FINANCIAL ACCOUNTING 4
DPA6013
5.0 INTRODUCTION TO GROUP ACCOUNTING
At the end of this topic, students should be able to:1.1 explain the basis element in group accounting
1.2 explain the procedures in preparing the group’s account
INTRODUCTION
MFRS 10 Consolidated Financial Statements, a parent is defined as an entity that
controls one or more entities, and a subsidiary is defined as an entity that is controlled
by another entity. A parent company or holding company has control over another
company (subsidiary), while a subsidiary is a company controlled by a parent
company.
Consolidated financial statements refer to the financial statements of a group in which
the assets, liabilities, equity, income expenses and cash flows of the parent and its
subsidiaries are presented as those of a single economic entity. Paragraph 10 of MFRS
10 provides that a parents company is required to prepare the consolidated financial
statements.
The main objectives of consolidation are as follows;(a) To present the financial statements of the parent and its subsidiary as a single
economic unit.
(b) To show the economic resources controlled by the group
(c) To present the obligations of the group after eliminating inter-group transactions
and balances, and
(d) To present the results that the group achieves with its resources
The Companies Act 2016 (Section 4) defines a subsidiary company as: (a) One in which the investor company:
i.
controls the composition of the board of directors of the corporation; or
ii.
controls more than half of the voting power of the corporation; or
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iii.
holds more than half of the issued share capital of the corporation
(excluding preference shares) or
(b) the corporation is a subsidiary of any corporation which is that other
corporation’s subsidiary
CONSOLIDATED FINANCIAL STATEMENT
Paragraph 4(1) of MFRS 10 requires the ultimate Malaysia parent that controls to
prepare consolidated financial statements.
EXEMPTION FROM CONSOLIDATED FINANCIAL STATEMENTS
An entity may be exempted from preparing consolidated financial statements under
the following circumstances: (a) the entity is wholly owned by the subsidiary of another entity
(b) the entity is partially owned and its remaining owners do not object if no
consolidated financial statements are prepared
(c) the debts or securities of the entity are not publicly traded
(d) the ultimate holding company or intermediate holding company prepares
consolidated financial statements.
PURPOSES OF CONSOLIDATED FINANCIAL STATEMENT
Providing shareholders of the parent company the whole picture of the performance of
the group and the efficiency of the directors and management in managing the
resources under their direct and indirect control.
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DEFINITION OF CONTROL AND NON CONTROLLING INTEREST
MFRS 127 defines ‘Control’ is the power to govern the financial and operating policies
of an entity so as to obtain benefits from its activities. The control is obtained when the
investor owns, directly or indirectly, more than one-half of the voting power of an entity.
Non-Controlling Interest (minority interest) is the term used for the group of shareholders
who do not control an entity.
Example : Ayden Bhd has in issue 1,000,000 equity shares and
Nadya Bhd had acquired 65% of the issued capital in Ayden Bhd
and has control over Ayden Bhd. the holders of the shares not held
by Nadya Bhd are collectively called non-controlling interest
CONSIDERATION TRANSFERRED
The consideration transferred will be measured at the fair value of:(a) assets transferred by the acquirer
(b) liabilities incurred by the acquirer to the former owners of the acquire
(c) equity instruments issued by the acquirer
(d) contingent consideration
PREPARATION OF CONSOLIDATED STATEMENT OF FINANCIAL POSITION
The consolidated (or group) financial statements present the performance, financial
position and changes in financial position of the group as a single operation.
The consolidated statement of financial position is prepared by combining the assets
and liabilities of the holding company and all of its subsidiaries, eliminating all intercompany balances, such as amounts to/by one member to another.
Here are the steps in preparing the consolidated financial statements:Step 1 : Group Structure
Compute the consideration transferred and measure the non-controlling interest.
 P Bhd. (parent) percentage of S Bhd. (subsidiary)
 Date of acquisition
 Non-controlling interest
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Step 2 : Write off Investment in subsidiary
Write off investment account of holding company in a subsidiary and transfer to
Adjustment Account.
Step 3 : Goodwill computation
Write off share capital account and subsidiary general reserve, revenue reserve and
capital reserve and transfer to Adjustment Account.
Dr. Ordinary Share Capital
Preference Share Capital
Reserves
Retained earning
Goodwill
Cr. Adjustment Account
Bargain Purchase
XX
XX
XX
XX
XX
XX
XX
Goodwill is defined my MFRS 3 as “an asset representing the future economic benefits
arising from other assets acquired in a business combination that are not individually
identified and separately recognized”. Goodwill arises when the fair value of the net
assets of the investee is less than the fair value of the investee’s equity shares as held by
all equity holders.
