FAC3762/107/0/2022
Tutorial Letter 107/0/2022
INTERNATIONAL GROUP AND
FINANCIAL ACCOUNTING
FAC3762
Year module
Department of Financial Accounting
IMPORTANT INFORMATION:
This tutorial letter contains important information about your module.
Please register on myUnisa, activate your myLife e-mail address and make sure
that you have regular access to the myUnisa module website.
BARCODE
Open Rubric
FAC3762/107
CONTENTS
1. INTRODUCTION ............................................................................................................................. 3
2. CONTACT DETAILS ....................................................................................................................... 3
3. GENERAL ....................................................................................................................................... 4
LEARNING UNIT 12: ........................................................................................................................... 5
LEARNING UNIT 13 ............................................................................................................................ 5
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FAC3762/107
1. INTRODUCTION
This tutorial letter consists of:
•
•
Learning Unit 12: Complex groups
Learning Unit 13: Change in control
It is in your own interests to work through the learning units in conjunction with
• Group statements (the prescribed textbook), and
• the myUnisa website, where additional online content is available.
2. CONTACT DETAILS
E-mail
You should use the following e-mail address for all communication with the lecturers:
FAC3762@unisa.ac.za
Due to the high volume of e-mails which lecturers receive from students; it is not always possible to
reply immediately. Please be patient, as your e-mails will be attended to as soon as possible.
Telephonic enquiries
Alternatively, you could use the following telephone numbers for all communication with the
lecturers:
012 429 4250 / 4246
You may also contact the lecturers of FAC3762 telephonically on the following telephone numbers:
Lecturers
Office
Mrs N Gumede
Simon Radipere Building, 2-66
Telephone
number
012 429 6671
Mrs S Noor Mahomed
Simon Radipere Building, 2-59
012 429 3943
Mrs L Botha
Simon Radipere Building, 2-65
012 429 4412
Mrs D Mkololo
Simon Radipere Building 2 -60
012 429 4633
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FAC3762/107
3. General
3.1 REVISION
The following topics were covered in your second-year module, FAC2602:
- Provisions in respect of companies in a group context;
- Consolidation of a wholly-owned subsidiary at date of acquisition;
- Consolidation of a partially-owned subsidiary at date of acquisition;
- Consolidation of a wholly-owned subsidiary after date of acquisition;
- Consolidation of a partially-owned subsidiary at date of acquisition;
- Elimination of intragroup transactions (excluding the effect of tax);
- Treatment of dividends during consolidations; and
- Treatment of preference shares during consolidations.
Please note:
The abovementioned topics were covered in your second-year module FAC2602 and are “assumed
knowledge” for the module FAC3762. Even though not specifically dealt with in this module, these
topics are still examinable, as they form part of basic consolidation procedures.
3.2 ABBREVIATIONS USED IN THE STUDY MATERIAL
Look out for the following abbreviations in the study material:
SP/LOCI
SFP
SOCIE
SCF
NCI
SC
RE
FV
CA
CGT
PREFS
DEP
REV
P/L
OCI
Statement of profit or loss and other comprehensive income
Statement of financial position
Statement of changes in equity
Statement of cash flows
Non-controlling interests
Share capital
Retained earnings
Fair value
Carrying amount
Capital gains tax
Preference shares
Depreciation
Revaluation
Profit or loss section of the statement of profit or loss and other comprehensive
income
Other comprehensive income section of the statement of profit or loss and other
comprehensive income
3.3 TAXATION
The South African normal tax rate for companies has been 28% since 1 March 2008.
However, another tax rate could be used in the study material. Read your questions carefully
and ensure you use the correct tax rates in your answers.
From 1 March 2016, the capital gains tax (CGT) inclusion rate has changed from 66,6% to
80%. As a result, the effective CGT rate increased from 18,648% (66,6% x 28%) to 22,4%
(80% x 28%). All questions will state the tax rate in the additional information. Use the tax
rate given in the question to prepare your solutions.
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FAC3762/107
LEARNING UNITFAC3704
12:
COMPLEX GROUPS
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LEARNING OUTCOMES
After you have studied this learning unit, you should be able to:
• Identify and describe different group formats
• Distinguish between a subsidiary, an associate and a joint arrangement
• Define and interpret “control”, “significant influence” and “joint control”
• Distinguish between the accounting treatment of a subsidiary, an associate, a joint arrangement
and an investment
• Apply the relevant consolidation procedures for different group formats
OVERVIEW
The learning unit consists of the following sections:
Page
1.
Complex groups
1.1
Composition of a group of entities
8
1.2
Horizontal groups
9
2.
E-tutor activity
22
3.
Assessment criteria
22
4.
Question bank
23
STUDY
Study the following chapter of the prescribed textbook (Group statements, Volume 1, 17th edition):
- Chapter 7: Consolidation of complex groups.
RECOMMENDED READINGS
IFRS Standards – The Annotated IFRS Standards
- IFRS 3: Business Combinations.
- IFRS 10: Consolidated Financial Statements.
- IFRS 12: Disclosure of Interests in Other Entities.
- IAS 27: Separate Financial Statements.
To access these standards, please register at https://login.ifrs.org/register/
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FAC3762/107
Figure 1: You are here: Complex groups
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FAC3762/107
1
1.1
COMPLEX GROUPS
COMPOSITION OF A GROUP OF ENTITIES
Study:
Group statements (Volume 1), 17th edition
- Chapter 7: Composition of a group of companies (pp. 440–466)
A parent company, together with its subsidiaries and sub-subsidiaries, forms a group of entities. The
following terms describe the different possible compositions of a group of entities:
Simple groups
A simple group is a group consisting of a parent and a single subsidiary.
Complex groups
A complex group is a group consisting of a parent and more than one subsidiary. There are three
types of complex groups, namely horizontal, vertical and mixed groups.
Horizontal groups (single-level structures)
A horizontal group is a group consisting of a parent which holds a direct interest in several other
entities (subsidiaries).
The group can be schematically illustrated as follows:
A Ltd
(parent)
B Ltd
(subsidiary)
C Ltd
(subsidiary)
Vertical groups (multiple-level structures)
A vertical group is a group consisting of a parent which holds a direct interest in a subsidiary, which
in turn holds a direct interest in its own subsidiary. The parent thus holds an indirect interest in the
bottom subsidiary. The group can be schematically illustrated as follows:
A Ltd
(parent)
B Ltd
(subsidiary)
C Ltd
(sub-subsidiary)
8
A Ltd
(parent)
B Ltd
(subsidiary)
C Ltd
(subsidiary)
D Ltd
(sub-subsidiary)
E Ltd
(sub-subsidiary)
FAC3762/107
Mixed groups
These groups can be schematically illustrated as follows:
A Ltd
(parent)
B Ltd (subsidiary of A Ltd and
parent of C Ltd)
C Ltd (subsidiary of A Ltd
and B Ltd)
In a mixed group, the parent itself owns the controlling equity shareholding in at least one subsidiary,
and the parent and such subsidiary together own the controlling interest in another company. Please
refer to Group statements (Volume 1) for more schematic illustrations of mixed groups.
Mixed groups do not form part of the syllabus of FAC3762 and do not need to be studied.
Horizontal and vertical groups, which will be examined in FAC3762, can include
associates and joint arrangements. Refer to the question bank for more examples.
1.2.
HORIZONTAL GROUPS
Study:
Group statements (Volume 1), 17th edition
- Chapter 7 – 7.2 Horizontal groups (p. 440)
- Chapter 7 – 7.4 Consolidation of a horizontal group (pp. 441–446)
EXAMPLE 1
The following are the abridged trial balances of A Ltd, B Ltd and C Ltd at 31 December 20.16:
A Ltd
R
Credits
Share capital
100 000 ordinary shares
80 000 ordinary shares
30 000 ordinary shares
Retained earnings – beginning of year
Profit before tax
-
Debits
Property, plant and equipment
Investment in equity instruments:
Investment in B Ltd at cost price
Investment in C Ltd at cost price
Trade and other receivables
Income tax expense
Dividends paid
B Ltd
R
C Ltd
R
100 000
—
—
200 000
345 000
645 000
—
80 000
—
150 000
220 000
450 000
—
—
60 000
110 000
95 000
265 000
266 500
284 000
136 500
110 000
100 000
35 000
103 500
30 000
645 000
—
—
60 000
66 000
40 000
450 000
—
—
65 000
28 500
35 000
265 000
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FAC3762/107
Additional information
1.
A Ltd purchased 60 000 shares in B Ltd on 1 January 20.13, when B Ltd’s retained earnings
amounted to R60 000. On 1 January 20.14, A Ltd acquired 27 000 shares in C Ltd, when the
retained earnings of C Ltd amounted to R40 000. On both acquisition dates, A Ltd acquired control
over the respective companies and the fair values of the identifiable assets, liabilities and
contingent liabilities were considered to be equal to the carrying amounts of these items.
2. Each share carries one (1) vote.
3.
The group elected to measure non-controlling interests at their proportionate interest in the
identifiable net assets of the acquiree. Goodwill was not considered to be impaired at the 20.16
year end.
4. Investments in subsidiaries are recognised at the cost price thereof.
REQUIRED:
Prepare the consolidated annual financial statements of A Ltd Group for the year
ended 31 December 20.16.
Your answer must comply with the requirements of International Financial
Reporting Standards.
No notes are required.
Ignore comparative figures.
SOLUTION 1
LECTURER’S COMMENT
Percentage interest that A Ltd has in:
B Ltd: 60 000/80 000 = 75%
C Ltd: 27 000/30 000 = 90%
Structure of group:
A Ltd
1 January 20.13
75%
B Ltd
1 January 20.14
90%
C Ltd
From the above it is clear that A Ltd has a direct interest in B Ltd and a direct
interest in C Ltd, therefore the group is a horizontal group.
An analysis is prepared for B Ltd and C Ltd. An analysis is prepared for each
subsidiary individually, as the group is a horizontal group and there is no direct
relationship between B Ltd and C Ltd.
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FAC3762/107
A LTD GROUP
CONSOLIDATED STATEMENT OF FINANCIAL POSITION AS AT 31 DECEMBER 20.16
R
ASSETS
Non-current assets
Property, plant and equipment (266 500 + 284 000 + 136 500)
Goodwill (5 000a + 10 000g)
702 000
687 000
15 000
Current assets
Trade and other receivables (35 000 + 60 000 + 65 000)
Total assets
160 000
160 000
862 000
EQUITY AND LIABILITIES
Total equity
Equity attributable to owners of the parent
Share capital
Retained earnings
Non-controlling interests (86 000f + 20 150m)
862 000
755 850
100 000
655 850
106 150
Total equity and liabilities
862 000
A LTD GROUP
CONSOLIDATED STATEMENT OF PROFIT OR LOSS AND OTHER COMPREHENSIVE INCOME
FOR THE YEAR ENDED 31 DECEMBER 20.16
R
Profit before tax
(345 000 + 220 000 + 95 000 – 30 000 (dividends) – 31 500(dividends))
Income tax expense (103 500 + 66 000 + 28 500)
PROFIT FOR THE YEAR
TOTAL COMPREHENSIVE INCOME FOR THE YEAR
Profit for the year attributable to:
Owners of the parent (balancing)
Non-controlling interests (38 500d + 6 650j)
Total comprehensive income attributable to:
Owners of the parent (balancing)
Non-controlling interests (38 500d + 6 650j)
598 500
(198 000)
400 500
400 500
355 350
45 150
400 500
355 350
45 150
400 500
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FAC3762/107
A LTD GROUP
CONSOLIDATED STATEMENT OF CHANGES IN EQUITY FOR THE YEAR ENDED
31 DECEMBER 20.16
Share
capital
Balance at 1 January 20.16
Changes in equity for 20.16
Dividends paid
Total comprehensive income for the
year:
Profit for the year
Balance at 31 December 20.16
Retained
earnings
R
100 000
R
330 5001
R
430 500
Noncontrolling
interests
R
74 5002
(30 000)
(30 000)
(13 500)3
(43 500)
355 350
655 850
355 350
755 850
45 150
106 1504
400 500
862 000
100 000
Total
Total
equity
R
505 000
200 000 + 67 500b + 63 000h = 330 500 or 200 000 + ((110 000 – 40 000) – 7 000 (J6)) + ((150 000
– 60 000) – 22 500 (J2)) = 330 500
2 57 500c + 17 000i = 74 500
3 10 000e + 3 500k = 13 500
4 Check: 86 000f + 20 150m = 106 150
1
CALCULATIONS
C1 ANALYSIS OF OWNERS' EQUITY OF B LTD
100%
Total
R
At acquisition
Share capital
Retained earnings
Equity represented by goodwill
Consideration paid and NCI
80 000
60 000
140 000
5 000
145 000
A Ltd
75%
At
R
Since
R
60 000
45 000
105 000
5 000a
110 000
25%
NCI
R
20 000
15 000
35 000
—
35 000
Since acquisition
Retained earnings (150 000 – 60 000)
Current year
Profit for the year
(220 000 – 66 000)
Dividends paid
12
90 000
235 000
67 500b
67 500
22 500
57 500c
154 000
(40 000)
349 000
115 500
(30 000)
153 000
38 500d
(10 000)e
86 000f
110 000
FAC3762/107
C2 ANALYSIS OF OWNERS’ EQUITY OF C LTD
100%
Total
R
At acquisition
Share capital
Retained earnings
Equity represented by goodwill
Consideration and NCI
Since acquisition
Retained earnings (110 000 – 40 000)
Current year
Profit for the year (95 000 – 28 500)
Dividends paid
C3
60 000
40 000
100 000
10 000
110 000
A Ltd
90%
At
R
10%
NCI
R
Since
R
54 000
36 000
90 000
10 000g
100 000
6 000
4 000
10 000
—
10 000
70 000
180 000
63 000h
63 000
7 000
17 000i
66 500
(35 000)
211 500
59 850
(31 500)
91 350
6 650j
(3 500)k
20 150m
100 000
PRO-FORMA CONSOLIDATION JOURNALS
J1 Share capital
Retained earnings
Goodwill
Non-controlling interests (SFP)
Investment in B Ltd
Elimination of owners' equity in B Ltd at acquisition
Dr
R
80 000
60 000
5 000a
J2 Retained earnings – beginning of year
Non-controlling interests (SFP)
Recording of the non-controlling interests in retained
earnings of B Ltd [(150 000 – 60 000) x 25%]
22 500
J3 Non-controlling interests (P/L)
Non-controlling interests (SFP)
Recording of non-controlling interests in profit for the
year of B Ltd
[(220 000 – 66 000) x 25%]
38 500
J4 Profit before tax (other income)
Non-controlling interests (SFP)
Dividends paid
Elimination of intragroup dividend and recording
portion of non-controlling interests therein
30 000
10 000
J5 Share capital
Retained earnings
Goodwill
Non-controlling interests (SFP)
Investment in C Ltd
Elimination of owners' equity in C Ltd at acquisition
60 000
40 000
10 000g
Cr
R
NCI
R
35 000
110 000
35 000
22 500
22 500
38 500
38 500d
(10 000)e
40 000
10 000
100 000
10 000
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J6 Retained earnings – beginning of year
Non-controlling interests (SFP)
Recording of the non-controlling interests in
retained earnings of C Ltd
[(110 000 – 40 000) x 10%]
Dr
R
7 000
Cr
R
7 000
NCI
R
7 000
17 000i
J7 Non-controlling interests (P/L)
Non-controlling interests (SFP)
Recording of non-controlling interests in profit for
the period of C Ltd
[(95 000 – 28 500) x 10%]
J8 Profit before tax (other income)
Non-controlling interests (SFP)
Dividends paid
Elimination of intragroup dividend and recording of
the portion of non-controlling interests therein
6 650
6 650
31 500
3 500
6 650j
(3 500)k
35 000
20 150m
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FAC3762/107
EXAMPLE 2
THE FOLLOWING REPRESENTS THE ABRIDGED ANNUAL FINANCIAL STATEMENTS OF
UTAH LTD, OHIO LTD AND THE MAINE LTD GROUP:
STATEMENTS OF FINANCIAL POSITION AS AT 31 AUGUST 20.16
ASSETS
Non-current assets
Property, plant and equipment
Equity investments:
– 80 000 ordinary shares in Maine Ltd at cost
– 30 000 ordinary shares in Ohio Ltd at cost
Current assets
Inventories
Trade and other receivables
Total assets
Utah
Ltd
Ohio
Ltd
R
R
Maine
Ltd
Group
R
981 000
541 000
337 500
337 500
778 400
778 400
270 000
170 000
—
—
—
—
494 000
100 000
394 000
1 475 000
305 000
85 000
220 000
642 500
283 000
180 000
103 000
1 061 400
EQUITY AND LIABILITIES
Total equity
Equity attributable to owners of the parent
Share capital – 200 000 ordinary shares
– 50 000 ordinary shares
– 100 000 ordinary shares
Retained earnings
Non-controlling interests
750 000
750 000
200 000
—
—
550 000
—
527 500
527 500
—
50 000
—
477 500
—
788 400
668 400
—
—
100 000
568 400
120 000
Non-current liabilities
Long-term borrowings
600 000
600 000
50 000
50 000
250 000
250 000
125 000
125 000
725 000
1 475 000
65 000
65 000
115 000
642 500
23 000
23 000
273 000
1 061 400
Current liabilities
Trade and other payables
Total liabilities
Total equity and liabilities
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STATEMENTS OF PROFIT OR LOSS AND OTHER COMPREHENSIVE INCOME FOR THE YEAR
ENDED 31 AUGUST 20.16
Profit before tax
Income tax expense
PROFIT FOR THE YEAR
TOTAL COMPREHENSIVE INCOME FOR THE
YEAR
Profit and total comprehensive income attributable to:
Owners of the parent
Non-controlling interests
Utah
Ltd
Ohio
Ltd
R
500 000
(150 000)
350 000
R
375 000
(112 500)
262 500
Maine
Ltd
Group
R
672 000
(201 600)
470 400
350 000
262 500
470 400
350 000
—
350 000
262 500
—
262 500
398 400
72 000
470 400
STATEMENTS OF CHANGES IN EQUITY FOR THE YEAR ENDED 31 AUGUST 20.16
Balance at 1 September 20.15
Changes in equity for 20.16
Dividends paid
Total comprehensive income for the year
Profit for the year
Balance at 31 August 20.16
Utah
Ltd
Retained earnings
Ohio
Ltd
R
240 000
R
240 000
Maine
Ltd
Group
R
200 000
(40 000)
(25 000)
(30 000)
350 000
550 000
262 500
477 500
398 400
568 400
Additional information
1.
Utah Ltd acquired its controlling interest in Maine Ltd Group on 1 September 20.15. The fair value
of the identifiable assets, liabilities and contingent liabilities at the acquisition date of Maine Ltd
Group was considered to be equal to the carrying amount of these items.
2.
Utah Ltd acquired its controlling interest in Ohio Ltd on 1 September 20.15. The identifiable
assets, liabilities and contingent liabilities at the acquisition date of Ohio Ltd were considered to
be fairly reflected, except for the following items:
Land
Inventories
Fair
value
R
200 800
57 600
Carrying
amount
R
180 000
70 000
Assume that the fair values of the above items have been reassessed and are considered to be
reasonable.
The group elected to measure non-controlling interests at their proportionate share of the
acquiree’s identifiable net assets. The goodwill that arose on the acquisition of Maine Ltd was
considered to be impaired by R20 000 at the end of the current year.
5. Each share carries one (1) vote.
6. The equity investments in subsidiaries are measured at the cost price thereof.
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FAC3762/107
7. The normal company tax rate is 28%, and capital gains tax is calculated at 80% thereof.
REQUIRED:
Prepare the consolidated annual financial statements of Utah Ltd Group for the year ended 31
August 20.16.
Your answer must comply with the requirements of International Financial Reporting Standards.
No notes are required.
Ignore comparative figures.
SOLUTION 2
LECTURER’S COMMENT
Percentage interest that Utah Ltd has in:
Ohio Ltd: 30 000 / 50 000 = 60%
Maine Ltd Group: 80 000 / 100 000 = 80%
Structure of group:
Utah Ltd
1 September 20.15
60%
1 September 20.15
80%
Ohio
Ltd
Maine
Ltd
Group
From the above it is clear that Utah Ltd has a direct interest in Ohio Ltd and
a direct interest in the Maine Ltd Group, therefore the group is a horizontal
group.
An analysis is prepared for Ohio Ltd and the Maine Ltd Group. An analysis is
prepared for each subsidiary individually, as the group is a horizontal group
and there is no direct relationship between Ohio Ltd and the Maine Ltd Group.
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FAC3762/107
UTAH LTD GROUP
CONSOLIDATED STATEMENT OF FINANCIAL POSITION AS AT 31 AUGUST 20.16
R
ASSETS
Non-current assets
Property, plant and equipment
(541 000 + 337 500 + 778 400 + 20 800(C3) / (J5))
Goodwill (30 000a – 20 000f)
Total non-current assets
1 677 700
10 000
1 687 700
Current assets
Trade receivables (394 000 + 220 000 + 103 000)
Inventories (100 000 + 85 000 + 180 000)
Total current assets
Total assets
717 000
365 000
1 082 000
2 769 700
EQUITY AND LIABILITIES
Equity attributable to owners of the parent
Share capital
Retained earnings
Non-controlling interests (120 000 (given) + 133 680e + 217 456k)
Total equity
1 180 905
200 000
980 905
471 136
1 652 041
Non-current liabilities
Long-term borrowings (600 000 + 50 000 + 250 000)
Deferred tax (4 659 – 3 472 + 3 472 (J9))
Total non-current liabilities
Current liabilities
Trade and other payables (125 000 + 65 000 + 23 000)
Total current liabilities
Total liabilities
Total equity and liabilities
900 000
4 659
904 659
213 000
213 000
1 117 659
2 769 700
UTAH LTD GROUP
CONSOLIDATED STATEMENT OF PROFIT OR LOSS AND OTHER COMPREHENSIVE INCOME
FOR THE YEAR ENDED 31 AUGUST 20.16
tax1
Profit before
Income tax expense2
PROFIT FOR THE YEAR
TOTAL COMPREHENSIVE INCOME FOR THE YEAR
Profit for the year attributable to:
Owners of the parent
Non-controlling interests3
Total comprehensive income attributable to:
Owners of the parent
Non-controlling interests3
1
2
18
500 000 – 15 000 (60% x 25 000(div)) – 24 000 (80% x 30 000(div)) + 375 000
+ 12 400 (C3) + 672 000 – 20 000f + 8 328g = 1 508 728
150 000 + 112 500 + 3 472(C3) + 201 600 = 467 572
R
1 508 728
(467 572)
1 041 156
1 041 156
780 905
260 251
1 041 156
780 905
260 251
1 041 156
FAC3762/107
3
72 000(given) + 79 680c + 108 571i = 260 251
LECTURER’S COMMENT
The gain on bargain purchase (R8 328) that arose on the acquisition of Ohio
Ltd is included in profit before tax, because the acquisition of Ohio Ltd by Utah
Ltd took place in the current year (1 September 20.15).
UTAH LTD GROUP
CONSOLIDATED STATEMENT OF CHANGES IN EQUITY FOR THE YEAR ENDED
31 AUGUST 20.16
Balance as at
1 September 20.15
Changes in equity for 20.16
Acquisition of subsidiaries
Dividends paid
Total comprehensive income for
the year:
Profit for the year
Balance at 31 August 20.16
1
2
Share
capital
Retained
earnings
R
200 000
R
240 000
200 000
Total
Noncontrolling
interests
Total
equity
R
440 000
R
—
R
440 000
(40 000)
(40 000)
226 8851
(16 000)2
226 885
(56 000)
780 905
980 905
780 905
1 180 905
260 251
471 136
1 041 156
1 652 041
60 000b + 118 885h + (120 000 (given) (SFP) – 72 000 (given) (SP/LOCI)) = 226 885
10 000 j + 6 000d = 16 000
CALCULATIONS
C1 ANALYSIS OF OWNERS' EQUITY OF MAINE LTD GROUP
100%
Total
R
At acquisition
Share capital
Retained earnings
Equity represented by goodwill
Consideration paid and NCI
Current year
Profit for the year (given)
Dividends paid
Impairment of goodwill
Current year (given)
Carrying amount – 31/08/20.16
100 000
200 000
300 000
30 000
330 000
398 400
(30 000)
698 400
Utah Ltd
80%
At
Since
R
R
80 000
160 000
240 000
30 000a
270 000
(30 000)
20%
NCI
R
20 000
40 000
60 000b
—
60 000
318 720
(24 000)
294 720
79 680c
(6 000)d
133 680e
20 000f
(10 000)
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FAC3762/107
C2 ANALYSIS OF OWNERS' EQUITY OF OHIO LTD
At acquisition
Share capital
Retained earnings
(240 000 – 8 928(write-off inventory) (C3))
Revaluation surplus (C3)
Equity represented by gain on bargain
purchase
Consideration paid and NCI
Current year
Profit for the year (262 500 + 8 928 (C3))
Dividends paid
100%
Total
R
50 000
231 072
Utah Ltd
60%
At
Since
R
R
30 000
138 643
40%
NCI
R
20 000
92 429
16 141
297 213
9 685
178 328
6 456
118 885
(8 323)
289 197
(8 328)g
170 000
—
118 885h
271 428
(25 000)
535 625
162 857
(15 000)
147 857
108 571i
(10 000)j
217 456k
C3 CALCULATION OF EFFECT OF FAIR VALUE ADJUSTMENTS AT ACQUISITION
Land
Inventories
1
2
Carrying
amount
R
200 800
57 600
Tax base
Temporary
difference
R
R
180 000
20 800
70 000
(12 400)
Tax effect
R
(4 659)1
3 472 2
After tax
amount
R
16 141
(8 928)
20 800 x 80% x 28% = 4 659
12 400 x 28% = 3 472
C4 PRO-FORMA CONSOLIDATION JOURNALS
J1 Share capital
Retained earnings
Goodwill
Non-controlling interests (SFP)
Investment in Maine Ltd
Elimination of owners' equity in Maine Ltd Group at
acquisition by Utah Ltd
Dr
R
100 000
200 000
30 000a
J2 Non-controlling interests (P/L)
Non-controlling interests (SFP)
Recording of non-controlling interests in profit for the
year of Maine Ltd Group
(398 400 x 20% = 79 680)
79 680
J3 Profit before tax
Non-controlling interests (SFP)
Dividends paid
Elimination of intragroup dividend and recording
portion of non-controlling interests therein of Maine
Ltd Group
24 000
6 000
Cr
R
NCI
R
60 000
270 000
60 000b
79 680
79 680c
(6 000)d
30 000
133 680e
20
FAC3762/107
J4 Profit before tax
Goodwill
Impairment of goodwill of Maine Ltd Group
J5 Property, plant and equipment
Deferred tax (SFP) (4 659 – 3 472)
Inventories
Revaluation surplus
Retained earnings
Recording of fair value adjustments at acquisition
(C3)
Dr
R
20 000
Cr
R
NCI
R
20 000f
20 800
1 187
12 400
16 141
8 928
J6 Share capital
Retained earnings (240 000 – 8 928)
Revaluation surplus
Non-controlling interests (SFP)
Investment in Ohio Ltd
Gain on bargain purchase (profit before tax)
Elimination of owners' equity in Ohio Ltd at
acquisition
50 000
231 072
16 141
J7 Non-controlling interests (P/L)
Non-controlling interests (SFP)
Recording of non-controlling interests in profit for the
year of Ohio Ltd
((262 500 + 8 928 (C3)) x 40% = 108 571)
108 571
J8 Profit before tax
Non-controlling interests (SFP)
Dividends paid
Elimination of intragroup dividend and recording
portion of non-controlling interests therein of
Ohio Ltd
J9 Inventories (SFP)
Income tax (P/L)
Deferred tax (SFP)
Cost of sales (profit before tax) (P/L)
Realisation of inventories fairly valued at acquisition
date
15 000
10 000
118 885h
170 000
8 328g
118 885
108 571i
108 571
(10 000)j
25 000
12 400
3 472
3 472
12 400
217 456k
21
FAC3762/107
2. E-TUTOR ACTIVITY
E-tutor activity
Attempt the following in the prescribed textbook (Group statements, Volume 1,
17th edition):
Self-assessment questions 7.1 and 7.2 (pp. 466–478).
