Group Statements – Volume 1
Sixteenth edition
Group Statements – Volume 1
Sixteenth edition
CS Binnekade
MCom(Taxation)(Pret) CA(SA)
Associate Professor of Accounting
University of South Africa
ZR Koppeschaar
DCom(Acc)(Pret) CA(SA)
Associate Professor of Accounting
University of South Africa
N Stegmann
DCom(RAU)
Associate Professor of Accounting
University of Johannesburg
J Rossouw
MAcc(UFS) CA(SA)
Associate Professor of Accounting
University of the Free State
C Wright
MCom(Forensic Acc) (Potchefstroom) CA(SA)
Senior Lecturer of Accounting
University of South Africa
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Preface
The purpose of this book is to set out the principles and conceptual issues of
consolidated financial statements as based on International Financial Reporting
Standards (IFRSs). It focuses on the principles of control and consolidation techniques
in preparing consolidated financial statements for a group of entities. Furthermore, the
accounting treatment of an investor’s interests in associates and joint arrangements is
covered in Volume 2 of this work.
The previous edition of Group Statements was adjusted to incorporate changes to the
following IFRSs (or revisions thereof):
• IAS 27 Separate Financial Statements relating to the equity method in separate
financial statements;
• IFRS 3 Business Combinations relating to disclosure requirements; and
• IFRS 10 Consolidated Financial Statements and IAS 28 Investments in Associates
and Joint Ventures relating to the sale or contribution of assets between an investor
and its associate or joint venture.
Most of the changes required by the adjustments in IFRSs affect Volume 2 of the work.
A number of examples have been added to Volume 2 to better illustrate the accounting
treatment of the relevant transactions/events. In chapter 1 of Volume 1, attention was
given to making the sections dealing with the requirements of the Companies Act 2008
more understandable. Examples of disclosure in the separate financial statements of
the parent have been added to chapters 1 and 2. The treatment of transaction costs on
acquisition received special attention in chapters 1 and 5.
The biggest change to the 16th edition of Volume 1 is the inclusion of LexisNexis
Passplus. PassPlus is an electronic assessment tool which allows students to
continuously assess their own understanding of, and progress through the textbook. All
PassPlus questions are automatically and immediately graded by the system, which
allows students to receive their feedback immediately. PassPlus also affords lecturers
the opportunity to use the system for continuous assessment purposes, without adding
any additional marking to their own workload. The most beneficial way for students to
use PassPlus is to work through each chapter in the textbook and then complete the
accompanying questions to test their progress. Some of the existing questions were
used for this purpose. A large number of short questions that are useful for selfassessment were added to each chapter of Volume 1.
The text includes numerous illustrative and practical examples which expand on the
principles and conceptual issues of IFRS 3, IFRS 10 and other related aspects of other
IFRSs. The approach of the text is to primarily make use of the analysis of owners’
equity in table format, but extensive use is also made of consolidation journal entries. In
addition, the worksheet approach is applied up to the end of chapter 4. The text makes
use of commentary to explain important concepts. Disclosure requirements for the
v
Preface
consolidated financial statements are illustrated and taxation issues are also addressed
to the extent that deferred tax is applicable to certain accounting areas.
The book is aimed at:
• undergraduate and postgraduate university students registered for financial
accounting modules;
• members and students of professional bodies such as the South African Institute of
Chartered Accountants (SAICA), the South African Institute of Professional
Accountants (SAIPA), the Institute of Certified Professional Accountants (CPA), etc.;
and
• practicing accountants and preparers of consolidated financial statements.
We trust that users of this publication will find it beneficial.
THE AUTHORS
November 2015
vi
Contents
Page
1 A group of entities and its financial statements: theory and background .......
2 IFRS 3 Business combinations ......................................................................
3 Consolidation at acquisition date ...................................................................
4 Consolidation after acquisition date ...............................................................
5 Intragroup transactions ..................................................................................
6 Adjustments and sundry aspects of group statements ...................................
7 Consolidation of complex groups ...................................................................
8 Interim acquisition of an interest in a subsidiary ............................................
1
35
79
125
191
315
445
519
Legend
P/L = Profit or loss section of the statement of profit or loss and other
comprehensive income
SFP = Statement of financial position
SCI = Statement of profit or loss and other comprehensive income
SCE = Statement of changes in equity
OCI = Other comprehensive income section of the statement of profit or loss and
other comprehensive income
NCI = Non-controlling interests
vii
1
A group of entities and its
financial statements:
theory and background
The emergence of a group of entities
1.1
1.2
Growth of entities .....................................................................................
Accounting for groups as determined by the Companies Act, 2008 ........
3
3
The concept of control in terms of IFRS
1.3
1.4
1.5
1.6
1.7
1.8
1.9
Definitions ................................................................................................
Elements of control ..................................................................................
Power .......................................................................................................
Exposure, or rights to variable returns .....................................................
Link between power and returns ..............................................................
Examples of group structures ..................................................................
Example 1.1: Simple group ...................................................................
Example 1.2: Vertical group ..................................................................
Example 1.3: Simple group with spread shareholding ..........................
Example 1.4: Simple group with spread shareholding ..........................
Example 1.5: Associate controls subsidiary .........................................
Example 1.6: Subsidiaries together control sub-subsidiary ..................
Example 1.7: Control through directors on board meetings .................
Example 1.8: Arrear preference dividends ...........................................
Non-controlling interests ..........................................................................
9
10
10
12
12
13
14
15
15
16
16
17
18
18
18
Group financial statements
1.10
1.11
1.12
1.13
1.14
Presentation of consolidated financial statements ...................................
Circumstances when consolidated financial statements need not be
prepared by the parent ............................................................................
Investment entities ...................................................................................
Consolidation procedures ........................................................................
Disclosure of interests in other entities ....................................................
19
21
22
23
24
1
Chapter 1
Accounting and disclosure in separate financial statements of the
parent
1.15
2
Accounting of subsidiaries in the separate records of the
investor (parent) .......................................................................................
Example 1.9: Financial asset at fair value through profit or loss ..........
Example 1.10: Financial asset with fair value adjustments in other
comprehensive income ...................................................
Example 1.11: Cost method ...................................................................
28
31
32
33
A group of entities and its financial statements: theory and background
The emergence of a group of entities
1.1 Growth of entities
1
2
The growth of a business entity takes place in various ways, and can occur for
various reasons. These could be the reduction of costs through economies of scale;
investing in competitors or suppliers in order to manage risks and gain easier
access to resources, or gaining access to required manpower or skills. The growth
can take place in an intensive manner through an increased volume of purchases,
production and sales without geographic expansion. Alternatively, an undertaking
can grow in an extensive manner by means of a geographic expansion, for example
by using travelling representatives, creating marketing agencies and the formation
of branches.
Applied to the sphere of companies, this tendency to growth in business entities
manifests itself mainly in one of two ways:
l the company itself can grow in size, as mentioned above; or
l the company can combine with other companies.
A business combination is regulated by IFRS 3 Business combinations. A
business combination is defined as a transaction or other event in which an acquirer
obtains control of one or more businesses (Appendix A). The basic aspects of
IFRS 3 Business combinations are discussed comprehensively in chapter 2 and
the advanced aspects in chapter 9 of Volume 2. In this chapter, attention is paid to
the requirements of the Companies Act 71 of 2008 (hereafter referred to as the
Companies Act, 2008) and the relevant IFRSs with regard to the theory and
background of groups of entities.
1.2 Accounting for groups as determined by the Companies Act, 2008
1
The Companies Act, 2008 defines a group of companies as a holding company and
all of its subsidiaries (section 1). A holding company in relation to a subsidiary is
defined as a juristic person (or undertaking) that controls the subsidiary. A company
will be a holding company if one of the following applies:
l it has the ability to directly or indirectly exercise, or control the exercise of a
majority of the general voting rights at a general meeting; or
l it has the right to appoint or elect, or control the appointment or election of
directors of that company who would have a majority of the votes at a board
meeting; or
l all the general voting rights associated with the issued securities of the
company are held and controlled by the persons contemplated above.
It should be noted that in terms of the Companies Act, 2008 the holding company
does not have to own shares in the company as ownership of voting rights is no
longer required to constitute a subsidiary relationship. If the holding company has
3
Chapter 1
the rights or control (e.g. a shareholders’ agreement) then that will constitute a
subsidiary relationship.
Comments
A subsidiary relationship is set out in section 3 of the Companies Act, 2008 as follows:
3(1) A company is a subsidiary of another juristic person, –
(a) if that juristic person, one or more other subsidiaries of the juristic person, or one
or more nominees of that juristic person or any of its subsidiaries, alone or in
combination –
(i) is or are directly or indirectly able to exercise, or control the exercise of, a
majority of the general voting rights associated with issued securities of that
company, whether pursuant to a shareholder agreement or otherwise; or
(ii) has or have the rights to appoint or elect, or control the appointment or
election of, directors of that company who control a majority of the votes at a
meeting of the board; or
(b) a wholly-owned subsidiary or another juristic person if all the general voting rights
associated with issued securities of the company are held or controlled, alone or
in combination, by persons contemplated in paragraph (a).
2
The Act further determines that for the purpose of determining the control of voting
rights, the following should be considered:
l voting rights that are exercisable only in certain circumstances are to be taken
into account only when those circumstances have arisen and for as long as they
will continue, or when the circumstances are under control of the person holding
the voting rights;
l voting rights that are exercisable only on instruction or with the consent of
another person are to be treated as being held by a nominee for that other
person; and
l voting rights held by a person as nominee for another person are to be treated
as held by that other person, or held by a person in a fiduciary capacity to be
treated as held by the beneficiary of those voting rights.
4
A group of entities and its financial statements: theory and background
Comment
1 Each issued share of a company, regardless of its class, has associated with it one
general voting right, except to the extent provided otherwise by:
l the Companies Act; or
l the preferences, rights, limitations and other terms determined by or in terms of
the company’s Memorandum of Incorporation (MoI)(section 37(2)).
2 However, despite anything to the contrary in a company’s MoI, every share issued by
that company has associated with it an irrevocable right of the shareholder to vote on
any proposal to amend preferences, rights, limitations and other terms associated
with that share (section 37(3)). The specific contingent voting rights exercisable by
the holders of preference shares under such conditions will therefore have to be
taken into account in determining whether a company (the investor) holds the
majority voting rights in another company (the investee) for it to be deemed to be the
subsidiary of such company (the investor).
3 Shares do not have a nominal or par value in terms of the Companies Act, 2008
(section 3). Any shares of a pre-existing company that have been issued with a
nominal or par value (in terms of the old Companies Act 61 of 1973), and that are
held by a shareholder immediately before the effective date (of the Act, i.e. 1 May
2011), continue to have the nominal or par value assigned to them when issued,
subject to any regulations to be made regarding their transitional status and
conversion. The rights of shareholders will be preserved to the extent that doing so is
compatible with the new Act. Shareholders will be compensated for the loss of any
such rights (Schedule 5(6)).
Before the accounting treatment of groups in terms of IFRS can be discussed, it should
be determined which reporting framework is relevant in terms of the Companies Act,
2008. This discussion commences with a brief exposition of the different classes of
companies defined in the Act.
3 The Companies Act, 2008 identifies two types of companies to be incorporated
under the Act. A company can either be a profit company or a non-profit
company. A profit company is defined as a company incorporated for the purpose of
financial gain for its shareholders. A non-profit company is incorporated for public
benefit and the income and property are not distributable to its incorporates. Profit
companies can be either:
l a state-owned company (SOC Ltd);
l a private company (Proprietary Limited) (Pty) Ltd);
l a personal liability company (Incorporated)(Inc); or
l a public company (Limited)(Ltd).
5
Chapter 1
The types of companies can be summarised schematically as follows:
Section 8
Non-profit
company (NPC)
Profit company
State-owned
company
(SOC Ltd)
Private company
(Pty) Ltd
May not offer securities to
the public, and
transferability of securities
is restricted
Personal liability
company (Inc)
Meets criteria for private
company, and
Memorandum of
Incorporation stipulates
that it is a personal liability
company
6
Public company
(Ltd)
A group of entities and its financial statements: theory and background
4
Depending on the classification of the company, a specified financial reporting
framework must be applied (only profit companies are discussed):
Profit company
Abbreviations Reporting framework
State-owned company
SOC Ltd
Minister may grant exemption from IFRS
where alternative ensures achievement
of purpose of Act, i.e. GRAP
Private company
(Pty) Ltd
*IFRS or IFRS for SMEs depending on
Public Interest Score (PSI):
• PSI > 350/holds assets in excess of
R5 million in fiduciary capacity – IFRS
or IFRS for SMEs
• PSI between 100 and 350 – IFRS or
IFRS for SMEs
• PSI < 100 and financial statements are
independently compiled – IFRS or
IFRS for SMEs
• PSI < 100 and financial statements are
internally compiled –IFRS for SMEs
Personal liability company
Inc
Framework for non-public entities
Public company – unlisted
Ltd
*IFRS or IFRS for SMEs (if company
meets scoping requirements in IFRS for
SMEs)
Public company – listed
Ltd
IFRS
* Framework to be applied depends on public interest score (PSI) of company.
Comment
A company may always elect to use a “higher” framework, but never a “lower”
framework.
Comment
The Public Interest Score is calculated by awarding 1 mark for each of the following:
l every R1 million turnover;
l every employee (average number);
l every security holder; and
l every R1 million third party obligation (Regulation 26).
5
The focus of this work is privately owned profit companies and therefore, from the
discussion above, it is clear that financial reporting will be governed by IFRS or the
7
Chapter 1
IFRS for SMEs. For the remainder of the discussion reference will therefore be
made to the requirements of the relevant IFRSs, namely:
l IFRS 10 Consolidated Financial Statements;
l IFRS 12 Disclosure of Interests in Other Entities;
l IAS 27 Separate Financial Statements; and
l IFRS for SMEs.
Comment
In May 2015, the IASB completed a comprehensive review of the IFRS for SMEs and
made limited amendments to the Standard. A complete revised version was published in
the third quarter of 2015 and the revisions have been taken into account in the
16th edition of this work.
The following two IFRSs are discussed in Volume 2 of this work:
l IAS 28 Investments in Associates and Joint Ventures; and
l IFRS 11 Joint Arrangements.
6 IFRS 10 Consolidated Financial Statements establishes principles for the
presentation and preparation of consolidated financial statements when an entity
controls one or more entities (IFRS 10.1). It defines the principles of control,
establishes control as the basis for determining which entities are consolidated, and
sets out the accounting requirements for the preparation of such consolidated
financial statements (IFRS 10.IN7).
7
IFRS 12 Disclosure of Interests in Other Entities requires an entity to disclose
information that enables users of its financial statements to evaluate:
(a) the nature of, and risks associated with its interests in other entities; and
(b) the effect of those interests on its financial position, financial performance and
cash flows (IFRS 12.1).
8 IAS 27 Separate Financial Statements contains accounting and disclosure
requirements for investments in subsidiaries, joint ventures and associates when an
entity prepares separate financial statements. The standard requires an entity
preparing separate financial statements to account for those investments at cost or
in accordance with IFRS 9 Financial Instruments (IAS 27.IN1).
9 Irrespective of whether IFRS 10 Consolidated Financial Statements or
IFRS for SMEs is applied, both standards have the same requirements with respect
to a parent and its subsidiaries – an entity that is a parent shall present consolidated
financial statements (IFRS 10.4 and IFRS for SMEs.9.2).
10 Where a parent is linked with a subsidiary or subsidiaries to form a larger and more
complex economic unit, it is customary to refer to the entity as a group. The basic
characteristic of such a group is that the management of the different independent
parent and subsidiary entities comprising the group is co-ordinated in such a way
that they are managed on a central and unified basis in the interest of the group as
a whole. This management on a unified basis is possible because of the control,
implicit in the parent-subsidiary relationship, which the parent exercises over its
subsidiaries. This control makes it possible for the group to be managed as an
8
A group of entities and its financial statements: theory and background
economic unit, in the sense that the different parent and subsidiary entities no
longer carry out their commercial activities on a basis of complete economic
independence.
11 Although the disclosure requirements of the Act in respect of group financial
statements (such as consolidated annual financial statements) treat the group as an
economic unit or business entity, they do not detract from the separate legal
personalities of the different parent and subsidiary entities. The duty on the part of
the parent to submit group financial statements is purely an additional statutory
requirement.
Comment
The Companies Act, 2008 (Act) uses the term “holding company”, while International
Financial Reporting Standards (IFRS) uses the term “parent”, indicating that not only
companies may be subsidiaries, as indicated in the definition below. The term “parent” is
used in this work to comply with IFRS.
The concept of control in terms of IFRS
1.3 Definitions
1
A group consists of a parent and its subsidiaries. A subsidiary is defined as an entity
that is controlled by another entity (known as the parent) (IFRS 10 Appendix A).
An investor controls an investee when the investor is exposed, or has rights, to
variable returns from its involvement with the investee and has the ability to affect
those returns through its power over the investee (IFRS 10.6).
Comment
IFRS for SMEs defines a subsidiary as an entity that is controlled by the parent
(par 9.4).
2
It is clear that control is essential. IFRS 10 therefore requires that an investor,
regardless of the nature of its involvement with an entity (the investee), shall
determine whether it is a parent by assessing whether it controls the entity (.5). In
this assessment all relevant facts and circumstances are considered and such
assessment is repeated if facts and circumstances indicate that there are changes
to one or more of the elements of control listed below.
Comment
The terms “investor” and “investee” are not defined in IFRS 10. “Investor” is used to refer
to a reporting entity that potentially controls one or more other entities, and “investee” to
refer to an entity that is, or may potentially be, the subsidiary of a reporting entity.
9
Chapter 1
1.4 Elements of control
1
When the definition of control is analysed, three elements of control are evident:
An investor controls an investee if, and only if, the investor has all the following:
(a) power over the investee;
(b) exposure, or rights to, variable returns from involvement with the investee; and
(c) the ability to use power over the investee to affect the amount of the
investor’s returns (IFRS 10.7).
2
When an investor assesses whether an investee is controlled, factors such as the
purpose and design of the investee, the nature of the relevant activities and how
decisions about those activities are made; whether the rights of the investor give it
the current ability to direct the relevant activities; whether the investor is exposed to,
or has rights to variable returns from its involvement with the investee; and whether
the investor has the ability to use its powers over the investee to affect the amount
of the investor’s returns are taken into consideration.
3
In the most straightforward scenario, an investee, in the absence of additional
arrangements that alter decision-making, is controlled by means of equity
instruments shares that give the holder proportionate voting rights in the investee.
The party who is able to exercise voting rights sufficient to determine the investee’s
operating and financing policies will control the investee.
4
An investee may however also be designed so that voting rights are not the
dominant factor in deciding who controls the investee. Voting rights may for
example relate only to administrative tasks and relevant activities be controlled
through contractual arrangements. In such cases all factors mentioned in 2 above
should be considered. Attention should also be paid to the risks to which the
investee was designed to be exposed, the risks it was designed to pass on to other
parties involved with the investee and whether the investor is exposed to some or all
of those risks in the assessment.
5
Each of the elements of control will now be discussed to highlight its importance in
the assessment of control.
1.5 Power
1
Power is defined as existing rights that give the current ability to direct the relevant
activities and for the purpose of IFRS 10, relevant activities are activities of the
investee that significantly affect the investee’s returns (Appendix A).
2
The determination of the investor’s powers depends on the relevant activities, the
way decisions about the relevant activities are made and the rights the investors
and other parties have in relation to the investee (Appendix B .B10).
10
A group of entities and its financial statements: theory and background
3
4
5
6
7
8
Power arises from rights. Such rights can be straightforward (e.g. through voting
rights) or complex (e.g. embedded in contractual arrangements) and require more
than one factor to be considered. Rights that, either individually or in
combination, give an investor power, include:
l voting rights granted by equity instruments such as shares (see 1.8);
l potential voting rights;
l rights to appoint, reassign or remove members of an investee’s key management
personnel who have the ability to direct the relevant activities;
l rights to appoint or remove another entity that directs the relevant activities;
l rights to direct the investee to enter into, or veto any changes to, transactions for
the benefit of the investor; and
l other rights (such as decision-making rights specified in a management contract)
that give the holder the ability to direct the relevant activities (Appendix B .B15).
When an investor assesses whether it has control over an investee, only
substantive rights relating to an investee are considered. A substantive right gives
the holder thereof the practical ability to exercise that right (IFRS 10.B22). This
means that the holder should not be hindered from exercising the right through
penalties, inabilities to obtain the necessary information or prohibitive legal or
regulatory requirements, amongst others. In Volume 1 of this work all rights will be
assumed to be substantive rights, unless the opposite is stated specifically.
Relevant activities could be any operating and financing activities of an entity,
including selling and purchasing of goods or services, selecting, acquiring and
disposing of assets, researching and developing new products or processes,
managing financial assets during their life and determining funding structures or
obtaining funding.
Often an investor has the current ability, through voting or similar rights, to direct the
relevant activities. This will be the case where the investor holds more than half of
the voting rights of an investee and the relevant activities are directed by a vote of
the holder of the majority of the voting rights, or a majority of the members of the
governing body that directs the relevant activities is appointed by vote of the
holder of the majority of the voting rights (IFRS 10.B34í36).
An investor can have power even if it holds less than a majority of the voting rights
of an investee. Such power could be obtained through a contractual arrangement
between the investor and other vote holders giving the former the right to exercise
voting rights sufficient to give the investor power, rights arising from other
contractual arrangements, potential voting rights or a combination thereof (IFRS
10.B38).
When assessing whether an investor’s voting rights are sufficient to give it power, all
facts and circumstances should be considered. The size of the investor’s holding of
voting rights relative to the size and dispersion of holdings of the other vote holders
is important, as the more voting rights an investor holds, the more likely the investor
is to have existing rights enabling it to direct relevant activities. An investor is also
11
Chapter 1
more likely to have the current ability to direct relevant activities, where a lot of
parties are needed to act together to outvote the investor. All facts and
circumstances should therefore be taken into account, for example previous voting
patterns by other voters (IFRS 10.B42).
