44
Study notes
Paper F2
Financial
Management
Step 2. Group structure and timeline
Even the best-prepared students sometimes falter
when tackling step acquisitions because they see
them as too tough. But adopting a step-by-step
approach should help to overcome the fear factor
Don’t omit this stage in your rush to get consolidating, because you’re more likely to make errors if you
do. Once the group structure and the timeline are in
place, much of the number-crunching will be easier.
These don’t have to be works of art, but they need to
be clear (see diagrams below). They give information
about the percentage holding, the status and the
dates from which to consolidate and equity account.
Specifically, NJ is a subsidiary for only 3/12 of the
year. This 3/12 will be applied to items in the statement of consolidated income (SOCI) on a line-by-line
basis. MK is an associate for 6/12 of the year. This 6/12
will be applied to the share of profit and the share of
other comprehensive income for the year when
equity accounting in the consolidation.
During your F1 studies you probably found the
SOCI easier to deal with than the statement of
­financial position. This may well be no longer true
at F2 level. In this question, for example, you have
a lot of time-apportioning to do, because you are
concerned with what happens during the year, rather
than the position at the year end.
By Katy Hibbert, financial reporting subject matter
specialist at BPP Learning Media
S
ince the introduction of the current
syllabus in May 2010, step acquisitions
– also called piecemeal acquisitions or,
more formally, “business combi­nations
achieved in stages” – have been examined four times. It’s clear that there is no
escaping them.
Step acquisitions were examined most recently
in question 6(a) of the November 2011 Financial
Management paper, which can be downloaded from
bit.ly/J9siiY. Let’s attempt to answer it using
a methodical, six-step approach.
Step 1. The requirement
Read it. This may sound obvious, but students often
don’t. And don’t just read it; think about it. The
requirement is as follows: “Prepare the consolidated
statement of comprehensive income for the BH
Group for the year ended 31 March 2011. Round all
figures to the nearest $000 (18 marks).”
Now, think about it. You have already studied
basic statements of comprehensive income for the
F1 paper and you know that these are usually easier
to deal with than statements of financial position.
So, if the F2 examiner is asking you for one, there
must be a twist: generally, a disposal or step acquisition. Sure enough, a quick glance at note 1 in the
“Additional information” section of the question
confirms that the BH Group is acquiring control of
NJ in two stages: 25 per cent and then a further 40
per cent, giving a 65 per cent stake.
When there are three companies in a consolidation question, the third is generally an associate or
a sub-subsidiary. If MK were a sub-subsidiary, it
would be acquired by NJ, rather than the parent
company, BH. Look out for the words “significant
influence”, which signal the existence of an associate. Note that the examiner is not trying to catch
you out – there will always be clues in the question
pointing you in the right direction.
Step 3. Pro formas
Now you need to draw up a pro forma for the consolidated SOCI (see bottom of page 46). You will
Working 1: group structure and timeline diagrams
BH
1.9.02: 25% (financial asset)
1.1.11: 40% (part-year
piecemeal acquisition)
1.10.10: 40% (associate)
(mid-year acquisition:
equity account 6/12)
65% (sub for 3/12)
NJMK
PAR (1.1.11) = $526,000
1.4.10
1.10.10 1.1.1131.3.11
3/ 12 (35% NCI)
NJ consolidate
MK equity account 6/12
46
Study notes
Paper F2
Financial Management
require additional lines for “Profit on derecognition
of financial asset” because, as you can see from the
group structure diagram, an accounting boundary
has been crossed. When this happens, you need to
revalue the investment.
You will also need a caption entitled “Availablefor-sale reclassification adjustment”. This is because
available-for-sale financial assets are valued at fair
value through other comprehensive income. When
these are sold, the revaluation gains are reclassified
from other comprehensive income to profit or loss.
Some of the figures can be taken from the question, or be worked out on a line-by-line basis, but
others will require separate workings.