The solution may be discussed with your e-tutor.
3. ASSESSMENT CRITERIA
On completion of this learning unit, you should be able to
-
describe and identify the different types of complex groups;
-
compile the consolidation working papers of the different types of complex
groups;
-
consolidate, from the consolidation working papers, the information
contained in the financial statements of the different companies in the
complex group; and
-
prepare and present the consolidated annual financial statements of a
complex group.
4. QUESTION BANK
The following questions are based on the work covered in this learning unit. It is
in your interest to answer the questions on your own, before marking them using
the solutions provided. If you follow this procedure, you can identify what you do
not understand. You can then revise the relevant sections of the work and try to
answer the applicable questions again.
Question
22
Topic
Marks
Minutes
1
Horizontal group with two subsidiaries
42
76
2
Horizontal group with a subsidiary and associate
32
58
3
Horizontal group with a subsidiary and associate
117
211
4
Horizontal group with a subsidiary and associate
30
54
5
Horizontal group with a subsidiary, associate and
joint venture
56
101
6
Horizontal group with a subsidiary and joint venture
35
63
Done
FAC3762/107
QUESTION 1
The following are the trial balances of Dune Ltd, Crow Ltd and Berry Ltd for the year ended
31 March 20.17:
Dune
Crow
Berry
Ltd
Ltd
Ltd
Dr/(Cr)
Dr/(Cr)
Dr/(Cr)
R
R
R
Share capital - 100 000 ordinary shares
(100 000)
- 50 000 ordinary shares
(50 000)
- 25 000 ordinary shares
(25 000)
Mark-to-market reserve
(3 880)
Retained earnings - 1 April 20.16
(870 000)
(249 000)
(260 000)
Deferred tax on mark-to-market reserve
(1 120)
Revenue
(840 000)
(248 000)
(190 000)
Other income
(28 800)
(6 500)
Cost of sales
504 000
149 000
85 500
Finance charges
5 000
Other expenses
88 000
35 000
45 000
Income tax expense
77 504
18 340
16 660
Dividends paid - 31 March 20.17
6 400
6 000
10 000
Bank, inventories and trade receivables
263 100
50 050
51 000
Trade and other payables
(85 000)
(120 000)
(113 755)
Investment in Crow Ltd at cost price
325 000
Investment in Berry Ltd at cost price
195 500
Investment in Sand Ltd at fair value
45 000
Property, plant and equipment
464 296
370 110
380 595
Additional information
1. Dune Ltd acquired control of Crow Ltd on 1 April 20.15 by acquiring 40 000 ordinary shares in
Crow Ltd when the retained earnings of Crow Ltd amounted to R349 000. The assets and liabilities
of Crow Ltd were fairly valued at date of acquisition.
2. Dune Ltd acquired control of Berry Ltd on 1 April 20.16 by acquiring 15 000 ordinary shares in
Berry Ltd. The assets and liabilities of Berry Ltd were fairly valued at date of acquisition, except
for the land and buildings. A sworn appraiser valued the land and buildings at R300 000. This was
R55 412 above the original cost price thereof. The land and buildings have not been depreciated.
3. During the year ended 31 March 20.17, Crow Ltd sold inventory to Dune Ltd for R18 000. The
inventory was still on hand at 31 March 20.17. Crow Ltd sold the inventory to Dune Ltd at cost
plus 20%.
4. On 1 April 20.16, Crow Ltd acquired a 5% interest in Sand Ltd for R40 000. On 31 March 20.17,
the investment in Sand Ltd was revalued to its fair value of R45 000.
5. During the year ended 31 March 20.17, Crow Ltd paid R5 000 interest to Dune Ltd. The interest
was charged on a short-term loan from Dune Ltd to Crow Ltd that was repaid by the end of the
financial year. The interest paid by Crow Ltd was included in “finance charges” and the interest
received by Dune Ltd was included in “other income”.
6. During the year ended 31 March 20.17 Crow Ltd paid management fees of R10 000 to Dune Ltd.
The management fees paid by Crow Ltd were included in “other expenses” and the management
fees received by Dune Ltd were included in “other income”.
7. Dune Ltd measures its investments in subsidiaries in its separate accounting records at cost
price, in accordance with IAS 27, Separate Financial Statements.
23
FAC3762/107
8. Crow Ltd classifies its investments in equity instruments at fair value, in accordance with IFRS 9,
Financial Instruments, and any fair value adjustments are recognised in a mark-to-market reserve
(other comprehensive income).
9. The Dune Ltd Group elected to measure non-controlling interests at their proportionate share of
the acquiree’s identifiable net assets at acquisition date.
10. The SA normal tax rate is 28% and capital gains tax is calculated at 80% thereof. You may
assume that both the tax rates have remained unchanged since 1 April 20.15.
11. Each share carries one (1) vote and the issued share capital of all the entities in the group has
remained unchanged since 1 April 20.15.
REQUIRED:
Marks
(a)
(b)
(c)
(d)
Discuss the accounting treatment of a gain from bargain purchase that arises as a
result of the acquisition of an interest in a subsidiary during the current year.
2
Prepare the consolidated statement of profit or loss and other comprehensive
income of the Dune Ltd Group for the year ended 31 March 20.17.
12
Prepare the consolidated statement of changes in equity of the Dune Ltd Group for
the year ended 31 March 20.17.
8
Prepare the consolidated statement of financial position of the Dune Ltd Group as at
31 March 20.17.
20
[42]
Please note:
Your answer must comply with the requirements of International Financial Reporting
Standards (IFRS).
Notes to the annual financial statements and comparative figures are not required.
All calculations must be shown and all amounts must be rounded off to the nearest Rand.
24
FAC3762/107
SUGGESTED SOLUTION 1
PART A
A gain on bargain purchase is the gain resulting from the acquisition of an interest in a subsidiary at
less than net asset value. The gain is recognised, immediately on the acquisition date, in profit/loss
(P/L) in “other income” in the consolidated statement of profit or loss and other comprehensive
income.
PART B
DUNE LTD GROUP
CONSOLIDATED STATEMENT OF PROFIT OR LOSS AND OTHER COMPREHENSIVE INCOME
FOR THE YEAR ENDED 31 MARCH 20.17
R
Revenue (840 000 + 248 000 + 190 000 – 18 000(C1))
1 260 000
Cost of sales (504 000 + 149 000 + 85 500 – 18 000(C1) + 3 000(C1))
(723 500)
Gross profit
536 500
Other income (28 800 + 6 500 - 5 000(interest) – 10 000(management fees) – 4
10 800
000(div)(6 000 x 80%) – 6 000(div)(10 000 x 60%) + 1 300h(gain on bargain purchase))
(158 000)
Other expenses (88 000 + 35 000 + 45 000 – 10 000(management fees))
Finance charges (5 000 – 5 000)
Profit before tax
389 300
Income tax expense (77 504 + 18 340 + 16 660 – 840(C1))
(111 664)
PROFIT FOR THE YEAR
277 636
Other comprehensive income:
Items that will not be reclassified to profit or loss:
Fair value adjustment on equity instruments, net of tax
Other comprehensive income for the year, net of tax
TOTAL COMPREHENSIVE INCOME FOR THE YEAR
Profit for the year attributable to:
Owners of the parent
Non-controlling interests (9 000d + 17 136j)
Total comprehensive income for the year attributable to:
Owners of the parent (281 516 – 26 912)
Non-controlling interests (26 136 + 776)
3 880
3 880
281 516
251 500
26 136
277 636
254 604
26 912
281 516
25
FAC3762/107
PART C
DUNE LTD GROUP
CONSOLIDATED STATEMENT OF CHANGES IN EQUITY FOR THE YEAR ENDED
31 MARCH 20.17
NonMark-tocontrolShare
market Retained
ling
Total
capital reserve earnings
Total
interests
equity
R
R
R
R
R
R
Balance at 1 April 20.16
100 000
790 0001
890 000 59 8002
949 800
Changes in equity for 20.17
Acquisition of subsidiary
Total comprehensive income
for the year
Profit for the year
Other comprehensive income
- fair value adjustment
Dividends paid
Balance at 31 March 20.17
1
2
3
4
-
-
-
-
131 200i
131 200
-
3 104
-
251 500
251 500
254 604
251 500
26 912
26 136
281 516
277 636
100 000
3 1044
3 104
(6 400)
1 035 100
3 104
(6 400)
1 138 204
776
(5 200)3
212 712
3 880
(11 600)
1 350 916
870 000 – 80 000b = 790 000 or 870 000 + ((249 000 – 349 000) x 80%) = 790 000
79 800(J8) – 20 000(J9) = 59 800c
4 000k + 1 200e = 5 200
3 880 x 80% = 3 104
PART D
DUNE LTD GROUP
CONSOLIDATED STATEMENT OF FINANCIAL POSITION AS AT 31 MARCH 20.17
ASSETS
Non-current assets
Property, plant and equipment (464 296 + 370 110 + 380 595 + 55 412(C2))
Goodwill
Investment in equity instruments
Total non-current assets
Current assets
Bank, inventories and trade receivables (263 100 + 50 050 + 51 000 - 3 000(C1))
Total current assets
Total assets
EQUITY AND LIABILITIES
Equity attributable to owners of the parent
Share capital
Retained earnings
Other components of equity (mark-to-market reserve)
Non-controlling interests (68 354g + 144 098l)
Total equity
Non-current liabilities
Deferred tax (1 120(given) + 12 412(J5)(C3) – 840(J2)(C1))
Total non-current liabilities
Current liabilities
Trade and other payables (85 000 + 120 000 + 113 755)
Total current liabilities
Total liabilities
Total equity and liabilities
26
R
1 270 413
5 800a
45 000
1 321 213
361 150
361 150
1 682 363
100 000
1 035 100
3 104
1 138 204
212 712m
1 350 916
12 692
12 692
318 755
318 755
331 447
1 682 363
FAC3762/107
CALCULATIONS
C1 Unrealised profit in closing inventories
R
18 000
3 000
840
Closing inventories on hand at 31 March 20.17 (given)
Unrealised profit in closing inventories (18 000 x 20/120)
Tax effect on unrealised profit (3 000 x 28%)
C2 Revaluation of land
Revaluation (given)
Deferred tax (55 412 x 80% x 28%)
R
55 412
(12 412)
43 000
C3 Profit for the year
R
248 000
(149 000)
6 500
(35 000)
(5 000)
(18 340)
47 160
Revenue
Cost of sales
Other income
Other expenses
Finance charges
Income tax expense
After-tax effect of unrealised profit in inventory
[(3 000(18 000 x 20/120) – (840(3 000 x 28%))]
(2 160)
45 000
C4 Analysis of owners’ equity of Crow Ltd
100%
Total
R
At acquisition
Share capital
Retained earnings
Equity represented by goodwill
Consideration and NCI
Since acquisition
Accumulated loss (249 000 – 349 000)
Current year
Profit for the year (C3)
Dividends paid
Other comprehensive income – fair value
adjustment on investment in equity instruments
(Mark-to-market reserve) (given)
50 000
349 000
399 000
5 800
404 800
Dune Ltd
80%
At
Since
R
R
40 000
279 200
319 200
5 800a
325 000
20%
NCI
R
10 000
69 800
79 800
79 800
(100 000)
(80 000)b
(20 000)
59 800c
45 000
(6 000)
36 000
(4 800)f
9 000d
(1 200)e
3 880
347 680
3 104
(45 696)
776n
68 376g
27
FAC3762/107
C5 Proof of goodwill of Crow Ltd (IFRS 3.32)
R
325 000
79 800
404 800
Consideration transferred at acquisition date
Non-controlling interests ((50 000 + 349 000) x 20%)
Net amount of identifiable assets acquired and liabilities assumed at acquisition date
(50 000 + 349 000)
Goodwill
(399 000)
5 800
C7 Analysis of owners’ equity of Berry Ltd
Dune Ltd
60%
At
Since
R
R
100%
Total
R
At acquisition
Share capital
Retained earnings
Revaluation of land (C2)
Equity represented by gain on bargain purchase
Consideration and NCI
Current year
Profit for the year1
Dividends paid
25 000
260 000
43 000
328 000
(1 300)
326 700
15 000
156 000
25 800
196 800
(1 300)h
195 500
42 840
(10 000)
359 540
40%
NCI
R
10 000
104 000
17 200
131 200 i
131 200
25 704
(6 000)m
19 704
1
17 136 j
(4 000)k
144 336 l
R
190 000
(85 500)
(45 000)
(16 660)
Profit for the year
Revenue
Cost of sales
Other expenses
Income tax expense
42 840
C8 Proof of gain on bargain purchase of Berry Ltd (IFRS 3.32)
R
195 500
131 200
326 700
Consideration transferred at acquisition date
Non-controlling interests (25 000 + 260 000 + 43 000(C2) x 40%)
Net amount of identifiable assets acquired and liabilities assumed at acquisition date
(25 000 + 260 000 + 43 000(C2))
Gain on bargain purchase
C9
Pro-forma consolidation journals
J1 Revenue
Cost of sales
Elimination of intragroup sales
J2 Cost of sales
Deferred tax
Inventories
Income tax expense
Elimination of intragroup profit included in inventories (C1)
28
(328 000)
(1 300)
Dr
R
18 000
Cr
R
18 000
3 000
840
3 000
840
NCI
R
FAC3762/107
J3 Other income (management fee received)
Other expenses (management fee paid)
Elimination of intragroup management fees paid
J4 Other income (interest received)
Finance charges (interest paid)
Elimination of intragroup interest paid
J5 Property, plant and equipment
Revaluation surplus
Deferred tax (SFP)
Revaluation of land (C2)
Dr
R
10 000
NCI
R
10 000
5 000
5 000
55 412
43 000
12 412
J6 Share capital
Retained earnings
Revaluation surplus
Other income (gain on bargain purchase)
Investment in Berry Ltd
Non-controlling interests (SFP)
Elimination of owners’ equity at acquisition of Berry Ltd
25 000
260 000
43 000
J7 Share capital
Retained earnings
Goodwill
Investment in Crow Ltd
Non-controlling interests (SFP)
Elimination of owners’ equity at acquisition of Crow Ltd
50 000
349 000
5 800a
J8 Non-controlling interests (SFP)
Accumulated loss – beginning of year
Recording of non-controlling interests in accumulated loss
– beginning of year since acquisition of Crow Ltd
((249 000 – 349 000) x 20%)
20 000
J9 Non-controlling interests (P/L)
Non-controlling interests (SFP)
Recording of non-controlling interests in current year’s
profit for the year of Berry Ltd (42 8402 x 40%)
17 136
J10 Non-controlling interests (P/L)
Non-controlling interests (SFP)
Recording of non-controlling interests in current year’s
profit for the year of Crow Ltd (45 000(C4) x 20%)
9 000
J11 Mark-to-market reserve
Non-controlling interests (SFP)
Recording of non-controlling interests mark-to-market
reserve (3 880 x 20%)
J12 Other income (dividend received) (P/L)
Non-controlling interests (SFP) (6 000 x 20%)
Dividend paid (SOCIE)
Elimination of intragroup dividend and recording of noncontrolling interests therein
J13 Other income (dividend received) (P/L)
Non-controlling interests (SFP) (10 000 x 40%)
Dividend paid (SOCIE)
Elimination of intragroup dividend and recording of noncontrolling interests therein
Cr
R
1 300h
195 500
131 200
131 200i
325 000
79 800
79 800
(20 000)
20 000
17 136
17 136j
9 000
9 000d
776
776n
776
4 800
1 200
6 000
4 000
(1 200)e
6
000m
(4 000)k
10 000
212 712m
29
FAC3762/107
QUESTION 2
The following are the trial balances of Mumbai Ltd, Delhi Ltd and Jaipur Ltd for the year ended
28 February 20.17:
Mumbai Ltd
Delhi Ltd
Jaipur Ltd
Dr/(Cr)
Dr/(Cr)
Dr/(Cr)
R
R
R
Share capital:
- 525 000 ordinary shares
(525 000)
- 90 000 ordinary shares
(90 000)
- 75 000 ordinary shares
(75 000)
Retained earnings - 1 March 20.16
(497 335)
(101 250)
Gross profit
(183 525)
(195 000)
(189 000)
Other income
(54 500)
Loan from Mumbai Ltd
(100 000)
(50 000)
Trade and other payables
(40 470)
(14 320)
(32 500)
Property, plant and equipment
460 200
162 000
199 700
Trade receivables
193 466
24 184
60 004
Accumulated loss - 1 March 20.16
86 700
Investment in Delhi Ltd at cost price
5 000
Investment in Jaipur Ltd at cost price
42 000
Investments in equity instruments:
- Other equity investments at fair value
100 000
Loan to Delhi Ltd
100 000
Loan to Jaipur Ltd
50 000
Inventories
133 943
29 300
76 430
Other expenses
96 630
21 300
54 300
Finance charges
10 000
5 000
Income tax expense
39 591
45 836
36 316
Dividends paid – 28 February 20.17
80 000
20 000
16 000
Additional information
1. On 1 March 20.14, Mumbai Ltd acquired control of Delhi Ltd by acquiring a 60% interest in
Delhi Ltd. Delhi Ltd was acquired with the intention of turning it into a profitable entity.
On the date of acquisition, the equity of Delhi Ltd consisted of the following items:
Share capital - 90 000 ordinary shares
Accumulated loss
Dr/(Cr)
R
(90 000)
122 000
2. On 1 March 20.14, Mumbai Ltd acquired a 40%, significant influence, in Jaipur Ltd. The retained
earnings of Jaipur Ltd on the acquisition date amounted to R45 000.
3. On 1 March 20.14, the fair value of all assets and liabilities of Delhi Ltd and Jaipur Ltd was equal
to the carrying amounts thereof.
4. During the current year, Mumbai Ltd sold inventories to Delhi Ltd at a mark-up of 25% on cost.
On 28 February 20.17, Delhi Ltd had inventories on hand that were purchased from Mumbai Ltd
to the value of R18 000.
5. On 1 March 20.16, Mumbai Ltd provided loans to Delhi Ltd and Jaipur Ltd. The loans are
repayable on 1 March 20.20. Mumbai Ltd charges interest on the loans at 10% per annum. There
were no outstanding interest payments at 28 February 20.17. The interest paid has been included
in “finance charges” and the interest received has been included in “other income”.
30
FAC3762/107
6. Mumbai Ltd charges a management fee of R7 000 per annum to all companies in the group. There
are no outstanding management fees at year end. Management fees paid have been included in
“other expenses” of Delhi Ltd and Jaipur Ltd, and management fees received have been included
in “other income” of Mumbai Ltd.
7. The value of goodwill was tested for impairment at 28 February 20.17 and it was determined that
the goodwill in Delhi Ltd had been impaired to R20 000 at the end of the current year.
8. The Mumbai Ltd Group elected to measure non-controlling interests in an acquiree at their
proportionate share of the acquiree’s identifiable net assets at acquisition date.
9. Mumbai Ltd measures its investments in subsidiaries and associates in its separate accounting
records at cost price, in accordance with IAS 27, Separate Financial Statements.
10. The Mumbai Ltd Group accounts for associates using the equity method, in accordance with
IAS 28, Investments in Associates and Joint Ventures.
12. The SA normal tax rate is 28% and capital gains tax is calculated at 80% thereof. You may assume
that both the tax rates have remained unchanged since 1 March 20.14.
13. Each share carries one (1) vote and the issued share capital of all the entities in the group has
remained unchanged since 1 March 20.14.
REQUIRED:
Marks
(a)
(b)
Prepare the consolidated statement of profit or loss and other comprehensive
income of the Mumbai Ltd Group for the year ended 28 February 2017.
21
Prepare the consolidated statement of changes in equity for the Mumbai Ltd
Group for the year ended 28 February 2017.
11
[32]
Please note:
Your answer must comply with the requirements of International Financial Reporting
Standards (IFRS).
Notes to the annual financial statements and comparative figures are not required.
All calculations must be shown and all amounts must be rounded off to the nearest Rand.
31
FAC3762/107
SUGGESTED SOLUTION 2
PART A
MUMBAI LTD GROUP
CONSOLIDATED STATEMENT OF PROFIT OR LOSS AND OTHER COMPREHENSIVE INCOME
FOR THE YEAR ENDED 28 FEBRUARY 20.17
R
1
374 925
Gross profit
19 100
Other income2
(115 130)
Other expenses3
37 354
Share of profit of associate(C3)
Finance charges (10 000 – 10 000(100 000 x 10%)(int))
Profit before tax
316 249
4
(84 419)
Income tax expense
PROFIT FOR THE YEAR
231 830
Other comprehensive income for the year
–
TOTAL COMPREHENSIVE INCOME FOR THE YEAR
231 830
Profit for the year attributable to:
Owners of the parent5
184 684
Non-controlling interests6
47 146
231 830
Total comprehensive income attributable to:
Owners of the parent5
184 684
Non-controlling interests6
47 146
231 830
1
2
3
4
5
6
183 525 + 195 000 – 3 600(18 000 x 25/125) = 374 925
54 500 – 7 000(mgt fee) – 10 000(100 000 x 10%)(int) – 12 000(20 000 x 60%)(div)
– 6 400(16 000 x 40%)(div) = 19 100
96 630 + 21 300 – 7 000(mgt fee) + 4 200(impairment) = 115 130
39 591 + 45 836 – 1 008(3 600 x 28%) = 84 419
231 830(profit for the year) – 47 1466(NCI) = 184 684
117 864(195 000 – 31 300 – 45 836) x 40% = 47 146
PART B
MUMBAI LTD GROUP
CONSOLIDATED STATEMENT OF CHANGES IN EQUITY FOR THE YEAR ENDED
28 FEBRUARY 20.17
NonShare
Retained
controlling
Total
capital
earnings
Total
interests
equity
R
R
R
R
R
Balance at 1 March 20.16
Changes in equity for 20.17
Total comprehensive income for the
year:
Profit for the year
Dividends
525 000
Balance at 28 February 20.17
525 000
1
2
547 0151 1 072 015
1 3202
1 073 335
184 684
(80 000)
47 146
(8 000)
231 830
(88 000)
651 699 1 176 699
40 466
1 217 165
184 684
(80 000)
497 335 + 21 180 + 22 500((101 250 – 45 000) x 40%) + 6 000 (gain) = 547 015
(12 800) + 14 120 = 1 320
32
FAC3762/107
CALCULATIONS
C1 Profit for the year
R
195 000
(21 300)
(10 000)
(45 836)
Gross profit
Other expenses
Finance charges
Income tax expense
117 864
C2 Analysis of owner’s equity of Delhi Ltd
100%
Total
R
At acquisition
Share capital
Accumulated loss
Equity represented by goodwill
Consideration paid and NCI
Since acquisition
Retained earnings (86 700 – 122 000)
Current year
Profit for the year (C1)
Dividends paid
90 000
(122 000)
(32 000)
24 200
(7 800)
Mumbai Ltd
60%
At
Since
R
R
54 000
(73 200)
(19 200)
24 200
5 000
40%
NCI
R
36 000
(48 800)
(12 800)
(12 800)
35 300
27 500
21 180k
21 180
14 120
1 320
117 864
(20 000)
125 364
70 718
(12 000)
79 898
47 146
(8 000)
40 466
Impairment of goodwill
Current year (24 200 – 20 000)
Carrying amount at 28 February 20.17
24 200
(4 200)
20 000
C3 Analysis of owner’s equity of Jaipur Ltd
At acquisition
Share capital
Retained earnings
Equity represented by gain on bargain
purchase
Consideration paid
Since acquisition
Gain on bargain purchase
Retained earnings (101 250 – 45 000)
Current year
Profit for the year (189 000 – 54 300 – 5 000
– 36 316)
Dividends
1
100%
Total
R
75 000
45 000
120 000
(6 000)
Mumbai Ltd
40%
At
Since
R
R
30 000
18 000
48 000
(6 000)
42 000
40%
CA
R
42 000
6 000
56 250
6 0001
22 500
6 000
22 500
93 384
(16 000)
253 634
37 354
(6 400)
59 454
37 354
(6 400)
101 454
Included in opening retained earnings, as acquisition took place on 1 March 20.14, therefore in the
period since acquisition to the beginning of the current year.
(The statement of financial position was not required in the question; it has been included for tuition
purposes only.)
33
FAC3762/107
MUMBAI LTD GROUP
CONSOLIDATED STATEMENT OF FINANCIAL POSITION AS AT 28 FEBRUARY 20.17
ASSETS
Non-current assets
Property, plant and equipment (460 200 + 162 000)
Loan to associate
Investment in associate (C3)
Other equity investments
Goodwill (C2)
Deferred tax (3 600 x 28%)
Total non-current assets
Current assets
Inventories (133 943 + 29 300 – 3 600(18 000 x 25/125))
Trade receivables (193 466 + 24 184)
Total current assets
Total assets
R
622 200
50 000
101 454
100 000
20 000
1 008
894 662
159 643
217 650
377 293
1 271 955
EQUITY AND LIABILITIES
Equity attributable to owners of the parent
Share capital
Retained earnings
525 000
651 699
1 176 699
40 466
1 217 165
Non-controlling interests
Total equity
Current liabilities
Trade and other payables (40 470 + 14 320)
Total current liabilities
Total liabilities
Total equity and liabilities
54 790
54 790
54 790
1 271 955
IAS 28, Investments in Associates and Joint Ventures requires the elimination of
unrealised profit and losses only (i.e. transactions that affect both the statement of profit
or loss and other comprehensive income and statement of financial position).
Income and expenses, such as interest received and paid, and management fees, are
not eliminated.
The focus is therefore on the elimination and realisation of intragroup profits, rather than
on intragroup transactions.
(The pro-forma journal entries were not required in the question; it has been included for tuition
purposes only.)