9
Another factor that also warrants attention in the assessment is where the investor
has a special relationship with the investee, which suggests that the investor has
more than a passive interest in the investee. Indicators of a special relationship are
where the investee’s key management personnel are current or previous employees
of the investor, where the investee’s operations are dependent on the investor,
where a significant portion of the investee’s activities either involve or are conducted
on behalf of the investor or the investor’s exposure, or rights, to returns from its
involvement with the investee is disproportionately greater than its voting or similar
rights.
1.6 Exposure, or rights to variable returns
1
An investor must be exposed, or have rights to variable returns from its involvement
with an investee to control the investee. This would be the case where the investor’s
returns from its involvement with the investee have the potential to vary as a result
of the investee’s performance. Such returns can be positive or negative or both
(IFRS 10.15).
2
Although one investor can control an investee, more than one party can share in the
returns of an investee (IFRS 10.16).
3
Examples of returns are:
l dividends;
l other distributions of economic benefits from an investee, i.e. interest from debt
instruments and changes in the value of the investor’s investment in the
investee;
l remuneration for services;
l fees and exposure to loss from providing credit or liquidity support;
l returns not available to other investors, i.e. savings through combination of
operations, sourcing scarce products, gaining access to proprietary knowledge
or limiting some operations or assets to enhance the value of the investor’s other
assets (IFRS 10.B57).
1.7 Link between power and returns
1
12
A parent must not only have power over an investee and exposure, or rights, to
variable returns from its involvement with the investee; a parent must also have the
ability to use its power over the investee to affect its returns from its involvement
with the investee (IFRS 10.17).
A group of entities and its financial statements: theory and background
2
The investor should therefore determine whether it acts as principal or an agent. An
agent is a party primarily engaged to act on behalf and for the benefit of another
party or parties (the principal(s)) and therefore does not control the investee when it
exercises its decision-making authority (IFRS 10.B58). If an investor merely acts as
an agent and exercises only decision-making rights that were delegated to it, it does
not control the investee.
1.8 Examples of group structures
1
A parent (P Ltd) may have more than one subsidiary, while a subsidiary (S Ltd) may
in turn be the parent of another company (SS Ltd); SS Ltd is referred to as the subsubsidiary of the ultimate parent (P Ltd). A parent plus subsidiaries plus sub-subsidiaries (if any) together form a group of companies. Note that, according to law, a
sub-subsidiary is regarded as being a subsidiary of the ultimate parent.
Comment
In this book, the following is used throughout the text:
P = Parent
S = Subsidiary
2
A simple group, which consists of a parent and a single subsidiary, may thus be
diagrammatically represented as follows:
P Ltd
51%
S Ltd
3
In the above diagram, P Ltd has made an assessment and established that it
controls S Ltd through the holding of the majority of the voting rights, which in turn
was obtained from holding 51% of the issued equity share capital of S Ltd.
A complex group may be constituted by, for example, the following ownership
interest in issued equity share capital:
P Ltd
S1 Ltd
4
S2 Ltd
S3 Ltd
SS1 Ltd
SS2 Ltd
A company is the fellow subsidiary of another company if both are subsidiaries of
the same parent, for example S2 Ltd and S3 Ltd are fellow subsidiaries in the
example above.
Complex groups are discussed in chapter 7.
As can be seen, there is virtually no limit to the variety and permutations of
ownership interests that can exist within a group.
13
Chapter 1
Example 1.1
Simple group
P Ltd owns 51% of the shares of S Ltd. Each share entitles the holder to one general
vote at the annual general meeting (AGM). The relevant activities are directed by the
AGM. S Ltd has no other classes of issued shares.
P Ltd
51%
S Ltd
S Ltd is a subsidiary of P Ltd and P Ltd is the parent of S Ltd, as P Ltd, by holding the
majority of the general voting rights (51%), has the existing rights that give it the current
ability to direct the relevant activities.
In the absence of additional arrangements that alter decision-making, the assessment
of control focuses on which party, if any, is able to exercise voting rights sufficient to
determine the investee’s operating and financial policies (IFRS 10.B6). In the most
straightforward scenario, such as the one above, the investor that holds a majority of
those voting rights, in the absence of other factors, controls the investee.
Comments
a In all the examples in Volume 1 where control was obtained through the majority
voting rights, it is assumed that the parent has the ability to determine the relevant
activities, without specifically stating this fact.
b It is necessary to distinguish between control and ownership. P Ltd controls 100%
(all the net) assets of S Ltd, but P Ltd has an economic interest (ownership interest)
of 51% of the undivided net assets of S Ltd. P Ltd controls 100% of the net assets of
S Ltd, therefore 100% of S Ltd’s net assets are taken up in the consolidated financial
statements. Due to P Ltd only owning 51% of the net assets, the non-controlling
interest (the remaining 49%) in the net assets of S Ltd are also included in the
consolidated statement of financial position.
14
A group of entities and its financial statements: theory and background
Example 1.2
Vertical group
P Ltd holds 51% of the shares of S Ltd and S Ltd hold 51% of the shares of SS Ltd.
Each share entitles the holder of the share to one general vote on the annual general
meeting. S Ltd and SS Ltd have no other classes of issued shares.
P Ltd
51%
S Ltd
51%
SS Ltd
In the absence of additional arrangements that could alter decision-making, it may be
assumed that S Ltd is a subsidiary of P Ltd and P Ltd is the parent of S Ltd, as P Ltd is
able to direct the relevant activities of S Ltd through the voting rights.
The same applies in respect of S Ltd and SS Ltd. SS Ltd is a subsidiary of S Ltd and
S Ltd is the parent of SS Ltd, as it may be assumed that S Ltd has the ability to direct
the relevant activities of SS Ltd through exercising the majority of the voting rights.
As SS Ltd is controlled by S Ltd, which in turn is controlled by P Ltd, it may be assumed
that P Ltd is also able to exercise control over the relevant activities of SS Ltd, thus
establishing a parent-subsidiary relationship between P Ltd and SS Ltd, as P Ltd can
give S Ltd instructions on how SS Ltd should be governed.
Example 1.3
Simple group with spread shareholding
P Ltd owns 48% of the shares of S Ltd. Each share entitles the holder to one general
vote at the annual general meeting (AGM). The relevant activities are directed by the
AGM. S Ltd has no other classes of issued shares. The remaining voting rights are held
by 1 000 shareholders (none holding more than 1% and no arrangements exist
between them to consult one another or make collective decisions).
P Ltd
48%
S Ltd
S Ltd is a subsidiary of P Ltd and P Ltd is the parent of S Ltd, as P Ltd can exercise
power through its 48% shareholding. The relative size of the other shareholders’
interest, gives P Ltd a large enough dominant voting interest to meet the power criterion
without the need to consider any other evidence of power.
15
Chapter 1
Example 1.4
Simple group with spread shareholding
P Ltd owns 40% of the shares of S Ltd. Each share entitles the holder to one general
vote at the annual general meeting (AGM). The relevant activities are directed by the
AGM. S Ltd has no other classes of issued shares. The remaining voting rights are held
by Mr A, who owns 35%, and Mrs B, who owns 25% of the issued shares. No other
arrangement exists that could influence decision-making.
P Ltd
40%
S Ltd
S Ltd is not a subsidiary of P Ltd and therefore P Ltd is not the parent of S Ltd. The size
of P Ltd’s voting interest and its size relative to the other shareholdings are sufficient to
conclude that P Ltd does not have power over S Ltd. Only two other investors would
need to co-operate to be able to prevent P Ltd from directing the relevant activities of
S Ltd.
Example 1.5
Associate controls subsidiary
P Ltd holds 40% of the shares of S Ltd and S Ltd hold 51% of the shares of SS Ltd.
Each share entitles the holder to one vote on the annual general meeting. S Ltd and
SS Ltd have no other classes of issued shares.
P Ltd
40%
S Ltd
51%
SS Ltd
S Ltd is not a subsidiary of P Ltd, as P Ltd does not hold enough voting rights in S Ltd
to direct its relevant activities.
SS Ltd is a subsidiary of S Ltd and S Ltd is the parent of SS Ltd, as S Ltd, by holding
the majority of the general voting rights (51%), has the existing rights that give it the
current ability to direct the relevant activities of SS Ltd.
16
A group of entities and its financial statements: theory and background
SS Ltd is not a subsidiary of P Ltd, as P Ltd does not have control over S Ltd.
If, however, the following arrangement exists in the example above, the whole scenario
changes:
The remaining 60% of S Ltd’s shares are held by 12 other shareholders, each holding
only 5% of the voting rights of S Ltd. A shareholder agreement grants P Ltd the right to
appoint, remove and set the remuneration of management responsible for directing the
relevant activities. To change the agreement, a two-thirds majority vote of the
shareholders is required.
The shareholding of P Ltd and the relative shareholding of the other 12 shareholders
solely is not sufficient to determine whether P Ltd can exercise control over S Ltd. If
P Ltd’s ability to determine S Ltd’s management (through which the relevant activities
are directed) is however considered, it is clear that P Ltd controls S Ltd and that S Ltd is
a subsidiary of P Ltd (IFRS 10 B34 Example 10).
Example 1.6
Subsidiaries together control sub-subsidiary
P Ltd holds 60% of the shares of S1 Ltd and S2 Ltd. S1 Ltd holds 30% of the shares of
SS Ltd and S2 Ltd holds 30% of the shares of SS Ltd. Each share entitles the holder of
the share to one vote on the annual general meeting. S1 Ltd, S2 Ltd and SS Ltd have
no other classes of issued shares.
P Ltd
S1 Ltd
60%
60%
30%
30%
S2 Ltd
SS Ltd
S1 Ltd is a subsidiary of P Ltd and P Ltd is S1 Ltd’s parent, as P Ltd holds the majority
voting rights (60%) in S1 Ltd.
S2 Ltd is a subsidiary of P Ltd and P Ltd is S2 Ltd’s parent, as P Ltd holds the majority
voting rights (60%) in S2 Ltd.
If it is assumed that there are no other arrangements, in both the abovementioned
relationships, the majority shareholdings (and thereby the majority voting rights) give
P Ltd the ability to direct the relevant activities of the subsidiaries (S1 Ltd and S2 Ltd).
As it controls both S1 Ltd and S2 Ltd, by implications it also controls the relevant
activities of SS Ltd, thus establishing a parent-subsidiary relationship.
17
Chapter 1
Example 1.7
Control through directors on board meetings
P Ltd holds 40% of the shares of S Ltd, but has, in terms of an agreement with the
other shareholders, the right to appoint four of the six directors of S Ltd. Each director
has one vote on the directors’ meetings.
P Ltd
40%
S Ltd
S Ltd is a subsidiary of P Ltd and P Ltd is the parent of S Ltd, as P Ltd has the right to
appoint directors of S Ltd that have a majority (4/6 = 67%) of the voting rights on directors’
meetings through which the relevant activities of S Ltd are directed.
Example 1.8
Arrear preference dividends
P Ltd holds 51% of the Class A shares and 10% of the Class B 5% preference shares
of S Ltd. Each Class A share entitles the holder to one general vote on the annual
general meeting. The MoI determines that a Class B preference shareholder is entitled
to one vote per share when the preference dividend is in arrears. The preference
dividend has been in arrears for the past five years. S Ltd’s issued share capital is as
follows:
100 000 Class A shares
50 000 Class B 5% preference shares
Interest in Class A shares
P Ltd
51%
S Ltd
Under the present circumstances S Ltd is not a subsidiary of P Ltd, as P Ltd only holds
37% ((51 000 + 5 000)/100 000 (Class A shares) + 50 000 (Class B 5% preference
shares)) of the total voting rights on the annual general meeting of S Ltd as long as the
preference dividends are in arrears. P Ltd will not be able to direct the relevant activities
under such circumstances. As soon as the arrears Class B preference dividends are
paid, P Ltd’s shareholding (and voting rights) would be equal to 51%, which constitutes
a parent-subsidiary relationship.
1.9 Non-controlling interests
1
18
Until now, attention has been given to the portion of the equity held by the parent.
The equity in a subsidiary not attributable, directly or indirectly, to a parent, is called
A group of entities and its financial statements: theory and background
2
the non-controlling interests (IFRS 10 Appendix A). Previously, this component of
equity was called the “minority interest”. The term “non-controlling interests” is
regarded as a more accurate description of the interests of those owners who do
not have a controlling interest in an entity than the term “minority interest”. The noncontrolling interest in a subsidiary represents the residual interest in the net assets
of subsidiaries held by some of the other owners (not the parent) of the subsidiaries
within a group, and is classified as equity. This classification is in compliance with
the definition of equity in the Conceptual Framework for Financial Reporting,
namely, equity is the residual interest in the assets of the entity after deducting all of
its liabilities (.49(c)).
A parent presents non-controlling interests in the consolidated statement of financial
position within equity, separately from the equity of the owners of the parent
(IFRS 10.22).
Group financial statements
1.10 Presentation of consolidated financial statements
1
From the prior discussion it is clear that if one entity (the parent) controls another
entity (the subsidiary), the entity that is the parent shall prepare consolidated
financial statements (IFRS 10.4).
Comment
The IFRS for SMEs is also clear that a parent entity shall present consolidated financial
statements that include all its subsidiaries (9.2).
2
3
4
The term group financial statements (group statements) is commonly used for all
forms of financial statements presenting information of a group of entities as those
of a single entity.
Consolidated financial statements constitute the most important and widely used
form of group statements and are defined as the financial statements of a group in
which the assets, liabilities, equity, income, expenses and cash flows of the parent
and its subsidiaries are presented as those of a single economic entity (IFRS 10
Appendix A). In this work, the primary focus is thus on the consolidation of company
financial statements in dealing with group statements and the underlying accounting
techniques.
Consolidated financial statements comply with the need of users of financial
statements to obtain information on the financial position, results of operations and
changes in the financial position of the group as a whole. In consolidated financial
statements, financial information is presented about the group as a single entity
without regard for the legal boundaries of the separate legal entities. In order to
obtain a clear picture of the financial position and prospects of a parent, it is not
sufficient to have insight into only the financial statements of the parent as such.
The intimate business ties between the parent and subsidiaries as well as sub-subsidiaries require more complete information.
19
Chapter 1
Comment
The Companies Act, 2008 requires the following regarding financial statements:
29(1) If a company provides any financial statements, including any annual financial
statements, to any person for any reason, those statements must –
5
(a)
satisfy the financial reporting standards as to form and content, if any such
standards are prescribed;
(b)
present fairly the state of affairs and business of the company, and explain the
transactions and the financial position of the business of the company.
It is obvious that consolidated financial statements shall in the first instance comply
with IAS 1 Presentation of Financial Statements. Part 1 Illustrative
Presentation of Financial Statements is in fact based on a group’s financial
statements.
Due to a lack of space an abridged statement of profit or loss and other
comprehensive income is used in this work. The reader must however take notice
that a complete statement of comprehensive income must be prepared in practice.
The format of the statement of profit or loss and other comprehensive income
(according to function) of an individual entity according to IAS 1 is as follows:
20.18
R
20.17
R
Revenue
Cost of sales
Gross profit
Other income
Distribution costs
Administrative expenses
Other expenses
Finance costs
xxx
(xx)
xxx
xx
(xx)
(xx)
(xx)
(xx)
xxx
(x)
xxx
xx
(xx)
(xx)
(xx)
(xx)
Profit before tax
Income tax expense
xxx
(xx)
xxx
(xx)
PROFIT FOR THE YEAR
xxx
xxx
Other comprehensive income
Mark-to-market reserve
(fair value adjustment on investment)
Income tax relating to items not reclassified
Other comprehensive income for the year, net of tax
xx
(xx)
xx
xx
(xx)
xx
TOTAL COMPREHENSIVE INCOME FOR THE YEAR
xxx
xxx
The portion up to Profit before tax, as indicated above, is omitted in most examples
in this work purely to save space.
20
A group of entities and its financial statements: theory and background
1.11 Circumstances when consolidated financial statements need not be
prepared by the parent
1
It has already been established above that an entity that is a parent shall present
consolidated financial statements. However, IFRS 10.4(a) allows a parent not to
present consolidated financial statements if it meets all the following conditions:
(i) it is a wholly-owned subsidiary or it is a partially owned subsidiary and all its
other owners, including those not otherwise entitled to vote, have been
informed about, and do not object to, the parent not presenting consolidated
financial statements;
(ii) its debt or equity instruments are not traded in a public market (like the
Johannesburg Securities Exchange);
(iii) it did not file (nor is it in the process of filing) its financial statements with a
securities commission or other regulatory organisation to issue any class of
instrument in a public market; and
(iv) its ultimate or any intermediate parent produces consolidated financial
statements in terms of IFRSs that are available for public use.
Comment
In the case of an SME, a subsidiary is not excluded from consolidation:
l simply because the investor is a venture capital organisation, mutual fund, unit trust
or similar entity (IFRS for SMEs.9.8);
l because its business activities are dissimilar from those of the other entities within
the group. In such cases the subsidiary is consolidated and additional information is
disclosed about the different activities of the subsidiary (IFRS for SMEs.9.9).
l because it operates in a jurisdiction that imposes restrictions on transferring cash or
other assets out of the jurisdiction (IFRS for SMEs.9.9).
It may however be excluded from consolidation if:
l both of the following conditions are met:
• the parent is itself a subsidiary; and
• its ultimate parent (or any intermediate parent) produces consolidated general
purpose financial statements that comply with full IFRSs or with the IFRS for
SMEs (IFRS for SMEs.9.3).
A subsidiary is also not consolidated if it is acquired and held with the intention of selling
of disposing of it within one year from its acquisition date (IFRS for SMEs.9.3A).
The carrying amounts of subsidiaries that are not consolidated are disclosed either in the
statement of financial position or the notes.
2
An entity that is exempted in accordance with paragraph 4(a) of IFRS 10 from
consolidation may present separate financial statements as its only financial
statements.
3
In October 2012 IFRS 10 was amended to introduce an exception to the principle
that all subsidiaries shall be consolidated. This exception relates to investment
entities and will be discussed next.
21
Chapter 1
1.12 Investment entities
1
2
3
4
5
An investment entity is defined as an entity that:
(a) obtains funds from one or more investors for the purpose of providing
investment management services to them;
(b) is committed to its business purpose to invest funds solely for returns from
capital appreciation, investment income, or both; and
(c) measures and evaluates the performance of substantially all of its investments
on a fair value basis (IFRS 10 Appendix A).
In assessing whether an entity meets the definition above, an entity shall consider
whether it has the following typical characteristics of an investment entity:
(a) it has more than one investment (IFRS 10.B85O);
(b) it has more than one investor (IFRS 10.B85Q);
(c) it has investors that are not related parties of the entity (IFRS 10.B85T); and
(d) its ownership interests are in the form of equity or similar interests
(IFRS 10.28).
An entity shall consider all facts and circumstances, including its purpose and
design, when assessing whether it is an investment entity. This can be determined
from documents that indicate the entity’s investment objectives such as the entity’s
offering memorandum and corporate publications. It should be clear that it does not
plan to hold its investments indefinitely and therefore needs a clear exit strategy
regarding the holding of investments.
If the entity obtains benefits that are not obtainable by other parties, which indicates
that it is a related party to the investee, then the entity is not an investing entity.
Examples of such benefits are the acquisition, use, exchange or exploitation of
processes, assets or technology of an investee (IFRS 10.B85I).
An investment property that is therefore not consolidated due to the
abovementioned conditions shall be measured at fair value through profit or loss in
accordance with IFRS 9 Financial Instruments (IFRS 10.31).
Comment
Notwithstanding the requirements set out above, if an investment entity has a subsidiary
that provides services that relate to the investment entity’s investment activities, it shall
consolidate that subsidiary in accordance with IFRS 10 and apply the requirements of
IFRS 3 to the acquisition of the subsidiary.
22
A group of entities and its financial statements: theory and background
1.13 Consolidation procedures
1
2
It has already been established that if one entity controls another entity, the former
known as the parent shall prepare consolidated financial statements (IFRS 10.4).
Broadly speaking, consolidated financial statements:
(a) combine like items of assets, liabilities, equity, income, expenses and cash
flows of the parent with those of its subsidiaries. The approach of combining
like items (P + S) is clearly evident in the worksheets that are used in Volume 1
of this work;
(b) offset (eliminate) the carrying amount of the parent’s investment in each
subsidiary and the parent’s portion of equity of each subsidiary, and explains
how to account for any related purchase difference (see 3.13 to 3.15 of this
work);
(c) eliminate in full intragroup assets and liabilities, equity, income, expenses and
cash flows relating to transactions between entities of the group (profits or
losses resulting from intragroup transactions that are recognised in assets,
such as inventory and non-current assets, are eliminated in full). Intragroup
losses may indicate an impairment that requires recognition in the consolidated
financial statements.
Comment
Refer to chapter 5 for a detailed discussion of the treatment of intragroup balances and
intragroup transactions, as well as chapter 6 for a discussion of impairment.
(d) IAS 12 Income Taxes applies to temporary differences that arise from the
elimination of profits and losses resulting from intragroup transactions
(IFRS 10.B86).
3 Consolidation of a subsidiary begins from the date the investor obtains control and
ceases when the parent loses control of the subsidiary (IFRS 10.20).
4 The financial statements of the parent and its subsidiaries used in the preparation of
the consolidated financial statements shall have the same reporting date
(IFRS 10.B92). If the reporting date of a subsidiary differs from that of the parent,
the subsidiary has to prepare additional financial information as of the same date as
the financial statements of the parent to enable the parent to consolidate the
financial information of the subsidiary, unless it is impracticable to do so. If it is
impracticable to do so, the most recent financial statements of the subsidiary are
adjusted for the effects of significant transactions or events that occur between the
date of those financial statements and the date of the consolidated financial
statements (IFRS 10.B93).