You also need to set up pro forma workings to be
filled in later. Although a goodwill working is usually associated with the consolidated statement of
BH GROUP’s CONSOLIDATED statement
OF COMPREHENSIVE INCOME for the
year ended 31 MARCH 2011
$000
financial position, it may also be required for the
SOCI where, as in this case, there’s a change in ownership, or where the goodwill is impaired. As this is
a step acqui­sition, your goodwill working will include
a calc­ulation of the profit on derecognition of the
available-for-sale financial asset. You will also know
from having determined the group structure that
there is an associate, and the question tells you that
there are dividends and some intra-group trading.
Leave plenty of space in your pro forma workings
for adjustments – e.g. for impairment of goodwill or
provision for unrealised profit. At this point they
should look something like the following:
Working 2: non-controlling interest (NJ)
Per question
Profit for
Total comp
year ($000) income ($000)
NCI share
x 35%
x 35%
Note: you can insert the NCI percentage here because you have derived it from working 1.
Revenue
Cost of sales
Gross profit
Administrative expenses
Distribution costs
Investment income
Finance costs
Profit on derecognition of financial asset (working 3)
Share of profit of associate (working 4)
Working 3: goodwill (NJ)
Consideration transferred (for 40% on 1.1.11)
Non-controlling interests (at fair value)
Fair value of previously held equity interest
Fair value of net assets at acquisition:
Share capital
Retained earnings (per question)
Impairment
($000)
($000)
Profit before tax
Income tax expense
Profit for the year
Other comprehensive income
Profit on derecognition of financial asset (inv in NJ)
Fair value at 1.1.11
Carrying value at 1.1.11
($000)
Revaluation of property, plant and equipment
Available-for-sale reclassification adjustment (working 3)
Tax effect of other comprehensive income
Share of other comprehensive income of associate
Other comprehensive income for the year, net of tax
Reclassification of previous revaluation gains
(remove from other comprehensive income)
Total profit to be recognised in P/L (separate line
of face of statement of comprehensive income)
Total comprehensive income for the year
Profit attributable to:
Owners of the parent
Working 4: investment in associate (MK)($000)
Cost of associate
Share of post-acquisition reserves of associate
Non-controlling interests (working 2)
Impairment loss
Total comprehensive income attributable to:
Owners of the parent
Working 5: intra-group trading
Non-controlling interests (working 2)
Working 6: intra-group dividend income
Further reading CIMA Official Study Text – Financial Management (2011-12 edition), CIMA Publishing, 2011.
47
Study notes
Step 5. Adjustments
Although any workings that are clear are accep­
table, students who have the BPP study text are
advised to follow the process that it specifies.
Read the additional information given in the question again and attempt the adjustments required:
l Goodwill. See working 3 of the final answer on page
48. Remember to include the fair value of the previously held equity interest, which is given in the question, along with the fair value of the non-controlling
interest. The goodwill impairment can now be calculated and transferred to administrative expenses
on the SOCI, and also to working 2. Note that, because
the non-controlling interest is at fair value, some of
the goodwill is attributable to the non-controlling
interest and has also suffered impairment.
l Profit on derecognition of financial asset. See
working 3 of the final answer on page 48. Transfer
this figure to the SOCI.
l Non-controlling interest. Insert the goodwill
impairment. This working is nearly complete, apart
from the provision for unrealised profit. Be aware
that a provision for unrealised profit will not be
included in the non-controlling interest if the profit
is made by the parent. In this question it is made by
the partly owned subsidiary.
l Intra-group trading and dividends. See workings
5 and 6 on page 48. The results of working 5 are
transferred to the SOCI and to the non-controlling
interest working, which can now be completed.
Step 4. Downloading
Work methodically down the income statement,
transferring figures to either the pro forma or the
workings as necessary. Put all of BH’s and 3/12 of NJ’s
income/expenses in brackets on the face of the pro
forma, ready for any adjustments you need to make.
Don’t make the mistake of including only 65 per
cent of NJ’s income and expenses. Candidates do
this all too often. The fact that NJ is not wholly owned
is dealt with in the working for non-controlling interest. BH does not own all of NJ, but it controls NJ.
Control results in the full consolidation of NJ’s
income and expenses (and assets and liabilities in
the statement of financial position), with a separate
working for non-controlling interest.
At this stage you should download from the question 3/12 of NJ’s profit for the year and total comprehensive income to the non-controlling interest
working. Look at working 2 of the final answer on
page 48 to see the neatest way to present this.