J1 Share capital
Goodwill
Non-controlling interests (SFP) ((90 000 – 122 000) x 40%)
Accumulated loss
Investment in Delhi Ltd
Elimination of investment in Delhi Ltd
J2 Retained earnings
Non-controlling interests (SFP)
Recording of NCI since acquisition to beginning of current
year (35 300(86 700 – 122 000) x 40%)
J3 Non-controlling interests (P/L)
Non-controlling interests (SFP)
Recording of NCI for current year ((117 864 x 40%)
34
Dr
R
90 000
24 200
12 800
Cr
R
NCI
R
(12 800)
122 000
5 000
14 120
14 120
14 120
47 146
47 146
47 146
FAC3762/107
J4 Other income
Non-controlling interests (SFP)
Dividend paid (SOCIE)
Recording of NCI interest in ordinary dividends paid
J5 Other expenses/Impairment loss
Goodwill
Impairment loss recognised on goodwill
J6 Other income/Management fee received
Other expenses/Management fee paid
Elimination of intragroup management fees
J7 Other income/Interest received
Finance charges
Elimination of intragroup interest paid on loan
J8 Loan from Mumbai Ltd
Loan to Delhi Ltd
Elimination of intragroup loans
J9 Cost of sales
Inventory (18 000 x 25/125)
Elimination of unrealised profit included in closing
inventory
J10 Deferred tax asset (SFP)
Income tax expense (P/L)
Tax effect of unrealised profit included in closing inventory
12 000
8 000
(8 000)
20 000
4 200
4 200
7 000
7 000
10 000
10 000
100 000
100 000
3 600
3 600
1 008
1 008
40 466
Carrying
amount of
Investment
in Associate
J11 Investment in associate
Investment in Jaipur Ltd at cost price
Reclassification of investment in associate
J12 Investment in associate
Retained earnings
Allocation of since-acquisition profits of the associate and
recognising the gain on bargain purchase on acquisition
date (22 500 + 6 000 gain on bargain purchase)
J13 Investment in associate
Share in profit of associate
Recognition of current year’s share in profit of associate
J14 Other income/dividend received
Investment in associate
Elimination of intragroup dividend received from the
associate
Dr
R
42 000
Cr
R
R
42 000
42 000
28 500
28 500
28 500
37 354
37 354
37 354
6 400
6 400
(6 400)
101 454
35
FAC3762/107
QUESTION 3
The following are the trial balances of Bodie Ltd, Cox Ltd and Young Ltd for the year ended
28 February 20.17:
Bodie Ltd
Cox Ltd
Young Ltd
R
R
R
Credits
Share capital:
- 250 000 ordinary shares
250 000
- 100 000 ordinary shares
100 000
- 50 000 ordinary shares
50 000
Retained earnings - 1 March 20.16
320 000
245 000
67 500
Loan from Bodie Ltd
100 000
50 000
Accumulated depreciation - Equipment
10 000
18 000
Gross profit
122 350
81 450
190 000
Other income
8 000
Interest income
15 000
Dividends received
21 500
7 000
Trade and other payables
12 000
5 000
758 850
556 450
357 500
Debits
Land and buildings at carrying amount
240 000
360 000
193 000
Equipment at cost price
50 000
100 000
Investment in Cox Ltd at cost price
160 000
Investment in Young Ltd at cost price
32 000
Loan to Cox Ltd
100 000
Loan to Young Ltd
50 000
Other investment
20 000
Inventories
13 932
19 484
97 700
Other expenses
22 500
Finance charges
10 000
5 000
Income tax expense
40 418
21 966
51 800
Dividends paid - 28 February 20.17
50 000
25 000
10 000
758 850
556 450
357 500
Additional information
1. Bodie Ltd acquired control of Cox Ltd by acquiring 70% of the issued share capital of Cox Ltd on
1 March 20.14. The retained earnings of Cox Ltd were R120 000 on date of acquisition. On this
date, the carrying amounts of the assets and liabilities of Cox Ltd were considered to be equal to
the fair values thereof, except equipment of Cox Ltd with a fair value of R9 000 more than its
carrying amount. The revaluation was not recorded in the separate financial records of Cox Ltd.
2.
Bodie Ltd sold equipment with a carrying amount of R65 000 to Cox Ltd on 1 March 20.16 for
R73 000. It is the policy of the group to write off depreciation on equipment at 10% per year on
the cost price.
3.
Bodie Ltd acquired a 40% interest in an associate, Young Ltd, a listed company, on
1 March 20.12. Since this date, Bodie Ltd has exercised significant influence over the financial
and operating policy decisions of Young Ltd. The retained earnings on the date of acquisition of
Young Ltd amounted to R30 000. The fair values of all the identifiable assets and liabilities was
considered to be equal to the carrying amounts thereof. The market value of Young Ltd’s shares
at 28 February 20.17 was R6,50 per share.
4.
The loans from Bodie Ltd to Cox Ltd and Young Ltd were made on 1 March 20.16 and are
repayable in full on 1 March 20.20. The loans bear interest at 10% per annum. Interest paid on
these loans by Cox Ltd and Young Ltd for the year is included in “finance charges” and interest
received by Bodie Ltd is included in “interest income”.
5.
Goodwill was considered to be impaired by R527 as at 28 February 20.17.
36
FAC3762/107
6.
Bodie Ltd measures its investments in subsidiaries and associates in its separate accounting
records at cost price, in accordance with IAS 27, Separate Financial Statements.
7.
The Bodie Ltd Group accounts for associates using the equity method, in accordance with IAS
28, Investments in Associates and Joint Ventures.
8.
The SA normal tax rate is 28% and capital gains tax is calculated at 80% thereof. You may
assume that both the tax rates have remained unchanged since 1 March 20.12.
9.
Each share carries one (1) vote and the issued share capital of all the entities in the group has
remained unchanged since 1 March 20.12.
REQUIRED:
PART A:
Assume that the Bodie Ltd Group measures non-controlling interests in an acquiree at their
proportionate share of the net assets.
Marks
(a)
(b)
(c)
Prepare all the pro-forma consolidation journal entries for the Bodie Ltd Group for
the year ended 28 February 20.17.
57
Prepare the consolidated statement of profit or loss and other comprehensive
income of the Bodie Ltd Group for the year ended 28 February 20.17.
11½
Prepare the consolidated statement of changes in equity of the Bodie Ltd Group
for the year ended 28 February 20.17.
7½
(d)
Prepare the consolidated statement of financial position of the Bodie Ltd Group as
at 28 February 20.17.
The following notes are required:
(i) Goodwill
(ii) Investment in associate
(e)
Prepare the following notes to the consolidated financial statements of the
Bodie Ltd Group as at 28 February 20.17:
(i) Goodwill
(ii) Investment in associate
17
3
16
[112]
PART B:
Assume that the Bodie Ltd Group measures non-controlling interests in an acquiree at their
fair value and Cox Ltd’s shares had a market value of R2,28 per share on 1 March 20.14.
Marks
(a)
Prepare only the asset section of the consolidated statement of financial
position of the Bodie Ltd Group as at 28 February 20.17.
5
[5]
For Part A and Part B:
Please note:
Your answer must comply with the requirements of International Financial Reporting
Standards (IFRS).
Notes to the annual financial statements and comparative figures are not required.
All calculations must be shown and all amounts must be rounded off to the nearest
Rand.
37
FAC3762/107
SUGGESTED SOLUTION 3
PART A
a) Pro-forma consolidation journals
J1
Equipment
Revaluation surplus (9 000 x 72%)
Deferred tax liability (SFP) (9 000 x 28%)
Revaluation of equipment at acquisition
J2
Share capital
Retained earnings
Revaluation surplus (J1)
Goodwill
Non-controlling interests (SFP)
((100 000 + 120 000 + 6 480) x 30%)
Investment in Cox Ltd
Elimination of owners’ equity at acquisition of Cox Ltd
J3
Retained earnings (depreciation)
Accumulated depreciation
Additional depreciation due to revaluation of equipment
(9 000 x 10% x 2 years)
J4
Deferred tax liability (SFP)
Retained earnings (income tax)
Tax effect of additional depreciation (1 800 x 28%)
J5
Retained earnings
[123 704(245 000 – 120 000 – 1 800(J4) + 504(J5)) x 30%]
Non-controlling interests (SFP)
Non-controlling interests in retained earnings since
acquisition
J6
Other income (profit on sale of equipment) (P/L)
(73 000 – 65 000)
Property, plant and equipment
Elimination of unrealised profit on the sale of equipment
J7
Deferred tax asset (SFP) (8 000 x 28%)
Income tax expense
Tax effect of elimination of unrealised profit on sale of
equipment
J8
Accumulated depreciation (SFP) (8 000 x 10%)
Other expenses (depreciation)
Realisation of unrealised profit through use of equipment
J9
Income tax expense (800 x 28%)
Deferred tax asset (SFP)
Tax effect on realisation of unrealised profit through the use
of equipment
J10 Depreciation
Accumulated depreciation
Additional depreciation due to revaluation of equipment
(9 000 x 10%)
38
Dr
R
9 000
Cr
R
NCI
R
6 480
2 520
100 000
120 000
6 480
1 464
67 944
160 000
67 944
1 800
1 800
504
504
37 111
37 111
8 000
8 000
2 240
2 240
800
800
224
224
900
900
37 111
FAC3762/107
J11
J12
J13
J14
J15
J16
J17
J18
J19
Deferred tax liability (SFP)
Income tax expense
Tax effect on additional depreciation (900 x 28%)
Interest income
Finance charges
To eliminate intragroup interest on the loan from Bodie
Ltd to Cox Ltd
Loan from Bodie Ltd
Loan to Cox Ltd
To eliminate intragroup interest on the loan from Bodie
Ltd to Cox Ltd
Other expenses (impairment of goodwill)(given)
Goodwill
To account for the impairment loss on goodwill
Non-controlling interests (P/L)
Non-controlling interests (SFP)
Non-controlling interests in profit for the year
((81 450 – 21 966 – 10 000 + 7 000 – 900(J7) + 252(J8))
x 30%)
Dividends received
Non-controlling interests (SFP)
Dividends paid (SOCIE)
Elimination of intragroup dividends and recording of noncontrolling interests therein
Non-controlling interests
Dr
R
252
Cr
R
NCI
R
252
10 000
10 000
100 000
100 000
527
527
16 751
16 751
17 500
7 500
16 751
(7 500)
25 000
114 306
Investment in associate
Retained earnings [37 500(67 500 – 30 000) x 40%]
Accounting for the share of retained earnings of associate
for the period 1 March 20.12 to 28 February 20.16
15 000
Investment in associate
Share of profit of associate [133 200(190 000 – 5 000
– 51 800) x 40%]
Accounting for the share of profit of associate for the
current year
Dividend paid (10 000 x 40%)
Investment in associate
Elimination of dividend paid by associate
Cost of investment (given)
Carrying amount of investment in associate
53 280
Investment in
associate
R
15 000
15 000
53 280
53 280
4 000
4 000
(4 000)
32 000
96 280
39
FAC3762/107
b) BODIE LTD GROUP
CONSOLIDATED STATEMENT OF PROFIT OR LOSS AND OTHER COMPREHENSIVE INCOME
FOR THE YEAR ENDED 28 FEBRUARY 20.17
R
Gross profit (122 350 + 81 450)
203 800
Other income (C1)
12 000
Other expenses (22 500 – 800(J8) + 900(J10) + 527)
(23 127)
Share of profit of associate
53 280
Finance charges (10 000 – 10 000(J12))
Profit before tax
245 953
Income tax expense (40 418 + 21 966 – 2 240 + 224 – 252)
(60 116)
PROFIT FOR THE YEAR
185 937
Other comprehensive income for the year
TOTAL COMPREHENSIVE INCOME FOR THE YEAR
185 937
Profit for the year attributable to:
Owners of the parent
Non-controlling interests
169 086
16 751
185 937
Total comprehensive income attributable to:
Owners of the parent
Non-controlling interests
169 086
16 751
185 937
CALCULATIONS
C1 Other income
Other income (8 000 – 8 000(73 000 – 65 000))
Interest received (15 000 – 10 000)
Dividends received (21 500 + 7 000 – 17 500(25 000 x 70%) – 4 000(10 000 x 40%))
R
5 000
7 000
12 000
c) BODIE LTD GROUP
CONSOLIDATED STATEMENT OF CHANGES IN EQUITY FOR THE YEAR ENDED
28 FEBRUARY 20.17
Balance at 1 March 20.16
Changes in equity for 20.17
Total comprehensive income for the year
Profit for the year
Dividends paid
Balance at 28 February 20.17
1
2
Share
Retained
capital
earnings
R
R
250 000
421 5931
Noncontrolling
Total
interests
R
R
671 593
105 0552
250 000
169 036
(50 000)
790 679
169 036
(50 000)
540 679
16 751
(7 500)
114 306
Total
equity
R
776 648
185 837
(57 500)
904 985
320 000 + 86 593(123 704 x 70%) + 15 000[37 500(67 500 – 30 000) x 40%] = 421 593 OR 320 000
+ 86 593(123 704 – 37 111) + 15 000[37 500(67 500 – 30 000) x 40%] = 421 593
67 944 + 37 111 = 105 055
40
FAC3762/107
d) BODIE LTD GROUP
CONSOLIDATED STATEMENT OF FINANCIAL POSITION AS AT 28 FEBRUARY 20.17
Notes
R
ASSETS
Non-current assets
Property, plant and equipment (C2)
Investment in associate (C4) 2
721 100
2
96 280
Loan to associate
50 000
Other investment
20 000
Goodwill (1 464 – 527) (C3)
1
937
Deferred tax (-2 520 + 504 + 252 + 2 240 – 224(800(C2) x 28%))
Total non-current assets
252
888 569
Current assets
Inventories (13 932 + 19 484)
33 416
Total current assets
33 416
Total assets
921 985
EQUITY AND LIABILITIES
Equity attributable to owners of the parent
790 679
Share capital
Retained earnings
250 000
540 679
Non-controlling interests
114 306
Total equity
904 985
Current liabilities
Trade and other payables (12 000 + 5 000)
17 000
Total current liabilities
17 000
Total liabilities
17 000
Total equity and liabilities
921 985
BODIE LTD GROUP
NOTES FOR THE YEAR ENDED 28 FEBRUARY 20.17
1. Goodwill
R
Carrying amount beginning of year
Gross carrying amount
Accumulated impairment losses
Impairment of goodwill
Carrying amount end of year
Gross carrying amount
Accumulated impairment losses
1 464
1 464
(527)
937
1 464
(527)
2. Investment in associate
Bodie Ltd has a 40% interest in Young Ltd, a listed company. Bodie Ltd uses the equity method to
measure its investments in associates. *The principal place of business and the nature of the
relationship with Young Ltd are not available.
41
FAC3762/107
2.1 Summary of the financial information of Young Ltd as at 28 February 20.17 is as follows:
Non-current assets
Current assets
Non-current liabilities
Current liabilities
Net asset value as at 28 February 20.17
R
193 000
97 700
(50 000)
240 700
Profit for the year (190 000 – 5 000 – 51 800)
Other comprehensive income
Total comprehensive income
133 200
133 200
2.2 Reconciliation between the summarised financial information and the carrying amount of
the interest in the associate
Net asset value as at 28 February 20.17 as per summarised financial information
40% interest held in associate (237 000 x 40%)
Goodwill included in the cost price of the investment
Carrying amount of investment in associate as per SFP
R
240 700
96 280
96 280
2.3 Fair value of the investment in associate:
R
The market value of the investment on 28 February 20.17.
(50 000 x R6,5 x 40%)
130 000
2.4 Unrecognised share of losses:
R
Not available
Not available
Unrecognised share of losses of associate for the current period
Cumulative share of losses of associate at the end of the period
2.5 Risks relating to the associate:
R
Not available
Not available
Commitments relating to the associate
Contingent liabilities in accordance with IAS 37
CALCULATIONS
C1 Analysis of owners’ equity of Cox Ltd
100%
Total
R
At acquisition
Share capital
Revaluation surplus (9 000 x 72% (100% - 28%))
Retained earnings
Equity represented by goodwill
Consideration and
NCI at their proportionate share of the net
identifiable assets
42
100 000
6 480
120 000
226 480
1 464
227 944
Bodie Ltd
70%
At
Since
R
R
70 000
4 536
84 000
158 536
1 464
160 000
30%
NCI
R
30 000
1 944
36 000
67 944
-
67 944
FAC3762/107
Total
R
Since acquisition
Retained earnings
Retained earnings (245 000 – 120 000)
Additional depreciation to revaluation of
equipment at acquisition date
(9 000 x 10% x 2 years)
Deferred tax on additional depreciation
(1 800 x 28%)
Current year
Profit for the year
(81 450 – 21 966 – 10 000 + 7 000)
Depreciation on revaluation (9 000 x 10%)
Deferred tax (900 x 28%)
Dividends paid
At
R
Since
R
NCI
R
123 704
125 000
86 593
87 500
37 111
37 500
(1 800)
(1 260)
(540)
504
351 648
55 836
353
39 085
151
105 055
16 751
56 484
(900)
252
(25 000)
382 484
39 539
(630)
176
(17 500)
108 178
16 945
(270)
76
(7 500)
114 306
IMPAIRMENT LOSS
Please note that in part A of the question The Bodie Ltd Group elected to measure
NCI at the acquirers’ identifiable net assets at acquisition date. If this method is
elected then the NCI will not share in the impairment loss of goodwill during the current
period. Therefore, NCI will not be adjusted with the impairment loss in the analysis.
C2 Property, plant and equipment
R
Land and buildings (240 000 + 360 000)
Equipment (100 000 + 50 000)
Accumulated depreciation – equipment (10 000 + 18 000)
Intragroup sale of equipment (73 000 – 65 000)
Depreciation on sale of equipment (8 000 x 10%)
Revaluation (given)
Depreciation on revaluation (9 000 x 10% x 2 years)
Depreciation on revaluation (current year) (9 000 x 10%)
600 000
150 000
(28 000)
(8 000)
800
9 000
(1 800)
(900)
721 100
C3 Proof of goodwill (IFRS 3.32)
R
Consideration transferred at acquisition date
Amount of non-controlling interests (100 000 + 120 000 + 9 000 – 2 520) x 30%)
160 000
67 944
227 944
Net amount of identifiable assets acquired and liabilities assumed at acquisition date
(100 000 + 120 000 + 9 000 – 2 520)
Goodwill
Impairment in the current year
(226 480)
1 464
(527)
937
43
FAC3762/107
C4 Analysis of owners’ equity of Young Ltd
100%
Total
R
At acquisition
Share capital
Retained earnings
Equity represented by goodwill
Consideration
50 000
30 000
80 000
80 000
Bodie Ltd
40%
At
Since
R
R
20 000
12 000
32 000
32 000
40%
CA
R
32 000
Since acquisition
Retained earnings (67 500 – 30 000)
Current year
Profit for the year (190 000 – 51 800 – 5 000)
Dividends paid
37 500
117 500
15 000
15 000
15 000
47 000
133 200
(10 000)
240 700
53 280
(4 000)
64 280
53 280
(4 000)
96 280
PART B
a)
BODIE LTD GROUP
CONSOLIDATED STATEMENT OF FINANCIAL POSITION AS AT 28 FEBRUARY 20.17
Note
ASSETS
Non-current assets
Property, plant and equipment
Investment in associate
Loan to associate
Other investment
Goodwill (1 920 – 527)
Deferred tax asset (-2 520 + 504 + 252 + 2 240 – 224(800(1) x 28%))
Total non-current assets
Current assets
Inventories (13 932 + 19 484)
Total current assets
Total assets
1
R
721 100
96 280
50 000
20 000
1 393
252
889 025
33 416
33 416
922 441
GOODWILL
Please note that in part A of the question, the Bodie Ltd Group elected to measure
NCI at the acquirers’ identifiable net assets at acquisition date. In part B, the Bodie
Ltd Group elected to measure NCI at fair value on acquisition date. At acquisition date
the NCI column will also include goodwill because the NCI is measured from its share
in the identifiable net assets to fair value. The difference will be goodwill or a gain on
bargain purchase. The total amount of goodwill will be disclose in the consolidated
statement of financial position.
44
FAC3762/107
CALCULATIONS
C1 Analysis of owners’ equity of Cox Ltd
100%
Total
R
At acquisition
Share capital
Revaluation surplus (9 000 x 72% (100% - 28%))
Retained earnings
Equity represented by goodwill
Consideration and
NCI at fair value (30 000 x R2,28)
Since acquisition
Retained earnings
Retained earnings (245 000 – 120 000)
Additional depreciation to revaluation of
equipment at acquisition date
(9 000 x 10% x 2 years)
Deferred tax on additional depreciation
(1 800 x 28%)
Current year
Profit for the year
(81 450 – 21 966 – 10 000 + 7 000)
Depreciation on revaluation (9 000 x 10%)
Deferred tax (900 x 28%)
Impairment of goodwill (full goodwill method)
Dividends paid
100 000
6 480
120 000
226 480
1 920
228 400
Bodie Ltd
70%
At
Since
R
R
70 000
4 536
84 000
158 536
1 464
160 000
30%
NCI
R
30 000
1 944
36 000
67 944
456
68 400
123 704
125 000
86 593
87 500
37 111
37 500
(1 800)
(1 260)
(540)
504
352 104
55 309
353
38 716
151
105 511
16 593
56 484
(900)
252
(527)
(25 000)
382 413
39 539
(630)
176
(369)
(17 500)
107 809
16 945
(270)
76
(158)
(7 500)
114 604
IMPAIRMENT LOSS
Please note that in part B, the Bodie Ltd Group elected to measure NCI at fair value
on acquisition date. If the fair value method is elected, then the NCI will share in the
impairment loss of goodwill during the current period. Therefore, NCI will be adjusted
with the impairment loss in the analysis.
C2 Proof of goodwill of Cox Ltd (IFRS 3.32)
Consideration transferred at acquisition date
Fair value of non-controlling interests at acquisition date (30 000 x R2,28)
Net amount of identifiable assets acquired and liabilities assumed at acquisition date
(100 000 + 120 000 + 9 000 – 2 520)
Goodwill
Impairment of goodwill for current year
R
160 000
68 400
228 400
(226 480)
1 920
(527)
1 393
45
FAC3762/107
QUESTION 4
Papyrus Ltd was incorporated in 19.06 and is one of the oldest bookstores in Bloemfontein. On
1 January 20.15, Papyrus Ltd purchased 36 000 ordinary shares in Parchment Ltd, a company that
exclusively sells Afrikaans books. From this date, Papyrus Ltd exercised significant influence over the
financial and operating policy decisions of Parchment Ltd. The assets and liabilities of Parchment Ltd
were fairly valued on this date, with the exception of trade and other receivables that were overvalued
by R10 000.
Papyrus Ltd wished to further expand its business and on 1 December 20.16 acquired control of Paper
Ltd by acquiring 90% of the issued ordinary shares in Paper Ltd. The assets and liabilities were fairly
valued at this date.
The following balances were extracted from the trial balances of Parchment Ltd and Paper Ltd at
various dates:
Parchment Ltd
01/01/20.15
01/12/20.16
R
R
Share capital - 120 000 ordinary shares
Share capital - 100 000 ordinary shares
Retained earnings
Revaluation reserve
220 000
1 060 000
210 000
Paper Ltd
01/12/20.16
R
220 000
1 480 000
245 000
100 000
90 000
-
The following are the trial balances of the relevant entities as at 30 November 20.17:
Share capital - 500 000 ordinary shares
- 120 000 ordinary shares
- 100 000 ordinary shares
Retained earnings - 30 November 20.17
Revaluation surplus
Mark-to-market reserve
Long-term loans
Deferred tax asset / (liability)
Loan from Papyrus Ltd
Loans from other owners
Trade and other payables
Bank overdraft
Property, plant and equipment
Investment in Parchment Ltd at cost
Investment in Paper Ltd at cost
Loan to Parchment Ltd
Loan to Paper Ltd
Trade and other receivables
Inventory
Cash and cash equivalents
46
Papyrus Ltd
R
(500 000)
(3 560 000)
(350 000)
(162 704)
14 670
(485 000)
2 567 000
430 330
185 000
12 500
45 000
594 000
467 000
579 500
-
Parchment Ltd
R
-
Paper Ltd
R
-
(220 000)
-
(1 630 000)
(290 000)
(100 000)
(8 500)
(12 500)
(202 500)
(15 400)
1 660 900
416 000
402 000
-
(100 000)
(104 000)
(45 000)
(55 000)
(154 000)
257 000
102 000
99 000
-
FAC3762/107
Additional information
1.
All the entities have a 30 November year end.
2.
On 28 February 20.17, Paper Ltd sold office equipment to Papyrus Ltd for an amount of R59 975.
Paper Ltd originally purchased this office equipment for R60 000 on 1 December 20.16. On 1
December 20.16, Paper Ltd estimated that the office equipment had a total useful life of six years.
The entity’s policy is to provide for depreciation over the expected useful life of the office
equipment using the straight-line method, which is consistent with the allowance of the South
African Revenue Service.
3.
From 1 January 20.15, Parchment Ltd purchased inventory from Papyrus Ltd. Papyrus Ltd sold
the inventory at a profit margin of 25% on cost. Total sales amounted to R400 000 in the 20.16
financial year and R620 000 in the 20.17 financial year.
Inventory purchased from Papyrus Ltd that was still on hand at year end was as follows:
30 November 20.16
30 November 20.17
-
R90 000
R130 000
4.
During the current year, Paper Ltd sold inventory to the value of R100 000 to Papyrus Ltd at a
profit mark-up of 40% on the selling price. On 30 November 20.17, Papyrus Ltd had inventory on
hand amounting to R60 000 that was purchased from Paper Ltd.
5.
Parchment Ltd declared a dividend of R30 000 on 1 September 20.17. Paper Ltd did not declare
a dividend for the current financial year.
6.
Papyrus Ltd has the right to demand repayment of the loans to Parchment Ltd and Paper Ltd at
any time.
1.
The Papyrus Ltd Group accounts for investments in associates using the equity method in
accordance with IAS 28, Investments in Associates and Joint Ventures.
2.
The Papyrus Ltd Group elected to measure non-controlling interests in an acquiree at their
proportional share of the acquiree’s identifiable net assets.
9.
Assume the SA normal tax rate is 28% and that the capital gains tax is calculated at 80% thereof.
REQUIRED:
Marks
Prepare only the asset section of the consolidated statement of financial position of the
Papyrus Ltd Group, as at 30 November 20.17.
30
[30]
Please note:
Your answer must comply with the requirements of International Financial Reporting
Standards (IFRS).
Notes to the annual financial statements and comparative figures are not required.
All calculations must be shown and all amounts must be rounded off to the nearest Rand.
47
FAC3762/107
SUGGESTED SOLUTION 4
PAPYRUS LTD GROUP
EXTRACT OF THE CONSOLIDATED STATEMENT OF FINANCIAL POSITION AS AT
30 NOVEMBER 20.17
ASSETS
Non-current assets
Property, plant and equipment
(2 567 000 + 257 000 - 2 475 (C1) + 323 (C1))
Goodwill (C2)
Investment in associate (C3)
Deferred tax asset (C5)
Total non-current assets
Current assets
Inventory (467 000 + 99 000 – 24 000 (60 000 x 40/100))
Trade and other receivables (594 000 + 102 000)
Cash and cash equivalents
Loan to Parchment Ltd
Total current assets
Total assets
20.17
R
2 821 848
14 000
634 200
24 177
3 494 225
542 000
696 000
579 500
12 500
1 830 000
5 324 225
Comment:
Important exam technique
IAS 28 is very clear that “investment in associate” must be disclosed separately from
any other investment. NO MARKS will be awarded in an exam if this is disclosed
under “investments in equity instruments”.