Comment
The IFRS for SMEs determines that the financial statements of the parent and the
subsidiary that are used for the preparation of the consolidated financial statements
shall have the same reporting date, unless it is impracticable to do so. In such a case
the most recent financial statements of the subsidiary is used, adjusted for the effects of
significant transactions and events that occur between the reporting date of the
subsidiary and the date of the consolidated financial statements (9.16)
23
Chapter 1
5 In the preparation of consolidated financial statements the financial statements shall
be prepared using uniform accounting policies (IFRS 10.19). If a subsidiary uses
accounting policies that differ from those adopted in the consolidated financial
statements, appropriate adjustments should be made to its financial statements to
ensure conformity with the group’s accounting policies (IFRS 10.B87).
6 The profit or loss and each component of other comprehensive income, as well as
the total comprehensive income shall be attributed to the owners of the parent and
the non-controlling interests on the basis of the present ownership interests (even if
this results in the non-controlling interests having a deficit balance) (IFRS 10.B94).
Comment
a Where potential voting rights exist, the proportion of profit or loss and changes in
equity allocated to the parent and non-controlling interests are determined solely on
the basis of the existing ownership interests and do not reflect the possible exercise
or conversion of potential voting rights (and other derivatives) (IFRS 10.B89).
b If a subsidiary has issued cumulative preference shares that are classified as equity
and are held by non-controlling interests, the parent’s share of profit or loss is
calculated after adjusting for the dividends attributable to such shares, whether or not
such dividends have been declared (IFRS 10.B95).
1.14 Disclosure of interests in other entities
1
IFRS 12 Disclosure of Interests in Other Entities specifies the minimum
disclosure requirements for subsidiaries, joint arrangements, associates and
unconsolidated structured entities.
Comment
In this chapter the emphasis falls on the basic disclosure relating to subsidiaries and
because a change in ownership is not discussed in Volume 1, disclosure requirements
relating to such changes are also omitted. Disclosure relating to joint arrangements,
associates and unconsolidated structured entities are discussed in Volume 2 of the
work.
2
3
24
IFRS 12 requires an entity to disclose information that enables users of financial
statements to evaluate the nature of, and risks associated with its interests in other
entities; and the effect of those interests on its financial position, financial
performance and cash flows (IFRS 12.1).
An entity shall disclose information about significant judgements and assumptions it
has made in determining that it has control of another entity (IFRS 12.7) (see
chapter 10 for more detail). The following judgements and assumptions made in this
regard shall be disclosed, namely where:
l it does not control another entity even though it holds more than half of the voting
rights of the other entity;
A group of entities and its financial statements: theory and background
l it controls another entity even though it holds less than half of the voting rights of
the other entity; and
l it is an agent or a principal (IFRS 12.9).
Comment
Example of note on significant judgements and assumptions:
The company has determined that it controls S Ltd, even though it owns less than 50%
of the voting rights. The factors taken into consideration in making this judgement
include the size of its block of shares, the relative size and dispersion of holdings by
other shareholders, the ability to appoint and remove the majority of the directors on the
Board of Directors and the sharing of key management positions between the company
and S Ltd.
4
If a parent is an investment entity (see 1.12 above), it shall disclose information
about significant judgements and assumptions made in determining that it is indeed
an investment entity (IFRS 10.9A). The following should also be disclosed for each
unconsolidated subsidiary:
l the subsidiary’s name;
l the principal place of business (and country of incorporation if different from the
principal place of business) of the subsidiary; and
l the proportion of ownership interest held by the parent and, if different, the
proportion of voting rights held (IFRS 10.19B).
5
The parent shall disclose information to enable users of its consolidated financial
statements:
(a) to understand:
l the composition of the group;
l the interest that non-controlling interests have in the group’s activities and
cash flows; and
(b) to evaluate:
l the nature and extent of significant restrictions on its ability to access or use
assets, and settle liabilities, of the group;
l the nature of, and changes in, the risks associated with its interests in
consolidated structured entities (IFRS 12.10).
25
Chapter 1
Comment
Example of composition of the group:
Principal subsidiaries:
The consolidated financial statements for the year ended 28 February 20.18 include the
amounts of the company and its subsidiaries. The principal subsidiaries and their
activities are:
South African
subsidiaries:
A Ltd (80%)
Research and development of products
B Ltd (75%)
Owner of manufacturing plant and leasing to the
company (parent)
German subsidiary:
C Ltd (55%)
6
7
26
Consultation services
When the financial statements of a subsidiary are as of a date or for a period that is
different from that of the consolidated financial statements, an entity shall disclose
the date of the end of the reporting period of the financial statements of the
subsidiary and the reason for using a different period (IFRS 12.11).
For each subsidiary that has non-controlling interests that are material to the
reporting entity, the following shall be disclosed:
l the name of the subsidiary;
l the principal place of business;
l the proportion of ownership interests held by non-controlling interests;
l the proportion of voting rights held by non-controlling interests, if different from
the proportion of ownership interests held;
l the profit or loss allocated to non-controlling interests during the period;
l the accumulated non-controlling interests of the subsidiary at the end of the
reporting period;
l the following summarised financial information about the subsidiary:
• dividends paid to non-controlling interests;
• summarised financial information about the assets, liabilities, profit or loss and
cash flows of the subsidiary that enables users to understand the interest that
non-controlling interests have in the group’s activities and cash flows (before
intragroup eliminations) (IFRS 12.12).
A group of entities and its financial statements: theory and background
Comment
Example of disclosure:
Non-controlling interests
The following subsidiaries have material NCI:
Name
Principal place
of business
Operating
segment
Ownership interests (%)
held by NCI
20.18
20.17
A Ltd
Namibia
Dealer
25
25
B Ltd
South Africa
Manufacturer
20
20
The following is the summarised financial information of the P Ltd Group prepared in
accordance with IFRS, modified for fair value adjustments on acquisition and
differences in the Group’s accounting policies, before any intragroup eliminations have
been done:
A Ltd
B Ltd
20.18
R’000
20.17
R’000
20.18
R’000
20.17
R’000
Revenue
30 000
20 000
12 000
10 000
Profit
2 000
1 500
800
600
500
375
160
120
–
–
40
10
Total comprehensive income
2 000
1 500
840
610
Total comprehensive income
attributable to NCI
500
375
168
122
Non-current assets
5 000
4 500
8 000
7 000
Current assets
3 000
2 500
4 000
3 000
Non-current liabilities
(2 000)
(1 500)
(1 400)
(1 200)
Current liabilities
(500)
(800)
(1 600)
(1 000)
Net assets
5 500
4 700
9 000
7 800
Net assets attributable to NCI
1 375
1 175
1 800
1 560
Cash flows from operating activities
480
450
280
320
Cash flows from investing activities
(130)
(85)
(200)
60
Cash flows from financing activities
20
(125)
400
(300)
Net increase in cash and cash
equivalents
370
240
480
80
Dividends paid to NCI during the year
80
70
40
–
Profit attributable to NCI
Other comprehensive income
27
Chapter 1
8
In the case of SMEs the following shall be disclosed (IFRS for SMEs.9.23):
l the fact that the statements are consolidated financial statements;
l the basis for concluding that control exists when the parent does not own,
directly or indirectly through subsidiaries, more than half of the voting power;
l any difference in the reporting date of the financial statements of the parent and
its subsidiaries used in the preparation of the consolidated financial statements;
and
l the nature and extent of any significant restrictions (e.g. resulting from borrowing
arrangements or regulatory requirements) on the ability of subsidiaries to transfer
funds to the parent in the form of cash dividends or to repay loans.
Comment
The disclosure relating to the loss of control of a subsidiary is discussed in chapter 13.
Accounting and disclosure in the separate financial statements of
the parent
1.15 Accounting of subsidiaries in the separate records of the investor
(parent)
1
Separate financial statements are defined as those presented by a parent (i.e.
investor with control of a subsidiary) in which the investments are accounted for at
cost or in accordance with IFRS 9 Financial Instruments (IAS 27.10). Separate
financial statements are presented in addition to consolidated financial statements
(IAS 27.4).
Comment
The IFRS for SMEs does not require presentation of separate financial statements for
the parent entity or for the individual subsidiaries (par .9.24).
However, when a parent does prepare separate financial statements and describes
them as conforming to the IFRS for SMEs, the entity’s financial statements shall
comply with all of the requirements of the IFRS for SMEs. The entity shall account for
investments in subsidiaries:
l at cost less impairment; or
l at fair value with changes in fair value recognised in profit or loss; or
l using the equity method (9.26).
2
28
Investments in subsidiaries are either measured using the cost model or the fair
value model. Two options are available for using the fair value model in terms of
IFRS 9. Investments in subsidiaries may be classified as either financial assets at
fair value through profit or loss, or at initial recognition the parent may make an
irrevocable decision to measure its investment in equity instruments at fair value
through other comprehensive income. Once an investment in subsidiary is
designated as one of the two categories, this classification may not be changed.
The classification of the investment may only change if the entity’s business model
for managing financial assets changes.
A group of entities and its financial statements: theory and background
3
In terms of IFRS 9 Financial Instruments, an entity classifies financial assets such
as investments in shares on the basis of both:
l the entity’s business model for managing the financial assets and
l the contractual cash flow characteristics of the financial asset (IFRS 9.4.1.1).
Comment
Examples of financial assets classified as at fair value through other comprehensive
income are investments in shares held for long-term purposes (e.g. strategic
investments). This could be the case for investments in subsidiaries, as investments in
subsidiaries are seldom made with a view to speculate with the shares in the short term
or for trading purposes (except where the investor is an investment entity – see 1.12
above).
4
5
Transaction costs on financial instruments are defined as incremental costs that are
directly attributable to the acquisition, issue or disposal of a financial asset (or
liability) (IFRS 9). An incremental cost is one that would not have been incurred if
the entity had not acquired the financial asset (IFRS 9). Transaction costs are
typically fees and commissions paid to agents and brokers, levies of regulatory
services and securities exchanges, and transfer taxes and duties. The treatment of
the transaction costs is determined by IFRS 9 and is set out below. Briefly, such
transaction costs are capitalised against the investment if the investment is
measured at fair value through other comprehensive income or if the cost method is
applied. Where the investment is measured at fair value through profit or loss, the
transaction costs are expensed in profit or loss.
At initial recognition, a financial asset is measured at its fair value, generally being
the consideration given, i.e. the transaction price. At initial recognition, there is a
rebuttable presumption that the transaction price is equal to the fair value. The
measurement models chosen to account for an investment in a subsidiary lead to
the following accounting treatments on initial recognition:
l Financial assets at fair value through profit or loss
The investment is recognised at cost, being the fair value, excluding transaction
costs, which are expensed.
l Financial asset at fair value through other comprehensive income
The investment is recognised at cost, being the fair value and transaction costs
are capitalised to the investment.
l Financial assets that do not have quoted prices in an active market and whose
fair value cannot be reliably measured.
This type of investment is carried at cost. Initial transaction costs are capitalised
to the investment.
29
Chapter 1
Comment
IFRS 3 Business Combinations determines that acquisition-related costs are expensed
in the periods in which they are incurred. (Refer Ex 2.13.) Acquisition-related costs are
defined as costs the acquirer incurs to effect a business combination. Those costs
include finder’s fees; advisory, legal, accounting, valuation and other professional or
consulting fees; general administrative costs, including the costs of maintaining an
internal acquisition department (IFRS 3.53). It is clear that this definition is much broader
than the one for transaction costs on financial instruments. (Also see chapter 2.10 of this
work.)
The authors are of the opinion that the transaction costs on financial instruments should
be capitalised against the investment in the separate financial statements of the parent
as discussed above. However, due to the fact that these and other costs are expensed
in the consolidated financial statements, as required by IFRS 3, the amount should be
eliminated against the investment in the subsidiary and transferred to profit or loss on a
pro forma basis on consolidation. This aspect is addressed in detail in chapter 5 (5.3) of
this work as well as chapter 2 (2.10).
6
7
30
The subsequent measurement of the financial assets is as follows:
l Financial assets at fair value through profit or loss
After initial recognition, the financial asset is remeasured at fair value, and any
gain or loss due to changes in the fair value is recognised directly in profit or
loss.
l Financial assets at fair value through other comprehensive income
After initial recognition, the financial asset is remeasured at fair value and any
gain or loss due to changes in the fair value is recognised in other
comprehensive income and accumulated in equity through the mark-to-market
reserve.
l Financial assets that do not have quoted prices in an active market and whose
fair value cannot be reliably measured
After initial recognition, such an investment is retained at its initial cost price,
unless there are indications that the financial asset may be impaired. If there are
indications of impairment (IAS 36.12), the recoverable amount, which will be the
fair value less costs to sell, has to be calculated. The latter is defined in IAS 36
Impairment of Assets as the amount obtainable from the sale of an asset in an
arm’s-length transaction between knowledgeable, willing parties, less the costs
of disposal (.6). The investment in the subsidiary is impaired if the carrying
amount (cost price) exceeds the recoverable amount. The financial asset will be
written down to its recoverable amount, and an impairment loss will be
recognised immediately in profit or loss (IAS 36.59 & .60).
An entity shall recognise a dividend from a subsidiary in profit or loss in its separate
financial statements when its right to receive the dividend is established (IAS 27.12).
A group of entities and its financial statements: theory and background
8
Assume the following information to illustrate the different ways in which
investments in subsidiaries may be accounted for in the separate financial
statements of the parent:
A Ltd purchased 10 000 (of a total of 15 000) shares in B Ltd at R15 000 on
1 January 20.18 and paid for them in cash. Transaction costs amount to R500. On
31 January, a dividend of 7 cents per share is paid in respect of the reporting period
ended 31 December 20.17. On 1 August 20.18, B Ltd pays an interim dividend of
8 cents per share. At the end of the reporting period the share trades at R1,80 each.
Ignore tax implications for the purpose of this example.
Example 1.9
Financial asset at fair value through profit or loss
On acquisition of the investment:
Dr
R
Investment in B Ltd (Statement of financial position (SFP))
Transaction costs (Profit or loss (P/L))
Bank
Recognition of investment in B Ltd at fair value
Cr
R
15 000
500
15 500
On receipt of the dividends by A Ltd:
Dividend paid on 31 January 20.18 in respect of previous reporting period:
Dr
R
Bank (SFP)
Dividend received (P/L)
Recognition of dividend received from B Ltd on
31 January 20.18
Cr
R
700
700
Comment
An entity recognises a dividend from a subsidiary in profit or loss in its separate financial
statements when its right to receive the dividend is established. Even though the
dividend relates to the previous reporting period when A Ltd had no interest in B Ltd,
A Ltd’s right to receive the dividend was established on 31 January 20.18 (post
acquisition) and is therefore recognised in profit or loss for the reporting period ended
31 December 20.18.
Dividend paid on 31 August 20.18:
Dr
R
Bank (SFP)
Dividend received (P/L)
Recognition of dividend received from B Ltd
Cr
R
800
800
31
Chapter 1
On remeasurement at the end of the reporting period:
Dr
R
Investment in B Ltd (SFP)
Remeasurement gain (P/L)
Recognition of fair value adjustment at the end of the
reporting period ((10 000 × R1,80) – R15 000)
Example 1.10
Cr
R
3 000
3 000
Financial asset with fair value adjustments in other
comprehensive income
On acquisition of the investment:
Dr
R
Investment in B Ltd (SFP) (15 000 + 500)
Bank (SFP)
Recognition of investment in B Ltd at fair value plus
transaction costs
Cr
R
15 500
15 500
On receipt of the dividends by A Ltd:
Dividend paid on 31 January 20.18 in respect of previous reporting period:
Dr
R
Bank (SFP)
Dividend received (P/L)
Recognition of dividend received from B Ltd on
31 January 20.18
Cr
R
700
700
Comment
The same principle applies as in example 1.11.
Dividend paid on 31 August 20.18:
Dr
R
Bank (SFP)
Dividend received (P/L)
Recognition of dividend received from B Ltd
32
Cr
R
800
800
A group of entities and its financial statements: theory and background
On remeasurement at the end of the reporting period:
Dr
R
Investment in B Ltd (SFP)
Mark-to-market reserve (OCI)
Recognition of fair value adjustment at the end of the
reporting period ((10 000 × R1,80) – R15 500)
Example 1.11
Cr
R
2 500
2 500
Cost method
On acquisition of the investment:
Dr
R
Investment in B Ltd (15 000 + 500)
Bank (SFP)
Recognition of investment in B Ltd at fair value plus
transaction costs
Cr
R
15 500
15 500
On receipt of the dividends by A Ltd:
Dividend paid on 31 January 20.18 in respect of previous reporting period:
Dr
R
Bank (SFP)
Dividend received (P/L)
Recognition of dividend received from B Ltd on
31 January 20.18
Cr
R
700
700
Comment
The same principle applies as in examples 1.11 and 1.12.
Dividend paid on 31 August 20.18:
Dr
R
Bank (SFP)
Dividend received (P/L)
Recognition of dividend received from B Ltd
Cr
R
800
800
33
Chapter 1
On remeasurement at the end of the reporting period:
Not applicable; the investment is carried at cost as a fair value cannot be measured
reliably at every reporting date. The value of the investment will only be adjusted if
indications of impairment are found, and the carrying amount of the investment exceeds
the recoverable amount, i.e. the fair value less costs to sell. In such a case the carrying
amount (cost price) of the investment is written down to the recoverable amount, by
recognising an impairment loss.
34
2
IFRS 3 Business combinations
Introduction
2.1
2.2
2.3
Overview of the topic ...............................................................................
Scope of IFRS 3 ......................................................................................
Example 2.1:
Entities under common control .....................................
Identifying a business combination ..........................................................
Example 2.2:
Accounting for a transaction as an asset acquisition ...
Example 2.3:
Accounting for a transaction as a business
combination ..................................................................
37
39
39
39
40
40
The acquisition method
2.4
2.5
2.6
2.7
2.8
2.9
2.10
Identifying the acquirer ............................................................................
Example 2.4:
Identifying the acquirer ............................................
Determining the acquisition date .............................................................
Example 2.5:
The acquisition date .....................................................
Recognising and measuring the identifiable assets acquired, the
liabilities assumed and any non-controlling interests in the acquiree ......
Recognising and measuring goodwill or a gain from a bargain
purchase ..................................................................................................
Example 2.6:
Goodwill – Non-controlling interests measured
at their proportionate share of the acquiree’s
identifiable net assets ...................................................
Example 2.7:
Goodwill – Non-controlling interests measured
at fair value ...................................................................
Example 2.8:
Gain from a bargain purchase ......................................
Example 2.9
Consideration for business combination ......................
Example 2.10: Contingent consideration – Financial liability ...............
Example 2.11: Contingent consideration – Financial liability
with shares issued ........................................................
Additional guidance for applying the acquisition method to particular
types of business combinations ...............................................................
Example 2.12: Business combination achieved in stages
(10%–60%) ..................................................................
Measurement period ................................................................................
Determining what is part of the business combination transaction ..........
Example 2.13: Acquisition-related costs ..............................................
42
44
44
44
45
46
46
47
48
48
50
50
51
52
53
54
56
35
Chapter 2
Subsequent measurement and accounting
2.11
2.12
2.13
2.14
Reacquired rights .....................................................................................
Contingent liabilities .................................................................................
Indemnification assets .............................................................................
Contingent consideration .........................................................................
Example 2.14: Contingent consideration classified as equity ..............
56
57
57
57
58
Business combinations and consolidated financial statements
2.15
2.16
2.17
Summary of IFRS 3 for the direct acquisition of net assets
as a business combination ......................................................................
Example 2.15: Acquiring the assets and liabilities of another entity
in terms of a business combination ..............................
The link between IFRS 3 and consolidated financial
statements ...............................................................................................
Example 2.16: Acquiring an interest in an entity’s equity shares
in terms of a business combination ..............................
Disclosure ................................................................................................
Example 2.17: IFRS 3 disclosure .................................................................
59
60
63
67
70
74
Self-assessment question
Question 2.1 ..........................................................................................................
36
76
IFRS 3 Business combinations
Introduction
2.1 Overview of the topic
The objective of IFRS 3 Business Combinations is to enhance the relevance,
reliability and comparability of information reported by an entity regarding business
combinations. It does that by applying the acquisition method for accounting for
business combinations and prescribing information that should be disclosed in the
financial statements. IFRS 3 establishes important principles for how the acquirer
recognises and measures the following in its records:
l the assets acquired and liabilities assumed;
l the non-controlling interests in the acquiree;
l the goodwill acquired in a business combination or the gain from a bargain
purchase; and
l adequate disclosure of information relating to the business combination, in order to
provide useful information for decision-making to the user of the financial
statements.
In terms of IFRS 3, each identifiable asset and liability should be measured at its
acquisition-date fair value. The non-controlling interests in an acquiree are measured
either at fair value or as the non-controlling interests’ proportionate share of the
acquiree’s identifiable net assets.
Once the acquirer has identified the identifiable assets and liabilities and the noncontrolling interests in the acquiree, any difference that exists between:
(a) the aggregate (sum) of the consideration transferred (the latter being measured at
fair value), any non-controlling interests in the acquiree and the acquisition-date fair
values of any previously held equity interest in the acquiree; and
(b) the identifiable net assets acquired,
should be identified. If such a difference is an excess of (a) over (b), the amount of the
difference will be recognised as goodwill. If the difference is not an excess but a
shortfall of (a) over (b), the acquirer has made a gain from a bargain purchase, and that
gain will then be recognised in profit or loss immediately.
In this chapter the basic principles of IFRS 3 Business Combinations are discussed,
while more advanced aspects relating to the recognition and measurement of the
identifiable assets acquired, the liabilities assumed and any non-controlling interests in
the acquiree, as well as the consideration transferred and measurement period, are
discussed in chapter 9 of Volume 2.
IFRS 3 is applicable to all transactions that meet the definition of a business
combination. The business combination definition comprises mainly two core aspects,
namely “control” and “business”. Chapter 10 of Volume 2 elaborates on the definition of
control and the definition of a business is discussed in chapter 2.3.