Bargain purchase arises when the price paid for the fair value of the equity shares of
the investee is less than the fair value of the net assets of the investee on the acquisition
date.
Step 4 : Group Retained Earnings (Profit)
Step 5: Non Controlling Interest
Step 6: Prepare Consolidated Statement of Financial Position
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Example 1:
Given below is the Statement of Financial Position of Jay Bhd and Bee Bhd as at 31
December 2017.
Jay Bhd
RM
Bee Bhd
RM
Non Current Asset
Land, plant and equipment (net)
Investment in Bee
1,000
2,250
3,250
600
0
600
Current Asset
Bank
Other assets
1,000
5,000
6,000
9,250
550
1,400
1,950
2,550
Financed by;
Ordinary share capital
Retained earning
5,000
2,750
7,750
1,500
750
2,250
1,500
9,250
300
2,550
Current Liability
Trade payables
On 31 December 2017, Jay Bhd took over Bee Bhd by acquiring all the shares issued by
Bee Bhd.
Prepare :
i.
Adjustment Account
ii.
Consolidated Statement of Financial Position
Suggested answer:
1. Close Investment account of Jay Bhd in Bee Bhd and transfer to Adjustment
Account.
Dr
Adjustment Account
RM 2,250
Cr
Investment account in B Bhd
RM 2,250
2. Write off Share Capital account & Retained Earnings
transfer to Adjustment Account.
account in B Bhd and
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Dr
Ordinary share capital
Retained earnings account
Cr
Adjustment Account
DPA6013
RM 1,500
RM 750
RM 2,250
When investment value = equity value taken over, no goodwill / discount takeover exist
3. Prepare Consolidated Statement of Financial Position
JAY BHD & GROUP
CONSOLIDATED STATEMENT OF FINANCIAL POSITION AS AT 31 DECEMBER 2017
RM
RM
Non Current Asset
Land, plant and equipment (net)
1,600
Current Asset
Bank
Other assets
1,550
6,400
7,950
9,550
Financed by;
Ordinary share capital
Retained earning
5,000
2,750
7,750
Current Liability
Trade payables
1,800
9,550
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Example 2 :
Given below is the Statement of Financial Position of Gol Bhd and Gincu Bhd as at 31
December 2018.
Gol Bhd
Gincu Bhd
RM
RM
Non Current Asset
Land, plant and equipment (net)
Investment in Gincu
800
2,500
3,300
600
0
600
Current Asset
Bank
Other assets
950
5,000
550
1,400
5,950
9,250
1,950
2,550
Financed by;
Ordinary share capital
Retained earning
5,000
2,750
7,750
1,500
750
2,250
1,500
9,250
300
2,550
Current Liability
Trade payables
On 31 December 2018, Gol Bhd took over
issued by Gincu Bhd.
Gincu Bhd by acquiring all the shared
You are required to prepare :
i.
Adjustment Account
ii.
Consolidated Statement of Financial Position
Suggested answer:
1. Close Investment account of Gol Bhd in Gincu Bhd and transfer to Adjustment
Account .
Dr
Adjustment Account
Cr
Investment account
RM 2,500
RM 2,500
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2. Write off share capital account & Retained earning account in Gincu Bhd and
transfer to Adjustment Account.
Dr
Cr
Ordinary share
RM 1,500
Retained earnings
RM 750
Goodwill
RM 250
Adjustment Account
RM 2,500
The balancing figure for Adjustment Account is goodwill or bargain purchase
(capital reserve).
Investment in Gincu
Adjustment Account
RM
2,500
Ordinary shares
Retained earnings
Goodwill
2,500
RM
1,500
750
250
2,500
3. Prepare consolidated statement of financial position
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GOL BHD & GROUP
CONSOLIDATED STATEMENT OF FINANCIAL POSITION AS AT 31 DECEMBER 2018
RM
RM
Non Current Asset
Land, plant and equipment (net)
Goodwill on consolidation
1,400
250
1,650
Current Asset
Bank
Other assets
1,500
6,400
7,900
9,550
Financed by;
Ordinary share capital
Retained earning
5,000
2,750
7,750
Current Liability
Trade payables
1,800
9,550
RESERVES
Pre-acquisition reserves are a reserve that has been in the subsidiaries account at the
date of acquisition.