CALCULATIONS
C1 Unrealised profit on sale of equipment
Cost of equipment
Accumulated depreciation at 28 February 20.17
(3 months elapsed from 1 December 20.16 = 60 000/6 x 3/12)
Carrying amount at 31 March 20.17
Proceeds of sale of equipment
Unrealised profit on sale
Reversal of current year’s depreciation (2 475/69 x 9 months)
(6 x 12 = 72 months – 3 months = 69 months, remaining useful life)
48
R
60 000
(2 500)
57 500
59 975
2 475
323
FAC3762/107
C2 Investment in subsidiary
Analysis of owners' equity of Paper Ltd
100%
Total
R
100 000
90 000
190 000
14 000
204 000
At acquisition
Share capital
Retained earnings
Goodwill
Consideration paid and NCI
Current year
Profit for the year (104 000 - 90 000)
Profit on the sale of machinery (2
475(C1) x 72%)
Depreciation on machinery (323(C1) –
90)
Papyrus Ltd 90%
At
Since
R
R
90 000
81 000
171 000
14 000
185 000
10%
NCI
R
10 000
9 000
19 000
19 000
14 000
12 600
1 400
(1 782)
(1 604)
(178)
23
232
216 450
185 000
209
11 205
20 245
C3 Investment in associate
Analysis of owners' equity of Parchment Ltd
At acquisition
Share capital
Retained earnings
[1 060 000 - (10 000 x 72%)]
Revaluation surplus
Gain on bargain purchase
Investment in Parchment Ltd
Since acquisition
Retained earnings [(1 480 000 –
1 060 000 + (10 000 x 72%)) x 30%]
Revaluation surplus (245 000 - 210
000)
Current year
Profit for the year [1 630 000 –
1 480 000 + 30 000 dividend]
Unrealised profit in closing inventory
(130 000 x 25/125)
Revaluation surplus (290 000 –
245 000)
Dividend paid
100%
Total
R
220 000
1 052 800
210 000
1 482 800
(14 510)
1 468 290
Papyrus Ltd
36 000/120 000 = 30%
At
Since
CA
R
R
R
66 000
315 840
63 000
444 840
(14 510)
430 330
14 510
430 330
444 840
427 200
128 160
35 000
1 930 490
10 500
138 660
583 500
180 000
54 000
54 000
(26 000)
-
45 000
(30 000)
2 099 490
13 500
(9 000)
430 330
189 360
128 160
10 500
(7 800)
13 500
(9 000)
634 200
49
FAC3762/107
The direction of the intragroup transaction is downward (from the parent to the
associate).
First, it is important to note that in the analysis the carrying amount column of the
investment in associate is adjusted with the unrealised profit of R7 800. The
inventory of the associate is overstated, with the unrealised profit included in
closing inventory but the only SFP line item of the associate that can be adjusted
is “investment in associate”. The journal entry to account for the unrealised profit
included in closing inventory will be as follows:
Dr
Cr
R
R
125
Revenue (130 000 x 30% x /125)
39 000
Cost of sales (130 000 x 30% x 100/125)
31 200
25
Investment in associate (130 000 x 30% x /125)
7 800
Second, it is important to note that in the analysis, the carrying amount column of
the investment in associate is not adjusted with the tax effect of the unrealised
profit. The journal entry will be as follows:
Dr
Cr
R
R
Deferred tax (SFP)(7 800 x28%)
2 184
Cost of sales (130 000 x 30% x 100/125)
2 184
Third, it is important to note that the “share in profit of associate” line item is not
adjusted with the unrealised profit of R7 800 included in the closing inventory,
because the P/L line items that are adjusted are “revenue” and “cost of sales”.
C4 Investment in associate alternative calculation
36 000 / 120 000 = 30%
Cost price of investment in associate
Gain on bargain purchase
Recognition of equity since acquisition until beginning of current year (128 160 +
10 500) (C4)
Recognition of share of profit and other comprehensive income
(54 000 + 13 500) (C4)
Reversal of intragroup dividend received
Reversal of current year unrealised profit in closing inventory
(130 000 x 25/125 x 30%)(C4)
R
430 330
14 510
138 660
67 500
(9 000)
(7 800)
634 200
C5 Deferred tax asset
Deferred tax liability at year end (given)
Unrealised profit in closing inventory – Parchment Ltd
(130 000 x 25/125 x 30%) x 28%
Unrealised profit in equipment (2 475 (C1) x 28%)
Reversal of current year’s depreciation (323 (C1) x 28%)
Unrealised profit in closing inventory – Paper Ltd
[(60 000 x 40/100) x 28%]
50
R
14 670
2 184
693
(90)
6 720
24 177
FAC3762/107
C6 Journal entries
J1
J2
J3
J4
J5
J6
J7
J8
J9
J10
J11
Share capital
Retained earnings
Goodwill
Investment in Paper Ltd
NCI (SFP)
Elimination of owner’s equity in Paper Ltd at acquisition date
Loan from Papyrus Ltd
Loan to Paper Ltd
Elimination of intragroup loan to Paper Ltd
Dr
R
100 000
90 000
14 000
185 000
19 000
45 000
45 000
Profit on sale of equipment
Property, plant and equipment
Elimination of profit on the sale of intragroup equipment
during the current year
2 475
Deferred tax (SFP) (2 475 x 28%)
Income tax expense
Elimination of tax on the profit on the sale of intragroup
equipment during the current year
693
Accumulated depreciation
Depreciation
Elimination of excess depreciation of the intragroup
equipment during the current year
323
Income tax expense (323 x 28%)
Deferred tax (SFP)
Elimination of tax on the excess depreciation of the
intragroup equipment during the current year
90
Revenue
Cost of sales
Elimination of realised intragroup sales during the current
year
Cost of sales (60 000 x 40/100)
Inventory
Elimination of unrealised profit in closing inventory
2 475
693
323
90
100 000
100 000
24 000
24 000
Deferred tax (24 000 x 28%)
Income tax expense
Tax implication of unrealised profit in closing inventory
6 720
NCI (PL) ((104 000 – 90 000 – 1 782 + 232) x 10%)
NCI (SFP)
Tax implication of unrealised profit in closing inventory
1 245
Investment in associate
Retained earnings
Recording of gain on bargain purchase against previous
year’s profits
Cr
R
6 720
1 245
14 510
14 510
51
FAC3762/107
J12
J13
J14
J15
J16
J17
J18
52
Investment in associate
Retained earnings
Recording of associate’s interest in since-acquisition retained
earnings
Dr
R
128 160
Cr
R
128 160
Investment in associate
Revaluation surplus
Recording of associate’s interest in since-acquisition
revaluation surplus
10 500
Investment in associate
Share of profit of associate
Recording of profit for the year in the associate
54 000
Investment in associate
Revaluation surplus
Recording of the revaluation surplus for the year in the
associate
13 500
Revenue
Cost of sales
Investment in associate
Elimination of unrealised profit resulting due to sale of
inventory to the associate
39 000
10 500
54 000
13 500
31 200
7 800
Deferred tax asset (SFP) (7 800 x 28%)
Income tax expense
Tax on the elimination of unrealised profit resulting due to sale
of inventory to the associate
2 184
Other income
Investment in associate
Elimination of dividend received from associate
9 000
2 184
9 000
FAC3762/107
QUESTION 5
You are assisting the chief financial officer of the Earth Ltd Group with the year-end consolidation.
The following is an extract from the annual financial statements of Earth Ltd and its related group of
investment companies for the year ended 31 December 20.17:
EXTRACT FROM THE STATEMENTS OF FINANCIAL POSITION AS AT 31 DECEMBER 20.17
Earth Ltd
R
ASSETS
Non-current assets
Property, plant and equipment
Investment in equity instruments
Total non-current assets
Current assets
Cash and cash equivalents
Inventory
Trade and other receivables
Total current assets
Total assets
EQUITY
Share capital -
500 000 ordinary shares
150 000 ordinary shares
80 000 ordinary shares
50 000 ordinary shares
Water Ltd
R
Air Ltd
R
Fire Ltd
R
4 500 000
935 000
5 435 000
2 000 000
128 000
2 128 000
400 000
400 000
350 000
350 000
550 000
670 000
700 000
1 920 000
7 355 000
150 000
115 000
255 280
520 280
2 648 280
66 200
450 000
50 000
566 200
966 200
10 500
70 000
60 000
140 500
490 500
1 000 000
-
300 000
-
80 000
-
100 000
EXTRACT FROM THE STATEMENTS OF CHANGES IN EQUITY FOR
31 DECEMBER 20.17
Earth Ltd
Water Ltd
R
R
RETAINED EARNINGS
Balance at 1 January 20.17
3 500 000
446 000
Profit for the year
2 865 000
1 536 500
Dividends paid
(100 000)
(50 000)
Balance as at 31 December 20.17
6 265 000
1 932 500
THE YEAR ENDED
Air Ltd
R
Fire Ltd
R
120 000
706 200
(20 000)
806 200
150 000
70 500
(10 000)
210 500
Additional information
1.
Water Ltd
On 1 January 20.17, Earth Ltd obtained control of Water Ltd, by acquiring 120 000 ordinary
shares in Water Ltd. The consideration paid consisted of a cash amount of R650 000 and a
vehicle transferred at a fair value (equal to the carrying amount) of R150 000. The market price
of Water Ltd’s shares on this date was R6,40 per share.
The following is an extract from the trial balance of Water Ltd on 1 January 20.17:
Share capital
Retained earnings
Revaluation surplus
Dr/(Cr)
R
(300 000)
(446 000)
(120 280)
On the acquisition date, the fair value of the identifiable assets and liabilities of Water Ltd was
equal to the carrying amounts thereof, except for a newly occupied manufacturing building which
was valued at R100 000 more than its carrying amount. The new manufacturing building was
ready for use on 1 January 20.17. The revaluation of the new building was not recorded in the
accounting records of Water Ltd.
53
FAC3762/107
Water Ltd acquired a 5% interest in Wind Ltd on 1 June 20.17 for an amount of R100 000. The
investment was fair valued to R128 000 at 31 December 20.17.
On 31 December 20.17, the directors of Earth Ltd assessed goodwill and determined that the
goodwill in Water Ltd was impaired by R18 000 in the current year. No impairment was
recognised on the investment in Water Ltd in the separate financial statements.
2.
Air Ltd
On 31 December 20.15, Earth Ltd acquired 40% of the ordinary share capital in Air Ltd and paid
a cash amount of R45 000 for the shares. At the date of acquisition, the retained earnings of
Air Ltd amounted to R40 000. Since 31 December 20.15, Earth Ltd has exercised significant
influence over the financial and operating policy decisions of Air Ltd.
On 1 January 20.16, Earth Ltd started selling inventory to Air Ltd at a profit mark-up of 25% on
the selling price. On 31 December 20.17, Air Ltd had inventory on hand that was purchased
from Earth Ltd amounting to R120 000 (20.16: R60 000).
3.
Fire Ltd
Earth Ltd acquired 15 000 ordinary shares in Fire Ltd on 1 January 20.17. A cash amount of
R90 000 was paid for these shares. Since this date, Earth Ltd has exercised joint control over
the financial and operating policy decisions of Fire Ltd in terms of a contractual agreement. The
arrangement was classified as a joint venture in accordance with IFRS 11, Joint Arrangements.
No gain on bargain purchase arose at the acquisition of Fire Ltd.
On 1 September 20.17, Fire Ltd sold furniture with a carrying amount of R135 000 to Earth Ltd
for R180 000. On this date, the remaining useful life of the furniture was 2 years. The entity’s
policy is to provide for depreciation over the expected useful life of the furniture using the
straight-line method, which is in line with the allowance received from the South African Revenue
Service. The furniture is included in the statement of financial position of Earth Ltd on
31 December 20.17.
4.
The fair value of the identifiable assets and liabilities of Air Ltd and Fire Ltd at the respective
acquisition dates was considered to be equal to the carrying amounts of these items.
5.
General accounting information and policies
The Earth Ltd Group:
- measures its non-controlling interests at fair value.
- measures its investments in equity instruments at fair value through profit or loss.
- depreciates newly occupied manufacturing buildings at 5% per annum, which is in line with
the allowance received from the South African Revenue Service.
- accounts for investments in associates and joint ventures in accordance with the equity
method.
Earth Ltd has no other investments in equity instruments, other than the investments detailed in
the given information.
The share capital of the companies remained unchanged since the acquisition dates of the
companies. Assume that each share carries one (1) vote.
The South African normal tax rate has remained unchanged at 28% since 31 December 20.15
and capital gains tax is calculated at 80% thereof.
54
FAC3762/107
REQUIRED:
Marks
(a)
Prepare the pro-forma journal entries to account for the intragroup sale of furniture
between Fire Ltd and Earth Ltd for the year ending 31 December 20.17.
8½
Journal narrations are not required.
(b)
Prepare only the asset section of the consolidated statement of financial position
of the Earth Ltd Group, as at 31 December 20.17
23
You may assume that there is no deferred tax asset as at 31 December 20.17.
(c)
Calculate the amount that will be disclosed as deferred tax in the consolidated
statement of financial position as at 31 December 20.17 of the Earth Ltd Group.
7
Clearly indicate whether amounts used are deferred tax assets or liabilities.
(d)
Prepare the consolidated statement of changes in equity of the Earth Ltd Group
for the year ended 31 December 20.17.
17½
The total columns are not required in the consolidated statement of changes in
equity.
[56]
Please note:
Your answer must comply with the requirements of International Financial Reporting
Standards (IFRS).
Notes to the annual financial statements and comparative figures are not required.
All calculations must be shown and all amounts must be rounded off to the nearest Rand.
55
FAC3762/107
SUGGESTED SOLUTION 5
PART A
J1
J2
J3
J4
Share of profit of joint venture (P/L)
((180 000 -135 000) x 30%)
Property, plant and equipment (SFP)
Elimination of unrealised profit on sale of furniture
Dr
R
13 500
13 500
Deferred tax (SFP) (13 500 x 28%)
Share of profit of joint venture (P/L)
Tax effect of eliminating unrealised profit on sale of furniture
3 780
Property, plant and equipment (depreciation) (SFP)
(13 500/2 x 4/12)
Share of profit of joint venture (P/L)
Depreciation adjustment
2 250
Share of profit of joint venture (P/L) (2 250 x 28%)
Deferred tax (SFP)
Tax effect of depreciation adjustment
Cr
R
3 780
2 250
630
630
PART B
EARTH LTD GROUP
CONSOLIDATED STATEMENT OF FINANCIAL POSITION AS AT 31 DECEMBER 20.17
ASSETS
Non-current assets
Property, plant and equipment
(4 500 000 + 2 000 000 + 100 000 - 5 000 (100 000 x 5%) (depreciation) –
13 500(part a) + 2 250(part a))
Investment in equity instruments (Wind Ltd) (given)
Investment in associate - Air Ltd (C1)
Investment in joint venture - Fire Ltd (C2)
Goodwill (C6)
Total non-current assets
Current assets
Trade and other receivables (700 000 + 255 280)
Cash and cash equivalents (550 000 + 150 000)
Inventory (670 000 + 115 000)
Total current assets
Total assets
R
6 583 750
128 000
342 480
108 150
35 720
7 198 100
955 280
700 000
785 000
2 440 280
9 638 380
Important exam technique
IAS 28 is very clear that “investment in associate” and “investment in joint venture”
must be disclosed separately from any other investment. No marks will be awarded
in an exam if these are disclosed under “investments in equity instruments”.
Associates and joint ventures are both accounted for using the equity method. You
should notice in the above consolidated statement of financial position that Air Ltd
and Fire Ltd are accounted for in exactly the same way.
56
FAC3762/107
CALCULATIONS
C1 Investment in associate
R
45 000
3 000
Cost price (given)
Gain on bargain purchase (48 000 ((80 000 + 40 000) x 40%) - 45 000)
Recognition of equity since acquisition until beginning of year
((120 000 - 40 000) x 40%)
Recognition of share of profit for the current year
(706 200 x 40%)
Reversal of intragroup dividends (20 000 x 40%)
Elimination of current year’s unrealised profit in closing inventory
((120 000 x 25/100) x 40%)
32 000
282 480
(8 000)
(12 000)
342 480
OR
Analysis of owners' equity of Air Ltd
At acquisition
Share capital
Retained earnings
Gain on bargain purchase
Investment in Air Ltd
Since acquisition
Retained earnings (120 000 – 40 000)
Gain on bargain purchase
Current year
Profit for the year
Dividend paid
Unrealised profit in closing inventory
(120 000 x 25/100)
100%
Total
R
80 000
40 000
120 000
(3 000)
117 000
At
R
32 000
16 000
48 000
(3 000)
45 000
Earth Ltd
40%
Since
R
CA
R
45 000
80 000
3 000
32 000
3 000
32 000
3 000
706 200
(20 000)
282 480
(8 000)
282 480
(8 000)
309 480
(12 000)
342 480
(30 000)
886 200
430 330
C2 Investment in joint venture
R
15 000/50 000 = 30%
Cost price (given)
Recognition of share of profit for the current year
(70 500 x 30%)
Reversal of intragroup dividends (10 000 x 30%)
90 000
21 150
(3 000)
108 150
OR
57
FAC3762/107
Analysis of owners' equity of Fire Ltd
At acquisition
Share capital
Retained earnings
Goodwill
Investment in Fire Ltd
100%
Total
R
100 000
150 000
250 000
15 000
235 000
Current year
Profit for the year
Dividend paid
70 500
(10 000)
886 200
At
R
30 000
45 000
75 000
15 000
90 000
Earth Ltd
30%
Since
R
90 000
CA
R
90 000
21 150
(3 000)
18 150
21 150
(3 000)
108 150
PART C
Dr/(Cr)
R
(28 000)
1 400
Opening balance deferred tax liability
Revaluation (100 000 x 28%) (part b) - liability
Depreciation ((100 000 x 5%) x 1-year x 28%) - asset
Closing inventory - associate
(120 000 x 25/100 x 40% = 12 000 x 28%) (part b) - asset
Unrealised profit - furniture - joint venture (part a) - asset
Unrealised profit - depreciation - furniture - joint venture (part a) - liability
Closing balance deferred tax liability
3 360
3 780
(630)
(20 090)
PART D
EARTH LTD GROUP
CONSOLIDATED STATEMENT OF CHANGES IN EQUITY FOR THE YEAR ENDED
31 DECEMBER 20.17
Share
capital
R
Balance as at 1 January 20.17
Acquisition of subsidiary
Total comprehensive income:
- Profit for the year
Dividends
Balance as at 31 December 20.17
1 50
1 000 000
1 000 000
Retained
earnings
R
NCI
R
3 530 680 C3
-
192 000
4 317 130 C4
(100 000)
7 747 810
C5
302 980
(10 000)1
484 980
000 x 20% = 10 000
C3 Opening retained earnings
Earth Ltd (given)
Air Ltd - associate - gain on bargain purchase (C1)
Air Ltd - associate - movement in retained earnings (C1)
Unrealised profit in opening inventory - Air Ltd (60 000 x 25% x 40%)
Tax on unrealised profit in opening inventory (6 000 x 28%)
58
R
3 500 000
3 000
32 000
(6 000)
1 680
3 530 680
FAC3762/107
C4 Profit for the year attributable to the owners of the parent
Earth Ltd (given)
Water Ltd - subsidiary (given)
Elimination of intragroup dividends - Water Ltd (50 000 x 80%)
Elimination of intragroup dividends - Air Ltd (part b)
Elimination of intragroup dividends - Fire Ltd (part b)
Impairment of goodwill (given)
Additional depreciation due to revaluation of building at acquisition date
Tax on additional depreciation
Unrealised intragroup profit in opening inventory, realised in current year
Tax on realisation of intragroup profit
Unrealised intragroup profit in closing inventory
Tax on unrealised intragroup profit
Share of profit from associate – Air Ltd (part b)
Share of profit from joint venture – Fire Ltd (part b)
Unrealised profit on intragroup sale of equipment (part a)
Tax on unrealised intragroup profit (part a)
Realisation of a portion of unrealised intragroup profit (part a)
Tax on realisation of intragroup profit (part a)
Minus: profit for the year attributable to NCI (C5)
R
2 865 000
1 536 500
(40 000)
(8 000)
(3 000)
(18 000)
(5 000)
1 400
6 000
(1 680)
(12 000)
3 360
282 480
21 150
(13 500)
3 780
2 250
(630)
4 620 110
302 980
4 317 130
C5 Profit for the year attributable to NCI
Water Ltd (profit for the year) (given)
Additional depreciation due to revaluation of building at acquisition date
Tax on additional depreciation
Impairment of goodwill (given)
Attributable to NCI (20%)
R
1 536 500
(5 000)
1 400
(18 000)
1 514 900
302 980
C6 Goodwill
An analysis of owners’ equity is for calculation purposes only - it is not the required
disclosure. In this question, only the “at acquisition” section of the analysis of owners’
equity was prepared, in order to calculate the goodwill at acquisition date. The full
analysis has deliberately been omitted from this solution, in order to highlight the fact
that it is not always necessary to prepare an analysis.
Proof of calculation of goodwill of Water Ltd in terms of IFRS 3.32:
Consideration transferred at acquisition date: IFRS 3.32(a)(i)
Amount of non-controlling interests: IFRS 3.32(a)(ii) ((150 000 - 120 000) x R6,40)
Net of the identifiable assets acquired and liabilities assumed at acquisition date:
IFRS 3.32(b) (300 000(SC) + 446 000(RE) + 120 280(RS) + 72 000(RS) (100 000 x
72%)))
Goodwill
Impairment loss
Goodwill at 31 December 20.17
R
800 000
192 000
992 000
(938 280)
53 720
(18 000)
35 720
59
FAC3762/107
Analysis of owners’ equity of Water Ltd - subsidiary
100%
Total
R
At acquisition
Share capital (given)
Retained earnings (given)
Revaluation surplus (given)
Revaluation surplus
(100 000 x 72%)
Goodwill
Consideration (650 000 + 150 000);
NCI (150 000 - 120 000) x R6,40)
Goodwill at date of acquisition
Impairment loss (given)
Goodwill at 31 December 20.17
Earth Ltd 80%
At
Since
R
R
20%
NCI
R
300 000
446 000
120 280
240 000
356 800
96 224
60 000
89 200
24 056
72 000
938 280
53 720
57 600
750 624
49 376
14 400
187 656
4 344
992 000
800 000
192 000
53 720
(18 000)
35 720
C7 Journal entries
J1
J2
J3
J4
J5
J6
J7
60
Property, plant and equipment
Deferred tax liability (SFP)
Revaluation surplus
Recording the revaluation of the manufacturing building of Water Ltd
at acquisition
Share capital
Retained earnings
Revaluation surplus (120 280 + 72 000)
Goodwill
Investment in Water Ltd
NCI (SFP)
Elimination of owner’s equity in Water Ltd at acquisition date
Dr
R
100 000
28 000
72 000
300 000
446 000
192 280
53 720
800 000
192 000
Depreciation
Accumulated depreciation
Recording of depreciation of the manufacturing building of Water Ltd
5 000
Deferred tax (SFP)
Income tax expense
Recording of the tax on the depreciation of manufacturing building
1 400
Impairment loss
Goodwill
Recording of associate’s interest in since-acquisition revaluation
surplus
Cr
R
5 000
1 400
18 000
18 000
NCI (SFP)
NCI (PL)
Recording of NCI’s interest in the impairment loss
3 600
NCI (PL)
NCI (SFP)
Recording of NCI’s interest in current year’s profit
306 580
3 600
306 580
FAC3762/107
J8
J9
Other income
NCI (SFP)
Dividend paid (SOCIE)
Elimination of dividend received from subsidiary
Investments in equity instruments
Investment in associate
Reclassification of investment in Air Ltd to investment in associate
J10 Investment in associate
Retained earnings (opening balance)
Recording of associate’s interest in since-acquisition retained
earnings
J11 Investment in associate (SFP)
Share in profit of associate (P/L)
Recording of profit for the year in the associate
Dr
R
40 000
10 000
50 000
45 000
45 000
32 000
32 000
282 480
282 480
J12 Investment in associate
Retained earnings (opening balance)
Recording of gain on bargain purchase against previous year’s profits
3 000
J13 Retained earnings (opening balance)
Deferred tax asset (SFP)
Investment in associate
Elimination of unrealised profit resulting due to sale of inventory to the
associate in previous financial year
4 320
1 680
J14 Cost of sales
Investment in associate
Revenue
Elimination of unrealised profit resulting due to sale of inventory to the
associate in previous financial year
18 000
6 000
J15 Income tax expense
Deferred tax asset (SFP)
Elimination of tax on the unrealised profit resulting due to sale of
inventory to the associate in previous financial year
J16 Revenue
Cost of sales
Investment in associate
Elimination of unrealised profit resulting due to sale of inventory to the
associate in the current financial year
J17 Deferred tax asset (SFP)
Income tax expense
Elimination of tax on the unrealised profit resulting due to sale of
inventory to the associate in the current financial year
Cr
R
3 000
6 000
24 000
1 680
1 680
48 000
36 000
12 000
3 360
3 360
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FAC3762/107
J18
J19
J20
J21
J22
J23
J24
J25
62
Other income
Investment in associate
Elimination of dividend received from associate
Dr
R
8 000
8 000
Investments in equity instruments
Investment in joint venture
Reclassification of investment in Fire Ltd to investment in joint
venture
90 000
Investment in joint venture
Share of profit in joint venture
Recording of profit for the year in the associate
21 150
Other income
Investment in joint venture
Elimination of dividend received from joint venture
Share of profit of joint venture (P/L)
((180 000 -135 000) x 30%)
Property, plant and equipment (SFP)
Elimination of unrealised profit on sale of furniture
90 000
21 150
3 000
3 000
13 500
13 500
Deferred tax (SFP) (13 500 x 28%)
Share of profit of joint venture (P/L)
Tax effect of eliminating unrealised profit on sale of furniture
3 780
Property, plant and equipment (depreciation) (SFP)
(13 500/2 x 4/12)
Share of profit of joint venture (P/L)
Depreciation adjustment
2 250
Share of profit of joint venture (P/L) (2 250 x 28%)
Deferred tax (SFP)
Tax effect of depreciation adjustment
Cr
R
3 780
2 250
630
630
FAC3762/107
QUESTION 6
Mosaic Ltd is a company that manufactures mosaic furniture and invests in other similar entities in
South Africa. All the companies in the Mosaic Ltd group have a 28 February year end. The following
information was provided by the management of the Mosaic Ltd group:
Extract from the trial balances of the entities in the Mosaic Ltd group for the year ended
28 February 20.17:
Share capital:
– 250 000 ordinary shares
– 200 000 ordinary shares
– 100 000 ordinary shares
Retained earnings – 1 March 20.16
Accumulated depreciation: property,
equipment
Trade and other payables
Profit after tax
Property, plant and equipment at cost
Investments in equity instruments:
- Garnet Ltd at cost
- Violet Ltd at cost
- Ruby Ltd at cost
- Amethyst Ltd at cost
- Aquamarine Ltd at cost
Trade receivables
Cash and cash equivalents
Inventory
Dividends paid – 28 February 20.17
plant
Mosaic Ltd
Dr/(Cr)
R
Garnet Ltd
Dr/(Cr)
R
Violet Ltd
Dr/(Cr)
R
(250 000)
(750 000)
(200 000)
(480 000)
(100 000)
(180 000)
(150 000)
(77 800)
(298 800)
533 600
(280 000)
(66 000)
(214 560)
948 560
(80 000)
(68 000)
(115 920)
337 920
280 000
140 000
100 000
115 000
78 000
180 000
100 000
-
25 000
45 000
85 000
87 000
50 000
-
20 000
58 000
63 000
65 000
-
and
Additional information
1.