37
Chapter 2
IFRS 3 can be summarised as follows:
IFRS 3
Business Combinations
Is IFRS 3
applicable?
2.2
The
acquisition
method
Subsequent
measurement
and accounting
Scope of IFRS 3
2.3
Identifying a business combination
2.4
Identifying the acquirer (IFRS 3.6–7)
2.5
Determining the acquisition date
(IFRS 3.8–9)
2.6
Recognising and measuring the
identifiable assets acquired, liabilities
assumed and non-controlling interests
(IFRS 3.10–13)
2.7
Recognising and measuring goodwill or
a gain from a bargain purchase
(IFRS 3.32–40)
2.8
Additional guidance for applying the
acquisition method to particular types of
business combinations (IFRS 3.41–44)
2.9
Measurement period (IFRS 3.45–50)
2.10 Determining what is part of the business
combination transaction (IFRS 3.51–53)
2.11 Reacquired rights (IFRS 3.55)
2.12 Contingent liabilities (IFRS 3.56)
2.13 Indemnification assets (IFRS 3.57)
2.14 Contingent consideration (IFRS 3.58)
38
IFRS 3 Business combinations
2.2 Scope of IFRS 3
IFRS 3 should only be applied to transactions that meet the definition of a
business combination (refer to chapter 2.3 below). Joint ventures, the acquisition of an
asset (or group of assets) that does not constitute a business and a combination of
entities or businesses under common control (the latter of which refers to a business
combination in which all of the combining entities or businesses are ultimately controlled
by the same party or parties both before and after the business combination, and control
is not transitory) are excluded from the scope of IFRS 3.
Example 2.1
Entities under common control
Assume the following group structure:
60%
40%
P Ltd
S1 Ltd
S2 Ltd
P Ltd controls (as defined in IFRS 10 Consolidated Financial Statements) both
S1 Ltd and S2 Ltd by virtue of an agreement. On 1 January 20.18, S1 Ltd acquired a
55% equity investment in S2 Ltd from the non-controlling interests of S2 Ltd (i.e. not
from P Ltd), resulting in total non-controlling interests of 60% (i.e. 55% held by S2 Ltd
and 5% by other owners) in S2 Ltd. P Ltd still holds the controlling interest of 40% by
virtue of agreement. The new group structure is as follows:
P Ltd
60%
S1 Ltd
40%
55%
S2 Ltd
After S1 Ltd’s acquisition of the shares in S2 Ltd, P Ltd still ultimately controls both
S1 Ltd and S2 Ltd by virtue of agreement. IFRS 3 is therefore not applicable to the
above business combination transaction.
2.3 Identifying a business combination
In identifying whether a business combination is present, the definition of a “business”
as per IFRS 3 should be applied. If the acquisition of assets and assumption of
liabilities do not constitute a business, the transaction shall be accounted for as an
asset acquisition instead of a business combination.
39
Chapter 2
Example 2.2
Accounting for a transaction as an asset acquisition
On 1 January 20.18 P Ltd acquired the following group of assets from S Ltd at a cost of
R4,9 million in a single transaction:
Individual fair values of items (1 January 20.18)
Property, plant and equipment
1 600 000
Intangible assets
750 000
Investment property
2 000 000
Current assets (inventory)
400 000
R4 750 000
The cost price of the assets was paid in cash by P Ltd on 1 January 20.18.
The transaction was considered by P Ltd and it was concluded that it does not meet the
definition of a business as defined in IFRS 3 Business Combinations. Goodwill or a
gain from a bargain purchase can therefore not be recognised at the date of acquisition.
The purchase price of R4,9 million is allocated to the individual assets based on their
relative fair values as at 1 January 20.18. The following journal entry will be recognised
in the accounting records of P Ltd on 1 January 20.18:
Dr
R
1 January 20.18
Property, plant and equipment (SFP)
(1 600 000/4 750 000 × 4 900 000)
Intangible assets (SFP) (750 000/4 750 000 × 4 900 000)
Investment property (SFP) (2 000 000/4 750 000 × 4 900 000)
Inventory (SFP) (400 000/4 750 000 × 4 900 000)
Bank (SFP)
Recognising an asset acquisition at the acquisition date
Example 2.3
1 651 000
774 000
2 063 000
412 000
Cr
R
4 900 000
Accounting for a transaction as a business combination
Assume the same information as in example 2.2. Also, assume that after consideration
of the transaction by P Ltd, it was concluded that the transaction meets the definition of
a business as defined in IFRS 3 Business Combinations. It is therefore possible that
goodwill or a gain from a bargain purchase can arise at the acquisition date.
40
IFRS 3 Business combinations
The journal entry to recognise the business combination transaction on 1 January 20.18
would be as follows:
Dr
R
1 January 20.18
Property, plant and equipment (SFP)
Intangible assets (SFP)
Investment property (SFP)
Inventory (SFP)
Goodwill (SFP) (balancing)
Bank (SFP)
Recognising a business combination at the acquisition
date
Cr
R
1 600 000*
750 000*
2 000 000*
400 000
150 000
4 900 000
* at fair value
The importance of determining whether assets are acquired or liabilities assumed as a
business is evident from the above examples. IFRS 3 defines a business combination
as a transaction or other event in which an acquirer obtains control of one or more
businesses by (for example) the transfer of cash, incurrence of liabilities, issue of equity
interests or by contract alone.
Various types of business combinations may be identified, including (for example) a
business becoming a subsidiary of the acquirer; the net assets of a business being
legally merged into the acquirer; assets or equity interests being transferred to another
combining entity, and so forth.
There are two crucial aspects in the definition of a business combination, namely
“control” and “business”:
l Control – IFRS 10 (Appendix A) defines when an investor controls an investee, the
investor is exposed, or has rights, to variable returns from its involvement with the
investee and has the ability to affect those returns through its power over the
investee.
l Business – IFRS 3 defines a business as an integrated set of activities and assets
that is capable of being conducted and managed for the purpose of providing a
return in the form of dividends, lower costs or other economic benefits directly to
investors or other owners, members or participants. A business consists of inputs
and processes applied to those inputs that have the ability to create outputs.
Outputs are however not required for an integrated set of activities and assets to
qualify as a business (IFRS 3 (Appendix B, B7–B12)).
Therefore, the acquisition of a subsidiary by an acquirer would constitute a business
combination, as the acquirer gained control over the business of the subsidiary.
There are three main elements in a business:
l input;
l process; and
l output.
INPUT
PROCESS
OUTPUT
41
Chapter 2
Input is any economic resource that creates or has the ability to create outputs when
one or more processes are applied to it. Examples would be non-current assets,
intellectual property, the ability to obtain access to necessary materials or rights, and
employees.
Process is any system, standard, protocol, convention or rules that, when applied to an
input or inputs, creates or has the ability to create outputs. Examples would be strategic
management processes, operational processes and resource management processes.
Accounting, billing, payroll and administrative systems are typically not processes used
to create outputs.
Output is the result of inputs and the processes applied to those inputs that provide or
have the ability to provide a return in the form of dividends, lower costs or other
economic benefits directly to investors or other owners, members or participants.
An integrated set of activities and assets in the development stage might not have
outputs. If not, the acquirer should consider other factors to determine whether the set
is a business as defined. Those factors include whether the set:
l has begun principal activities;
l has employees, intellectual property and other inputs and processes that could be
applied to those inputs;
l is pursuing a plan to produce outputs; and
l will be able to obtain access to customers that will purchase the outputs.
In the absence of evidence to the contrary, a particular set of assets and activities in
which goodwill is present shall be presumed to be a business. However, a business
need not have goodwill.
The acquisition method
The entity shall account for each business combination by applying the “acquisition
method” (IFRS 3.4). This method requires four steps to be executed:
l identifying the acquirer (chapter 2.4);
l determining the acquisition date (chapter 2.5);
l recognising and measuring the identifiable assets acquired, the liabilities assumed
and any non-controlling interests in the acquiree (chapter 2.6); and
l recognising and measuring goodwill or a gain from a bargain purchase (chapter 2.7).
2.4 Identifying the acquirer
In terms of IFRS 3, one of the combining entities shall be identified as the acquirer for
each business combination. This is the entity that obtains control of the acquiree.
IFRS 3 requires the guidance supplied in IFRS 10 Consolidated Financial
Statements to be applied when identifying the entity that obtains control.
42
IFRS 3 Business combinations
As discussed in chapter 1, according to IFRS 10.6 an investor controls an investee
when the investor is exposed, or has rights, to variable returns from its involvement with
the investee and has the ability to affect those returns through its power over the
investee. The elements of control as discussed in chapter 1.4 are important in
determining whether a parent controls another entity.
The existence of potential voting rights should also be considered when determining
control. If the holder of those potential voting rights currently has the practical ability to
exercise the right, it will influence the determination of control. Potential voting rights
are addressed in chapter 10 of Volume 2 in more detail.
If the application of IFRS 10 does not clearly indicate which of the combining entities is
the acquirer Appendix B Application guidance to IFRS 3 should be used to
determine this fact. The principles contained in the Appendix can be summarised as
follows:
l If the business combination is primarily effected through the transfer of cash or
other assets or the incurrence of liabilities, the acquirer is the combining entity that
transfers the cash or other assets or incurs the liabilities.
l If the business combination is primarily effected through the transfer of equity
interests, the acquirer is usually the entity that issues the equity instruments.
However, there is an exception to this principle commonly referred to as “reverse
acquisitions”, where the issuing entity is the acquiree and not the acquirer (IFRS 3
Appendix B B19–B27). Other pertinent facts and circumstances should also be
considered in identifying the acquirer in a business combination effected through
the issue of equity interests, including:
• the relative voting rights in the combined entity after the business combination;
• the existence of a large non-controlling interest in the combined entity if no other
owner or organised group of owners has a significant voting interest;
• the composition of the governing body of the combined entity;
• the composition of the senior management of the combined entity; and
• the terms of the exchange of equity interests.
l The acquirer is usually the combining entity whose relative size (measured for
example in assets, revenues or profit) is significantly greater than that of the other
combining entity or entities.
l In a business combination consisting of more than two combining entities,
determining the acquirer shall include a consideration of which of the entities
initiated the combination, as well as the relative size of the combining entities.
l A new entity formed to effect the business combination is not necessarily the
acquirer. If a new entity is formed to issue equity interests to effect a business
combination, one of the combining entities that existed before the business
combination shall be identified as the acquirer. In contrast, a new entity that
transfers cash or other assets or incurs liabilities as consideration may be the
acquirer.
43
Chapter 2
Example 2.4
Identifying the acquirer
During 20.18 P Ltd entered into the following transactions:
l On 1 January 20.18 P Ltd acquired the majority of the shares (voting rights) in
S Ltd. P Ltd paid the consideration to the former owners of S Ltd in cash. P Ltd is
the acquirer as P Ltd obtained control of S Ltd. P Ltd is exposed to variable returns
(dividends) from its involvement with S Ltd and has the ability to affect those
returns through its power (majority voting rights) over S Ltd.
l On 15 April 20.18 P Ltd (an existing investor in S Ltd) signed an agreement with
other owners of S Ltd in terms of which P Ltd can now appoint the majority of the
directors of S Ltd. P Ltd is the acquirer as P Ltd obtained control of S Ltd. P Ltd is
exposed to variable returns (dividends) from its involvement with S Ltd and has the
ability to affect those returns through its power (appoint the majority of the
directors) over S Ltd.
l The activities of S Ltd were merged with that of P Ltd on 30 May 20.18. P Ltd
initiated the merge. The net assets of P Ltd are five times that of S Ltd. P Ltd is the
acquirer as P Ltd initiated the business combination and P Ltd is significantly larger
than S Ltd.
2.5 Determining the acquisition date
The acquisition date in a business combination is the date on which the acquirer
obtains control of the acquiree.
In terms of IFRS 3.9, this is normally the date on which the acquirer legally transfers the
consideration, acquires the assets and assumes the liabilities of the acquiree, i.e. the
closing date. It is, however, possible that the acquirer obtains control before or after the
closing date. It is, for example, possible that a written agreement between the parties
stipulates that the acquirer obtain control of the acquiree on a different date than the
closing date. Certain business combinations are also subject to the satisfaction of
certain suspensive legal conditions, for example the successful completion of a due
diligence review or the obtaining of the approval of an authority such as the South
African Competition Board, etc. Where there are conditions that have to be satisfied
before ownership can be transferred, control is not transferred until those conditions
have been met.
Example 2.5
The acquisition date
P Ltd acquired 70% of the shares in S Ltd and paid the consideration on
31 October 20.18. In terms of an agreement with the former owners of S Ltd, P Ltd took
control of the business of S Ltd on 30 September 20.18. From 30 September 20.18 P Ltd
controlled all the assets of S Ltd and assumed responsibility for all the obligations of
S Ltd.
The acquisition date is therefore 30 September 20.18.
44
IFRS 3 Business combinations
2.6 Recognising and measuring the identifiable assets acquired, the
liabilities assumed and any non-controlling interests in the acquiree
1 Recognition principle
IFRS 3.10 determines that the acquirer shall, at the acquisition date, recognise, separately from goodwill, the identifiable assets acquired, the liabilities assumed and any
non-controlling interests in the acquiree.
Recognition conditions
Firstly, to be recognised, the identifiable assets and liabilities acquired and assumed
must meet the definitions of assets and liabilities in the Conceptual Framework. For this
reason, future planned costs to be incurred by the acquirer will not meet the definition of
a liability as at the date of acquisition, as there is no present obligation to incur these
costs at this date. These costs will therefore only be recognised after the date of
acquisition, when the obligation to pay arises.
Secondly, to be recognised, the identifiable assets and liabilities acquired and assumed
must be part of what the acquirer and acquiree exchanged in the business combination
transaction and not the result of separate transactions. Guidance is provided in IFRS 3
as to what forms part of a business combination transaction – this guidance is
addressed in chapter 2.10.
Thirdly, the acquirer’s application of the recognition principle and conditions may result
in recognising some assets and liabilities that the acquiree had previously not
recognised as assets and liabilities in its pre-acquisition financial statements. This
would be the case especially where the acquirer recognises, for example, certain
intangible assets (e.g. brand names, customer relationships, etc.) at the acquisition
date where these items were not recognised as intangible assets by the acquiree as
they were internally generated by the acquiree. IFRS 3 has introduced some new
principles, especially in respect of intangible assets in terms of IAS 38 Intangible
Assets. These are dealt with in chapter 9 of Volume 2 in detail.
Classifying or designating identifiable assets acquired and liabilities assumed in
a business combination
The acquirer shall classify or designate at the acquisition date the identifiable assets
acquired and liabilities assumed to facilitate the subsequent application of other IFRSs.
These designations or classifications shall be made on the basis of contractual terms,
economic conditions, the acquirer’s operating or accounting policies and other pertinent
conditions as they exist at the acquisition date.
Two exceptions to this rule exist:
l the classification of a lease contract as either operating lease or finance lease in
accordance with IAS 17 Leases; and
l classification of a contract as an insurance contract in accordance with IFRS 4
Insurance Contracts.
The above contracts will be classified on the basis of the contractual terms and other
factors at the inception of the contract (or, if the terms of the contract have been
modified in a manner that would change the classification of the contract, at the date of
the modification, which may be the acquisition date).
45
Chapter 2
2 Measurement principle
The acquirer shall measure the identifiable assets acquired and liabilities assumed at
their acquisition-date fair values. The effect of any remeasurement of assets and
liabilities to fair value at the acquisition date should be taken into account in the
consolidated financial statements. For example, if machinery is remeasured to its fair
value at acquisition date, the depreciation on the machinery should be based on the fair
value in the consolidated financial statements (also refer to the examples in chapter 6.3
to 6.6).
Comment
Chapter 9.3 provides examples relating to this section, and chapter 9.4 explains the
exceptions to the recognition and measurement principles.
2.7 Recognising and measuring goodwill or a gain from a bargain
purchase
Goodwill is an asset representing the future economic benefits arising from other assets
acquired in a business combination that are not individually identified and separately
recognised.
At the acquisition date, goodwill shall be measured as the excess of (a) over (b) below:
(a) the aggregate of:
(i) the consideration transferred, measured in accordance with IFRS 3, which
generally requires acquisition-date fair value;
(ii) the amount of any non-controlling interests in the acquiree measured in
accordance with IFRS 3 (i.e. either at fair value or at the non-controlling
interests’ proportionate share of the acquiree’s identifiable net assets); and
(iii) in a business combination achieved in stages, the acquisition-date fair value
of the acquirer’s previously held equity interest in the acquiree.
(b) the net of the acquisition-date amounts of the identifiable assets acquired and the
liabilities assumed measured in accordance with IFRS 3.
Example 2.6
Goodwill – Non-controlling interests measured at their
proportionate share of the acquiree’s identifiable net assets
On 1 January 20.19, P Ltd acquired a 75% interest in S Ltd. From that date P Ltd had
control over S Ltd as per the definition of control in terms of IFRS 10. The fair value of
the consideration was R1,4 million. The fair value of the identifiable net assets of S Ltd
amounted to R1,65 million at the acquisition date. The non-controlling interests are
measured at their proportionate share of the acquiree’s identifiable net assets at the
acquisition date.
46
IFRS 3 Business combinations
Goodwill is calculated as follows:
Consideration transferred
Non-controlling interests (25% × R1,65 million)
Fair value of previously held equity interest (n/a)
1 400 000
412 500
–
Less: Net identifiable assets acquired
1 812 500
(1 650 000)
Goodwill (SFP)
R162 500
Example 2.7
Goodwill – Non-controlling interests measured at fair value
On 1 January 20.19, P Ltd acquired a 75% interest in S Ltd. From that date P Ltd had
control over S Ltd as per the definition of control in terms of IFRS 10. The fair value of
the consideration was R1,4 million. The fair value of the identifiable net assets of S Ltd
amounted to R1,65 million at the acquisition date. The non-controlling interests are
measured at fair value of R430 000 at the acquisition date.
Goodwill is calculated as follows:
Consideration transferred
1 400 000
Non-controlling interests at fair value
430 000
Fair value of previously held equity interest (n/a)
–
Less: Net identifiable assets acquired
1 830 000
(1 650 000)
Goodwill (SFP)
R180 000
It will occasionally happen that the acquirer will make a bargain purchase. The gain is
recognised in profit or loss of the combined entity on acquisition date and is attributable
to the acquirer. However, before such a gain is recognised on a bargain purchase, the
acquirer shall:
l reassess whether it has correctly identified all of the assets acquired and liabilities
assumed and shall then recognise the additional assets or liabilities identified in
such an assessment;
l review the procedures used to measure the amounts that IFRS 3 requires to be
recognised at the acquisition date for all of the following:
(i) the identifiable assets acquired and liabilities assumed;
(ii) the non-controlling interests in the acquiree;
(iii) for a business combination achieved in stages, the acquirer’s previously held
equity interest in the acquiree; and
(iv) the consideration transferred.
47
Chapter 2
Example 2.8
Gain from a bargain purchase
On 1 January 20.19, P Ltd acquired a 75% interest in S Ltd. From that date P Ltd had
control over S Ltd as per the definition of control in terms of IFRS 10. The fair value of
the consideration was R1,1 million. The fair value of the identifiable net assets of S Ltd
amounted to R1,6 million at the acquisition date. The non-controlling interests are
measured at the proportionate share of the acquiree’s identifiable net assets at the
acquisition date.
P Ltd reassesses its identification of assets and liabilities of S Ltd and reviews its
procedures to recognise and measure all the items required by IFRS 3. No adjustments
are made.
The gain from the bargain purchase is calculated as follows:
Consideration transferred
1 100 000
Non-controlling interests (25% × R1,6 million)
400 000
Less: Net identifiable assets acquired
1 500 000
(1 600 000)
Gain from bargain purchase (P/L)
R100 000
1 Consideration transferred
The consideration transferred in a business combination shall be measured at fair
value, i.e. the sum of the acquisition-date fair values of:
l the assets transferred by the acquirer;
l the liabilities incurred by the acquirer to former owners of the acquiree; and
l equity interests issued by the acquirer.
It should be noted here that any portion of the acquirer’s share-based payment awards
exchanged for awards held by the acquiree’s employees that are included in the
consideration transferred in the business combination, should be measured in terms of
the “market-based measure” of the award instead of at fair value.
If the carrying amounts of assets or liabilities transferred by the acquirer in the business
combination differ from their acquisition-date fair value, these assets and/or liabilities
should be remeasured to their acquisition-date fair values by the acquirer, and the
resulting gains or losses will be recognised by the acquirer in profit or loss in the
statement of profit or loss and other comprehensive income.
Example 2.9
Consideration for business combination
On 1 January 20.19 P Ltd acquired a 90% interest in S Ltd. P Ltd acquired the shares
from Mr Controlall, the former owner. From that date P Ltd had control over S Ltd as
per the definition of control in terms of IFRS 10. The consideration is to be settled as
follows:
l A cash payment of R800 000.
l Transfer of a vehicle to Mr Controlall. The fair value of the vehicle is R75 000 and
the carrying amount in the records of P Ltd was R65 000.
48
IFRS 3 Business combinations
l
l
P Ltd will settle an outstanding liability of R40 000 on behalf of Mr Controlall.
P Ltd will issue 3 000 shares to Mr Controlall. P Ltd’s shares had a market price of
R10 per share on 1 January 20.19 and R11 per share at the end of the financial
period.
The total consideration is therefore R945 000 (R800 000 + R75 000 + R40 000 +
R30 000 (3 000 × R10)). P Ltd shall account for the transaction in its own records as
follows:
Dr
R
Cr
R
1 January 20.19
Investment in S Ltd (SFP)
Bank (SFP)
Property, plant and equipment (SFP) (carrying amount)
Gain on transfer of vehicle (P/L)
Sundry liabilities (SFP)
Share capital (SCE)
Recognition of the consideration for the business
combination of S Ltd
945 000
800 000
65 000
10 000
40 000
30 000
Comment
The consideration transferred should be measured at the acquisition-date fair values.