You will be picking up some easy marks here for
basic consolidation aspects, so don’t let the fact that
this is a step acquisition deter you.
Global contact details
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48
Study notes
Paper F2
Financial Management
l Associate. The associate’s share of profit is worked
out easily on the face of the SOCI, but remember to
time-apportion. The associate is impaired and working 4 shows how this is calculated.
If you can, add across to show that you have understood any adjustments – e.g. non-controlling interest.
This is less important for items that don’t need adjusting, but, then again, those items won’t take long.
Step 6. Ownership reconciliation
The last stage involves apportioning profit and total
comprehensive income for the year between the
parent and the non-controlling interest. This is
straightforward: take the figures from working 2 and
find the parent’s share as a balancing figure.
BH GROUP’s CONSOLIDATED statement
OF COMPREHENSIVE INCOME for the
year ended 31 MARCH 2011
$000
Revenue: 3,360 + [3/12 x 3,240] – 200
Cost of sales: 1,800 + [3/12 x 1,860] – 200 + 20
3,970
1,885
Administrative expenses: 380 + [3/12 x 340] + 16
(481)
Distribution costs: 400 + [3/12 x 300]
(475)
Finance costs: 180 + [3/12 x 140]
Profit on derecognition of financial asset (working 3)
Share of profit of associate: [6/12 x 350 x 40%] – 38
Profit before tax
Income tax expense: 200 + [3/12 x 160]
Profit for the year
48
(215)
125
32
919
Revaluation of PPE: 70 + [3/12 x 40]
Tax effect of OCI: 50 + [3/12 x 16]
Share of OCI of associate: 20 x 6/12 x 40%
679
80
(100)
(54)
4
Other comprehensive income for the year, net of tax
(70)
Total comprehensive income for the year
609
Profit attributable to:
Owners of the parent
Non-controlling interests (working 2)
Working 3: goodwill (NJ)
($000)
($000)
Consideration transferred (for 40% on 1.1.11)
680
Non-controlling interests (at fair value)
581
Fair value of previously held equity interest
425
Fair value of net assets at acquisition:
Share capital
1,000
Retained earnings (per question)
526
(1,526)
160
Impairment: 10% x 160 (add to admin expenses)
(16)
144
Profit on derecognition of financial asset
($000)
Fair value at 1.1.11
425
Carrying value at 1.1.11 (assume this has not been revalued
since 31 March 2010 – i.e. revalued only at year end)
(400)
25
Reclassification of previous revaluation gains
(remove from other comprehensive income): 400 – 300
100
Total profit to be recognised in P/L (separate line of SOCI)
125
(240)
Other comprehensive income
Available-for-sale reclassification adjustment (working 3)
Profit for
Total comp
year ($000) income ($000)
110
116
(16)
(16)
(20)
(20)
7480
x 35%
x 35%
26
28
(2,085)
Gross profit
Investment income: 80 – 32
Working 2: non-controlling interest (NJ)
Per question: 440 x 3/12
464 x 3/12
Impairment of goodwill (working 3)
Provision for unrealised profit (working 5)
NCI share
653
26
679
Working 4: investment in associate (MK)($000)
Cost of associate
334
Share of post-acquisition reserves of MK: [{370 x 6/12} – 80] x 40%
42
376
Impairment loss: 10% x 376
(38)
338
Working 5: intra-group trading
NJ (in Jan 2011 – i.e. when NJ was a 65% subsidiary)
BH (parent).
Cancel intra-group revenue and cost of sales of $200,000 (all in post-acquisition
period, so there’s no need to pro-rate). Provision for unrealised profit = $200,000
x 1/2 in inventories x 20/100 margin = $20,000. Increase NJ’s cost of sales (and,
as the subsidiary is the seller, adjust non-controlling interest).
Total comprehensive income attributable to:
Owners of the parent
Non-controlling interests (working 2)
581
28
609
Working 6: intra-group dividend income
On 31.3.11 MK pays BH a dividend of $80,000 x 40% = $32,000. This must be cancelled from “investment income”, as it’s in the group accounts. The group share
of MK’s profit is included instead.