On 1 January 20.14, Mosaic Ltd acquired control over Garnet Ltd by purchasing 160 000 of the
issued ordinary shares of Garnet Ltd for R280 000 when the retained earnings of Garnet Ltd
amounted to R140 000.
2.
At the acquisition date, the fair value of the identifiable assets and liabilities of Garnet Ltd were
considered to be equal to the carrying amounts thereof, except for land which was revalued
by R10 000 more than its carrying amount and inventory which was written down by R9 000
to its net realisable value.
3.
On 1 March 20.16, Mosaic Ltd acquired a 49% interest in Violet Ltd. In terms of a contractual
agreement with the other operators, Mosaic Ltd exercises joint control over the economic
activities of Violet Ltd. The arrangement is classified as a joint venture as per IFRS 11, Joint
Arrangements. At acquisition date, the fair value of the identifiable assets and liabilities of Violet
Ltd was considered to be equal to the carrying amounts thereof.
4.
During the current year Mosaic Ltd sold inventory of R100 000 to Violet Ltd at a profit of 25%
on the cost price of the inventory. On 28 February 20.17, Violet Ltd had inventory on hand
amounting to R50 000 that was purchased from Mosaic Ltd.
5.
On 1 December 20.16, Mosaic Ltd sold equipment with a carrying amount of R110 000 to
Garnet Ltd for R125 000. On this date the remaining useful life of the equipment was 3 years.
The entity’s policy is to provide for depreciation over the expected useful life of the equipment
using the straight-line method, which is in line with the allowance received from the South
63
FAC3762/107
African Revenue Service. On 28 February 20.17, 40% of the selling price of the equipment
was still outstanding and is included in “trade receivables” and “trade and other payables” of
Mosaic Ltd and Garnet Ltd respectively.
6.
The Mosaic Ltd Group measures its investments in equity instruments at cost.
7.
The Mosaic Ltd Group elected to measure non-controlling interests at fair value at acquisition
date. Goodwill was tested for impairment at 28 February 20.17 and it was determined that the
goodwill relating to Garnet Ltd was impaired by R2 000.
8.
The market value of Garnet Ltd’s shares at 1 January 20.14 was R1,75 per share.
9.
The South African normal tax rate is 28% and capital gains tax is calculated at 80% thereof.
You may assume that the tax rate has remained unchanged since 1 January 20.14.
10.
Each share carries one (1) vote.
REQUIRED:
Marks
(a)
(b)
Prepare only the asset section (including deferred tax asset) of the consolidated
statement of financial position of the Mosaic Ltd Group, as at 28 February 20.17.
30
Calculate the amount that will be disclosed as non-controlling interests in the
consolidated statement of financial position of the Mosaic Ltd Group as at
28 February 20.17.
5
[35]
Please note:
Your answer must comply with the requirements of International Financial Reporting
Standards (IFRS).
Notes to the annual financial statements and comparative figures are not required.
All calculations must be shown and all amounts must be rounded off to the nearest Rand.
64
FAC3762/107
SUGGESTED SOLUTION 6
PART A
MOSAIC LTD GROUP
EXTRACT OF THE CONSOLIDATED STATEMENT OF FINANCIAL POSITION AS AT
28 FEBRUARY 20.17
R
ASSETS
Non-current assets
Property, plant and equipment (533 600 + 948 560 + 10 000 - 15 000 (125 000 110 000) - 150 000 - 280 000 + 1 250 (15 000/3 x 3/12))
*Investment in Ruby Ltd
*Investment in Amethyst Ltd
Goodwill (8 720(C1) - 2 000(impairment loss))
Investment in joint venture (140 000 + 56 801 (115 920 x 49%) – 4 900 (50 000 x
25/
125 x 49%))
Deferred tax (-2 240 (10 000 x 22,4%) + 1 372 (4 900 x 28%) + 4 200 (15 000 x
28%) - 350 (1 250 x 28%)
Total non-current assets
Current assets
Trade and other receivables (115 000 + 45 000 - 50 000 (125 000 x 40%))
Cash and cash equivalents (78 000 + 85 000)
Inventory (180 000 + 87 000)
Total current assets
Total assets
*May be combined as one line item.
1 048 410
100 000
25 000
6 720
191 901
2 982
1 375 013
110 000
163 000
267 000
540 000
1 915 013
PART B
Non-controlling interests
At acquisition date fair value (200 000 x 20% x R1,75)
Since acquisition date ((480 000 - 140 000 + 6 480) x 20%)
Current year:
Profit for the year ((214 560 - 2 000) x 20%)
Dividends paid (50 000 x 20%)
Alternative calculation:
Balance at beginning of year
Total comprehensive income for the year:
Profit for the year ((214 560 - 2 000) x 20%)
Dividends paid (50 000 x 20%)
Closing balance
R
70 000
69 296
42 512
(10 000)
171 808
139 2961
42 512
(10 000)
171 808
170
000 (200 000 x 20% x R1,75) + 68 000 ((480 000 - 140 000) x 20%) + 1 296 (6 480 x 20%)
= 139 296
65
FAC3762/107
CALCULATIONS
C1 Analysis of owners’ equity of Garnet Ltd
Mosaic Ltd
80%
At
Since
R
R
100%
Total
R
At acquisition
Share capital
Adjusted retained earnings
Retained earnings
Adjustment for inventory (9 000 x 72%)
Revaluation surplus (10 000 x 77,6%)
Equity presented by goodwill
Investment in Garnet Ltd and NCI
Since acquisition to beginning of the current year
Adjusted retained earnings
Retained earnings (480 000 - 140 000)
Reversal of inventory adjustment
Current year
Adjusted profit for the year
Profit for the year
Impairment of goodwill
Dividend paid
200 000
133 520
140 000
(6 480)
7 760
341 280
8 720
350 000
160 000
106 816
112 000
(5 184)
6 208
273 024
6 976
280 000
20%
NCI
R
40 000
26 704
28 000
(1 296)
1 552
68 256
1 744
70 000
346 480
340 000
6 480
277 184
272 000
5 184
69 296
68 000
1 296
212 560
214 560
(2 000)
170 048
171 648
(1 600)
42 512
42 912
(400)
(40 000)
402 048
(10 000)
171 808
(50 000)
852 560
280 000
Goodwill at acquisition date
Impairment loss
Balance as at 28 February 20.17
8 720
(2 000)
6 720
OR
Goodwill can be calculated using the proof of goodwill method:
Consideration transferred at acquisition date: IFRS 3.32(a)(i)
Plus: Amount of non-controlling interests (200 000 x 20% x 1,75): IFRS 3.32(a)(ii)
Less: net of assets acquired and liabilities assumed at acquisition date: IFRS 3.32(b)
Goodwill as at acquisition date
Impairment loss
Balance as at 28 February 20.17
R
280 000
70 000
350 000
(341 280)
8 720
(2 000)
6 720
OR
Goodwill can be calculated by preparing the at-acquisition journal entry:
Share capital
Retained earnings at acquisition date (140 000 – 6 480)
Revaluation surplus
Goodwill (balancing)
Investment in Garnet Ltd at cost
Non-controlling interests
66
Dr
R
200 000
133 520
7 760
8 720
Cr
R
280 000
70 000
FAC3762/107
From the above it should be clear that many methods may be applied to obtain the correct
answer. It is important to decide which method works best for you, and then to apply that
method in an examination. Do not apply more than one method, as you will be wasting
time.
It is of the utmost importance to realise that an analysis of owners’ equity is only a
calculation and will earn you no marks in an examination, unless the amounts calculated
in the analysis have been correctly disclosed in the financial statements.
C2 Journal entries
J1
J2
J3
J4
J5
J6
J7
J8
Property, plant and equipment
Deferred tax liability (SFP)
Revaluation surplus
Remeasurement of land of Garnet Ltd at acquisition date
Share capital
Retained earnings (C1)
Revaluation surplus
Goodwill
Investment in Garnet Ltd
NCI (SFP) (200 000 – 160 000) x R1.75
Elimination of owner’s equity in Garnet Ltd at acquisition date
Dr
R
10 000
2 240
7 760
200 000
133 520
7 760
8 720
280 000
70 000
Retained earnings (C1)
NCI (SFP)
Recognition of NCI’s interest in since-acquisition retained earnings
69 296
Other income
Property, plant and equipment
Elimination of unrealised intragroup gain included in the equipment
of Garnet Ltd on 28 February 20.17
15 000
Deferred tax asset (SFP)
Income tax expense
Tax implication of elimination of unrealised intragroup gain included
in the equipment of Garnet Ltd on 28 February 20.17
4 200
Accumulated depreciation
Depreciation
Recognition of the portion of the unrealised intragroup gain realised
by the depreciation process during 20.17
1 250
Income tax expense
Deferred tax asset (SFP)
Tax implication of the recognition of the portion of the unrealised
intragroup gain realised by the depreciation process during 20.17
NCI (PL)
NCI (SFP)
Recording of NCI’s interest in current year’s profit
Cr
R
69 296
15 000
4 200
1 250
350
350
42 912
42 912
67
FAC3762/107
J9
J10
J11
J12
J13
J14
J15
J16
68
Trade payables
Trade receivables
Elimination of amount outstanding caused by intragroup sale of
equipment at year end
Other income/Impairment loss
Goodwill
Impairment of goodwill as at year end
Dr
R
50 000
50 000
2 000
2 000
NCI (SFP)
NCI (PL)
NCI portion on the goodwill impairment as at year end
400
Other income
NCI (SFP)
Dividend paid (SOCIE)
Elimination of dividend received from Garnet Ltd
40 000
10 000
Investment in joint venture
Investment in Violet Ltd
Reclassification of investment in Violet Ltd to investment in joint
venture
400
50 000
140 000
140 000
Investment in joint venture
Share of profit of joint venture
Recognition of share in profit of joint venture
56 801
Sales (50 000 x 49%)
Cost of sales (50 000 x 100/125 x 49%)
Investment in joint venture (50 000 x 25/125 x 49%)
Elimination of unrealised profit in closing inventory of Violet Ltd
24 500
Deferred tax asset (SFP)
Income tax expense
Tax effect of the elimination of unrealised profit in closing inventory
of Violet Ltd
Cr
R
56 801
19 600
4 900
1 372
1 372
FAC3762/107
FAC3704
LEARNING UNIT 13:
CHANGES IN OWNERSHIP
69
FAC3762/107
Figure 2: You are here: Change in ownership
70
FAC3762/107
LEARNING OUTCOMES
After you have studied this learning unit, you should be able to:
• Apply the relevant consolidation procedures where there was a change in ownership
• Prepare the consolidated financial statements for a group where there has been a change in
ownership
OVERVIEW
The learning unit consists of the following sections:
Page
1.
Change in ownership
1.1
Introduction
74
1.2
Step acquisitions of interests in investees
75
1.3
Disposal of interests in investees
89
2.
E-tutor activity
109
3.
Assessment criteria
109
4.
Question bank
110
STUDY
Study the following chapters of the prescribed textbook (Group statements, Volume 2, 17th edition):
- Chapter 13: Changes in ownership of subsidiaries through buying or selling shares
RECOMMENDED READING
IFRS Standards – The Annotated IFRS Standards
- IFRS 3: Business Combinations
- IFRS 10: Consolidated Financial Statements
- IFRS 12: Disclosure of Interests in Other Entities
- IAS 27: Separate Financial Statements
To access these standards, please register at https://login.ifrs.org/register/
71
FAC3762/107
5
1.1
CHANGE IN OWNERSHIP
INTRODUCTION
Study:
Group statements, Volume 2, 17th edition
- Chapter 13 (pp. 169–281)
A company investing in another company exercises a certain degree of ownership (control) over the
acquired company’s financial and operating policies. The principles of IFRS 3 should be applied at the
acquisition date, that is the date when control is obtained.
A change in status implies that either there was control over a company which no longer exists after
the change in ownership (decrease in degree of control) or that there was no control before the change
in ownership and thereafter there is control (increase in the degree of control).
In principle, the consolidated statements of a group are the combined statements of all the companies
in the group. Certain adjustments need to be made, however, to get to the final consolidated
statements. The principles, procedures and adjustments that are needed in order to prepare and
present the consolidated financial statements for a group of companies, will be discussed in this
learning unit.
SUMMARY:
The following circumstances giving rise to changes in ownership are examinable in
FAC3762 and must be studied:
Acquisition of interests in subsidiaries:
- Acquisition of an additional interest in an existing subsidiary, where the subsidiary
remains a subsidiary
- Acquisition of an additional interest where an IFRS 9 simple investment becomes a
subsidiary.
Disposals of interests in subsidiaries:
- Partial disposal of an interest in a subsidiary, where it remains a subsidiary after the
disposal (i.e. control is not lost)
- Partial disposal of an interest in a subsidiary and an IFRS 9 simple investment is
retained.
Excluded:
Rights issues, share buy-backs and capitalisation shares are not examinable.
1.1.1 Methods of change in ownership
Changes in ownership can occur in many different ways, but only the sections covered in this module
are discussed:
(a) Increase of interest (increase in degree of control) by means of the following:
-
72
Additional equity shares in the acquired company are bought from the other investors or from a
share issue of the acquired company. This will increase the already existing degree of control.
(Not resulting in a change in status.)
FAC3762/107
(b) Decrease of interest (decrease in degree of control) by means of the following:
-
Shares in a subsidiary are sold, but the acquired company still remains a subsidiary, while the
parent has a smaller interest in the subsidiary’s net identifiable assets and liabilities. (Not
resulting in a change in status, which means the parent is still the controlling party.)
Study:
Group statements, Volume 2, 17th edition
- Chapter 13: 13.1 Methods of change in ownership (p. 170)
- Chapter 13: 13.2 Methods of step acquisition (p. 171)
Included:
The following sections must be studied for FAC3762:
- Chapter 13: 13.1 Methods of change in ownership (p. 170):
▪ “Piecemeal acquisition of interest in an investee from other owners”;
▪ “Disposal of interest in an investee to other owners”
-
Chapter 13: 13.2 Methods of step acquisition (p. 171):
▪ “Acquisition of an additional interest in an existing subsidiary (i.e. there is no
change in status of the investee)”;
▪ “Acquisition of an additional interest in an entity, with the result that the entity
becomes a subsidiary (i.e. change in status)”.
Excluded:
The following section does not have to be studied for FAC3762:
- Chapter 13: 13.1 Methods of change in ownership (p. 170):
▪ “As a result of the issue of additional shares by an investee”;
▪ “As a result of a buy-back of shares by an investee”;
▪ “As a result of other events, such as obtaining or losing control through a
contract with other owners”.
- Chapter 13: 13.2 Methods of step acquisition (p. 171):
▪ “Acquisition of an additional interest in an existing associate/joint venture (i.e.
there is no change in status of the investee)”;
▪ “Acquisition of an additional interest in an entity, with the result that the entity
becomes an associate/joint venture (i.e. change in status)”.
1.2
STEP ACQUISITIONS OF INTERESTS IN INVESTEES
Different scenarios where there is an increase in the degree of control:
(a) Acquisition of an additional interest in an existing subsidiary (change in the degree of
control, but not in status where control has already been obtained)
Subsidiary
remains a subsidiary, with parent company holding a greater interest
In this case it is important to realise that there is no change in status: the subsidiary remains a
subsidiary, only with a greater interest.
73
FAC3762/107
The following steps are taken:
(i)
The carrying amounts of the controlling and non-controlling interests, including any goodwill
attributable to the non-controlling interests (if applicable), need to be adjusted to reflect the
non-controlling interests’ reduced interest in the subsidiary.
(ii)
The difference between the non-controlling interests’ adjustment amount (as discussed above)
and the consideration transferred by the parent for the additional interest, must be recognised
directly in equity in the change in ownership reserve.
(iii)
No additional goodwill or gain on bargain purchase is recognised.
(iv)
No gain or loss should be recognised in the statement of profit or loss and other comprehensive
income.
Study:
Group statements, Volume 2, 17th edition
- Chapter 13: 13.3 Acquisition of an additional interest in an existing subsidiary (pp.
171–187)
- Chapter 13: Example 13.1a NCI is measured at its proportionate share of its
identifiable net assets at the acquisition date (pp. 172–180)
- Chapter 13: Example 13.1b NCI is measured at fair value at the acquisition date (pp.
181–187).
EXAMPLE 1
Increase in holding in existing subsidiary, no change in status, with revaluation of property,
plant and equipment
THE ABRIDGED TRIAL BALANCES OF BON LTD AND ITS SUBSIDIARY, AQUA LTD, FOR THE
YEAR ENDED 31 DECEMBER 20.16:
Bon
Aqua
Ltd
Ltd
R
R
Credits
Share capital – 60 000 ordinary shares
300 000
—
Share capital – 40 000 ordinary shares
—
200 000
Retained earnings – 1 January 20.16
500 000
150 000
Profit before tax
190 000
240 000
Long-term borrowings
270 000
175 000
Trade and other payables
13 900
20 000
1 273 900
785 000
Debits
Property, plant and equipment
823 000
651 000
Investment in Aqua Ltd at cost price
268 900
—
Trade receivables
78 800
36 800
Income tax expense
53 200
67 200
Dividends paid – 31 December 20.16
50 000
30 000
1 273 900
785 000
Additional information
1. On 1 January 20.14, Bon Ltd acquired 60% of the equity of Aqua Ltd and paid R190 000 for the
investment. The share capital has remained unchanged since that date. There were no reserves
other than retained earnings of R75 000 on the date of acquisition. At this acquisition date, no
unidentified assets, liabilities or contingent liabilities existed, and the fair value of all assets,
liabilities and contingent liabilities was confirmed to be equal to the carrying amounts thereof,
except for a vacant piece of land that had been revalued at R60 000 more than the cost price (cost
R40 000) for the purposes of this acquisition. Aqua Ltd did not process any revaluation in its
records.
74
FAC3762/107
2.
On 30 June 20.15, Aqua Ltd sold the piece of land for R110 000.
3.
On 1 October 20.16, Bon Ltd acquired an additional 6 000 ordinary shares in Aqua Ltd. On this
date there was no change in the fair value of assets, liabilities or contingent liabilities, as was
determined on 1 January 20.14. The profit of Aqua Ltd other than the effect of the intragroup
transaction (refer point 5) was earned evenly throughout the year.
4.
The Bon Ltd Group recognised its equity investment in subsidiary, Aqua Ltd, in its separate
financial records using the cost price method.
5.
On 2 October 20.16, Aqua Ltd sold machinery with a carrying amount of R80 000 to Bon Ltd for
R120 000. The depreciation policy of the group is to depreciate machinery over the expected
useful life of 5 years, using the straight-line method. Machinery is depreciated over the same
number of years, as is allowed for tax purposes.
6.
On 1 January 20.14, Bon Ltd acquired control of Aqua Ltd. Assume that Bon Ltd continued to
control Aqua Ltd throughout the period.
7.
Assume that each share carries one (1) vote.
8. The South African normal tax rate is 28%. You may assume the tax rate has been 28% since
1 January 20.14 and CGT is calculated at 80% thereof.
9.
The group elected to measure non-controlling interests at their proportionate share of the
identifiable net assets on acquisition date. The value of goodwill was tested for impairment at the
end of 20.16 and it was found not to be impaired.
REQUIRED:
Prepare the following for the Bon Ltd Group for the year ended 31 December
20.16:
-
Consolidated statement of profit or loss and other comprehensive income;
Consolidated statement of changes in equity; and
Consolidated statement of financial position.
Your answer must comply with the requirements of International Financial
Reporting Standards.
The notes to the consolidated annual financial statements and comparative
figures are not required.
All calculations are to be done to the nearest Rand.
75
FAC3762/107
SOLUTION 1
BON LTD GROUP
CONSOLIDATED STATEMENT OF FINANCIAL POSITION AS AT 31 DECEMBER 20.16
ASSETS
Non-current assets
Property, plant and equipment
(823 000 + 651 000 – 40 000 (machinery) + 2 000 (depreciation) (C2))
Deferred tax (11 200 (40 000 x 28%) – 560 (C2))
R
1 446 640
Current assets
Trade receivables (78 800 + 36 800)
Total assets
115 600
115 600
1 562 240
EQUITY AND LIABILITIES
Total equity
Equity attributable to owners of the parent
Share capital
Retained earnings
Other components of equity
Non-controlling interests
1 083 340
966 180
300 000
677 180
(10 200)
116 360h
Non-current liabilities
Long-term borrowings (270 000 + 175 000)
Current liabilities
Trade and other payables (13 900 + 20 000)
Total liabilities
Total equity and liabilities
445 000
445 000
33 900
33 900
478 900
1 562 240
1 436 000
10 640
BON LTD GROUP
CONSOLIDATED STATEMENT OF PROFIT OR LOSS AND OTHER COMPREHENSIVE INCOME
FOR THE YEAR ENDED 31 DECEMBER 20.16
Profit before tax
(190 000 + 240 000 – 22 500 (div) – 40 000 (machinery) + 2 000 (depreciation)
(C2))
Income tax expense (53 200 + 67 200 – 11 200 (40 000 x 28%) + 560 (C2))
PROFIT FOR THE YEAR
TOTAL COMPREHENSIVE INCOME FOR THE YEAR
Profit for the year attributable to:
Owners of the parent
Non-controlling interests (43 200a + 9 360b)
Total comprehensive income attributable to:
Owners of the parent
Non-controlling interests (43 200a + 9 360b)
76
R
369 500
(109 760)
259 740
259 740
207 180
52 560
259 740
207 180
52 560
259 740
FAC3762/107
BON LTD GROUP
CONSOLIDATED STATEMENT OF CHANGES IN EQUITY FOR THE YEAR ENDED
31 DECEMBER 20.16
Balance at 1 January 20.16
Changes in equity for 20.16
Total comprehensive income for
the year:
Profit for the year
Purchase additional interest
Dividend paid
Balance at 31 December 20.16
Share
capital
R
300 000
Retained
earnings
R
520 0001
Change in
ownership
R
—
Noncontrolling
interests
R
140 0002
Total
equity
R
960 000
52 5603
(68 700)
(7 500)e
116 360
259 740
(78 900)
(57 500)
1 083 340
207 180
(10
300 000
(50 000)
677 180
200)g
(10 200)
1
500 000 + 17 064c + 2 936d = 520 000 or
500 000 + (150 000 – 75 000 – 46 560 – 11 376 (J4)) + 2 936d = 520 000
2128 624 + 11 376 = 140 000i
343 200a + 9 360b = 52 560
Calculation of percentage interest
The share capital consists of 40 000 ordinary shares with a value of R200 000.
When calculating Bon Ltd’s percentage interest in Aqua Ltd, the number of shares
acquired by Bon Ltd is divided by the total number of shares issued by Aqua Ltd.
First acquisition:
Acquired 60%; Bon Ltd purchased 24 000 shares (60% x 40 000)
Second acquisition:
Acquired 6 000 shares; Bon Ltd’s interest increased to 75%
[(24 000 + 6 000) / 40 000]
Subsequent disposal of land revalued at acquisition date
On 1 January 20.14 (additional information – note 1), when Bon Ltd acquired a
controlling interest in Aqua Ltd, the fair value of a piece of vacant land was
R60 000 (after tax - R46 560 (60 000 – (60 000 x 80% x 28%)) more than its
carrying amount. The revaluation of the land was done for group purposes only.
The revaluation of land was not accounted for in the separate financial records of
Aqua Ltd.
Aqua Ltd sold the land for R110 000 on 30 June 20.15 (additional information –
note 2). The profit or loss on disposal of the land will not be the same for the
Bon Ltd Group as for Aqua Ltd, as the carrying amount of the land for the Bon Ltd
Group is R60 000 more than for Aqua Ltd (due to the revaluation at acquisition
date). The profit for the Bon Ltd Group will be R60 000 less than for Aqua Ltd.
The pro-forma consolidation journal entry to correctly reflect the profit on
sale of land for group purposes
Dr Retained earnings (profit on sale of land)
Cr Property, plant and equipment (land)
Dr Deferred tax asset (SFP)
Cr Retained earnings (income tax expense)
R
60 000
R
60 000
13 440
13 440
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FAC3762/107
CALCULATIONS
C1 ANALYSIS OF OWNERS' EQUITY OF AQUA LTD
100%
Total
R
At acquisition
Share capital
Retained earnings
Revaluation surplus
(60 000 – 11 189 (60 000 x 80% x 28%))
Equity represented by gain on bargain
purchase
Consideration and non-controlling interests
Since acquisition
Retained earnings
(150 000 – 75 000 – 46 560)
Current year
Profit for the year (C2)
Bon Ltd
60% – 75%
At
Since
R
R
40% –
25%
NCI
R
200 000
75 000
120 000
45 000
80 000
30 000
46 560
321 560
27 936
192 936
18 624
128 624
(2 936)
318 624
(2 936)d
190 000
—
128 624
28 440
347 064
17 064c
17 064
11 376
140 000i
108 000
455 064
64 800
81 864
43 200a
183 200
Purchase of 6 000 shares ((455 064 + 2 936
gain on bargain at acquisition date) x 15%)
Investment in Aqua Ltd (purchase of
additional interest) (268 900 – 190 000)
Change in ownership
(68 700)e
68 700
(78 900)
(10 200)g
Profit for the year (C2)
Unrealised profit on the sale of machine
(120 000 – 80 000)
37 440
64 800
28 080
48 600
9 360b
16 200
(40 000)
(30 000)
(10 000)
Tax effect of unrealised profit on sale of
machine (40 000 x 28%)
11 200
8 400
2 800
Realisation of unrealised profit on sale of
machine (40 000/5 x 3/12)
2 000
1 500
500
(560)
(30 000)
462 504
(420)
Tax effect on realisation of unrealised profit
(2 000 x 28%)
Dividends paid
(22 500)
87 444
(140)
(7 500)f
116 360h
It is important to note that a gain on bargain purchase (R2 936) is always
attributable to the acquirer (Bon Ltd). It does not form part of the net assets (equity)
of Aqua Ltd. Therefore, when 15% of the equity of Aqua Ltd is transferred from NCI
to Bon Ltd, it is important to remember to add back the R2 936 to the total of
R455 064 (analysis) in order to exclude it.
When there is no change in status (no difference in control over the subsidiary
before and after the change in ownership), IFRS 3 requires the difference between
the additional interest obtained and the amount of consideration paid for that
additional interest to be recognised as part of change in ownership reserve. The
R10 200 will be disclosed in the consolidated statement of changes in equity in the
change in ownership reserve column.