Where assets or liabilities, whose acquisition-date fair values differ from their carrying
amounts, are transferred directly to the acquiree (instead of to the former owners of the
acquiree) as part of the consideration transferred, these assets and/or liabilities shall be
measured not at their acquisition-date fair values, but at their acquisition-date carrying
amounts, and no resulting gains or losses will be recognised on them by the acquirer at
the acquisition date. This is because the acquirer controls the assets and/or liabilities
before and after the business combination.
2 Contingent consideration
The acquirer may agree to transfer additional equity interests, cash, or other assets to
the former owners of the acquiree after the acquisition date, provided that specified
events occur, for example if certain profit levels are reached – this is referred to as
contingent consideration. Any asset or liability that arises from a contingent
consideration agreement will be included in the consideration transferred by the
acquirer in the business combination. The contingent consideration shall be measured
at the acquisition-date fair value thereof as part of the consideration transferred by the
acquirer to obtain the acquiree. The obligation to pay the contingent consideration shall
be classified in terms of IAS 32 Financial Instruments: Presentation as either an
equity instrument or as a financial liability. An asset will also be recognised by the
acquirer for the right it has to the return of previously transferred consideration if certain
49
Chapter 2
specified conditions are met. The subsequent measurement and accounting of
contingent considerations is addressed in chapter 2.14.
Example 2.10
Contingent consideration – Financial liability
On 1 January 20.19 P Ltd acquired a 70% interest in S Ltd for R1,3 million from a
former owner, payable in cash. From that date P Ltd had control over S Ltd as per the
definition of control in terms of IFRS 10. In terms of the agreement with the seller, P Ltd
will have to pay an extra R200 000 to the seller if the sales of S Ltd increase by more
than 15% in total over the next three financial periods. On 1 January 20.19 both P Ltd
and the seller were confident that the 15% increase will indeed take place. The fair
value of the financial liability for the contingent payment is estimated at R110 000.
By 31 December 20.19, the sales of S Ltd declined somewhat due to an adverse
economic climate. P Ltd now estimates that the 15% target will probably not be met at
the end of the third financial period. The fair value of the financial liability for the
contingent payment is now estimated at R30 000.
P Ltd shall account for the transaction in its own records as follows:
Dr
R
Cr
R
1 January 20.19
Investment in S Ltd (SFP)
Bank (SFP)
Financial liability at fair value through profit or loss (SFP)
Recognition of the consideration and contingent
consideration for the business combination of S Ltd
1 410 000
Dr
R
1 300 000
110 000
Cr
R
31 December 20.19
Financial liability at fair value through profit or loss (SFP)
(110 000 – 30 000)
Fair value adjustment (P/L)
Recognition of the fair value adjustment on the liability
for the contingent consideration for the business
combination of S Ltd
Example 2.11
80 000
80 000
Contingent consideration – Financial liability with shares
issued
On 1 January 20.19 P Ltd acquired a 70% interest in S Ltd for R1,3 million from a
former owner. From that date P Ltd had control over S Ltd as per the definition of
control in terms of IFRS 10. P Ltd shall settle the consideration by issuing 100 000 of
50
IFRS 3 Business combinations
P Ltd’s shares to the former owner at market price of R13 per share. P Ltd and the
seller agreed that P Ltd would issue more shares to the seller if the market price of
the P Ltd’s shares declined below R13 per share by 28 February 20.19. On
28 February 20.19 P Ltd’s shares were trading at R10 per share, and P Ltd issued
130 000 shares to the seller.
The fair value of the total consideration for the acquisition of S Ltd is R1,3 million on
1 January 20.19 and is classified as a financial liability (fixed amount for variable
number of shares). By 28 February 20.19 the fair value of the consideration had not
changed, but P Ltd issued more shares to the seller to compensate for the decline in
the individual share price. Details of the consideration are therefore as follows:
On 1 January 20.19: 100 000 shares at R13 each = R1,3 million
On 28 February 20.19: 130 000 shares at R10 each = R1,3 million
P Ltd shall account for the transaction in its own records as follows:
Dr
R
Cr
R
1 January 20.19
Investment in S Ltd (SFP)
Financial liability (SFP)
Financial liability (SFP)
Share capital (SCE) (100 000 × R13)
Recognition of the consideration and issue of shares
for the business combination of S Ltd
1 300 000
1 300 000
1 300 000
1 300 000
2.8 Additional guidance for applying the acquisition method to particular
types of business combinations
Two specific areas are elaborated upon by IFRS 3:
l a business combination achieved in stages; and
l a business combination achieved without the transfer of consideration.
1 Business combinations achieved in stages (refer to examples in chapter 13)
Also referred to as a “step acquisition”, this type of transaction exists where the acquirer
held non-controlling interests in the acquiree before obtaining a controlling interest in
that acquiree. The principle identified is that the acquirer shall remeasure its previously
held equity interest in the acquiree at its acquisition-date fair value in a business
combination achieved in stages, and recognise the resulting gain or loss arising from
such remeasurement, in profit or loss or other comprehensive income, as appropriate.
It is possible that the acquirer may have recognised changes in the fair value of the
previously held equity interests in the acquiree in other comprehensive income, for
example, fair value adjustments of the investment in the acquiree, before the controlling
interest was obtained (e.g., the investment held before acquisition was regarded as a
financial asset measured in the acquirer’s financial statements at fair value through
51
Chapter 2
other comprehensive income in terms of IFRS 9 Financial Instruments). Such fair value
adjustments recognised in other comprehensive income should be derecognised on the
same basis as if the acquirer had disposed directly of the previously held equity interest
(i.e. the cumulative fair value adjustments accumulated in other comprehensive income
may be reclassified to retained earnings on the date that control is obtained).
Example 2.12
Business combination achieved in stages (10%–60%)
The issued share capital of S Ltd consists of 100 000 shares. On 1 January 20.18 P Ltd
acquired 10 000 shares in S Ltd at fair value for R100 000 (transaction costs are
immaterial). The investment was classified as a financial asset subsequently measured
at fair value through other comprehensive income (OCI). On 31 December 20.18 the
fair value of the investment was R130 000. On 1 January 20.19 P Ltd acquired 50 000
shares in S Ltd at market value of R13 per share (transaction costs are immaterial).
From that date P Ltd had control over S Ltd as per the definition of control in terms of
IFRS 10.
Comment
The acquisition date is 1 January 20.19 when P Ltd gained control over S Ltd through its
60% interest (see chapter 2.5).
The fair value of the consideration is calculated as follows:
Fair value of consideration transferred (50 000 shares × R13)
Fair value of the previously held equity interest
650 000
130 000
Total consideration for the business combination
R780 000
P Ltd shall account for the transaction in its own records as follows:
Dr
R
Cr
R
1 January 20.18
Financial asset (SFP)
Bank (SFP)
Recognition of the investment made in S Ltd
100 000
Dr
R
100 000
Cr
R
31 December 20.18
Financial asset (SFP) (130 000 – 100 000)
Mark-to-market reserve (OCI)
Recognition of the fair value adjustment on the
investment
52
30 000
30 000
IFRS 3 Business combinations
Dr
R
Cr
R
1 January 20.19
J1
Investment in S Ltd (SFP)
Bank (SFP) (50 000 × R13)
Financial asset (SFP)
Recognition of the consideration for the
business combination of S Ltd
780 000
J2
Mark-to-market reserve (SCE)
Retained earnings (SCE)
Reclassification of fair value adjustments within equity
30 000
650 000
130 000
30 000
2 Business combinations achieved without the transfer of consideration
The acquisition method as discussed should still be applied to such business
combinations. Examples of such circumstances are:
l The acquiree repurchases its own shares to such an extent that an existing
investor (the acquirer) obtains control.
l Minority veto rights lapse that previously kept the acquirer from controlling an
acquiree in which the acquirer held the majority voting rights.
l The acquirer and acquiree agree to combine their businesses by contract alone.
There is no consideration transferred and no equity interest is held by the acquirer
in the acquiree before or after the business combination. This would be, for
example, with the purpose of forming a dual-listed corporation.
Comment
In the latter example, the acquirer shall attribute the full net assets (i.e. equity interests in)
of the acquiree to the non-controlling interests in the post-combination consolidated
financial statements of the acquirer.
2.9 Measurement period
In the sections above, it was indicated that the acquirer needs to identify and recognise
all the assets and liabilities of the acquiree. Furthermore, the fair value of the various
assets, liabilities, non-controlling interests, consideration, etc., needs to be obtained.
From a practical point of view, one should bear in mind that all these requirements are
very time-consuming. The measurement period in IFRS 3 therefore allows the acquirer
some leeway to finalise all the required procedures to complete the accounting of the
business combination properly.
If the initial accounting for the business combination is incomplete at the end of the
reporting period in which the combination transaction occurs, the acquirer shall report
provisional amounts in its financial statements for the items for which the accounting is
incomplete.
During the measurement period, the acquirer shall retrospectively adjust the provisional
amounts recognised at the acquisition date to reflect new information obtained about
facts and circumstances that existed at the acquisition date that, if known, would have
affected the measurement of the amounts recognised at the acquisition date.
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Chapter 2
During the measurement period, the acquirer shall also recognise additional assets and
liabilities if new information is obtained about facts and circumstances that existed at
the acquisition date that, if known, would have resulted in the recognition of those
assets and liabilities at the acquisition date.
The measurement period ends as soon as the acquirer receives the information it was
seeking about facts and circumstances that existed at the acquisition date or learns that
more information is not obtainable. However, the measurement period shall not exceed
one year from the acquisition date.
The effect of the above principle is that goodwill is subsequently adjusted for such
changes due to the fact that the changes resulting from new information are processed
retrospectively, as if the information had existed at the acquisition date. This results in a
fairer presentation of the goodwill (or gain from a bargain purchase) at the acquisition
date.
It is very important to note that not all information obtained in the measurement period
will result in changes to the provisional amounts at the acquisition date. The acquirer
should apply professional judgement to ensure that the new information reflects the
circumstances that existed at the acquisition date and not those that arose thereafter.
The shorter the time period between the estimate of the provisional amount at the
acquisition date and the receipt of additional information about the provisional amount
in the measurement period, the more likely that the new information relates to a
circumstance that existed at the acquisition date. The opposite is also true.
After the measurement period ends, the acquirer shall revise the accounting for a
business combination only to correct an error in accordance with IAS 8 Accounting
Policies, Changes in Accounting Estimates and Errors.
Comment
Chapter 9 contains examples relating to the measurement period (examples 9.22–9.23).
2.10 Determining what is part of the business combination transaction
In certain circumstances, the acquirer and the acquiree may have had a pre-existing
relationship or other arrangement before negotiations for the business combination
began, and may even enter into an arrangement during the negotiations that is
separate from the business combination. The acquirer shall identify any amounts that
are not part of what the acquirer and the acquiree exchanged in the business
combination, i.e. amounts that are not part of the exchange for the acquiree.
The acquirer shall recognise, as part of applying the acquisition method, only the
consideration transferred for the acquiree and only the assets acquired and liabilities
assumed in the exchange for the acquiree. Separate transactions shall be accounted
for separately in terms of the relevant IFRSs.
The following factors should be considered by the acquirer to determine whether a
specific transaction forms part of the business combination:
l The reasons for the transaction. A transaction entered into by or primarily for the
benefit of the acquirer or the new combined entity is likely to be such a separate
54
IFRS 3 Business combinations
transaction, which should not be included in the application of the acquisition
method.
l Who initiated the transaction? A transaction initiated by the acquirer is more likely
to be for the acquirer’s benefit and therefore more likely to be a separate
transaction, whereas a transaction initiated by the acquiree will be more likely to
the benefit of the acquiree or its former owners and will therefore be less likely to
be a separate transaction.
l The timing of the transaction. A transaction between the acquirer and acquiree that
takes place during the negotiations of the terms of the business combination may
have been entered into in contemplation of providing benefits to the acquirer or the
combined entity, and if so, is less likely to provide benefit to the acquiree or its
former owners and therefore more likely to be a separate transaction.
It is clear from the above that both parties’ intentions should be investigated in order to
determine which party would benefit from the identified separate transaction. If the
acquiree or its former owners clearly stand to benefit from the additional transaction,
the transaction is very likely to form part of the business combination transaction.
Where the acquiree or its former owners clearly do not stand to benefit from the
additional transaction, such a transaction will very likely qualify as a separate
transaction that should not be included in the business combination transaction at the
acquisition date.
Examples of such separate transactions in IFRS 3 include:
l a transaction that settles pre-existing relationships between the acquirer and
acquiree;
l a transaction that remunerates employees or former owners of the acquiree for
future services; and
l a transaction that reimburses the acquiree or its former owners for the paying of
the acquirer’s acquisition-related costs.
For more guidance refer to IFRS 3.B50–62.
Acquisition-related costs
These are costs the acquirer incurs to effect the business combination. Examples are
advisory, legal, accounting, valuation and other professional and consulting fees and
other general administrative costs. The acquirer shall account for acquisition-related
costs as expenses in the periods in which the costs are incurred and the services are
received. The costs to issue debt or equity securities shall however be recognised in
accordance with IAS 32 Financial Instruments: Presentation and IFRS 9 Financial
Instruments (i.e. these costs shall be set off against the cash flow at initial recognition of
the debt or equity securities). Acquisition-related costs must be distinguished from
transaction costs in terms of IFRS 9 (e.g. brokerage fees), which may be capitalised to
the carrying amount of the investment in the separate records of investor. These
transaction costs will be reclassified to profit or loss in accordance with IFRS 3 in the pro
forma consolidation journals.
55
Chapter 2
Example 2.13
Acquisition-related costs
P Ltd acquired a 90% interest in S Ltd on 1 October 20.18 for R1 million. From that date
P Ltd had control over S Ltd as per the definition of control in terms of IFRS 10. The
consideration was settled as follows:
l cash of R500 000;
l issuing 50 000 shares to the seller to the value of R300 000;
l issuing debentures to the seller to the value of R200 000.
Legal and other costs incurred in relation to the acquisition of the shares in S Ltd
amounted to R63 000. Costs to issue the shares and the debentures amounted to
R45 000 and R32 000 respectively.
P Ltd shall account for the transaction in its own records as follows:
Dr
R
Cr
R
1 October 20.18
J1
Investment in S Ltd (SFP)
Bank (SFP)
Share capital (SCE)
Debentures (financial liability) (SFP)
Recognition of the consideration for the business
combination of S Ltd
1 000 000
J2
Other expense (P/L)
Retained earnings (SCE)
Debentures (financial liability) (SFP)
Bank (SFP)
Recognition of the acquisition-related costs for the
business combination of S Ltd
63 000
45 000
32 000
500 000
300 000
200 000
140 000
Subsequent measurement and accounting
Assets acquired, liabilities assumed or incurred, and equity instruments issued in a
business combination, shall be subsequently measured and accounted for in
accordance with other IFRSs for those items, depending on their nature. There is,
however, specific guidance provided in IFRS 3.54–58 for the following items:
l reacquired rights;
l contingent liabilities;
l indemnification assets; and
l contingent consideration.
2.11 Reacquired rights
The acquirer may reacquire a right that it had previously granted to the acquiree, such
as the right to use one or more of the acquirer’s recognised or unrecognised assets. This
right is recognised separately from goodwill. An example is the acquisition of the right to
use its trade name under a franchise agreement that the acquirer had previously granted
56
IFRS 3 Business combinations
to the acquiree. The right is now reacquired by the acquirer from the acquiree in the
business combination transaction (refer to chapter 9.12 for an example).
A reacquired right which was recognised at the acquisition date as an intangible asset
shall be amortised over the remaining contractual period of the contract in which the right
was granted. An acquirer that subsequently sells a reacquired right to a third party will
include the carrying amount of the intangible asset in determining the loss or gain on the
sale of the reacquired right. This principle is consistent with IAS 38.115A Intangible
Assets.
2.12 Contingent liabilities
After initial recognition and until the liability is settled, cancelled or expires, the acquirer
shall subsequently measure the contingent liability recognised in the business
combination at the higher of:
l
the amount that would be recognised in accordance with IAS 37 Provisions,
Contingent Liabilities and Contingent Assets; and
l
the amount initially recognised, less, if appropriate, the cumulative amount of
income recognised in accordance with the principles of IFRS 15 Revenue from
Contracts with Customers.
However, this requirement does not apply to contracts that are accounted for in
accordance with IFRS 9 Financial Instruments.
2.13 Indemnification assets
The seller in the business combination (i.e. the acquiree) may contractually indemnify
the acquirer for the outcome of a contingency or uncertainty related to all or part of a
specific asset or liability. For example, a seller may guarantee that an acquirer’s liability
will not exceed a specified amount. As a result, the acquirer obtains an indemnification
asset.
At the end of each subsequent reporting period, an indemnification asset that was
recognised at the acquisition date shall be measured on the same basis as the
indemnified asset or liability, subject to any contractual limitations on its amount and
management’s subsequent assessment of the collectability of its amount (where such
indemnification asset is not measured at fair value).
2.14 Contingent consideration
It should be noted that information that becomes available during the measurement
period and relates to circumstances that existed at the acquisition date should be
accounted for in terms of the principles of the measurement period.
Changes resulting from events after the acquisition date, for example, meeting set
targets or reaching a specified share price, are not regarded as measurement period
adjustments. These changes shall be accounted for as follows:
l
Contingent consideration classified as equity shall not be remeasured and its
subsequent settlement shall be accounted for within equity.
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Chapter 2
l
Contingent consideration classified as an asset or liability that:
• is within the scope of IFRS 9 shall be measured at fair value at each reporting
date, with any resulting gain or loss recognised in profit or loss (refer to
example 2.10);
• is not within the scope of IFRS 9 shall be measured at fair value at each
reporting date, with any resulting gain or loss recognised in profit or loss.
Example 2.14
Contingent consideration classified as equity
On 1 April 20.19, P Ltd acquired all of the shares of S Ltd for R700 000 cash. From that
date P Ltd had control over S Ltd as per the definition of control in terms of IFRS 10. In
terms of the agreement with the seller, P Ltd will issue 20 000 shares in P Ltd to the
seller, if the profit of S Ltd for the financial reporting period ended 31 December 20.19 is
more than R1,4 million. On 1 April 20.19 the fair value of the contingent consideration is
estimated at R60 000. The fair value of P Ltd’s shares on 1 April 20.19 is R5 per share.
The contingent consideration is classified as equity, as it will be settled through a fixed
number of shares.
The actual profit of S Ltd for the financial reporting period ended 31 December 20.19
was R1,44 million and P Ltd issued the additional 20 000 shares to the seller. The fair
value of P Ltd’s shares on 31 December 20.19 is R7 per share.
P Ltd shall account for the transaction in its own records as follows:
Dr
R
Cr
R
1 April 20.19
Investment in S Ltd (SFP)
Bank (SFP)
Equity – contingent consideration (SCE)
Recognition of the consideration and contingent
consideration for the business combination of S Ltd
760 000
Dr
R
700 000
60 000
Cr
R
31 December 20.19
Equity – contingent consideration (SFP)
Share capital (SFP)
Recognition of the issuing of additional shares in respect
of the contingent consideration for the business
combination of S Ltd
58
60 000
60 000
IFRS 3 Business combinations
Comment
Even though the total fair value of the 20 000 shares increased from R100 000 (20 000
× R5) to R140 000 (20 000 × R7), the contingent consideration was not remeasured as
it was classified as equity. According to IAS 32.22 changes in the fair value of an equity
instrument are not recognised in the financial statements.
Business combinations and consolidated financial statements
2.15 Summary of IFRS 3 for the direct acquisition of net assets
as a business combination
IFRS 3 Business Combinations prescribes the accounting treatment of all business
combinations, irrespective of how the business combination was effected. A business
combination can be effected through the direct acquisition of assets and takeover of
liabilities of another entity as a business, or through an investment in the equity of another
entity. The latter will lead to the preparation of consolidated financial statements as
discussed in the next section of this chapter.
To summarise the approach required by IFRS 3, the following steps should be followed:
Direct acquisition of assets and/or takeover of liabilities
Step 1: Ensure that the assets acquired and/or liabilities assumed in the transaction
represent a business combination as defined in IFRS 3. Consideration should
be given to the concept of control in this regard as well as the definition of a
business as explained in the chapter.
Step 2: Recognise all identifiable assets acquired and liabilities assumed (as part of
the business combination transaction) according to the principles of IFRS 3 in
the separate financial statements of the acquirer. Here focus should be placed
on identification of assets and liabilities that may not have appeared on the
statement of financial position of the acquiree before the business
combination but that form part of the business combination transaction (e.g.
intangible assets or contingent liabilities, etc.). Care should also be taken not
to recognise assets and liabilities that do not form part of the business
combination, i.e. those transactions that are regarded as separate
transactions.
Step 3: Measure all identifiable assets and liabilities at their respective fair values as
prescribed by IFRS 3 in the separate financial statements of the acquirer. Most
assets and liabilities are measured at their acquisition-date fair values,
although certain exceptions to this measurement rule have been identified by
IFRS 3. Measure all assets and liabilities that cannot be measured reliably at
the acquisition date, at their provisional fair values.
Step 4: Recognise the consideration of the business combination according to the
principles prescribed by IFRS 3 in the separate financial statements of the
acquirer. This would entail ensuring that all components of the consideration
are carefully identified and properly measured at their fair values. Care should
be taken to consider whether a component forms part of the consideration of
59
Chapter 2
Step 5:
Step 6:
Step 7:
Step 8:
the business combination transaction. Furthermore, certain components of the
consideration may be contingent and should be treated in terms of the
principles in IFRS 3.
Identify the difference between the assets and liabilities recognised in step 3
and the consideration of the business combination in step 4 as goodwill where
such a difference represents an excess of step 4 over step 3, or as a gain from
a bargain purchase where such a difference represents an excess of step 3 over
step 4. Also, ensure that a reassessment is performed where a gain from a
bargain purchase is initially identified in order to comply with the requirements
of IFRS 3.36 in this regard. Recognise goodwill or a gain from a bargain
purchase in the separate financial statements of the acquirer.
