assoc because that would be grouped

together and replaced with the “Share of profits of associate” Adjust for URP (group’s share)

o Increase COGS by the URP to remove the profit. No cancellation of Revenues and COGS for sales and purchases between Parent and

Assoc as the income statements are not combined.

Consolidated Statement of Comprehensive Income Add a line “Share of other comprehensive income of associate” under the Parent + Sub’s

Revaluation Surpluso Group’s share of associate’s other comprehensive income



Group Accounting & Consolidation F3

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