78
FAC3762/107
C2 PROFIT FOR THE YEAR
Profit for the year (240 000 – 67 200)
Deduct profit on sale of machine (after tax) not earned evenly throughout the
year (40 000(120 000 – 80 000) – 11 200(40 000 x 28%))
Profit for the year earned evenly throughout the year
9 months
R
108 000
Profit for the year apportioned (144 000 x 9/12)
(144 000 x 3/12)
Profit made on sale of machine (after tax) (refer to comment)
Profit for the period
108 000
Total
R
172 800
(28 800)
144 000
3 months
R
36 000
28 800
64 800
It is important to note that in calculation C2, profit for the year, we deduct the profit
on the sale of the machine before allocating the profit between 9 months and 3
months. Refer to additional information – note 3, which states that the profit of Aqua
Ltd, other than the effect of the intragroup sale of the machinery, was earned evenly
throughout the year.
Thereafter you need to insert the profit on the sale of the machine in the period
of 3 months, because the sale of the machine took place on 2 October 20.16.
Next, you need to eliminate the intragroup sale of the machine for group purposes
and add back the portion of the unrealised profit that realises through the use of
the asset.
C3 PRO-FORMA CONSOLIDATION JOURNALS
J1
J2
J3
Property, plant and equipment
Deferred tax liability (SFP)
(60 000 x 80% x 28%)
Revaluation surplus
Revaluation of fixed property at date of
acquisition
Share capital
Retained earnings
Revaluation surplus
Non-controlling interests (SFP)
Investment in Aqua Ltd
Retained earnings (gain on bargain purchase)
Elimination of original investment in Aqua Ltd
Retained earnings
Deferred tax liability (SFP)
Property, plant and equipment
Sale of fixed property revalued at acquisition
(refer to lecturer’s comment)
Dr
R
60 000
Cr
R
NCI
R
13 440
46 560
200 000
75 000
46 560
128 624
190 000
2 936d
128 624
46 560
13 440
60 000
79
FAC3762/107
J4
Retained earnings (SOCIE)
Non-controlling interests (SFP)
Recording of non-controlling interests in retained
earnings since acquisition to beginning of current
year
((150 000 – 75 000 – 46 560) x 40%)
Dr
R
11 376
Cr
R
11 376
NCI
R
11 376
140 000i
J5
Non-controlling interests (P/L)
Non-controlling interests (SFP)
Recording of non-controlling interests in profit for
the year for 9 months to 30/09/20.3 (108 000 (C2)
x 40%)
43 200
43 200
43 200a
183 200
J6
Non-controlling interests (SFP)
(183 200 x 15% / 40%)
Change in ownership (SOCIE)
Investment in Aqua Ltd
(268 900 – 190 000)
Elimination of additional investment in Aqua Ltd
(68 700)e
68 700
10 200
78 900
114 500
J7
Non-controlling interests (P/L)
Non-controlling interests (SFP)
Recording of non-controlling interests in profit for
the 3-month period to 31/12/20.16
(10 080(37 440 – 40 000 + 11 200 + 2 000 – 560)
(C2) x 25%)
9 360
Dividend received/Other income (P/L)
Non-controlling interests (SFP)
(30 000 x 25%)
Dividend paid (SOCIE)
Elimination of intragroup dividends and recording of
non-controlling interests in dividends paid
22 500
Other income (P/L) (120 000 – 80 000)
Property, plant and equipment (SFP)
Elimination of the unrealised intragroup profit/gain
included in Bon Ltd’s machinery
40 000
J10 Deferred tax asset (SFP)
Income tax expense/deferred tax (P/L)
Recognition of the deferred tax on the unrealised
intragroup profit/gain included in Bon Ltd’s
machinery.
11 200
J8
J9
J11 Accumulated depreciation (SFP)
(40 000/5 years x 3/12)
Other expense/depreciation
Recognition of the portion of unrealised intragroup
profit/gain realised during the year ended 31
December 20.16
J12 Income tax expense/deferred tax (P/L)
Deferred tax asset (SFP)
Recognition of the deferred tax on the portion of
unrealised profit realised during the current year
9 360
9 630b
(7 500)f
7 500
30 000
40 000
11 200
2 000
2 000
560
560
116 630
80
FAC3762/107
(b) Acquisition of an additional interest where an IFRS 9 simple investment becomes a
subsidiary
-
IFRS 3 simple investment
becomes a subsidiary
In this case it is important to realise that there is a change in status: control is obtained.
The following steps are taken:
-
On the acquisition date (the date when control is obtained over the investee), remeasure the
previously held interest (i.e. the IFRS 9 simple investment) to its fair value. The resulting gain
or loss is recognised in the profit or loss section of the consolidated statement of profit or loss
and other comprehensive income.
-
On the acquisition date, goodwill or gain on bargain purchase is recognised.
Goodwill or gain on bargain purchase is recognised only on the acquisition date
(when control is obtained) and not again on any date thereafter, should additional
interests in the subsidiary be acquired.
Study:
Group statements, Volume 2, 17th edition
- Chapter 13: 13.4 Acquisition of an additional interest whereby the investee
(investment) becomes a subsidiary (pp. 187–196)
- Chapter 13: Example 13.2 (pp. 189–196)
Exclude:
Group statements, Volume 2, 17th edition
- Chapter 13: 13.5 Acquisition of an additional interest whereby an associate becomes
a subsidiary (pp. 196–205)
- Chapter 13: Example 13.3 (pp. 198–205)
EXAMPLE 2
Acquisition of an additional interest, whereby an IFRS 9 investment becomes a subsidiary.
The following are extracts from the trial balances of Jam Ltd and Toast Ltd for the year ended
31 December 20.18:
Jam Ltd
Toast Ltd
DEBITS
R
R
Property, plant and equipment
648 040
445 400
Investment in Toast Ltd at fair value
380 900
Trade receivables
70 514
41 158
Cash and cash equivalents
26 580
25 810
Cost of sales
125 504
42 000
Other expenses
35 400
25 900
Income tax expense
99 763
25 732
1 386 701
606 000
CREDITS
Share capital:
- 120 000 ordinary shares
120 000
- 100 000 ordinary shares
100 000
Retained earnings - 1 January 20.18
722 900
335 400
Revenue
385 200
126 500
Other income
132 000
33 300
Deferred tax
2 442
Trade and other payables
24 159
10 800
1 386 701
606 000
81
FAC3762/107
Additional information
1. On 1 April 20.17, Jam Ltd acquired 15% of the issued ordinary shares in Toast Ltd for R59 500.
2. The fair value of the 15% investment in Toast Ltd was as follows on the respective dates:
31 December 20.17
R68 100
1 March 20.18
R70 400
Jam Ltd has revalued its investment in Toast Ltd to fair value at all the above dates.
3. On 1 March 20.18, Jam Ltd obtained control over Toast Ltd with the acquisition of an additional
65 000 shares in Toast Ltd from the non-controlling shareholders for R310 500. On 1 March 20.18,
all the assets and liabilities in the separate financial statements of Toast Ltd were fairly valued. On
1 March 20.18, the market price of one Toast Ltd share was R5,00. Jam Ltd has correctly
accounted for the purchase transaction in its separate accounting records.
4. The profit of Toast Ltd was earned evenly throughout the current year.
5. Jam Ltd measures simple investments in equity instruments at fair value through profit or loss.
Jam Ltd measures investments in subsidiaries at cost price.
6. The Jam Ltd Group measures non-controlling interests at fair value on the acquisition date.
7. The South African normal tax rate is 28% and capital gains tax is calculated at 80% thereof. You
may assume that the tax rate has remained unchanged since 1 April 20.17. Each share carries
one (1) vote and the issued share capital of all entities in the group has remained unchanged
since 1 April 20.17.
REQUIRED:
(a) Prepare the pro-forma consolidation journal entries for the Jam Ltd Group, for
the year ended 31 December 20.18.
(b) Prepare the consolidated statement of profit or loss and other comprehensive
income of the Jam Ltd Group, for the year ended 31 December 20.18.
(c) Prepare the consolidated statement of changes in equity of the Jam Ltd
Group, for the year ended 31 December 20.18.
(d) Prepare the consolidated statement of financial position of the Jam Ltd
Group, for the year ended 31 December 20.18.
All answers must comply with the requirements of International Financial
Reporting Standards (IFRS).
All amounts should be rounded to the nearest Rand.
Comparative figures and notes to the consolidated financial statements are not
required.
82
FAC3762/107
SOLUTION 2
PART A
PRO-FORMA CONSOLIDATION JOURNAL ENTRIES
J1 Share capital
Retained earnings – 1 January 20.18 (given)
Revenue (126 500 x 2/12)
Other income (33 300 x 2/12)
Cost of sales (42 000 x 2/12)
Other expenses (25 900 x 2/12)
Income tax expense (25 732 x 2/12)
Investment in Toast Ltd (310 500(consideration) +
70 4 00(fair value of previously held investment))
Non-controlling interests (SFP) (100 000 x 20% x R5,00)
Goodwill
Elimination of equity of Toast Ltd at the acquisition date to ensure
that only equity of Toast Ltd from 1 March 20.18 is brought into the
consolidated financial statements.
Dr
R
100 000
335 400
21 083
5 550
Cr
R
7 000
4 317
4 289
380 900
100 000
34 472
Jam Ltd has already correctly accounted for the investment in Toast Ltd as follows in its
separate accounting records:
1 April 20.17:
Investment in Toast Ltd
Bank
Initial recognition of investment in Toast Ltd
31 December 20.17:
Investment in Toast Ltd
Other income (fair value adjustment) (68 100 – 59 500)
Accounting for the fair value adjustment
Income tax expense (8 600 x 80% x 28%)
Deferred tax liability (SFP)
Deferred tax effect of the fair value adjustment
1 March 20.18:
Investment in Toast Ltd
Other income (fair value adjustment) (70 400 – 68 100)
Recording the fair value adjustment
Income tax expense (2 300 x 80% x 28%)
Deferred tax liability (SFP)
Deferred tax effect of the fair value adjustment
1 March 20.18:
Investment in Toast Ltd
Bank
Initial recognition of investment in Toast Ltd
Dr
R
59 500
Cr
R
59 500
8 600
8 600
1 926
1 926
2 300
2 300
515
515
310 500
310 500
83
FAC3762/107
Comment on J1:
Toast Ltd is a subsidiary of Jam Ltd at year end. We therefore start the consolidation
process by adding, line by line, 100% of Jam Ltd plus 100% of Toast Ltd. Toast Ltd only
became a subsidiary of Jam Ltd on 1 March 20.18 (when control was obtained). Our first
consolidation journal therefore eliminates the revenue, cost of sales, other income, other
expenses and income tax expense for the first 2 months of the year. This ensures that only
profit for the year which Toast Ltd earned after the acquisition date (1 March 20.18) is
included in the consolidated statement of profit or loss (SPL).
J2 Non-controlling interests (P/L)
Non-controlling interests (SFP)
Recording of non-controlling interests in profit for the year
(126 500 + 33 300 – 42 000 – 25 900 – 25 732 = 66 168;
66 168 x 10/12 x 20%) (refer to lecturer’s comment)
Dr
R
11 028
Cr
R
11 028
Comment on J2:
The non-controlling interests (NCI) are entitled to 20% of the profit of the subsidiary that
has been included in the consolidated SPL. Hence, the NCI is then entitled to 20% of the
profit for 10 months (i.e. x 10/12).
J3 Deferred tax liability (SFP)
Income tax expense (P/L)
Reversal of deferred tax liability raised on the revaluation of the investment
in Toast Ltd to fair value in the separate
accounting records of Toast Ltd (refer to lecturer’s comment)
Dr
R
2 442
Cr
R
2 442
Comment on J3:
IAS 12 states that a deferred tax liability shall not be recognised on an investment in
a subsidiary, if
(a) the parent can control the reversal of the temporary difference; and
(b) it is probable that the temporary difference will not reverse in future.
As Jam Ltd has control of Toast Ltd and holds its investment in Toast Ltd as a longterm investment, the temporary difference that arose when the investment in Toast
Ltd was revalued is not expected to reverse in future. Therefore, based on the
requirements of IAS 12, no deferred tax liability should be raised on the investment
in Toast Ltd, and any such deferred tax liability in the separate financial statements
of Jam Ltd should be reversed.
84
FAC3762/107
PART B
JAM LTD GROUP
CONSOLIDATED STATEMENT OF PROFIT OR LOSS AND OTHER COMPREHENSIVE INCOME
FOR THE YEAR ENDED 31 DECEMBER 20.18
R
10
Revenue (385 200 + 105 417(126 500 x /12))
490 617
10
Cost of sales (125 504 + 35 000(42 000 x /12))
(160 504)
Gross profit
330 113
10
Other income (132 000 + 27 750(33 300 x /12))
159 750
10
Other expenses (35 400 + 21 583(25 900 x /12))
(56 983)
Profit before tax
432 880
Income tax expense (99 763 + 21 443(25 732 x 10/12) – 2 442(J3))
(118 764)
PROFIT FOR THE YEAR
314 116
Other comprehensive income for the year
–
TOTAL COMPREHENSIVE INCOME FOR THE YEAR
314 116
Profit for the year attributable to:
Owners of the parent
Non-controlling interests (66 168 x 10/12 x 20%)
303 088
11 028
314 116
Total comprehensive income for the year attributable to:
Owners of the parent
Non-controlling interests (66 168 x 10/12 x 20%)
1
303 088
11 028
314 116
126 500 + 33 300 – 42 000 – 25 900 – 25 732 = 66 168
The consolidated statement of profit or loss and other comprehensive income of the
Jam Ltd Group will only include the income and expenses of Toast Ltd from the date
it became part of the Jam Ltd Group (1 March 20.18). As the profit of Toast Ltd was
earned evenly throughout the year, we can apportion the profit of Toast Ltd so that
only the profit for the period 1 March 20.18 until 31 December 20.18 (i.e. 10 months)
is included.
PART C
JAM LTD GROUP
CONSOLIDATED STATEMENT OF CHANGES IN EQUITY FOR THE YEAR ENDED
31 DECEMBER 20.18
Balance at 1 December 20.18
Changes in equity for 20.18
Acquisition of subsidiary
Total comprehensive income:
Profit for the year
Balance at 31 December 20.18
1
NonShare
Retained controlling
capital
earnings
interests
R
R
R
1
120 000
722 900
110 0002
303 088
11 028
120 000 1 025 987
121 028
Total
R
842 900
110 000
314 115
1 267 015
Only opening retained earnings of Jam Ltd, as Toast Ltd (subsidiary) is not acquired yet.
interests at the acquisition date (refer analysis).
2 Non-controlling
85
FAC3762/107
PART D
JAM LTD GROUP
CONSOLIDATED STATEMENT OF FINANCIAL POSITION AS AT 31 DECEMBER 20.18
R
ASSETS
Non-current assets
Property, plant and equipment (648 040 + 445 400)
Goodwill (see journals/analysis)
Total non-current assets
1 093 440
44 472
1 137 912
Current assets
Trade receivables (70 514 + 41 158)
Cash and cash equivalents (26 580 + 25 810)
Total current assets
Total assets
111 672
52 390
164 062
1 301 974
EQUITY AND LIABILITIES
Equity attributable to owners of the parent
Share capital
Retained earnings
Non-controlling interests
Total equity
1 145 987
120 000
1 025 987
121 028
1 267 015
Current liabilities
Trade and other payables (24 159 + 10 800)
Total current liabilities
Total liabilities
Total equity and liabilities
34 959
34 959
34 959
1 301 974
The consolidated statement of financial position is a ‘snapshot’ of the assets and
liabilities of the Jam Ltd Group at 31 December 20.18. You will notice that the assets
and liabilities are therefore not apportioned, because at 31 December 20.18,
Toast Ltd is a subsidiary of Jam Ltd, regardless of when Jam Ltd obtained control of
Toast Ltd.
ANALYSIS OF OWNERS’ EQUITY OF TOAST LTD
At acquisition – 1 March 20.18
Share capital
Retained earnings
(335 400 + 11 028(66 168 x 2/12))
Equity represented by goodwill
Consideration paid and NCI
(100 000 x 20% x R5,50);
(310 500(consideration transferred) + 70 400(fair
value of previously held investment))
Current year
Profit for the year (66 168 x 10/12)
86
100%
Total
R
Jam Ltd
80%
At
Since
R
R
100 000
80 000
20 000
346 428
446 428
44 472
490 900
277 142
357 142
23 758
380 900
69 286
89 286
20 714
110 000
55 140
546 040
44 112
44 112
NCI
20%
R
11 028
121 028
FAC3762/107
1.3 DISPOSAL OF INTERESTS IN AN INVESTEE
Different scenarios where there is a decrease in the degree of control:
(a) Partial disposal of an interest in an existing subsidiary, control not lost (no change in
status):
subsidiary
remains a subsidiary, with parent company holding a smaller interest
In this case it is important to realise that there is no change in status: the subsidiary remains a
subsidiary, only with the parent company holding a smaller interest.
The parent will recognise the profit or loss on disposal of the investment in its separate financial
statements. The following steps are taken:
(i)
The profit or loss on disposal, that was recognised in the parent’s separate financial statements,
will be reversed upon consolidation.
- The difference between the amount that the non-controlling interests are adjusted by and the
consideration received by the parent on disposal, must be recognised directly in the change
in ownership reserve.
- No gain or loss should be recognised in the statement of profit or loss and other comprehensive
income.
- The total amount of goodwill that arose at acquisition date is not adjusted. However, allocation
of goodwill between the NCI and the parent is adjusted, as the parent now has a smaller
ownership interest in the net assets (including goodwill) of the subsidiary. It is important to note
that additional goodwill will only be allocated to the NCI if goodwill was initially recognised for
the NCI (i.e. the NCI was measured at the fair value at acquisition date). If the NCI was
measured at its proportionate share of the identifiable net asset at acquisition date, the total
goodwill that arose on initial acquisition will remain attributable to the parent.
When a subsidiary remains a subsidiary, albeit with a smaller interest, the goodwill
recognised on acquisition of the original interest in the subsidiary will not be
derecognised. The goodwill will remain in the consolidated financial statements of
the parent until such time as the control is relinquished. The ratio of goodwill
attributable to the parent and the non-controlling interests can change, depending
on the method used for recognising goodwill (non-controlling interests are
measured at their proportionate share of the identifiable net assets or at fair value
on acquisition date).
Study:
Group statements, Volume 2, 17th edition
- Chapter 13: 13.6 Basic approach on disposal of an interest (pp. 205–206)
- Chapter 13: 13.7 Partial disposal of an interest in a subsidiary whereby control is
not lost (pp. 207–224)
- Chapter 13: Example 13.4a NCI is measured at its proportionate share of the
acquiree’s identifiable net assets at the acquisition date (pp. 208–218).
- Chapter 13: Example 13.4 b NCI is measured at fair value at the date of acquisition
(pp. 219–224)
EXAMPLE 3
Decrease in holding, no change in status, a subsidiary remains a subsidiary with smaller
interest.
THE FOLLOWING ARE THE TRIAL BALANCES OF ROSE LTD AND PETAL LTD FOR THE YEAR
ENDED 28 FEBRUARY 20.17:
87
FAC3762/107
Credits
Share capital - 50 000 ordinary shares
Retained earnings – 1 March 20.16
Profit before tax
Trade and other payables
Debits
Property, plant and equipment at carrying amount
Investment in Petal Ltd at cost price
Trade receivables
Cash and cash equivalents
Income tax expense
Rose
Ltd
R
Petal
Ltd
R
50 000
110 000
115 000
14 500
289 500
50 000
75 000
85 000
15 700
225 700
148 040
45 000
34 760
29 500
32 200
289 500
145 400
—
34 000
22 500
23 800
225 700
Additional information
1.
On 1 March 20.14, Rose Ltd acquired control of Petal Ltd by acquiring 40 000 of the issued
ordinary shares in Petal Ltd for R60 000. On 1 March 20.14, the retained earnings of Petal Ltd
amounted to R20 000, and the assets and liabilities in the separate financial statements of
Petal Ltd were fairly valued, except for the following items:
Land
Trade receivables
Fair value
R
103 000
18 000
Carrying amount
R
95 000
23 000
The market price of one Petal Ltd share was R1,55 on 1 March 20.14.
2.
On 28 February 20.17, Rose Ltd sold 10 000 shares in Petal Ltd to the non-controlling interests
for R17 500. After the disposal, Rose Ltd still controlled Petal Ltd. The sales transaction and
the taxation payable on the sale of shares were correctly accounted for by Rose Ltd in its
separate accounting records.
3.
Rose Ltd recognised the equity investment in the subsidiary, Petal Ltd, in its separate
accounting records using the cost-price method.
4.
In both companies, each share carries one (1) vote and the issued share capital has remained
unchanged since 1 March 20.14.
5.
The South African normal tax rate is 28% and the capital gains tax is calculated at 80% thereof.
6.
The income and expenses of Petal Ltd have accrued evenly during the 20.17 year.
REQUIRED:
PART A
The group elected to measure the non-controlling interests in an acquiree at the
proportionate share of the identifiable net assets at acquisition date.
(i) Prepare the pro-forma consolidation journal entries for the Rose Ltd Group,
for the year ended 28 February 20.17.
(ii) Prepare the consolidated statement of profit or loss and other comprehensive
income for the Rose Ltd Group, for the year ended 28 February 20.17.
(iii) Prepare the consolidated statement of changes in equity of the Rose Ltd
88
FAC3762/107
Group, for the year ended 28 February 20.17.
(iv) Prepare the consolidated statement of financial position of the Rose Ltd
Group, as at 28 February 20.17.
PART B
The group elected to measure the non-controlling interests in an acquiree at fair
value at acquisition date.
(i) Prepare the pro-forma consolidation journal entries for the Rose Ltd Group
for the year ended 28 February 20.17. Provide only the journal entries for
Part B that are different from Part A.
(ii) Prepare the consolidated statement of profit or loss and other comprehensive
income for the Rose Ltd Group, for the year ended 28 February 20.17.
(iii) Prepare the consolidated statement of changes in equity of the Rose Ltd
Group, for the year ended 28 February 20.17.
(iv) Prepare the consolidated statement of financial position of the Rose Ltd
Group, as at 28 February 20.17.
Your answers must comply with the requirements of International Financial
Reporting Standards.
Notes to the consolidated annual financial statements and comparative figures
are not required.
All calculations must be done to the nearest Rand.
89
FAC3762/107
SOLUTION 3
PART A (i)
ROSE LTD GROUP
PRO-FORMA CONSOLIDATION
28 FEBRUARY 20.17
J1
J2
J3
J4
J5
JOURNAL
ENTRIES
Property, plant and equipment
(103 000 – 95 000)
Deferred tax liability (SFP) (8 000 x 80% x 28%)
Revaluation surplus
Revaluation of land at date of acquisition
Retained earnings
Deferred tax asset (SFP)(5 000 x 28%)
Trade receivables (23 000 – 18 000)
Revaluation of trade receivables at date of
acquisition
Share capital
Retained earnings (20 000 – 3 600)
Revaluation surplus
Non-controlling interests (SFP)
(72 608(50 000 + 16 400 + 6 208) x 20%)
Investment in Petal Ltd
Goodwill
Elimination of at-acquisition equity against original
investment in Petal Ltd
Trade receivables
Retained earnings
Deferred tax asset (SFP)
Reversal of at-acquisition write-off of trade
receivables
FOR
Dr
R
8 000
THE
YEAR
Cr
R
ENDED
NCI
R
1 792
6 208
3 600
1 400
5 000
50 000
16 400
6 208
14 522
60 000
14 522
1 914d
5 000
3 600
1 400
Retained earnings (SOCIE)
Non-controlling interests (SFP)
Recording of non-controlling interests in retained
earnings since acquisition to beginning of current
year
(58 600(75 000 – 20 000 + 3 600) x 20%)
11 720
Non-controlling interests (P/L)
Non-controlling interests (SFP)
Recording of non-controlling interests in profit for the
year
(61 200(85 000 – 23 800) x 20%)
12 240
11 720
11 720
26 242
J6
12 240
12 240
38 482
90
FAC3762/107
Dr
R
J7
Investment in Petal Ltd
((10 000/40 000) x R60 000)
Other income (profit on sale of shares)
(17 500 – 15 000)
Change in ownership (SOCIE)
Non-controlling interests (SFP)
(192 408 x 20%)
Recording of increase in non-controlling interests
due to sale of shares
Cr
R
NCI
R
38 482
38 482
15 000
2 500
20 982
76 964
C1 CALCULATION OF EFFECT OF FAIR VALUE ADJUSTMENTS AT ACQUISITION
Land
Trade receivables
1
2
Carrying
amount
R
103 800
18 000
Tax
Temporary
base
difference
R
R
95 000
8 000
23 000
(5 000)
Tax effect
R
(1 792)1
1 400 2
After tax
amount
R
6 208
(3 600)
8 000 x 80% x 28% = 1 792
5 000 x 28% = 1 400
PART A (ii)
ROSE LTD GROUP
CONSOLIDATED STATEMENT OF PROFIT OR LOSS AND OTHER COMPREHENSIVE INCOME
FOR THE YEAR ENDED 28 FEBRUARY 20.17
Profit before tax (115 000 + 85 000 – 2 500)
Income tax expense (32 200 + 23 800)
PROFIT FOR THE YEAR
TOTAL COMPREHENSIVE INCOME FOR THE YEAR
Total profit and comprehensive income attributable to:
Owners of the parent
Non-controlling interests (61 200(85 000 – 23 800) x 20%)
R
197 500
(56 000)
141 500
141 500
129 260
12 240
141 500
91
FAC3762/107
PART A (iii)
ROSE LTD GROUP
CONSOLIDATED STATEMENT OF CHANGES IN EQUITY FOR THE YEAR ENDED
28 FEBRUARY 20.17
NonShare
Retained
controlling
Total
capital
earnings
Change in
interests
equity
R
R
ownership
R
R
R
Balance at 1 March 20.16
50 000
156 8801
—
26 2422
233 122
Changes in equity for 20.17
Total comprehensive income
for the year:
Profit for the year
129 260
12 240 141 500
Sale of interest in subsidiary
(20 982)4
38 4823
Balance at 28 Feb 20.17
50 000
286 140
(20 982)
76 964 392 122
100 000 + 46 880(58 600(75 000 – 20 000 + 3 600(trade receivables adjustment) x 80%) = 156 880
50 000 + 16 400 + 6 208 = 72 608 x 20% = 14 522 + 11 720 (58 600(75 000 – 20 000 + 3 600) x
20%) = 26 242
3 72 608(50 000 + 16 400 + 6 208) + 58 600 + 61 200 = 192 408 x 20% = 38 482
4 17 500 – 38 482 = -20 982
1
2
PART A (iv)
ROSE LTD GROUP
CONSOLIDATED STATEMENT OF FINANCIAL POSITION AS AT 28 FEBRUARY 20.17
ASSETS
Non-current assets
Property, plant and equipment (148 040 + 145 400 + 8 000(103 000 – 95 000)
Goodwill (see analysis/J3)
Total non-current assets
Current assets
Trade receivables (34 760 + 34 000)
Cash and cash equivalents (29 500 + 22 500)
Total current assets
Total assets
EQUITY AND LIABILITIES
Equity attributable to owners of the parent
Share capital
Retained earnings
(change in ownership reserve)
Non-controlling interests
Total equity
Non-current liabilities
Deferred tax liability
Total non-current assets
Current liabilities
Trade and other payables (14 500 + 15 700)
Total current liabilities
Total liabilities
Total equity and liabilities
92
R
301 440
1 914
303 354
68 760
52 000
120 760
424 114
315 158
50 000
286 140
(20 982)
76 964g
392 122
1 792
1 792
30 200
30 200
31 992
424 114
FAC3762/107
CALCULATIONS
C1 ANALYSIS OF OWNERS' EQUITY OF PETAL LTD
100%
Total
R
At acquisition - 1 March 20.14
Share capital
Retained earnings
(20 000 – 3 600(5 000(23 000 – 18 000)) x
72%))
Revaluation surplus
(8 000(103 000 – 95 000) x 77,6%)
Equity represented by goodwill
Consideration paid and NCI
Since acquisition to beginning of current
year
Retained earnings
(75 000 – 20 000 + 3 600)
Current year
Profit for the period: 01/03/20.16 to 28/02/20.17
(85 000 – 23 800)
Rose Ltd
80% – 60%
At
Since
R
R
20% –
40%
NCI
R
50 000
40 000
10 000
16 400
13 1 20
3 280
6 208
72 608
1 914
74 522
4 966
58 086
1 914
60 000
1 242
14 522
—
14 522
58 600
46 880b
11 720
61 200
194 322
48 960
95 840
12 240
38 482
Sale of 10 000 shares - 28 Feb 20.17
Transfer of equity to NCI
(192 408(72 608 + 58 600 + 61 200) x 20%))
Proceeds from sale of shares (given)
Change in ownership reserve
(38 482)
17 500
(20 982)
194 322
38 482
95 840
76 964
93
FAC3762/107
Rose Ltd has already correctly accounted for the investment in Petal Ltd as follows
in its separate accounting records:
Dr
R
60 000
1 March 20.14:
Investment in Petal Ltd
Bank
Initial recognition of investment in Petal Ltd
Cr
R
60 000
28 February 20.17:
Bank
Other income (profit on sale of shares)
(17 500 – 15 000)
Investment in Petal Ltd
((10 000/40 000) x 60 000)
Accounting for the sale of shares in Petal Ltd
17 500
2 500
15 000
Income tax expense (2 500 x 80% x 28%)
Bank
Accounting for the capital gains tax paid on sale of
shares in Petal Ltd
560
560
For consolidation purposes, the sale of shares in Rose Ltd to the non-controlling
interests is a transaction between owners (both Rose Ltd and the non-controlling
interests are owners of Petal Ltd). Any consolidated gain/loss on disposal of shares
in Petal Ltd must not be recognised in profit or loss but recognised directly to equity.