Assets and liabilities that could not be measured reliably at the acquisition date
were measured at provisional values (refer step 3). These values should now
be adjusted during the measurement period as defined in IFRS 3 in the
separate financial statements of the acquirer. Note that any such relevant
adjustments during the measurement period will be adjusted against the
relevant asset and/or liability and the other leg of the adjustment will be
processed against goodwill or the gain from a bargain purchase in the
separate financial statements of the acquirer.
Any adjustments that are made to the consideration in respect of finalisation of
provisional values during the measurement period are processed against
goodwill or the gain from a bargain purchase in the separate financial
statements of the acquirer.
The business combination transaction should be properly disclosed in terms of
IFRS 3’s requirements in the separate financial statements of the acquirer.
Example 2.15
Acquiring the assets and liabilities of another entity in terms
of a business combination
On 1 January 20.16, P Ltd decided to expand its operations by acquiring all of the
assets and liabilities of S Ltd in a business combination transaction. The assets and
liabilities meet the definition of a “business” in terms of IFRS 3 Business
Combinations. The following information is available:
60
IFRS 3 Business combinations
STATEMENT OF FINANCIAL POSITION OF S LTD AS AT 31 DECEMBER 20.15
Carrying
amounts
ASSETS
Property, plant and equipment
Investment property
Intangible assets (meet IAS 38 requirements)
Goodwill (from previous business combinations)
Trade receivables
Fair
values
950 000 R1 200 000
500 000 R700 000
800 000 R900 000
50 000
?
1 300 000 R1 200 000
Total assets
EQUITY AND LIABILITIES
Share capital
Retained earnings
Long-term loan
Deferred tax
Trade and other payables
R3 600 000
Total equity and liabilities
R3 600 000
1 600 000
500 000
600 000
500 000
400 000
n/a
n/a
R500 000
?
R300 000
The purchase consideration for the assets and liabilities is paid as follows:
l
R2 million is paid in cash immediately to the former owners on 1 January 20.16.
l
100 000 of P Ltd’s shares with a market price on 1 January 20.16 of R10 per share
are issued to the former owners of S Ltd on 1 January 20.16.
l
Land, with a carrying amount of R200 000 and fair value of R600 000, is
transferred to the former owners of S Ltd on 1 January 20.16.
l
A final once-off amount of R1 million is payable on 31 December 20.18 in cash to
the former owners of S Ltd. In terms of the business combination agreement, no
interest is charged on this amount. The market-related interest rate available to
P Ltd for financing purposes is 10% per annum, nominal and pre-tax.
Additional information
S Ltd expensed development costs of R100 000 (fair value on 1 January 20.16:
R200 000) in its separate financial statements. The project meets the definition of an
intangible asset in terms of IAS 38 Intangible Assets but was not recognised by S Ltd
in its separate financial statements, as S Ltd could not previously demonstrate the
probability of future economic benefits in terms of IAS 38.
S Ltd has a contingent liability of R450 000, which is a present obligation for which the
probability criterion was not met in S Ltd’s separate financial statements. At the
acquisition date the fair value of the contingent liability was R300 000. The contingent
liability forms part of the business combination transaction. The amount is not
deductible for taxation purposes.
61
Chapter 2
Certain employees of S Ltd will have to be retrenched due to the business combination,
at a cost of R2 million. This transaction is regarded as a separate transaction in terms
of IFRS 3.
The South African Revenue Service (SARS) accepts all transfer values of assets and
liabilities for taxation purposes.
The following considerations should be taken into account in respect of the
business combination transaction:
Is control obtained?
Yes; P Ltd obtains control over assets and
liabilities of S Ltd through direct acquisition.
Is there an acquirer?
Yes; P Ltd is the party obtaining control.
Is there a business?
Yes; the assets acquired and liabilities
assumed meet the definition of a business in
terms of IFRS 3.
What is the acquisition date?
1 January 20.16
Are there any identifiable assets (e.g.
intangible assets) that do not appear on the
acquiree’s statement of financial position?
Yes; therefore recognise them now in terms
of the principles of IFRS 3 and IAS 38
(section dealing with intangible assets in a
business combination).
Are there any identifiable liabilities and/or
contingent liabilities that do not appear on
the acquiree’s statement of financial
position?
Yes; therefore recognise them now in terms
of the principles of IFRS 3.
Are the assets and liabilities on S Ltd’s
statement of financial position all fairly
valued?
No; therefore make sure to recognise them
at the appropriate fair value in P Ltd’s
records at their acquisition-date fair values.
Are there assets and liabilities on S Ltd’s
statement of financial position that should
not be recognised in terms of IFRSs (e.g.
intangible assets that do not meet the
definition in IAS 38)?
No; the example did not state any such
assets. If it had, these assets/liabilities may
not be recognised in the business
combination.
Are there any assets or liabilities that cannot Yes; existing goodwill is not an identifiable
be taken over in the business combination? intangible asset and deferred tax of the
acquiree may never be taken over in a
business combination.
Are all items of the consideration transferred No; the deferred payment should be
measured at fair value?
measured at the present value thereof,
using a market-related discount rate.
Are there any separate transactions that do
not form part of the business combination
transaction?
62
Yes; these transactions may not be
recognised as part of the acquisition journal
entry and should be accounted for in the
post-acquisition period (employees
retrenched).
IFRS 3 Business combinations
The acquisition journal entry is therefore as follows in the separate financial statements
of P Ltd (there are no consolidated financial statements):
Dr
R
Cr
R
1 January 20.16
J1
Property, plant and equipment (SFP)
Investment property (SFP)
Intangible assets (SFP) (900 000 + 200 000)
Trade receivables (SFP)
Goodwill (SFP) (balancing)
Long-term loan (SFP)
Trade and other payables (SFP)
Contingent liability (SFP)
Bank (SFP)
Share capital (SCE)
Land (SFP)
Profit on transfer of land (P/L)
Trade and other payables (SFP) (at present value)
(FV = 1 million; i = 10%; n = 3) or (1 000 000 / 1.103)
Acquisition journal entry in the separate financial
statements of P Ltd
J2
1 200 000
700 000
1 100 000
1 200 000
1 251 315
500 000
300 000
300 000
2 000 000
1 000 000
200 000
400 000
751 315
Other expenses (P/L)
2 000 000
Provision for retrenchment costs (SFP)
2 000 000
Provide the retrenchment costs that arose as a separate
transaction through the post-acquisition profit or loss
Comment
Deferred tax is not recognised in this example, as SARS accepts all transfer values of
assets and liabilities for taxation purposes. Therefore, the tax bases of assets and
liabilities are equal to the carrying amounts thereof and there are no temporary
differences.
The principles illustrated in this example (except for the deferred tax) apply equally to
business combinations where control is obtained through the acquisition of shares in a
subsidiary (as is discussed in the next section).
2.16 The link between IFRS 3 and consolidated financial statements
It is very important to establish the link between IFRS 3 Business Combinations and
the preparation of consolidated financial statements early on. When reading IFRS 3, it
appears that the standard is only applicable to the direct acquisition of assets and
liabilities that form a business as defined in the standard. This is, however, not the case
as IFRS 3 is applicable to all business combination transactions where control is
obtained over another business, whether that happens through direct acquisition of
assets and takeover of liabilities of another entity (as was illustrated in the previous
example), or through investment in the equity of another entity. The latter would
represent an ownership interest that is obtained in another entity where the acquirer
obtains control over the voting rights of that entity, as discussed earlier in this chapter.
63
Chapter 2
It should always be borne in mind that IFRS 3 has, as one of its main objectives, the fair
presentation of goodwill or a gain from a bargain purchase arising in a business
combination transaction. It is therefore of the utmost importance that the principles of
the standard be applied in all such relevant transactions.
To summarise the approach required by IFRS 3, the following steps should be followed:
Indirect acquisition of assets and/or assumption of liabilities through an equity
investment in the acquiree
In the separate financial statements of the acquirer
Step 1: Recognise the consideration paid for the investment in the separate financial
statements of the acquirer in terms of the principles of IFRS 3. Note that no
goodwill or gain from a bargain purchase will arise at the acquisition date as
no underlying assets or liabilities have been recognised by the acquirer in its
separate financial statements. The cost price of the investment will be equal to
the fair value of the consideration given in the business combination.
Step 2: Thereafter, measure the investment in the shares of the acquiree in terms of
the adopted policy in terms of IFRS 9 Financial Instruments. Such an
investment will most often be classified as a financial asset at fair value
(whose subsequent fair value adjustments are recognised directly in other
comprehensive income or through profit or loss).
In the consolidated financial statements of the acquirer
Step 1: Ensure that the acquirer gained control over another entity that represents a
business, as defined in IFRS 3, through its investment in the equity of the
acquiree. Consideration should be given to the concept of control in this regard
as well as to the definition of a business as explained in this chapter.
Step 2: Recognise all identifiable assets acquired and liabilities assumed (as part of
the business combination transaction) according to the principles of IFRS 3 in
the consolidated financial statements of the acquirer (this may entail processing
pro forma journal entries (*) to recognise/derecognise certain assets and/or
liabilities). Here, focus should be placed on identification of assets and
liabilities that may not have appeared on the statement of financial position of
the acquiree before the business combination, but that form part of the
business combination transaction (e.g. intangible assets or contingent
liabilities, etc.). Care should also be taken not to recognise assets and
liabilities that do not form part of the business combination, i.e. those
transactions that are regarded as separate transactions. It should be noted
here that certain assets and liabilities that were not recognised in the
statement of financial position of the acquiree at the acquisition date might
now have to be recognised on a pro forma (*) basis at the acquisition date, for
the purposes of drawing up consolidated financial statements.
64
IFRS 3 Business combinations
Comment
* A pro forma journal entry is a journal entry that is not processed in the separate
financial statements of the acquirer or the acquiree but is processed for the purposes
of drawing up consolidated financial statements only. The pro forma journal entry
therefore only adjusts the consolidated financial statements and is mostly processed
to ensure compliance with the requirements of IFRS 3 and to eliminate intragroup
transactions and balances once the acquirer and acquiree are consolidated.
Step 3: Measure all identifiable assets and liabilities at their respective fair values as
prescribed by IFRS 3 in the consolidated financial statements of the acquirer.
Most assets and liabilities are measured at their acquisition-date fair values,
although certain exceptions to this measurement rule have been identified by
IFRS 3. Measure all assets and liabilities that cannot be measured reliably at
the acquisition date, at their provisional fair values. Also, note that certain
assets and liabilities may have to be adjusted to their appropriate fair values
by means of pro forma journal entries at the acquisition date. This would be
done to ensure compliance with the requirements of IFRS 3. Note that where
assets and liabilities are acquired directly, no such pro forma journal entries
would be required as the transaction is recognised and measured directly in
the separate financial statements of the acquirer and no subsequent
consolidated financial statements are prepared. All identifiable assets and
liabilities are therefore recognised and measured by means of actual journal
entries processed in the separate financial statements of the acquirer.
However, where an equity investment is acquired, the financial statements of
the acquirer and acquiree are subsequently consolidated. Therefore, certain
adjustments may need to be done both at the acquisition date as well as
subsequently to ensure that the consolidated financial statements comply with
the requirements of IFRS 3. Chapter 6 of this text book deals mainly with the
pro forma fair value adjustments that are required in consolidated financial
statements.
Step 4: A choice should be made in respect of the measurement of the non-controlling
interests in the acquiree. According to IFRS 3, a non-controlling interest in the
acquiree is measured at the acquisition date either at the fair value of the
non-controlling interests or at the non-controlling interests’ proportionate share
of the acquiree’s identifiable net assets.
Step 5: Eliminate the cost price of the investment of the acquirer (fair value of the
consideration for the business combination) against the fairly valued equity of
the acquiree that was included in the consolidated financial statements and
recognise the amount of the non-controlling interests (as determined in
step 4). Note here that the equity of the acquiree at the acquisition date is
indirectly fairly valued by ensuring that all the identifiable assets and liabilities
of the acquiree are measured at their acquisition-date fair values (or other
specified values per the exceptions to the measurement principle of IFRS 3) at
the acquisition date. It is also important to note that any fair value
65
Chapter 2
adjustments that were made to the investment in the separate financial
statements of the acquirer should be reversed on a pro forma basis in order for
the historical cost price of the investment to be eliminated against the equity of
the acquiree at the acquisition date. Goodwill or a gain from a bargain
purchase is therefore kept constant at all subsequent consolidation dates.
Step 6: Recognise the resulting difference between the equity of the acquiree and the
aggregate of the cost price of the investment and the amount of the noncontrolling interests, that arose in the elimination process in step 5 as either
goodwill (where such a difference represents an excess of the aggregate of
the cost price of the investment and the amount of the non-controlling interests
over the equity of the acquiree at the acquisition date), or as a gain from a
bargain purchase (where such a difference represents an excess of the equity
of the acquiree at the acquisition date over the aggregate of the cost price of
the investment and the amount of the non-controlling interests) in the
consolidated financial statements of the acquirer. Also, ensure that a
reassessment is performed where a gain from a bargain purchase is initially
identified in order to comply with the requirements of IFRS 3.36 in this regard.
Step 7: Assets and liabilities that could not be measured reliably at the acquisition date
were measured at provisional values. These values should now be adjusted
during the measurement period as defined in IFRS 3 in the consolidated
financial statements of the acquirer. Note that any such relevant adjustments
during the measurement period will be adjusted against the relevant asset
and/or liability and the other leg of the adjustment will be processed against
goodwill or the gain from a bargain purchase in the consolidated financial
statements of the acquirer. Such adjustments will most often be processed in
the consolidated financial statements by means of pro forma journal entries,
unless the acquiree processes these adjustments in its separate financial
statements as well, in which case the acquiree would have to ensure that the
fair value adjustments are in line with its adopted accounting policies.
Step 8: Any adjustments that are made to the consideration in respect of the
finalisation of provisional values during the measurement period are accounted
for against goodwill or the gain from a bargain purchase in the consolidated
financial statements of the acquirer.
Step 9: Also note that all pro forma journal entries that were processed at the
acquisition date in the consolidated financial statements could have a postacquisition impact on the consolidated financial statements. This could, for
example, occur where a depreciable asset is remeasured to its acquisitiondate fair value on a pro forma basis at the acquisition date. Subsequent
depreciation included from the financial statements of the acquiree in the
consolidated financial statements should then also be adjusted, on a pro forma
basis, to reflect the pro forma fair value adjustment that was processed at the
acquisition date. This concept is elaborated on in chapter 6.
Step 10: The business combination transaction should be properly disclosed in terms of
IFRS 3’s requirements in the consolidated financial statements of the acquirer.
66
IFRS 3 Business combinations
Example 2.16
Acquiring an interest in an entity’s equity shares in terms of
a business combination
On 1 January 20.16, P Ltd decided to invest in S Ltd by acquiring 80% of the issued
share capital of S Ltd in a business combination transaction. Control is obtained as
defined in IFRS 10 Consolidated Financial Statements. The following information is
available:
STATEMENT OF FINANCIAL POSITION OF S LTD AS AT 31 DECEMBER 20.15
Carrying
amounts
ASSETS
Property, plant and equipment
Investment property
Intangible assets
Trade receivables
Fair
values
1 000 000 R1 200 000
500 000 R700 000
800 000 R800 000
1 300 000 R1 200 000
Total assets
EQUITY AND LIABILITIES
Share capital
Retained earnings
Long-term loan (10% interest)
Trade and other payables
R3 600 000
Total equity and liabilities
R3 600 000
2 100 000
500 000
600 000
400 000
n/a
n/a
R660 000
R400 000
The purchase consideration for the equity interest is paid as follows:
l R3,5 million is paid in cash for the 80% investment in the shares of S Ltd on
1 January 20.16.
Additional information
l S Ltd measures all property, plant and equipment (PPE) and investment property
according to the cost model in terms of IAS 16 Property, Plant and Equipment
and IAS 40 Investment Property. S Ltd will therefore not process any fair value
adjustments in its separate financial statements in respect of the business
combination transaction.
l PPE is depreciated over ten years on the straight-line method. On
1 January 20.16, the average remaining useful life of the PPE was five years. S Ltd
qualifies for wear-and-tear allowances on all items of PPE.
l Existing intangible assets are all amortised over 20 years in terms of IAS 38, and in
terms of the company’s accounting policy for intangible assets.
l An allowance for credit losses (doubtful debt) of R100 000 has to be raised in
respect of the receivables of S Ltd on 1 January 20.16. The allowance is only
deductible for tax purposes when the credit losses actually go bad.
l Interest on the long-term loan had to be recognised in respect of S Ltd on
1 January 20.16.
67
Chapter 2
l
S Ltd expensed development cost of R100 000 (fair value on 1 January 20.16:
R300 000) in its separate financial statements. The project meets the definition of
an intangible asset in terms of IAS 38 Intangible Assets, but was not recognised
by S Ltd in its separate financial statements as the probability of future economic
benefits could not previously be demonstrated in terms of IAS 38 by S Ltd.
l S Ltd has a contingent liability of R450 000, which is a present obligation for which
the probability criterion was not met in S Ltd’s separate financial statements. At the
acquisition date the fair value of the contingent liability was R300 000. The
contingent liability forms part of the business combination transaction. The amount
is not deductible for taxation purposes.
l P Ltd elected to measure the non-controlling interests in the acquiree as its
proportionate share of the acquiree’s identifiable net assets.
l Assume a tax rate of 28% and a capital gains tax inclusion rate of 66,6%.
The acquisition is journalised as follows in P Ltd’s separate financial statements:
Dr
R
Cr
R
1 January 20.16
Investment in S Ltd (SFP)
Bank (SFP)
Recognition of the investment in S Ltd in P Ltd’s records
3 500 000
3 500 000
The acquisition is dealt with as follows in the consolidated financial statements:
Pro forma fair value adjusting journal entries required at acquisition to comply with
IFRS 3 requirements:
Dr
R
Cr
R
1 January 20.16
J1
Property, plant and equipment (SFP)
Revaluation surplus (SCE)
Deferred tax (SFP)
Pro forma revaluation of property, plant and equipment
at group level
200 000
J2
Investment property (SFP)
Retained earnings (SCE)
Deferred tax (SFP) (200 000 × 66,6% × 28%)
Pro forma revaluation of investment property
at group level
200 000
J3
Retained earnings (SCE)
Deferred tax (SFP)
Allowance for credit losses (SFP)
Pro forma provision for credit losses at group level
72 000
28 000
144 000
56 000
162 704
37 296
100 000
continued
68
IFRS 3 Business combinations
Dr
R
J4
Cr
R
Retained earnings (SCE)
Deferred tax (SFP)
Long-term loan (SFP)
Pro forma revaluation of loan at group level
– interest recognised
43 200
16 800
J5
Intangible assets (SFP)
Revaluation surplus (SCE)
Deferred tax (SFP)
Pro forma recognition of intangible assets at group
level
300 000
J6
Retained earnings (SCE)
Contingent liability (SFP)
Pro forma recognition of contingent liability at group
level
300 000
60 000
216 000
84 000
300 000
After the above fair value adjustments, the equity (now fairly stated) at acquisition will be:
Share capital
2 100 000
Revaluation surplus (144 000 + 216 000)
360 000
Retained earnings (500 000 + 162 704 – 72 000 – 43 200 – 300 000)
247 504
Equity (i.e. net asset value) at acquisition (fairly valued)
R2 707 504
The main elimination pro forma journal entry is therefore processed as follows in the
consolidated financial statements of P Ltd:
Dr
R
Cr
R
1 January 20.16
Share capital (SFP)
Retained earnings (SCE)
Revaluation surplus (SCE)
Goodwill (SFP) (balancing)
Investment in S Ltd (SFP)
Non-controlling interests (SFP/SCE) (20% × 2 707 504)
Elimination of owners’ equity of S Ltd at acquisition
2 100 000
247 504
360 000
1 333 997
3 500 000
541 501
69
Chapter 2
Comment
The pro forma fair value adjusting and elimination journal entries could also have been
combined into one journal:
Dr
R
1 January 20.16
Property, plant and equipment (SFP)
Investment property (SFP)
Allowance for credit losses (SFP)
Long-term loan (SFP)
Intangible asset (SFP)
Contingent liability (SFP)
Deferred tax (SFP) (((200 000 × 66,6%) +
(200 000 – 100 000 – 60 000 + 300 000)) × 28%)
Share capital (SCE)
Retained earnings (SCE)
Goodwill (SFP) (balancing)
Investment in S Ltd (SFP)
Non-controlling interests (SFP/SCE) (20% × 2 707 504)
Pro forma journal entry at acquisition
Cr
R
200 000
200 000
100 000
60 000
300 000
300 000
132 496
2 100 000
500 000
1 333 997
3 500 000
541 501
Post-acquisition adjustments like depreciation, amortisation, etc., will now be processed
due to the above fair value adjustments at acquisition date.
In this chapter the basic principles of business combinations were discussed, while in
the next chapter these principles are applied in order to prepare consolidated financial
statements.
2.17 Disclosure
For each business combination that occurred during the current reporting period, the
following should be disclosed by the acquirer, unless it is impracticable to do so:
l the name of the acquiree;
l a description of the acquiree;
l the acquisition date;
l the percentage of voting equity interests acquired;
l the primary reasons for the business combination and a description of how the
acquirer obtained control of the acquiree;
l a description of the factors that make up goodwill, such as expected synergies
from combining operations of the acquiree and the acquirer, intangible assets that
do not qualify for separate recognition or other factors;
l the acquisition-date fair value of the total consideration transferred and the
acquisition-date fair value of each major class of consideration, such as:
• cash;
• other tangible or intangible assets, including a business or subsidiary of the
acquirer;
70
IFRS 3 Business combinations
l
l
l
l
l
l
l
• liabilities incurred, for example, a liability for contingent consideration; and
• equity interests of the acquirer, including the number of instruments or interests
issued or issuable and the method of measuring the fair value of those
instruments or interests;
for contingent consideration and indemnification assets:
• the amount recognised as of the acquisition date;
• a description of the arrangement and the basis for determining the amount; and
• an estimate of the range of undiscounted outcomes or, if a range cannot be
estimated, that fact, and the reasons why not. If the maximum amount of the
payment is unlimited, the acquirer shall disclose that fact;
for acquired receivables:
• the fair value of the receivables;
• the gross contractual amounts receivable; and
• the best estimate at the acquisition date of the contractual cash flows not
expected to be collected;
the amounts recognised as of the acquisition date for each major class of assets
acquired and liabilities assumed;
for each contingent liability recognised:
• a brief description of the nature of the obligation and the expected timing of any
resulting outflows of economic benefits;
• an indication of the uncertainties about the amount or timing of those outflows.