It has to be written off (transferred to Adjustment Account) every time during
preparation of consolidated financial statement because it does not belong to the
holding company.
Post-acquisition reserves are profits and losses made by the subsidiary after the shares
are acquired. Increase or reduction from other reserves is also post acquisition reserves.
The holding company is entitled to these profits and losses according to their
percentage ownership on the subsidiary.
Example 3 :
On 31 December 2017, Siput Bhd acquired 100% interest in Sepet Bhd for the price of
RM 32,000. On that date net assets of Sepet Bhd represented by equities are as follows:
Ordinary share capital
RM 20,000
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Generel reserves
Retained earnings
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RM 10,000
RM 10,000
Given below are the financial statements of the two companies as at 31 December
2017.
Assets
Other assets
Investment in Sepet Bhd
Equities and Liabilities
Ordinary Share
Retained earnings
General reserves
Liabilities
Siput Bhd
RM
Sepet Bhd
RM
150,000
32,000
182,000
120,000
0
120,000
50,000
60,000
50,000
22,000
182,000
20,000
35,000
15,000
50,000
120,000
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Prepare :
i.
ii.
iii.
Adjustment Account
Consolidated Profit& loss account
Consolidated Statement of Financial Position as at 31 December 2017
PREFERENCE SHARES
Apart from ordinary shares, subsidiaries may also issue preference shares and
debentures that may also be acquired by holding company (other than ordinary
shares)
Therefore, if holding company acquires preference shares in subsidiaries, it will not
involve control percentage of holding company on the subsidiaries.
DEBENTURE
Debenture includes debenture stocks, bonds, notes and any other evidence of
indebtedness of a corporation for borrowed money. Generally, the debentures are
issued with fixed interest rates.
If a holding company bought some debentures in a subsidiary, the amount taken over
will be transferred to Adjustment Account.
The balance which was not taken over will not be transferred to Non-controlling interest
account.
This is because that amount is a long term liability under the responsibility of the group.
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Example 4 :
Statement of Financial Position as at 31.12.2017
Investment in YY Bhd
Non current assets
Trade receivables
Bank
Inventories
Ordinary share @ RM1.00
Preference shares
Share premium
Retained earnings
General reserves
Trade payables
Other liabilities
SS
RM
360,000
340,000
32,000
10,000
18,000
760,000
YY
RM
545,000
35,000
15,000
10,000
605,000
600,000
50,000
50,000
30,000
30,000
760,000
400,000
50,000
30,000
30,000
30,000
20,000
45,000
605,000
Additional information:
SS Bhd bought 300,000 units of ordinary shares and 50% preference shares in YY Bhd on
31 December 2017, when the reserves balances in YY Bhd as at that date are as follows
:
Share premium
RM 30,000
Retained earnings RM 10,000
General reserves
RM 20,000
You are required to prepare the consolidated statement of financial position as at 31
December 2017.
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FINANCIAL ACCOUNTING 4
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*Exercise 1 :
Given below were the Statements of Financial Positions of Ali Bhd and Abam Bhd as at
31.12.2019
Investment in Abam Bhd
Non current assets
Current Asset
Ordinary share
Retained earnings
General reserves
Ali
RM
325,000
585,000
50,000
960,000
300,000
50,000
350,000
660,000
150,000
150,000
960,000
240,000
30,000
80,000
350,000
Abam
RM
On 1.1.2019 Ali Bhd bought ordinary shares in Abam Bhd when the accounts in Baba
Bhd showed the following balances :
General reserve
Retained earnings
RM 50,000
RM 10,000
Prepare the Consolidated Statement of Financial Position of Ali Bhd and group as at 31
December 2017.
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FINANCIAL ACCOUNTING 4
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*Exercise 2 :
Asyraf Bhd bought 400,000 units of ordinary shares in Bunga Bhd on 1.1.2019. The
retained earnings and general reserves upon acquisition showed balances of
RM80,000 and RM60,000 each consecutively.
Statement of Financial Position as at 31.12.2019
Investment in Bunga Bhd
Non current assets
Current Asset
Ordinary share
Retained earnings
General reserves
Asyraf
RM
550,000
150,000
135,000
835,000
Bunga
RM
580,000
120,000
700,000
600,000
85,000
150,000
835,000
500,000
100,000
100,000
700,000
Prepare the consolidated statement of Financial Position for Asyraf and group as at 31
December 2019
You have BRAINS in your HEAD
You have FEET on your SHOES
You can STEER yourself any
DIRECTION you CHOOSE
~Dr Seuss~
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