The amount to be recognised directly in equity is calculated as follows:
R
17 500
(38 482)
(20 982)
Proceeds received on sale (given)
Less: equity transferred to NCI (C1)
Change in ownership reserve (equity)
The equity transferred to NCI is calculated as follows:
R
50 000
Share capital
Retained earnings
(20 000 – 3 600(5 000(23 000 – 18 000)) x 72%)
Revaluation surplus ((103 000 – 95 000) x 77,6%)
Since-acquisition retained earnings (75 000 – 20 000 + 3 600)
Profit for the year (85 000 – 23 800)
Total column: 192 408 x 20/100 = 38 482
OR
NCI column: (38 482(14 522 + 11 720 + 12 240) x
20/
20
16 400
6 208
72 608
58 600
61 200
192 408
= 38 482
The profit on disposal of shares of R2 500, that was recognised in the separate
financial statements of Rose Ltd, will be reversed on consolidation, and a
consolidated loss on disposal of shares of R20 982 will be recognised directly to
equity (change in ownership).
94
FAC3762/107
PART B (i)
ROSE LTD GROUP
NOTE: All the journal entries will be the same for PART A and B, except for J3 and J7.
PRO-FORMA CONSOLIDATION
28 FEBRUARY 20.17
J1
J2
J3
J4
J5
JOURNAL
ENTRIES
Property, plant and equipment
(103 000 – 95 000)
Deferred tax liability (SFP) (8 000 x 80% x 28%)
Revaluation surplus
Revaluation of land at date of acquisition
Retained earnings
Deferred tax asset (SFP) (5 000 x 28%)
Trade receivables (23 000 – 18 000)
Revaluation of trade receivables at date of
acquisition
Share capital
Retained earnings (20 000 – 3 600)
Revaluation surplus
Non-controlling interests (SFP)
(10 000 x R1,55)
Investment in Petal Ltd
Goodwill
Elimination of at acquisition equity against original
investment in Petal Ltd
Trade receivables
Retained earnings
Deferred tax asset (SFP)
Reversal of at-acquisition write-off of trade
receivables
Retained earnings (SOCIE)
Non-controlling interests (SFP)
Recording of non-controlling interests in retained
earnings since acquisition to beginning of current
year
(58 600(75 000 – 20 000 + 3 600) x 20%)
FOR
Dr
R
8 000
THE
YEAR
Cr
R
ENDED
NCI
R
1 792
6 208
3 600
1 400
5 000
50 000
16 400
6 208
15 500
60 000
15 500
2 892d
5 000
3 600
1 400
11 720
11 720
11 720
27 220
J6
Non-controlling interests (P/L)
Non-controlling interests (SFP)
Recording of non-controlling interests in profit for the
year
(61 200(85 000 – 23 800) x 20%)
12 240
12 240
12 240a
39 460
95
FAC3762/107
Dr
R
J7
Investment in Petal Ltd
((10 000/40 000) x R60 000)
Other income (profit on sale of shares)
(17 500 – 15 000)
Change in ownership (SOCIE)
Non-controlling interests (SFP)
((192 408 x 20%) + (1 914 x 20%))
Recording of increase in non-controlling interests
due to sale of shares
Cr
R
NCI
R
15 000
2 500
21 461
38 961
38 961
78 421
C1 CALCULATION OF EFFECT OF FAIR VALUE ADJUSTMENTS AT ACQUISITION
Land
Trade receivables
1
2
Carrying
amount
R
103 800
18 000
Tax base
Temporary
difference
R
R
95 000
8 000
23 000
(5 000)
Tax effect
R
(1 792)1
1 400 2
After tax
amount
R
6 208
(3 600)
8 000 x 80% x 28% = 1 792
5 000 x 28% = 1 400
PART B (ii)
ROSE LTD GROUP
CONSOLIDATED STATEMENT OF PROFIT OR LOSS AND OTHER COMPREHENSIVE INCOME
FOR THE YEAR ENDED 28 FEBRUARY 20.17
Profit before tax (115 000 + 85 000 – 2 500)
Income tax expense (32 200 + 23 800)
PROFIT FOR THE YEAR
TOTAL COMPREHENSIVE INCOME FOR THE YEAR
Total profit and comprehensive income attributable to:
Owners of the parent
Non-controlling interests (61 200(85 000 – 23 800) x 20%)
96
R
197 500
(56 000)
141 500
141 500
129 260
12 240
141 500
FAC3762/107
PART B (iii)
ROSE LTD GROUP
CONSOLIDATED STATEMENT OF CHANGES IN EQUITY FOR THE YEAR ENDED
28 FEBRUARY 20.17
Share
capital
R
Balance at 1 March 20.16
Changes in equity for 20.17
Total comprehensive income
for the year:
Profit for the year
Sale of interest in subsidiary
Balance at 28 Feb 20.17
50 000
Retained
earnings
R
156 8801
Change in
ownership
R
—
129 260
50 000
286 140
(21 461)4
(21 461)
Noncontrolling
interests
R
27 2202
12 240
38 9613
78 421
Total
equity
R
234 100
141 500
17 500
393 100
100 000 + 46 880(58 600(75 000 – 20 000 + 3 600(trade receivables adjustment) x 80%) = 156 880
10 000 x R1.55 = 15 500 + 11 720 (58 600(75 000 – 20 000 + 3 600) x 20%) = 27 220
3
72 608(50 000 + 16 400 + 6 208) + 58 600 + 61 200 = 192 408 x 20% = 38 482
4
17 500 – 38 482 = -20 982
1
2
PART B (iv)
ROSE LTD GROUP
CONSOLIDATED STATEMENT OF FINANCIAL POSITION AS AT 28 FEBRUARY 20.17
R
ASSETS
Non-current assets
Property, plant and equipment (148 040 + 145 400 + 8 000(103 000 – 95 000))
Goodwill (see analysis/J3)
Total non-current assets
Current assets
Trade receivables (34 760 + 34 000)
Cash and cash equivalents (29 500 + 22 500)
Total current assets
Total assets
EQUITY AND LIABILITIES
Equity attributable to owners of the parent
Share capital
Retained earnings
Other equity reserves (change in ownership reserve)
Non-controlling interests
Total equity
Non-current liabilities
Deferred tax liability
Total non-current assets
Current liabilities
Trade and other payables (14 500 + 15 700)
Total current liabilities
Total liabilities
Total equity and liabilities
301 440
2 892
304 332
68 760
52 000
120 760
425 092
314 679
50 000
286 140
(21 461)
78 421
393 100
1 792
1 792
30 200
30 200
31 992
425 092
97
FAC3762/107
CALCULATIONS
C1 ANALYSIS OF OWNERS' EQUITY OF PETAL LTD
100%
Total
R
At acquisition - 1 March 20.14
Share capital
Retained earnings
(20 000 – 3 600(5 000(23 000 – 18 000)) x
72%))
Revaluation surplus
(8 000(103 000 – 95 000) x 77,6%)
Equity represented by goodwill
Consideration paid and
NCI (50 000 x 20% = 10 000 x R1,55)
Since acquisition to beginning of current
year
Retained earnings
(75 000 – 20 000 + 3 600)
Current year
Profit for the period: 01/03/20.16 to 28/02/20.17
(85 000 – 23 800)
20% –
40%
NCI
R
50 000
40 000
10 000
16 400
13 1 20
3 280
6 208
72 608
2 892a
75 500
4 966
58 086
1 914
60 000
1 242
14 522
978
15 500
58 600
46 880b
11 720
61 200
195 300
48 960
95 840
12 240
39 460
Sale of 10 000 shares -28 Feb 20.17
Transfer of equity to NCI (192 408(72 608 + 58
600 + 61 200) x 20%))
Transfer of goodwill to NCI (1 914 x 20%)
(38 482)
(479)
(38 961)
17 500
(21 461)
Proceeds from sale of shares (given)
Change in ownership reserve
194 322
98
Rose Ltd
80% – 60%
At
Since
R
R
38 961
95 840
78 421
FAC3762/107
Rose Ltd has already correctly accounted for the investment in Petal Ltd as follows
in its separate accounting records:
Dr
R
60 000
1 March 20.14:
Investment in Petal Ltd
Bank
Initial recognition of investment in Petal Ltd
Cr
R
60 000
28 February 20.17:
Bank
Other income (profit on sale of shares)
(17 500 – 15 000)
Investment in Petal Ltd
((10 000/40 000) x 60 000)
Accounting for the sale of shares in Petal Ltd
17 500
2 500
15 000
Income tax expense (2 500 x 80% x 28%)
Bank
Accounting for the capital gains tax paid on sale of
shares in Petal Ltd
560
560
For consolidation purposes, the sale of shares in Rose Ltd to the non-controlling
interests is a transaction between owners (both Rose Ltd and the non-controlling
interests are owners of Petal Ltd). Any consolidated gain/loss on disposal of shares
in Petal Ltd must not be recognised in profit or loss, but recognised directly to equity.
The amount to be recognised directly in equity is calculated as follows:
R
17 500
(38 482)
(479)
(21 461)
Proceeds received on sale (given)
Less: equity transferred to NCI (C1)
Less: goodwill transferred to NCI (C2)
Change in ownership reserve (equity)
The equity transferred to NCI is calculated as follows:
R
50 000
Share capital
Retained earnings
(20 000 – 3 600(5 000(23 000 – 18 000)) x 72%)
Revaluation surplus ((103 000 – 95 000) x 77,6%)
16 400
6 208
72 608
Since-acquisition retained earnings (75 000 – 20 000 + 3 600)
58 600
61 200
192 408
Profit for the year (85 000 – 23 800)
Total column: 192 408 x 20/100 = 38 482
OR
NCI column: (38 482(14 522 + 11 720 + 12 240) x
20/
20
= 38 482
99
FAC3762/107
The goodwill is only transferred to NCI if the group elected to measure noncontrolling interests at fair value. If the group elected to measure the non-controlling
interests at their proportionate share of the acquiree’s identifiable net assets, no
goodwill will transfer to NCI.
The goodwill transferred to NCI is calculated as follows:
R1914 x 20/80 = R479
The profit on disposal of shares of R2 500, that was recognised in the separate
financial statements of Rose Ltd, will be reversed on consolidation, and a
consolidated loss on disposal of shares of R21 461 will be recognised directly to
equity (change in ownership).
(b) Partial disposal of an interest in an existing subsidiary, with a simple investment retained:
control is lost (change in status):
-
subsidiary
IFRS 9 simple investment
In this case, it is important to realise that there is a change in status: control is lost.
The parent will recognise the profit or loss on disposal of the investment in its separate financial
statements.
The following steps are taken:
(i)
The profit or loss on disposal, that was recognised in the parent’s separate financial
statements, will be reversed upon consolidation.
-
A consolidated profit or loss on disposal will be recognised in the consolidated statement of
profit or loss and other comprehensive income, calculated as the difference between the
proceeds received on disposal and the portion of net assets (including goodwill) disposed of.
-
The remaining investment (i.e. the portion of net assets and goodwill retained) is remeasured
to fair value on the date control is lost (i.e. the date of disposal). The remeasurement gain or
loss is recognised in the profit or loss section of the consolidated profit or loss and other
comprehensive income and is attributable to the parent.
Study:
Group statements, Volume 2, 17th edition
- Chapter 13: 13.8 Loss of control with partial disposal of a subsidiary, with a simple
investment retained (pp. 224–236)
- Chapter 13: Example 13.5 (pp. 228–236)
Exclude:
Group statements, Volume 2, 17th edition
- Chapter 13: 13.9 Partial disposal of interest in a subsidiary, whereby it becomes an
associate (pp. 237–261)
100
FAC3762/107
EXAMPLE 4
Disposal of an interest whereby a subsidiary becomes an IFRS 9 investment.
THE FOLLOWING ARE EXTRACTS FROM THE TRIAL BALANCES OF CHEESE LTD AND
TOMATO LTD FOR THE YEAR ENDED 31 DECEMBER 20.8:
DEBITS
Property, plant and equipment
Investment in Tomato Ltd at fair value
Trade receivables
Cash and cash equivalents
Cost of sales
Other expenses
Income tax expense
CREDITS
Share capital:
- 180 000 ordinary shares
- 150 000 ordinary shares
Retained earnings - 1 January 20.18
Revenue
Other income
Trade and other payables
Cheese Ltd Tomato Ltd
R
R
1 499 907
668 100
78 000
105 771
61 737
39 870
38 715
188 256
63 000
53 100
38 850
164 484
38 598
2 129 388
909 000
180 000
1 084 350
577 800
251 000
36 238
2 129 388
150 000
503 100
189 750
49 950
16 200
909 000
Additional information
1.
On 1 January 20.16, Cheese Ltd acquired control of Tomato Ltd with the acquisition of 70% of
the issued ordinary shares in Tomato Ltd for a cash consideration of R273 000. On 1 January
20.16, the retained earnings of Tomato Ltd amounted to R216 400 and all the identifiable assets
and liabilities of Tomato Ltd were fairly valued.
2. On 31 January 20.18, Cheese Ltd lost control of Tomato Ltd by disposing 75 000 of the issued
ordinary shares held in Tomato Ltd to the other shareholders for R350 000. The sales transaction
and the taxation payable on the sale of shares were correctly accounted for by Cheese Ltd in its
separate accounting records.
3. The fair value of the remaining investment in Tomato Ltd was R78 000 on 31 January 2018.
4. The profit of Tomato Ltd was earned evenly throughout the current year.
5. Cheese Ltd measures simple investments in equity instruments at fair value through profit or loss.
The fair value of all equity instruments is equal to the cost thereof, unless otherwise indicated.
Cheese Ltd measures investments in subsidiaries at cost price.
6. The Cheese Ltd Group measures non-controlling interests at their proportionate share of the net
identifiable assets at the acquisition date.
7. The South African normal tax rate is 28% and capital gains tax is calculated at 80% thereof. You
may assume that the tax rate has remained unchanged since 1 January 20.16.
8. Each share carries one (1) vote and the issued share capital of all entities in the group has
remained unchanged since 1 January 20.16.
101
FAC3762/107
REQUIRED:
a) Prepare the pro-forma consolidation journal entries for the Cheese Ltd Group
for the year ended 31 December 20.18.
b) Prepare the consolidated statement of profit or loss and other comprehensive
income of the Cheese Ltd Group, for the year ended 31 December 20.18.
c)
Prepare the consolidated statement of changes in equity of the Cheese Ltd
Group, for the year ended 31 December 20.18.
d) Prepare the consolidated statement of financial position of the Cheese Ltd
Group, for the year ended 31 December 20.18.
All answers must comply with the requirements of International Financial
Reporting Standards (IFRS).
All amounts should be rounded to the nearest Rand.
Comparative figures and notes to the consolidated financial statements are not
required.
SOLUTION 4
PART A
PRO-FORMA CONSOLIDATION JOURNAL ENTRIES
J1 Other income (profit on sale in separate records)
Other expenses (consolidated loss on disposal)
Cost of sales (63 000 x 1/12)
Other expenses (38 850 x 1/12)
Income tax expense (38 598 x 1/12)
Non-controlling interests (P/L)(refer analysis)
Retained earnings (refer analysis)
Revenue (189 750 x 1/12)
Other income (49 950 x 1/12)
Elimination of profit on sale of shares in the separate financial
statements of Cheese Ltd.
Recognising the consolidated loss on disposal of shares. Bringing
in the retained earnings and profits of Tomato Ltd while the
investment was still a subsidiary.
102
Dr
R
155 000
51 480
5 250
3 238
3 217
2 481
Cr
R
200 690
15 813
4 163
FAC3762/107
Cheese Ltd has already correctly accounted for the investment in Tomato Ltd as
follows in its separate accounting records:
1 January 20.16:
Investment in Tomato Ltd
Bank
Initial recognition of investment in Tomato Ltd at cost
31 January 20.18:
Bank
Other income (profit on sale of shares)
(350 000 – 195 000)(proceeds less carrying amount)
Investment in Tomato Ltd
(273 000/105 000 x 75 000)
Accounting for the profit on sale of shares
Income tax expense (155 000 x 80% x 28%)
Bank
Capital gains tax paid to SARS
Dr
R
273 000
Cr
R
273 000
350 000
155 000
195 000
34 720
34 720
Comment on J1:
Tomato Ltd is not a subsidiary of Cheese Ltd at year end. We therefore start the
consolidation process by adding, line by line, 100% of Cheese Ltd only. Tomato Ltd
was a subsidiary of Cheese Ltd from 1 January 20.16 until 31 January 20.18 (from the
acquisition date until the date that control was lost). The consolidation journal
therefore
(i)
brings in Cheese Ltd's share (70%) of the retained earnings of Tomato Ltd since
acquisition date until the beginning of the current year.
(ii)
brings in the revenue, cost of sales, other income, other expenses and income
tax expense of Tomato Ltd for the first month of the year (i.e. for the period that
Tomato Ltd was a subsidiary of Cheese Ltd), and accounts for the noncontrolling interests therein.
(iii)
reverses the profit on sale of shares already accounted for in the separate
financial records of Cheese Ltd (see below).
(iv)
recognises the consolidated gain/loss on disposal (see below).
For consolidation purposes, the profit on sale of shares of R155 000 in the separate
accounting records of Cheese Ltd must be reversed.
A consolidated gain/loss on disposal of shares in Tomato Ltd is then recognised
directly in profit/loss.
The amount to be recognised directly in profit or loss is calculated as follows:
Consolidated loss on disposal:
Consolidated gain on investment disposed of
Remeasurement loss on previously held investment
R
(51 480)
7 514
(58 994)
103
FAC3762/107
Proceeds received on sale (given)
Less: equity transferred to other shareholders(C1)
Less: goodwill transferred to other shareholders (C2)
Gain on investment disposed of
Fair value of remaining investment (given)
Remaining investment
(equity and goodwill retained)(C3)
Remeasurement loss on previously held investment
R
350 000
(330 686)
(11 800)
7 514
R
78 000
(136 994)
(58 994)
C1 Equity transferred to other shareholders:
Share capital
Retained earnings
Since-acquisition retained earnings (503 100 – 216 400)
Profit for the year (99 252 x 1/12)
661 371 x 50%(70% - 20%)
R
150 000
216 400
366 400
286 700
8 271
661 371
330 686
C2 R16 520 x 50/70 = 11 800.
C3 Remaining investment:
Equity retained after disposal: 661 371(C1) x 20%
Goodwill retained after disposal: 16 520 x 20/70
Remaining investment (equity and goodwill retained)
132 274
4 720
136 994
PART B
CHEESE LTD GROUP
CONSOLIDATED STATEMENT OF PROFIT OR LOSS AND OTHER COMPREHENSIVE INCOME
FOR THE YEAR ENDED 31 DECEMBER 20.18
1/
Revenue (577 800 + 15 813(189 750 x 12))
Cost of sales (188 256 + 5 250 (63 000 x 1/12))
Gross profit
Other income (251 000 + 4 163(49 950 x 1/12) - 155 000(J1))
Other expenses (53 100 + 3 238(38 850 x 1/12) + 51 480(J1))
Profit before tax
Income tax expense (164 484 + 3 217(38 598 x 1/12))
PROFIT FOR THE YEAR
Other comprehensive income for the year
TOTAL COMPREHENSIVE INCOME FOR THE YEAR
Profit for the year attributable to:
Owners of the parent
Non-controlling interests (99 252 x 1/12 x 30%)
Total comprehensive income for the year attributable to:
Owners of the parent
Non-controlling interests (99 252 x 1/12 x 30%)
1
189 750 + 49 950 – 63 000 – 38 850 – 38 598 = 99 252
104
R
593 613
(193 506)
400 107
100 163
(107 818)
392 451
(167 701)
224 751
–
224 751
222 270
2 481
224 751
222 270
2 481
224 751
FAC3762/107
The consolidated statement of profit or loss and other comprehensive income of the
Cheese Ltd Group will only include the income and expenses of Tomato Ltd for the
period it was part of the Cheese Ltd Group (i.e. until 31 January 20.18).
As the profit of Tomato Ltd was earned evenly throughout the year, we can apportion
the profit of Tomato Ltd, so that only the profit for the period 1 January 20.18 until 31
January 20.18 (i.e. 1 month) is included.
PART C
CHEESE LTD GROUP
CONSOLIDATED STATEMENT OF CHANGES IN EQUITY FOR THE YEAR ENDED
31 DECEMBER 20.18
Balance at 1 December 20.18
Changes in equity for 20.18
Total comprehensive income:
Profit for the year
Disposal of subsidiary
Balance at 31 December 20.18
Share
capital
R
180 000
NonTotal
Retained controlling
earnings
interests
R
R
R
1
2
1 285 040
195 930 1 660 970
222 270
180 000
1 507 310
2 481
224 751
3
(198 411) (198 411)
1 687 310
1
1 084 350(Cheese Ltd) + 200 690(Tomato Ltd)(refer analysis)
920 + 86 010 (refer NCI column of analysis)
3 The NCI is derecognised when control is lost.
2 109
105
FAC3762/107
PART D
CHEESE LTD GROUP
CONSOLIDATED STATEMENT OF FINANCIAL POSITION AS AT 31 DECEMBER 20.18
R
ASSETS
Non-current assets
Property, plant and equipment
Investment in Tomato Ltd (given)
Total non-current assets
1 499 907
78 000
1 577 907
Current assets
Trade receivables
Cash and cash equivalents
Total current assets
Total assets
EQUITY AND LIABILITIES
Total equity
Equity attributable to owners of the parent
Share capital
Retained earnings
Non-controlling interests
105 771
39 870
145 641
1 723 548
1 687 310
1 687 310
180 000
1 507 310
-
Current liabilities
Trade and other payables
Total current liabilities
Total liabilities
Total equity and liabilities
36 238
36 238
36 238
1 723 548
The consolidated statement of financial position is a ‘snapshot’ of the assets and
liabilities of the Cheese Ltd Group at 31 December 20.18. You will notice that the
assets and liabilities include those of Cheese Ltd only. The assets and liabilities of
Tomato Ltd are not included, because at 31 December 20.18, Tomato Ltd is not a
subsidiary of Cheese Ltd, regardless of when Cheese Ltd lost control of Tomato Ltd.
ANALYSIS OF OWNERS’ EQUITY OF TOMATO LTD
100%
Total
R
At acquisition – 1 January 20.16
Share capital
Retained earnings
Goodwill
Consideration paid and NCI
Since acquisition to beginning of current year
Retained earnings (503 100 – 216 400)
Current year (until loss of control)
Profit for the year (99 252 x 1/12)
106
150 000
216 400
366 400
16 520
382 920
Cheese Ltd
70%
At
Since
R
R
105 000
151 480
256 480
16 520
273 000
NCI
30%
R
45 000
64 920
109 920
109 920
286 700
200 690
86 010
8 271
677 891
5 790
206 480
2 481
198 411
FAC3762/107
2. E-TUTOR ACTIVITY
E-tutor activity
Attempt the following in the prescribed textbook (Group statements, Volume 2,
17th edition):
Self-assessment questions 13.2 and 13.3 (pp. 270–281)
The solution may be discussed with your e-tutor.
Excluded:
Please note that self-assessment question 13.1 in Group statements, Volume 2
(pp. 262–269) is excluded from the syllabus of FAC3762.
3. ASSESSMENT CRITERIA
On completion of this learning unit you should be able to
-
identify the acquirer in a business combination and determine the
acquirer’s percentage ownership interest in the acquiree, before and after
an increase or decrease in holding;
-
identify the following circumstances giving rise to a change in control:
- acquisition of an additional interest in an existing subsidiary;
- acquisition of an additional interest, whereby an IFRS 9 investment
becomes a subsidiary;
- disposal of a partial interest in a subsidiary, where the subsidiary
remains a subsidiary; and
-
- disposal of a partial interest in a subsidiary, whereby the subsidiary
becomes an IFRS 9 simple investment.
account for the effect of a change in ownership interest in the separate
and consolidated statements.
107
FAC3762/107
4. QUESTION BANK
The following questions are based on the work covered in this learning unit. It is
in your own interest to answer the questions on your own and then to mark them
using the solutions provided. If you follow this procedure, you can identify what
you do not understand. You can then revise the relevant sections of the work
and try to answer the applicable questions again.
Question
Topic
Marks
Minutes
1
Change in ownership and joint venture
50
90
2
Change in ownership
50
90
Done
QUESTION 1
Panem Ltd is a company that produces combat equipment and invests in other similar entities in South
Africa. Everdeen Ltd manufactures bows and arrows. All the companies in the Panem Ltd Group have
a 31 December year end.