Where necessary to provide adequate information, an entity shall disclose the
major assumptions made concerning future events; and
• the amount of any expected reimbursement, as well as the amount of any asset
that has been recognised for that expected reimbursement;
If a contingent liability is not recognised because its fair value cannot be measured
reliably, the acquirer shall disclose:
• a brief description of the nature of the contingent liability;
• an estimate of its financial effect (if practicable);
• an indication of the uncertainties relating to the amount or timing of any outflow;
• the possibility of any reimbursement; and
• the reasons why the liability cannot be measured reliably;
the total amount of goodwill that is expected to be deductible for tax purposes (in
South Africa goodwill is normally not tax deductible);
for transactions that are recognised separately from the acquisition of assets and
assumption of liabilities in the business combination (see chapter 2.10):
• a description of the transaction;
• how the acquirer accounted for the transaction;
71
Chapter 2
• the transaction amount and the line item in the financial statements in which the
amount is recognised; and
• if the transaction is the effective settlement of a pre-existing relationship, the
method used to determine the settlement amount;
l separately recognised acquisition-related costs as well as the amount recognised
as an expense and the line item in the statement of profit or loss and other
comprehensive income in which those expenses are recognised. The amount of
any issue costs not recognised as an expense and how they were recognised shall
also be disclosed;
l in a bargain purchase:
• the amount of any gain recognised and the line item in the statement of profit or
loss and other comprehensive income in which the gain is recognised; and
• a description of the reasons why the transaction resulted in a bargain purchase;
l for each business combination in which the acquirer holds less than 100% of the
equity interest in the acquiree at the acquisition date:
• the amount of the non-controlling interests in the acquiree recognised at the
acquisition date and the measurement basis for that amount; and
• for all non-controlling interests in an acquiree measured at fair value, the
valuation technique(s) and significant inputs used in the valuation;
l in a business combination achieved in stages:
• the acquisition-date fair value of the equity interest in the acquiree held by the
acquirer immediately before the acquisition date; and
• the amount of any gain or loss recognised as a result of remeasuring to fair
value the equity interest in the acquiree held by the acquirer before the business
combination and the line item in the statement of profit or loss and other
comprehensive income in which that gain or loss is recognised;
l the following information:
• the amounts of revenue and profit or loss of the acquiree since the acquisition
date included in the consolidated statement of profit or loss and other
comprehensive income for the reporting period; and
• the revenue and profit or loss of the combined entity for the current reporting
period as though the acquisition date for all business combinations that occurred
during the year had been as of the beginning of the annual reporting period.
If the acquisition date of a business combination is after the end of the reporting period
but before the financial statements are authorised for issue, the acquirer shall disclose
all the information as stated above, unless the initial accounting for the business
combination is incomplete at the time the financial statements are authorised for issue.
In that situation, the acquirer shall describe which disclosures could not be made and
the reasons why they cannot be made.
If any of the above disclosure is impracticable to provide, the acquirer shall note that
fact and explain why it is impracticable to disclose the information.
72
IFRS 3 Business combinations
The following information should be disclosed annually for each material business
combination or in the aggregate for individually immaterial business combinations that
are material collectively:
l if the initial accounting for a business combination is incomplete and some
amounts have only been determined provisionally:
• the reasons why the initial accounting for the business combination is
incomplete;
• the assets, liabilities, equity interests or items of consideration for which the
initial accounting is incomplete; and
• the nature and amount of any measurement period adjustments recognised
during the reporting period.
l for each reporting period after the acquisition date until the entity collects, sells or
otherwise loses the right to a contingent consideration asset, or until the entity
settles a contingent consideration liability or the liability is cancelled or expires:
• any changes in the recognised amounts, including any differences arising upon
settlement;
• any changes in the range of undiscounted outcomes and the reasons for those
changes; and
• the valuation techniques and significant inputs used in the valuation;
l for contingent liabilities recognised in a business combination, the acquirer shall
disclose the following for each class of provision:
• the carrying amount at the beginning and end of the period;
• additional provisions made in the period, including increases to existing
provisions;
• amounts used (incurred) during the period;
• unused amounts reversed during the period;
• the increase during the period in the discounted amount arising from the
passage of time and the effect of any change in the discount rate;
• a brief description of the nature of the obligation and the expected timing of any
resulting outflows of economic benefits;
• an indication of the uncertainties about the amount or timing of those outflows.
Where necessary to provide adequate information, an entity shall disclose the
major assumptions made concerning future events; and
• the amount of any expected reimbursement, stating the amount of any asset that
has been recognised for that expected reimbursement;
l a reconciliation of the carrying amount of goodwill at the beginning and end of the
reporting period showing separately:
• the gross amount and accumulated impairment losses at the beginning of the
reporting period.
• additional goodwill recognised during the reporting period (except goodwill
included in a disposal group that, on acquisition date, meets the criteria held for
73
Chapter 2
l
sale in accordance with IFRS 5 Non-current Assets Held for Sale and
Discontinued Operations);
• adjustments resulting from the subsequent recognition of deferred tax assets
during the reporting period;
• goodwill included in a disposal group held for sale in accordance with IFRS 5
and goodwill derecognised during the reporting period;
• impairment losses recognised during the reporting period in accordance with
IAS 36;
• net exchange rate differences arising during the reporting period in accordance
with IAS 21 The Effects of Changes in Foreign Exchange Rates;
• any other changes in the carrying amount during the reporting period;
• the gross amount and accumulated impairment losses at the end of the reporting
period;
the amount and an explanation of any gain or loss recognised in the current
reporting period that both:
• relates to the identifiable assets acquired or liabilities assumed in a business
combination that were effected in the current or previous reporting period; and
• is of such a size, nature or incidence that disclosure is relevant to understanding
the combined entity’s financial statements.
Example 2.17
IFRS 3 Disclosure
The following example illustrates certain of the disclosure requirements as discussed
above.
P LTD GROUP
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR
ENDED 30 JUNE 20.15
IFRS 3
disclosure
requirement
Acquisition of subsidiary
On 1 June 20.15 P Ltd obtained control over S Ltd by acquiring 80%
B64(a)–(d)
of the shares and voting rights of the company. S Ltd is a bakery
equipment manufacturer.
The interest was acquired to expand the business and gain control
B64(d)–(e)
over the one of P Ltd’s major suppliers.
74
IFRS 3 Business combinations
IFRS 3
disclosure
requirement
The fair value of the total consideration transferred amounted to
R507 000 and is made up out of the following:
Cash
457 000
Deferred payment
50 000
B64(f)
R507 000
The non-controlling interests for the acquisition of S Ltd was
measured at the proportionate interest in the acquiree’s identifiable
net assets on acquisition date and amounted to R123 000.
The fair value of the assets acquired and the liabilities assumed of
S Ltd were as follows:
Property, plant and equipment
700 000
Trade receivables
60 000
Cash and cash equivalents
25 000
Long-term borrowings
(140 000)
Trade payables
(30 000)
Net assets acquired
B64(o)
B64(i)
R615 000
The gross contractual amount receivable from trade receivables is
R68 000 of which R8 000 is expected to be uncollectible.
Goodwill of R15 000 was recognised and is mostly made up of
anticipated future synergy savings for the Group. The goodwill
recognised will not be deductible for income tax purposes in the
future.
Acquisition-related cost amounted to R25 000 in was included in
other expenses in the statement of profit or loss and other
comprehensive income.
S Ltd’s revenue and profit for the period 1 June 20.15 to 30 June
20.15 amounted to R31 000 and R12 000 respectively.
S Ltd’s revenue and profit for the period 1 July 20.14 to 30 June
20.15 amounted to R372 000 and R144 000 respectively.
B64(h)
B64(k)
B64(m)
B64(q)(i)
B64(q)(ii)
75
Chapter 2
IFRS 3
disclosure
requirement
Goodwill
Carrying amount at the beginning of the period
R40 000
Gross carrying amount
Accumulated impairment losses
65 000
(25 000)
B67(d)(i)
B67(d)(i)
Acquisition of subsidiary
Derecognition of goodwill on loss of control in subsidiary
Impairment loss
15 000
(8 000)
(10 000)
B67(d)(ii)
B67(d)(vii)
B67(d)(v)
Carrying amount at the end of the period
R37 000
Gross carrying amount
Accumulated impairment losses
72 000
(35 000)
B67(d)(viii)
B67(d)(viii)
During the year an impairment loss of R10 000 was recognised in profit or loss (IAS
36.126(a)). The impairment loss of R10 000 is with regards to A Ltd, a subsidiary of the
P Ltd group acquired on 1 July 20.10 (IAS 36.130(d)(i)).
Self-assessment question
Question 2.1
Alpha Ltd purchased a 60% controlling interest in Omega Ltd on 1 January 20.11. On
this date Alpha Ltd obtained control over Omega Ltd when the share capital and
retained earnings of Omega Ltd amounted to R1 000 000 and R900 000 respectively.
On acquisition date Omega Ltd’s net asset value was considered to be fairly valued
with the exception of the following items:
1. Equipment with a cost price of R300 000 had a fair value of R400 000 on
1 January 20.11. Alpha Ltd, however, does not intend to use the equipment in the
future and subsequently valued the equipment only at R200 000 on 1 January
20.11.
2. Omega Ltd disclosed a contingent liability of R300 000 in its financial statements on
1 January 20.11 relating a court case. The claim represents a present obligation,
but at this point in time the attorneys of Omega Ltd are of the opinion that it is
unlikely to lead to an outflow of economic benefits due to a lack of evidence to
support the claim. The R300 000 is the fair value of the claim taking into account all
possible outcomes on 1 January 20.11.
The shareholders of Omega Ltd have, as part of the purchase agreement by Alpha
Ltd, guaranteed to reimburse Omega Ltd 50% of the claim, should it be successful.
The claim will not be deductible for taxation purposes should it succeed.
76
IFRS 3 Business combinations
3. Details of the consideration transferred to the shareholders of Omega Ltd were as
follows:
l Cash of R600 000 was paid.
l Due to current cash flow problems Alpha Ltd will make a further cash payment of
R275 000 on 31 December 20.11.
l Alpha Ltd issued 1 000 ordinary shares to the shareholders of Omega Ltd. The
fair value of the shares was R460 each on 1 January 20.11. On registration date
of the shares on 22 January 20.11, the shares were valued at R465 each.
l Alpha Ltd is required to make an additional cash payment of R110 000 on
31 December 20.12 if the share price of Omega Ltd increases by more than
20%. The fair value of the contingent consideration was estimated to be R50 000
on 1 January 20.11.
l Alpha Ltd transferred office furniture that is currently not used to Omega Ltd. On
1 January 20.11 the fair value of the furniture is R40 000 and the carrying
amount in the records of Alpha Ltd is R30 000.
Included in the cash consideration paid is valuation fees of R120 000 and share
issue cost of R20 000, which was paid by Alpha Ltd.
Additional information
l All the companies in the group have a 31 December year end.
l It is the accounting policy of Alpha Ltd to measure non-controlling interests in
subsidiaries at fair value.
l The fair value of the non-controlling interests was R750 000 on 1 January 20.11.
l The company tax rate is 28% and capital gains tax inclusion rate is 66,6%.
l A market-related interest rate (before tax) is 10% compounded annually.
Required
(a) Prepare the journal entry in the separate accounting records of Alpha Ltd to
account for the acquisition of Omega Ltd on 1 January 20.11.
(b) Prepare the pro forma journal entries for the Alpha Ltd Group to account for the
acquisition of Omega Ltd on 1 January 20.11. Journal entries relating to deferred
taxation are also required.
77
Chapter 2
Suggested solution 2.1
(a) Journals entries in the accounting records of Alpha Ltd
Dr
R
J1
1 January 20.11
Investment in Omega Ltd (SFP) (balancing)
Acquisition cost (P/L)
Retained earnings (SCE) (share issue cost)
Office furniture (SFP)
Share capital (SCE) (1 000 × R460)
Contingent consideration (SFP)
Deferred consideration (SFP)
1 250 000
120 000
20 000
Cr
R
30 000
460 000
50 000
250 000
(275 000 × 100/110)
Bank (SFP)
Accounting for the investment in Omega Ltd
600 000
(b) Pro forma journals entries in the group’s accounting records
1 January 20.11
Dr
R
J1
Equipment (SFP)
Revaluation surplus (SCE)
Deferred tax (SFP)
Pro forma revaluation of equipment at group
level
100 000
J2
Retained earnings (SCE)
Indemnification asset (SFP) (300 000 × 50%)
Contingent liability (SFP)
Pro forma recognition of contingent liability at
group level
150 000
150 000
Share capital (SCE)
Retained earnings (SCE) (900 000 – 150 000)
Revaluation surplus (SCE)
Goodwill (SFP) (balancing)
Non-controlling interests (SFP/SCE)
Investment in Omega Ltd (SFP) (part (a))
Elimination of owners’ equity of Omega Ltd at
acquisition
1 000 000
750 000
72 000
178 000
J3
Cr
R
72 000
28 000
300 000
750 000
1 250 000
Comment
According to IFRS 13 Fair Value Measurement, fair value refers to the highest and best
use of a non-financial asset. Therefore, although Alpha Ltd does not intend to use the
equipment after the acquisition of Omega Ltd, the highest and best use of the equipment
will be to sell it for R400 000 and thus R400 000 will be the fair value.
78
3
Consolidation at acquisition date
Review
3.1
Group statements and consolidated statements .....................................
81
Basic consolidation techniques
3.2
3.3
3.4
3.5
3.6
3.7
Fundamental procedures .........................................................................
The elimination of common items ............................................................
The consolidation of non-common items .................................................
Use of a consolidation worksheet ............................................................
Pro forma journals ...................................................................................
Components of consolidated financial statements ..................................
81
81
82
82
83
83
Consolidation of the statement of financial position
of a wholly-owned subsidiary at acquisition date
3.8
3.9
3.10
3.11
3.12
3.13
3.14
3.15
Acquisition date .......................................................................................
Measurement principle in terms of IFRS 3 ..............................................
Similar accounting policies and reporting dates ......................................
Acquisition price of interest in the subsidiary ...........................................
Interest acquired at the fair value of the identifiable assets acquired
and liabilities assumed of the acquiree ....................................................
Example 3.1:
Wholly-owned subsidiary – Interest acquired at the
fair value of the identifiable net assets .........................
Interest acquired at more than the fair value of the identifiable assets
acquired and liabilities assumed of the acquiree (therefore
at a premium) ...........................................................................................
Accounting treatment of goodwill .............................................................
Example 3.2:
Wholly-owned subsidiary – Interest acquired
at a premium ................................................................
Interest acquired at less than the fair value of the identifiable assets
acquired and liabilities assumed of the acquiree (therefore at a
discount) .................................................................................................
Example 3.3:
Wholly-owned subsidiary – Interest acquired
at a discount .................................................................
83
84
84
84
85
85
90
91
92
95
96
79
Chapter 3
Consolidation of the statements of financial position of a
parent and partially-owned subsidiary at acquisition date
3.16
3.17
3.18
3.19
3.20
3.21
3.22
3.23
Non-controlling interests (NCI) ................................................................
Analysis of owners’ equity .......................................................................
Recognising and measuring goodwill or a gain from a bargain purchase
Acquisition of a partial interest in a subsidiary .........................................
Interest acquired at the fair value of the identifiable assets acquired
and liabilities assumed of the acquiree – NCI measured at their
proportionate share of the subsidiary’s identifiable net assets at
acquisition date ........................................................................................
Example 3.4:
Partially-owned subsidiary – Interest acquired at the
fair value of the identifiable net assets, NCI measured
at their proportionate share of the identifiable net
assets at acquisition date .............................................
Interest acquired at a premium – NCI measured at their proportionate
share of the subsidiary’s identifiable net assets at acquisition date .......
Example 3.5:
Partially-owned subsidiary – Interest acquired at a
premium, NCI measured at their proportionate interest
of identifiable net assets at acquisition date ................
Interest acquired at a premium – NCI is measured at fair value at
acquisition ................................................................................................
Example 3.6:
Partially-owned subsidiary – Interest acquired at a
premium, NCI measured at fair value of identifiable
net assets at acquisition date ......................................
Interest acquired at a discount – NCI measured at their proportionate
share of the subsidiary’s identifiable net assets at acquisition date ........
Example 3.7:
Partially-owned subsidiary – Interest acquired at a
discount, NCI measured at their proportionate interest
of identifiable net assets at acquisition date .................
99
100
100
101
102
102
106
106
110
110
113
113
Self-assessment questions
Question 3.1
Question 3.2
Question 3.3
80
.....................................................................................................
.....................................................................................................
.....................................................................................................
116
118
121
Consolidation at acquisition date
Review
3.1 Group statements and consolidated statements
1
2
Chapter 1 dealt in general with groups and the element of control in the constitution of
a group of entities. The presentation of group statements by the parent and the
general principles governing group statements and consolidated statements were
considered. Consolidated financial statements are the most important and most
commonly used form of group statements. IFRS 10 Consolidated Financial
Statements very clearly requires an entity (the parent) that controls one or more other
entities (subsidiaries) to present consolidated financial statements (.2).
The next few chapters deal with the way in which the information contained in the
separate financial statements of the companies in a group is combined to present
consolidated financial statements (see chapter 1.10). Chapters 3 and 4 deal with the
consolidation of the financial statements of a simple group (consisting of the parent
and a single subsidiary) where the share capital of both companies includes no
preference shares. In chapter 3, the discussion is limited to consolidation of the
financial statements of the parent and the subsidiary as at the acquisition of the
controlling interest by the parent. The discussion deals with the procedures where
the subsidiary is respectively a wholly-owned or partially-owned subsidiary and
where, in both of these cases, the interest is acquired at the present fair value of the
identifiable assets and liabilities of the acquiree, a consideration higher than the fair
value of the identifiable assets and liabilities of the acquiree, or a consideration
lower than the fair value of the identifiable assets and liabilities of the acquiree.
Basic consolidation techniques
3.2 Fundamental procedures
The mechanics of the preparation of consolidated annual financial statements are
based on certain basic procedures and although the application of these procedures
may differ somewhat from case to case, they remain essentially the same. The basic
procedures comprise the following:
l the elimination of common items; and
l the consolidation or combination of the remaining non-common items, line-by-line
by adding together like items of assets, liabilities, equity, income and expenses.
In this process pro forma journals are prepared to account for the elimination of
intragroup items. Pro forma journals are prepared for consolidation purposes only and
are not recognised in the separate records of either the parent or the subsidiary. These
pro forma journals form part of the working papers to effect the consolidation process.
3.3 The elimination of common items
1
An important intra-entity relationship between the respective financial statements of
a parent and subsidiary is that which exists between the investment in the
subsidiary in the statement of financial position of the parent and the parent’s
portion of the equity of the statement of financial position of the subsidiary. Since
this investment account in the parent’s records (an asset) is merely a claim against
the net assets of the subsidiary as represented by its equity, the two items are the
81
Chapter 3
2
obverse sides or mirror images of the same item and must be eliminated in the new
reporting entity, i.e. the group. In branch accounts, the investment account in the
records of the head office (the branch account) is replaced on consolidation of the
records of the head office and branch, by the net assets of the branch. In a similar
manner, the account for the investment in a subsidiary in the parent’s records is in
effect replaced on consolidation by the appropriate portion of the interest of the
parent in the net assets of the subsidiary.
In this chapter, the only case that is discussed is one in which the investment in the
subsidiary is carried (in the records of the parent) at the original cost price for the
sake of simplicity and no fair value adjustments are taken into account.
3.4 The consolidation of non-common items
In order to present the combined assets, liabilities, equity, income and expenses of the
parent with those of the subsidiary, all non-common items (thus after carrying out the
elimination procedures described in par 3.3) are included in the consolidated statements.
Non-common items are combined on a line-by-line basis in the consolidated statements
by adding together like assets, liabilities, equity, income and expenses.
3.5 Use of a consolidation worksheet
In the following discussion, a relatively broad approach to the solution of consolidation
problems is followed. You will notice that use is made of:
l an analysis of owners’ equity in the subsidiary;
l pro forma consolidation journal entries; and
l a worksheet.
It is stressed that a separate set of consolidated records is not normally kept.
Nowadays, more emphasis is placed on electronic data-processing in the consolidation
process of large groups, while most other groups make use of a standard consolidation
package, which is included in the accounting manual of the group and in terms of which
the consolidation process is carried out.
In the learning process, it is important to show clearly how the figures in respect of
subsidiaries are taken up in the consolidated statements. For this purpose, a
consolidation worksheet, to which the necessary adjustments and eliminations are
posted by means of pro forma consolidation journal entries, is initially used in this book.
The worksheet aids in preparing the consolidated financial statements by adding
together the balances in the trial balances of the parent and the subsidiary on a line-byline basis after taking pro forma journals into account. The end result of the worksheet
is to determine the consolidated balances that are taken up into the consolidated
financial statements. This procedure will become clear in the examples that follow. This
broad approach (in which all the procedures are initially explained and used repeatedly)
is adopted with a definite purpose. You will soon realise that you need not always make
use of all these procedures when preparing consolidated statements.