The following are extracts of the trial balances of the entities in the Panem Ltd Group for the year
ended 31 December 20.17:
Panem
Everdeen
Mellark
Ltd
Ltd
Ltd
R
R
R
Credits
Share capital:
– 1 000 000 ordinary shares
1 000 000
– 350 000 ordinary shares
500 000
– 80 000 8% cumulative preference shares
80 000
Share capital – 250 000 ordinary shares
250 000
Retained earnings – 1 January 20.17
2 777 600
960 000
90 000
Accumulated depreciation
1 650 000
214 000
390 000
Trade and other payables
150 000
82 000
76 000
Revenue
4 114 000 2 200 000 1 050 000
Other income
386 000
96 000
20 000
10 077 600 4 132 000 1 876 000
Debits
Property, plant and equipment at cost
5 589 294 1 788 728
843 800
Investments in equity instruments:
– Everdeen Ltd at cost: ordinary shares
584 706
– Everdeen Ltd at cost: cumulative preference shares
40 000
– Mellark Ltd at cost
136 000
Trade and other receivables
200 000
115 000
50 000
Cash and cash equivalents
190 000
260 000
98 000
Inventories
380 000
280 000
85 000
Ordinary dividends paid – 31 December 20.17
200 000
50 000
10 000
Preference dividends paid – 31 December 20.17
6 400
Cost of sales
1 600 000
950 000
530 000
Other expenses
480 000
423 600
150 000
Income tax expense
677 600
258 272
109 200
10 077 600 4 132 000 1 876 000
108
FAC3762/107
Additional information
1. On 1 January 20.14, Panem Ltd acquired control of Everdeen Ltd by acquiring 85% of the issued
ordinary shares in Everdeen Ltd for R710 000. The retained earnings of Everdeen Ltd amounted
to R300 000 on 1 January 20.14.
2. On 1 January 20.14, Panem Ltd also acquired 50% of the issued cumulative preference shares
of Everdeen Ltd for R40 000. No preference dividends were in arrears on 1 January 20.14 and all
preference dividends had been declared and paid until 31 December 20.17. On 1 January 20.14,
the fair value of the identifiable assets and liabilities of Everdeen Ltd were considered to be equal
to the carrying amounts thereof.
3.
Panem Ltd acquired a 40% interest in Mellark Ltd on 1 January 20.17. In terms of a contractual
agreement with other operators, Panem Ltd exercises joint control over the economic activities of
Mellark Ltd. The arrangement was classified as a joint venture as per IFRS 11, Joint
Arrangements and the consideration paid was equal to the fair value of the net assets of Mellark
Ltd on the date of acquisition. At acquisition date, the fair value of the identifiable assets and
liabilities of Mellark Ltd was considered to be equal to the carrying amounts thereof.
4.
Since 20.16, Panem Ltd has purchased inventory from Everdeen Ltd at a margin of 25% on the
cost price. During the current year, Panem Ltd purchased inventories to the value of R750 000
from Everdeen Ltd. On 31 December 20.17, 50% of the inventory on hand in the records of
Panem Ltd had been purchased from Everdeen Ltd (31 December 20.16: R110 000).
5.
On 1 March 20.17, Panem Ltd sold a vacant piece of land to Mellark Ltd for R600 000. The vacant
piece of land was originally acquired by Panem Ltd on 1 May 20.14 for R500 000.
6.
Panem Ltd is responsible for the day-to-day management of Mellark Ltd at an agreed
management fee of R28 000 per annum, in accordance with the contractual arrangement.
Management fees paid to Panem Ltd are included in “other expenses” of Mellark Ltd and
management fees received are included in “other income” of Panem Ltd.
7.
On 1 May 20.17, Panem Ltd disposed of 52 500 of the ordinary shares held in Everdeen Ltd for
an amount of R255 000 (fair value) to non-controlling shareholders. The profit on the disposal of
shares is included in “other income” of Panem Ltd. Panem Ltd continued to control Everdeen Ltd.
8.
The disposal of the interest in the subsidiary, Everdeen Ltd, did not comply with the criteria of
IFRS 5, Non-current Assets Held for Sale and Discontinued Operations, until the date of disposal.
9.
The profit of Everdeen Ltd and Mellark Ltd was earned evenly during the current year.
10. The Panem Ltd Group measures its investments in equity instruments at cost, in accordance with
IAS 27, Separate Financial Statements.
11. The Panem Ltd Group uses the partial (proportionate) goodwill method to recognise goodwill.
Goodwill relating to the Everdeen Ltd investment was tested for impairment at
31 December 20.17 and it was determined that the fair value of the goodwill was R22 000 on 31
December 20.17. Panem Ltd did not recognise any impairment on its investment in Everdeen Ltd
in its separate accounting records.
12. The South African normal tax rate is 28% and capital gains tax is calculated at 80% thereof
(effective capital gains tax rate of 22,4%). You may assume that the tax rate has remained
unchanged since 1 January 20.14.
13. Each share carries one (1) vote and the issued share capital of all the entities in the group has
remained unchanged since 1 January 20.14.
109
FAC3762/107
REQUIRED:
Marks
(a)
Prepare the consolidated statement of profit or loss and other comprehensive
income of the Panem Ltd Group, for the year ended 31 December 20.17.
37
(b)
Prepare the consolidated statement of changes in equity for the Panem Ltd Group,
for the year ended 31 December 20.17.
13
[50]
Please note:
Your answer must comply with the requirements of International Financial Reporting
Standards (IFRS).
Notes to the annual financial statements and comparative figures are not required.
All calculations must be shown and all amounts must be rounded off to the nearest Rand.
SUGGESTED SOLUTION 1
PART A
PANEM LTD GROUP
CONSOLIDATED STATEMENT OF PROFIT OR LOSS AND OTHER COMPREHENSIVE
INCOME FOR THE YEAR ENDING 31 DECEMBER 20.17
R
Revenue (4 114 000 + 2 200 000 - 750 000)
Cost of sales (1 600 000 + 950 000 - 22 000 (110 000 x 25/125) - 750 000 + 38 000
(380 000 x 50% x 25/125))
Gross profit
Other income (386 000 + 96 000 - 4 000 (10 000 x 40% div JV) - 40 000 (C1) – 35 000
(50 000 x 70%div sub) - 3 200 (6 400 (80 000 x 8%) x 50% preference div) - 129 706
(C3))
Share of profit of joint venture ((1 050 000 + 20 000 – 530 000 – 150 000 - 109 200) x
40%)
Other expenses (480 000 + 423 600 + 8 000 (C5))
Profit before tax
Income tax expense (677 600 + 258 272 + 6 160 (22 000 x 28%) – 8 960 (C2) - 10 640
(38 000 x 28%))
PROFIT FOR THE YEAR
Other comprehensive income for the year
TOTAL COMPREHENSIVE INCOME FOR THE YEAR
Profit for the year attributable to:
Owners of the parent
Non-controlling interests (35 262(C5) + 123 338(C5) + 3 200(preference shares)
5 564 000
(1 816 000)
3 748 000
270 094
112 320
(911 600)
3 218 814
(922 432)
2 296 382
2 296 382
2 134 582
161 800
2 296 382
Total comprehensive income for the year attributable to:
Owners of the parent
Non-controlling interests (35 262(C5) + 123 338(C5) + 3 200(preference shares)
110
2 134 582
161 800
2 296 382
FAC3762/107
PART B
PANEM LTD GROUP
CONSOLIDATED STATEMENT OF CHANGES IN EQUITY FOR THE YEAR ENDED
31 DECEMBER 20.17
Share
Retained
Change in
Noncapital
earnings
ownership
controlling
interests
R
R
R
R
Balance at 1 January 20.17
1 000 000
3 325 1364
256 6241
Total comprehensive income:
-Profit for the year
2 134 582
161 8005
Disposal of interest (C4)
3 114
251 886
Ordinary dividends paid
(200 000)
(15 000)2
Preference dividends paid
(3 200)3
Balance at 31 December 20.17
1 000 000
5 259 718
3 114
652 110
1 120
000 (C5) + 96 624 (C5) + 40 000 (80 000 x 50%) (preference share capital) = 256 624
000 x 30% = 15 000
3 80 000 x 8% x 50% = 3 200
4 2 777 600 + 547 536 (C5) = 3 325 136
5 123 338 + 35 262 + 3 200 (preference dividends NCI) = 161 800
2 50
CALCULATIONS
C1 Unrealised profit on sale of land
Selling price
Carrying amount
Profit on sale of land
Eliminate only 40% interest
R
600 000
(500 000)
100 000
40 000
C2 Tax effect on unrealised profit on sale of land
Unrealised profit
Tax on unrealised profit (40 000 x 22,4% (28% x 80%))
R
40 000
8 960
C3 Profit on sale of shares – separate financial statements of Panem Ltd
Consideration received (given)
Carrying amount of shares sold
(710 000/297 500 shares (350 000 x 85%) = R2,39 x 52 500 shares sold (given)
Profit on sale of shares
R
255 000
(125 294)
129 706
C4 Change in ownership (equity)
Consideration received (given)
Equity of subsidiary transferred to NCI
(800 000 (C5) + 644 160 (C5) + 235 083 (C5)) x 15%
Goodwill transferred to NCI (no goodwill transferred to NCI as control retained and
partial goodwill method used)
Change in ownership
R
255 000
(251 886)
3 114
111
FAC3762/107
When there is a change in % interest holding in a subsidiary and the parent entity
retained control of the subsidiary (i.e. parent has control of the subsidiary before
and after the change in interest), IFRS 3 requires the transaction to be recognised
as a transaction between owners (i.e. as an equity transaction).
The difference between the consideration received by Panem Ltd on the disposal
of the shares in Everdeen Ltd and the equity “lost/transferred” to the NCI will be
accounted for directly in equity in a reserve called change in ownership.
Any profit/loss recognised on the disposal of the shares in the parent’s separate
financial statements, will be reversed on consolidation. In this question, Panem Ltd
recognised a profit on disposal of shares in Everdeen Ltd of R129 706, which must
be reversed on consolidation.
112
FAC3762/107
C5 Analysis of owners’ equity of Everdeen Ltd
At acquisition
Share capital
Retained earnings
Equity presented by goodwill
Consideration and NCI
Since acquisition
Adjusted retained earnings
Retained earnings
(960 000 - 300 000)
Unrealised profit in opening
inventory (110 000 x 25/125)
Tax effect on unrealised profit
(22 000 x 28%)
Current year
Profit before change in interest
Profit for 4 months of the year
(657 7281 x 4/12)
Adjusted for:
Unrealised profit in opening
inventory – realised (110 000 x
25/
125)
Tax effect on opening inventory
(22 000 x 28%)
100%
Total
R
500 000
300 000
800 000
30 000
830 000
Dividends paid
15% - 30%
NCI
R
75 000
45 000
120 000
120 000
644 160
547 536
96 624
660 000
561 000
99 000
(22 000)
(18 700)
(3 300)
6 160
1 474 160
5 236
547 536
924
216 624
235 083
199 820
35 262
219 243
15 840
186 356
13 464
32 886
2 376
22 000
18 700
3 300
(5 236)
747 356
(924)
251 886
(6 160)
1 709 243
Disposal of 52 500 ordinary
shares
Proceeds on disposal (given)
Transfer of equity to NCI
[(800 000 + 644 160 + 235 083) x
15%] or [(680 000 + 547 536 +
199 820) x 15/85]
Change in ownership equity
reserve
Profit after change in interest
Net profit for 8 months of the year
(657 7281 x 8/12)
Adjusted for:
Unrealised profit in closing
inventory (190 000(380 000 x 50%)
x 25/125)
Tax effect on unrealised profit
(38 000 x 28%)
Panem Ltd 85% - 70%
At
Since
R
R
425 000
255 000
680 000
30 000
710 000
255 000
(251 886)
251 886
3 114
411 125
287 788
123 338
438 485
(27 360)
306 940
(19 152)
131 546
(8 208)
(38 000)
(26 600)
(11 400)
10 640
7 448
3 192
(50 000)
2 070 368
Goodwill at acquisition
Current year impairment of goodwill - SP/LOCI
Balance at end of year
(35 000)
1 000 144
(15 000)
612 110
30 000
(8 000)
22 000
12
200 000 (revenue) + 96 000 (other income) - 950 000 (cost of sales) - 423 600 (other expenses) 258 272 (income tax expense) - 6 400 (80 000 x 8%) (preference dividend) = 657 728.
113
FAC3762/107
C6 Analysis of owners’ equity of Everdeen Ltd – preference shares
At acquisition
Share capital
Current year
Profit attributable to preference
shareholders
Dividend paid
100%
Total
R
80 000
Panem Ltd 50%
At
Since
R
R
40 000
6 400
(6 400)
80 000
3 200
(3 200)
0
50%
NCI
R
40 000
3 200
(3 200)
40 000
C7 Investment in joint venture
Analysis of owners' equity of Mellark Ltd
At acquisition
Share capital
Retained earnings
Goodwill
Investment in Mellark Ltd
Current year
Profit for the year [1 050 000 + 20 000 –
530 000 – 150 000 -109 200]
Unrealised profit in sale of land
Dividend paid
100%
Total
R
250 000
90 000
340 000
340 000
280 800
(100 000)
(10 000)
510 800
Panem Ltd 40%
At
Since
R
R
100 000
36 000
136 000
136 000
320 000
112 320
(4 000)
108 320
CA
R
136 000
112 320
(40 000)
(4 000)
204 320
C8 Journal entries
J1
J2
J3
J4
Share capital – ordinary shares
Retained earnings
Goodwill
Investment in Everdeen Ltd – ordinary shares
NCI (SFP)
Elimination of owner’s equity in Everdeen Ltd at acquisition date
Dr
R
500 000
300 000
30 000
710 000
120 000
Share capital – preference shares
Investment in Everdeen Ltd – preference shares
NCI (SFP)
Elimination of owner’s equity in Everdeen Ltd at acquisition date
80 000
Retained earnings ((960 000 – 300 000 – 22 000 + 6 160) x 15%)
NCI (SFP)
Recognition of NCI’s interest in since-acquisition retained
earnings
96 624
Retained earnings – beginning of year
Deferred tax asset (SFP) (22 000 x 28%)
Cost of sales (110 000 x 25/125)
Elimination of unrealised profit in opening inventories
15 840
6 160
40 000
40 000
96 624
22 000
Dr
114
Cr
R
Cr
FAC3762/107
J5
J6
J7
Income tax expense
Deferred tax asset (SFP)
Deferred tax implication on unrealised profit in opening inventories
R
6 160
R
6 160
NCI (SPL)
(657 7281 x 4/12 = 219 243 + 22 000 – 6 160 = 235 253 x 15%)
NCI (SFP)
Recording of NCI’s interest in current year’s profit for the first four
months
35 262
NCI (SPL)
(657 7281 x 8/12 = 438 485 – 38 000 + 10 640 = 411 125 x 30%)
NCI (SFP)
Recording of NCI’s interest in current year’s profit for the second
eight months
123 338
35 262
123 338
12
200 000 (revenue) + 96 000 (other income) - 950 000 (cost of sales) - 423 600 (other expenses) 258 272 (income tax expense) - 6 400 (80 000 x 8%) (preference dividend) = 657 728.
J8
J9
J10
J11
J12
J13
J14
Revenue
Cost of sales
Elimination of realised intragroup sales during the current year
Dr
R
750 000
750 000
Cost of sales (190 000 x 25/125)
Inventory
Elimination of unrealised profit in closing inventory
38 000
Deferred tax asset (SFP) (38 000 x 28%)
Income tax expense
Tax implication of unrealised profit in closing inventory
10 640
Investment in Everdeen Ltd – ordinary shares
Other income
Change in ownership equity reserve (255 000 – 251 886)
NCI (SFP)
Recording of change in control due to sale of 52 500 shares to NCI
Other income (50 000 x 70%)
NCI (SFP) (50 000 x 30%)
Ordinary dividend paid (SOCIE)
Elimination of ordinary dividends received from subsidiary
Cr
R
38 000
10 640
125 294
129 706
3 114
251 886
35 000
15 000
50 000
Other income (6 400 x 50%)
NCI (SFP) (6 400 x 50%)
Preference dividend paid
3 200
3 200
Other expenses
Goodwill
Impairment of goodwill in current year
8 000
6 400
8 000
115
FAC3762/107
J15
J16
J17
J18
Other income (10 000 x 40%)
Investment in joint venture
Elimination of dividend received from joint venture
Other income (100 000 x 40%)
Investment in joint venture
Elimination of unrealised profit on sale of a vacant piece of land to
the joint venture
Deferred tax asset (SFP) (40 000 x 80% x 28%)
Income tax expense
Tax implications of realisation of unrealised profit on sale of a
vacant piece of land to the joint venture
Investment in joint venture
((1 050 000 + 20 000 – 530 000 – 150 000 -109 200) x 40%)
Share of profit in joint venture
Recording of the joint venture’s profit for the current year
Dr
R
4 000
Cr
R
4 000
40 000
40 000
8 960
8 960
112 320
112 320
QUESTION 2
The following are extracts from the trial balances of the entities in the Big Ltd Group for the year
ended 31 December 2017:
Big Ltd
Bang Ltd
Dr/(Cr)
Dr/(Cr)
R
R
Property, plant and equipment at cost price
3 605 683
1 977 050
Investments in equity instruments:
- Investment in Bang Ltd at cost price
1 410 000
- Investment in Theory Ltd at fair value
318 750
Loan to Bang Ltd
125 000
Trade and other receivables
723 125
215 360
Cash and cash equivalents
404 375
168 149
Inventories
1 094 000
266 250
Ordinary dividends paid – 31 December 2017
100 000
46 870
Cost of sales
1 573 375
550 000
Other expenses
818 875
141 625
Finance charges
17 750
Income tax expense
400 361
76 300
Share capital:
- 625 000 ordinary shares
(625 000)
- 250 000 ordinary shares
(250 000)
Retained earnings – 1 January 2017
(4 640 433)
(1 519 200)
Loan from Big Ltd
(125 000)
Other long-term borrowings
(92 500)
Accumulated depreciation
(650 000)
(281 250)
Trade and other payables
(736 000)
(197 029)
Revenue
(3 323 431)
(865 000)
Other income
(498 680)
(116 875)
Other comprehensive income - fair value adjustment on
equipment, net after tax
(72 000)
(9 000)
Deferred tax
(28 000)
(3 500)
-
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FAC3762/107
Additional information
1.
On 1 January 2016, Big Ltd acquired control over Bang Ltd by acquiring 175 000 of the issued
ordinary shares of Bang Ltd for R1 250 000. On this date, the retained earnings of Bang Ltd
amounted to R1 329 600.
On the acquisition date, the fair value of all the identifiable assets and liabilities of Bang Ltd were
considered to be equal to the carrying amounts thereof, except for land with a carrying amount of
R1 062 500 and a fair value of R1 187 500. The fair value adjustment was not accounted for in
the separate accounting records of Bang Ltd.
2.
On 1 January 2017, Big Ltd acquired an additional 25 000 ordinary shares in Bang Ltd from the
non-controlling shareholders for R160 000. Big Ltd continued to control Bang Ltd.
Intragroup transactions
3.
Bang Ltd sold inventory to Big Ltd from 1 January 2017 at a mark-up of 20% on the cost price.
Total sales of inventory made by Bang Ltd to Big Ltd during the current year amounted to
R555 000. On 31 December 2017, Big Ltd had inventory on hand amounting to R87 500 that had
been purchased from Bang Ltd.
4.
On 1 March 2017, Big Ltd granted a loan to Bang Ltd. The terms of the loan agreement between
Big Ltd and Bang Ltd were as follows:
Loan amount
Loan period
Interest rate
R 125 000
36 months
9% per annum, payable monthly in arrears
The loan is repayable in full at the end of the loan period and interest is capitalised on
31 December of each year. On 31 December 2017, there were no outstanding interest payments
on the loan.
Other information
5.
Big Ltd classifies its investment in Theory Ltd at fair value, in accordance with IFRS 9, Financial
Instruments and any fair value adjustments are recognised in a mark-to-market reserve (other
comprehensive income). The fair value of the investment in Theory Ltd can be assumed to be
equal to the cost price thereof, unless otherwise stated.
6.
Big Ltd measured its investment in Bang Ltd at cost price in its separate accounting records in
accordance with IAS 27, Separate Financial Statements.
7.
The Big Ltd Group elected to measure the non-controlling interests at their proportionate share of
the acquiree’s identifiable net assets at the acquisition date.
8.
The South African normal tax rate is 28% and capital gains tax is calculated at 80% thereof. You
may assume that both the tax rates have remained unchanged since 1 January 2016.
9.
Each share carries one (1) vote and the issued share capital of all the entities in the group has
remained unchanged since 1 January 2016.
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FAC3762/107
REQUIRED:
Marks
(a)
Discuss how to account for the change in degree of control of Big Ltd in Bang Ltd.
5
(b)
Prepare all the pro-forma consolidation journal entries for the Big Ltd Group for the
year ended 31 December 2017.
45
Journal narrations are required.
[50]
Please note:
Your answer must comply with the requirements of International Financial Reporting
Standards (IFRS).
Notes to the annual financial statements and comparative figures are not required.
All calculations must be shown and all amounts must be rounded off to the nearest Rand.
SUGGESTED SOLUTION 2
PART A
The following steps will be taken to account for the change in degree of control of Big Ltd in
Bang Ltd:
(i)
The carrying amounts of the controlling and non-controlling interests (NAV), (excluding any
goodwill) attributable to the non-controlling interests (transferred from NCI to parent as the
parent obtained an additional interest – if applicable), needs to be adjusted to reflect the
non-controlling interests’ reduced interest in the subsidiary.
(ii)
The difference between the non-controlling interests’ adjustment amount (as discussed above)
and the consideration transferred by the parent for the additional interest, must be recognised
directly in equity in the change in ownership reserve (SOCIE or SFP).
(iii)
No additional goodwill or gain on bargain purchase is recognised.
(iv)
No gain or loss should be recognised in the statement of profit or loss and other comprehensive
income. The additional investment must be eliminated.
PART B
Big Ltd Group
Consolidated journal entries for the year ended 31 December 2017
J1
118
Land (1 187 500 – 1 062 500)
Revaluation surplus – at acquisition (SOCIE)
(125 000 x 77,6%)
Deferred tax liability (SFP)
(125 000 co x 22,4% (28% x 80%))
To remeasure land to fair value at acquisition date
Debit
R
125 000
Credit
R
97 000
28 000
FAC3762/107
J2
Share capital
Retained earnings – 1 January 2016 (given)
Revaluation surplus (from J1)
Goodwill (balancing)
Investment in Bang Ltd at cost price (given)
NCI (SFP or SOCIE)
(250 000 co + 1 329 600 + 97 000 co) x 30%
To eliminate at-acquisition equity against cost of
investment
250 000
1 329 600
97 000
76 380
1 250 000
502 980
1 752 980
1 752 980
OR
Land (1 187 500 – 1 062 500)
J1 and Revaluation surplus – at acquisition (SOCIE)
J2
(125 000 x 77,6%)
Deferred tax liability (SFP)
(125 000 co x 22,4% (28% x 80%))
Share capital
Retained earnings – 1 January 2016 (given)
Revaluation surplus (from J1)
Goodwill (balancing)
Investment in Bang Ltd at cost price (given)
NCI (SFP or SOCIE)
(250 000 co + 1 329 600 co + 97 000 co) x 30%
To eliminate at-acquisition equity against cost of
investment
125 000
97 000
28 000
250 000
1 329 600
97 000
76 380
1 250 000
502 980
1 752 980
J3
J4
J5
J6
J7
Retained earnings (1 519 200 – 1 320 600) x 30%
(175 000 / 250 000 = 70%; 30%) (SOCIE)
Non-controlling interest (SFP)
To account for NCI interest in since-acquisition retained
earnings
56 880
56 880
Non-controlling interest (SFP or SOCIE) (see analysis)
Change in ownership reserve (SOCIE)
Investment in Bang Ltd
To account for change in interest
186 620
Revenue
Cost of sales
To eliminate total intragroup sales
555 000
Cost of sales (87 500 x 20 / 120)
Inventory
To eliminate unrealised profit on sale of inventories
Deferred tax asset (SFP) (14 583 co x 28%)
Income tax expense
Tax effect of elimination of unrealised profit
1 752 980
26 620
160 000
555 000
14 583
14 583
4 083
4 083
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FAC3762/107
J8
J9
J10
J11
J12
Loan from Big Ltd
Loan to Bang Ltd
To eliminate intragroup loan
Other income / Interest received / Interest income (125 000
x 9% x 10/12)
Finance charges / Interest paid
To eliminate intragroup interest paid on loan
Non-controlling interests / NCI (SPL) (196 200 – 10 500 (–
14 583 co + 4 083 co) = 185 700 x 20% (175 000 + 25 000
= 150 000 / 250 000 = 80%; 20%))
Non-controlling interests / NCI (SFP or SOCIE)
To account for the NCI interest in the current year’s profit
Non-controlling interests / NCI (OCI) (9 000 x 20% co)
Non-controlling interests / NCI (SFP or SOCIE)
To account for the NCI interest in the other comprehensive
income
Other income / Dividend income / Dividend received
(46 870 x 80%)
Non-controlling interests / NCI (SFP or SOCIE)
Dividend paid (SOCIE)
To eliminate the intragroup dividend
Debit
R
125 000
Credit
R
125 000
9 375
9 375
37 140
37 140
1 800
1 800
37 496
9 374
46 870
C1 Profit for the year – Bang Ltd
Revenue
Cost of sales
Other income
Other expenses
Finance charges
Income tax @ 28%
Profit for the year
120
R
865 000
(550 000)
116 875
(141 625)
(17 750)
(76 300)
196 200
FAC3762/107
C2 – Analysis of owner’s equity in Bang Ltd
Big Ltd
(175 000 / 250 000) 70% 80%
Total
At
Since
250 000
175 000
1 329 600
930 720
100%
At acquisition 1 January 2016
Share capital
Retained earnings (given)
Revaluation surplus – land
(1 062 500 – 1 187 500) x 77,6%
Equity represented by goodwill
Consideration (given)
Since acquisition to beginning of current
year
Retained earnings
97 000
1 676 600
76 380
1 752 980
67 900
1 173 620
76 380
1 250 000
189 600
1 942 580
30% 20%
NCI
75 000
398 880
29 100
502 980
502 980
132 720
132 720
56 880
559 860
Total equity ‘gained’ on date of change
186 620
Additional NAV gained from NCI:
Total column:
[1 866 200(1 676 600 + 189 600) x 10/100)]
OR
Parent column:[1 306 340(1 173 620 +
132 720) x 10/70)] OR
NCI column:
[559 860(502 980 + 56 880) x 10/30]
Additional goodwill gained from NCI:
Amount paid for additional shares
Change in ownership reserve
After the change in interest:
Profit for the period
Unrealised profit on sale of inventory (after
tax) (87 500 x 20/120 x 72%)
Other comprehensive income – fair value
adjustment on land
Dividend paid
(186 620)
186 620
(160 000)
26 620
373 240
37 140
37 240
185 700
196 200
148 560
156 960
(30 500)
2 128 280
(8 400)
281 280
(2 100)
9 000
(46 870)
2 090 410
7 200
(37 496)
250 984
1 800
(9 374)
402 806
Ref:/ FAC3762_2022_TL_107_0_B.pdf
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UNISA 2022
121