82
Consolidation at acquisition date
3.6 Pro forma journals
Pro forma journals are prepared to eliminate the effect of internal transactions between
the parent and the subsidiary. Pro forma journals are not recognised in the individual
general ledgers of either entities. Such journals may affect the trial balances of any of
the entities involved. It may therefore happen that a ledger account in the parent’s trial
balance is debited while a ledger accounting in the subsidiary’s trial balance is credited.
Such journal entries form part of the working papers or calculations related to
consolidations and are taken into account on the worksheet described above. It is
important to realise that they are never recognised in either of the separate accounting
records of the parent or the subsidiary and because of this, such pro forma journals
need to be repeated every year on consolidation of the financial statements.
3.7 Components of consolidated financial statements
1
The consolidated statements consist of five components:
l a consolidated statement of financial position at the end of the reporting period;
l a consolidated statement of profit or loss and other comprehensive income for
the period;
l a consolidated statement of changes in equity for the period;
l a consolidated statement of cash flows for the period; and
l the notes, comprising a summary of significant accounting policies and other
explanatory information (IAS 1.10).
The disclosure requirements for the notes to a set of consolidated financial
statements agree with the disclosure requirements for notes in the financial
statements of an individual entity.
2
The consolidated statement of financial position is a statement that presents the
combined financial position of a group as an entity at a fixed date. The consolidated
statement of financial position thus shows the assets, liabilities and equity of the
consolidated entities as they would appear to an outsider who regards the separate
entities in the group as a single economic unit.
3
The remainder of this chapter will be devoted mainly to the consolidation of the
statements of financial position of a parent and subsidiary (wholly-owned and
partially-owned) at the acquisition date of the interest in the subsidiary. At the
acquisition date, there is no reporting period in respect of which statements of profit
or loss and other comprehensive income and statements of changes in equity could
be prepared in respect of the subsidiary.
Consolidation of the statement of financial position of a
wholly-owned subsidiary at acquisition date
3.8 Acquisition date
The acquisition date is the date on which the acquirer (parent) obtains control over the
acquiree (subsidiary) (IFRS 3 Business Combinations Appendix A). When
acquisition is achieved in a single exchange transaction, as is the case in the first
83
Chapter 3
volume of Group Statements, the date of exchange coincides with the acquisition date.
It is generally the date on which the acquirer legally transfers the consideration,
acquires the assets and assumes the liabilities of the acquiree, and is also called the
closing date. However, the acquirer might obtain control on a date that is either earlier
or later than the closing date. An acquirer shall consider all pertinent facts and
circumstances in identifying the acquisition date (IFRS 3.9). A business combination
may however involve more than one exchange transaction, for example when it is
achieved in stages by successive share purchases. In chapter 13, step acquisition is
discussed in detail.
3.9 Measurement principle in terms of IFRS 3
As discussed in chapter 2, the acquirer (the parent) shall measure the identifiable
assets acquired and the liabilities assumed at their acquisition-date fair values. The
measurement of specific assets and liabilities at the acquisition date in terms of IFRS 3
is discussed in chapter 6.
3.10 Similar accounting policies and reporting dates
1
Before the consolidation process can commence, it must be ensured that the financial
statements of the parent and its subsidiary used in the preparation of the consolidated
financial statements are prepared as of the same date, i.e. the financial statements
must have the same reporting date. When the reporting date of the parent is
different from that of the subsidiary, the subsidiary prepares, for consolidation
purposes, additional financial statements as of the same date as the financial
statements of the parent, unless it is impracticable to do so. In any case, the
difference between the end of the reporting period of the subsidiary and that of the
parent shall be no more than three months. The length of the reporting period and
any difference between the reporting dates shall be the same from period to period
(IFRS 3 B92, B93).
2
Consolidated financial statements shall be prepared using uniform accounting
policies. If a member of the group uses accounting policies other than those
adopted in the consolidated financial statements for like transactions and events in
similar circumstances, appropriate adjustments are made to that group member’s
financial statements in preparing the consolidated financial statements to ensure
conformity with the group’s accounting policies (IFRS 3.B87).
3
For the sake of simplicity, it will however be assumed that there are no differences
in this regard in the examples and questions discussed in chapters three and four of
Volume one of this work.
3.11 Acquisition price of interest in the subsidiary
1
84
The mechanics of the consolidation procedures in respect of the consolidated
statement of financial position at the acquisition date of, in the first instance, the
wholly-owned subsidiary will now be dealt with. In a wholly-owned subsidiary the
parent owns 100% of the shares (and voting rights) and there are therefore no noncontrolling interests.
Consolidation at acquisition date
2
The process of consolidation of the financial statements of a parent and subsidiary
at the acquisition date of the shares in the subsidiary by the parent is illustrated with
reference to three situations:
l where the shares in a wholly-owned subsidiary are acquired by the parent at a
consideration equal to the fair value of the net assets (being assets less
liabilities) on the last day of the reporting period as it appears in the accounting
records of the subsidiary. Such an acquisition is referred to as an acquisition of
shares at the fair value of the identifiable assets and liabilities of the acquiree;
l where the shares in a wholly-owned subsidiary are acquired by the parent at a
premium (therefore a consideration higher than the fair value of the identifiable
assets and liabilities of the acquiree) on the first day of the reporting period; and
l where the shares in a wholly-owned subsidiary are acquired by the parent at a
discount (therefore for less than the fair value of the identifiable assets and
liabilities of the acquiree) on the first day of the reporting period.
In all three cases, the investment is recognised in the records of the parent at cost
price.
3.12 Interest acquired at the fair value of the identifiable assets acquired
and liabilities assumed of the acquiree
Example 3.1
Wholly-owned subsidiary – Interest acquired at the fair value
of the identifiable net assets
The following are the condensed statements of financial position of P Ltd and its whollyowned subsidiary, S Ltd, at 31 December 20.18, the date on which P Ltd acquired all
the shares in S Ltd. From that date P Ltd had control over S Ltd as per the definition of
control in terms of IFRS 10.
P Ltd
ASSETS
Property, plant and equipment
Investment in S Ltd: 80 000 shares at cost price
Trade receivables
Total assets
EQUITY AND LIABILITIES
Share capital (200 000/80 000 shares)
Retained earnings
Trade and other payables
Total equity and liabilities
S Ltd
91 000
89 000
48 000
65 000
–
44 000
R228 000
R109 000
200 000
8 000
20 000
80 000
9 000
20 000
R228 000
R109 000
Assume that the identifiable assets acquired and the liabilities assumed at acquisition
date are shown at their acquisition-date fair values as determined in terms of IFRS 3.
P Ltd recognised the equity investment in S Ltd in its separate records using the cost
price method.
Ignore tax implications.
85
Chapter 3
Solution 3.1
As was stated earlier, the basic consolidation procedures comprise (a) the elimination
of common items and (b) the combination of the remaining (non-common) items on a
line-by-line basis.
When the two separate statements of financial position are combined (consolidated)
and regarded as those of a single reporting entity (i.e. the group), the only two common
items are the investment in the subsidiary (S Ltd) on the statement of financial position
of the parent and the portion of the equity of the subsidiary (S Ltd) held by the parent
(P Ltd) on the statement of financial position of the subsidiary.
The line item “Investment in S Ltd” of R89 000 represents the cost to P Ltd of acquiring
the equity of (and control over) S Ltd. The two line items, share capital and retained
earnings, together comprise “Equity” of R89 000 which represents the fair value of the
identifiable assets acquired and liabilities assumed of the acquiree in the statement of
financial position of S Ltd (or the interest of the owners in S Ltd) and must be eliminated
against the investment in S Ltd. As the shares in S Ltd were acquired at the fair value of
the identifiable assets acquired and liabilities assumed, these two items must be set off
against each other. The remaining non-common items in the two statements of financial
position are then simply added together on a line-by-line basis to produce the
consolidated statement of financial position.
An analysis of equity is used in this work to simplify the consolidation process. The
analysis of the equity at acquisition complies with the requirements of IFRS 3.
Calculations
C1 Analysis of owners’ equity of S Ltd
P Ltd 100%
Total
i At acquisition (31/12/20.18)
Share capital
Retained earnings
Purchase difference
Consideration
At acquisition
80 000 (dr)
9 000 (dr)
80 000
9 000
89 000
–
89 000
–
R89 000 (cr)
R89 000
Comments
The references to (dr) and (cr) in the above analysis refer to the relevant journal entry
(J1).
From the analysis it is clear that there is no purchase difference between the fair value
of the identifiable assets and liabilities of the acquiree and the consideration transferred
by the parent to obtain the investment. IFRS 3 requires that the purchase difference be
calculated in the following manner:
86
Consolidation at acquisition date
C2 Proof of calculation of purchase difference of S Ltd in terms of IFRS 3.32
Consideration transferred at acquisition date: IFRS 3.32(a)(i)
89 000
Net of the identifiable assets acquired and the liabilities assumed
at acquisition date: IFRS 3.32(b)
(89 000)
Purchase difference
R–
Comments
In order to comply with the requirements of IFRS 3, this calculation will be done for
every example, even though the purchase difference is also reflected in the analysis.
In order to apply the consolidation worksheet method, pro forma journals must be
prepared that are used solely to eliminate intragroup items in the consolidation process.
With the above analysis as basis, the elimination of the related items can be recorded
as follows by means of a pro forma consolidation journal entry:
C3 Pro forma consolidation journal entry
Dr
R
J1
Share capital (S)(SCE)
Retained earnings (S)(SCE)
Investment in S Ltd (P)(SFP)
Elimination of equity of S Ltd against investment
account at acquisition
Cr
R
80 000
9 000
89 000
Comments
a The references to (S) and (P) are purely for purposes of clarity, being references to
the respective financial statements in which these items appear, namely the
subsidiary (S) and the parent (P).
b The following abbreviations that are used in the pro forma journals refer to the
different parts of the financial statements that are influenced by each pro forma
journal:
SFP – Statement of financial position
SCE – Statement of changes in equity
P/L
– Profit or loss
OCI – Other comprehensive income.
By netting off the pro forma journal entry against the amounts contained in the
statements of financial position of P Ltd and S Ltd, the non-common items which
remain are then added together on a line-by-line basis in the consolidated statement of
financial position. For this purpose, use is made of a consolidation worksheet.
87
Chapter 3
C4 Consolidation worksheet: P Ltd and subsidiary
P Ltd
Consolidation
adjustments
S Ltd
Dr
Property, plant and
equipment
Investment in S Ltd
Trade receivables
91 000
89 000
48 000
65 000
–
44 000
Cr
89 000 (J1)
R228 000 R109 000
Share capital
Retained earnings
Trade and other
payables
200 000
8 000
80 000
9 000
20 000
20 000
Consolidated
156 000
–
92 000
R248 000
80 000 (J1)
9 000 (J1)
R228 000 R109 000 R89 000
200 000
8 000
40 000
R89 000
R248 000
The consolidated statement of financial position is prepared from the worksheet and it
should be clear to you that all intragroup balances have now been eliminated and the
remaining items added together on a line-by-line basis. The consolidated statement of
financial position will therefore only contain items that result from transactions with
parties outside the group.
P LTD GROUP
CONSOLIDATED STATEMENT OF FINANCIAL POSITION AS AT 31 DECEMBER 20.18
ASSETS
Non-current assets
Property, plant and equipment (91 000(P) + 65 000(S))
156 000
Current assets
Trade receivables (48 000(P) + 44 000(S))
92 000
Total assets
R248 000
EQUITY AND LIABILITIES
Equity attributable to owners of the parent
Share capital (P)
Retained earnings (P)
200 000
8 000
Total equity
208 000
Current liabilities
Trade and other payables (20 000(P) + 20 000(S))
40 000
Total equity and liabilities
88
R248 000
Consolidation at acquisition date
Comment
The investment in the subsidiary is not set off only against the share capital of the
subsidiary, but rather against the total equity of the subsidiary as at the acquisition date,
i.e. share capital and retained earnings.
Note therefore that as a result of the consolidation adjustment, no item of the equity of
the subsidiary at acquisition date appears in the equity of the consolidated statement of
financial position. Only the share capital and retained earnings of the parent are
presented in the consolidated statement of financial position.
Suppose that extracts from the statements of profit or loss and other comprehensive
income and statements of changes in equity of P Ltd and S Ltd were as follows for the
reporting period ended 31 December 20.18:
EXTRACT FROM THE STATEMENTS OF PROFIT OR LOSS
AND OTHER COMPREHENSIVE INCOME
FOR THE YEAR ENDED 31 DECEMBER 20.18
P Ltd
S Ltd
Profit before tax
Income tax expense
10 000
(3 000)
11 500
(3 500)
PROFIT FOR THE YEAR
7 000
8 000
–
–
R7 000
R8 000
Other comprehensive income for the year
TOTAL COMPREHENSIVE INCOME FOR THE YEAR
Comment
In this work, the presentation of the components of profit or loss in a single statement of
profit or loss and other comprehensive income is adopted in terms of IAS 1
Presentation of Financial Statements (.12 & .81), although initial examples include no
items of other comprehensive income.
EXTRACT FROM THE STATEMENTS OF CHANGES IN EQUITY
FOR THE YEAR ENDED 31 DECEMBER 20.18
Retained earnings
P Ltd
S Ltd
Balance at 1 January 20.18
Changes in equity for 20.18
Total comprehensive income for the year:
Profit for the year
Dividend
5 000
4 000
7 000
(4 000)
8 000
(3 000)
Balance at 31 December 20.18
R8 000
R9 000
P Ltd only obtained control over S Ltd on 31 December 20.18. P Ltd therefore had no
influence over the performance of S Ltd for the reporting period ended
31 December 20.18 and P Ltd has no right to the profit for that reporting period. That
profit “belongs” to the previous owners, from whom P Ltd obtained the shares.
89
Chapter 3
The consolidated statement of profit or loss and other comprehensive income of the
group for the reporting period will therefore contain only the profit of P Ltd for the
reporting period; likewise the consolidated statement of changes in equity will also
contain only the profit for the reporting period of P Ltd.
The dividend of R3 000 that was paid by S Ltd is also attributable to the previous
owners and not to P Ltd. The retained earnings of R9 000 of S Ltd at
31 December 20.18 is “purchased profit” and forms part of the “net identifiable assets”,
that were taken over in the business combination and is eliminated on consolidation.
The consolidated statement of profit or loss and other comprehensive income and
statement of changes in equity will therefore be as follows:
P LTD GROUP
EXTRACT FROM THE CONSOLIDATED STATEMENT OF PROFIT OR LOSS
AND OTHER COMPREHENSIVE INCOME
FOR THE YEAR ENDED 31 DECEMBER 20.18
Profit before tax
Income tax expense
10 000
(3 000)
PROFIT FOR THE YEAR
7 000
Other comprehensive income for the year
–
TOTAL COMPREHENSIVE INCOME FOR THE YEAR
R7 000
P LTD GROUP
EXTRACT FROM THE CONSOLIDATED STATEMENT OF CHANGES IN EQUITY
FOR THE YEAR ENDED 31 DECEMBER 20.18
Share
capital
Retained
earnings
Balance at 1 January 20.18
Changes in equity for 20.18
Total comprehensive income for the year:
Profit for the year
Ordinary dividend
200 000
5 000
–
–
7 000
(4 000)
Balance at 31 December 20.18
R200 000
R8 000
3.13 Interest acquired at more than the fair value of the identifiable
assets acquired and liabilities assumed of the acquiree (therefore at
a premium)
1
90
A parent may pay more than the fair value of the identifiable assets and liabilities of
the acquiree (through the shares it acquires) when an interest in a subsidiary is
obtained. Because the ownership of shares in an entity represents an indivisible
interest in the net assets and earning capacity of such an entity, the premium
(excess) which is paid to acquire the interest can arise as a result of different
factors. In simple terms, the parent may pay more than the fair value of the assets
acquired and liabilities assumed due to factors such as the investee’s good
customer base, its market share or to merely ensure that it gets the controlling
interest in the entity.
Consolidation at acquisition date
2
3
4
In the Basis for Conclusions to IFRS 3, the following, amongst others, are
identified as possible components of goodwill when it is measured as the residual
(which is currently the case):
l the fair value of the “going concern” element of the subsidiary’s existing
business. The “going concern” element represents the ability of the subsidiary to
earn a higher rate of return on an assembled collection of net assets than would
be expected if those assets had to be acquired separately. That value stems
from the synergies of the net assets of the business, as well as from other
benefits (such as factors related to market imperfections, including the ability to
earn monopoly profits and barriers to market entry – either legal or because of
transaction costs – by potential competitors);
l the fair value of the expected synergies and other benefits from combining the
subsidiary’s net assets and businesses with those of the parent (BC 313–318).
The two concepts described above represent the “core” goodwill, and qualify as an
asset under the definition of the Conceptual Framework for Financial Reporting,
due to the fact that the parent can direct the policies and management of the
subsidiary (BC 323).
Goodwill cannot be directly measured and IFRS 3 therefore determines that it is
measured as a residual (BC 328). Such residual (being a premium or excess of the
consideration over the fair value of the identifiable assets and liabilities of the
acquiree) must thus be analysed with care. If the excess is ascribable to specific
assets, it must be allocated to such items on consolidation (refer to chapter 6).
However, where the excess cannot be allocated in this way and thus in fact
represents the amount paid for an intangible asset which does not appear in the
records of the subsidiary, such excess must be recognised as an asset of the group
in the consolidated statements. According to International Financial Reporting
Standards (IFRS), such unallocated excess should be treated as goodwill. Goodwill
is defined in IFRS 3 in terms of its nature, rather than in terms of its measurement. It
is defined as an asset representing the future economic benefits arising from other
assets acquired in a business combination that are not individually identified and
separately recognised (IFRS 3 Appendix A).
It is important to note that the current view of the IASB is that the goodwill that is
created at the acquisition date in a business combination is regarded as an asset of
the subsidiary. This view is in compliance with the principle of IAS 21 where a
foreign operation is translated into the functional currency and any goodwill is
regarded as an asset of the subsidiary. In addition, a fair value could be awarded to
the non-controlling interest, as assets are recognised in full at fair value, including
goodwill. The fact that the goodwill “belongs” to the subsidiary implies that it
increases the equity that is analysed at the acquisition date (increase in assets
increases equity).
3.14 Accounting treatment of goodwill
1
In the case of a wholly-owned subsidiary, the parent (acquirer) shall recognise
goodwill as of the acquisition date, measured as the excess of the consideration
91
Chapter 3
transferred (at fair value) over the net of the identifiable assets acquired and the
liabilities assumed and the contingent liabilities, based on acquisition-date fair
values, i.e. the equity of the subsidiary (IFRS 3.32 – adopted for a wholly-owned
subsidiary).
After initial recognition, the goodwill acquired in a business combination shall be
measured at cost less any accumulated impairment losses. Goodwill may not be
amortised. Instead, it shall be tested for impairment annually, or more frequently if
events or changes in circumstances indicate that it might be impaired in accordance
with IAS 36 Impairment of Assets (.10) (see chapter 6.7).
2
Example 3.2
Wholly-owned subsidiary – Interest acquired at a premium
The following are the condensed statements of financial position of P Ltd and its whollyowned subsidiary, S Ltd, at 1 January 20.19, the acquisition date of the shares in S Ltd
by P Ltd. The information in this example is thus very similar to that in the previous
example, except for the increased consideration paid for the investment. In this case,
the acquisition date is 1 January 20.19, i.e. the first day of the reporting period; thus
there is no profit that warrants the preparation of a consolidated statement of profit or
loss and other comprehensive income and statement of changes in equity. Only a
consolidated statement of financial position can be prepared at that date.
P Ltd
ASSETS
Property, plant and equipment
Investment in S Ltd: 80 000 shares at cost price
Trade receivables
Total assets
EQUITY AND LIABILITIES
Share capital (200 000/80 000 shares)
Retained earnings
Trade and other payables
Total equity and liabilities
S Ltd
91 000
95 000
42 000
65 000
–
44 000
R228 000
R109 000
200 000
8 000
20 000
80 000
9 000
20 000
R228 000
R109 000
Assume that the identifiable assets acquired and the liabilities assumed at acquisition
date are shown at their acquisition-date fair values as determined in terms of IFRS 3.
P Ltd recognised the equity investment in S Ltd in its separate records using the cost
price method.
Ignore tax implications.
Solution 3.2
The basic consolidation procedures are the same as in example 3.1, i.e. eliminate the
common items and consolidate the remaining non-common items on a line-by-line
basis.
92
Consolidation at acquisition date
The line item “Investment in S Ltd” in the statement of financial position of P Ltd
represents the fair value to P Ltd of acquiring the equity in and control over S Ltd. P Ltd
has thus purchased equity (net assets) amounting to R89 000 and paid R95 000, which
leaves a difference of R6 000. P Ltd has in essence acquired, at a consideration at fair
value (assumed) of R95 000, the following net assets:
Consideration transferred (Investment at fair value)
95 000
Net recognised values of S Ltd’s identifiable assets and liabilities
(89 000)
Property, plant and equipment
65 000
Trade receivables
44 000
109 000
(20 000)
Trade and other payables
Excess/premium
R6 000
As the excess of R6 000 cannot be attributed to a single asset that is undervalued, it
may be assumed that the excess was paid for factors that relate to various intangible
assets, which is called goodwill. As there is no common element or item against which
this goodwill of R6 000 can be set off, it is presented as a separate item in the
consolidated statement of financial position of the group. This goodwill is an asset and
because an increase in assets increases the equity of S Ltd, the amount is transferred
to the total column in the analysis of the equity of S Ltd.
Calculations
C1 Analysis of owners’ equity of S Ltd
Total
i At acquisition (1/1/20.19)
Share capital
Retained earnings
P Ltd 100%
At acquisition
80 000 (dr)
9 000 (dr)
80 000
9 000
Equity represented by goodwill – Parent
89 000
6 000 (dr)
89 000
6 000
Consideration
R95 000 (cr)
R95 000
C2 Proof of calculation of goodwill of S Ltd in terms of IFRS 3.32
Consideration transferred at acquisition date: IFRS 3.32(a)(i)
Net of the identifiable assets acquired and liabilities assumed
at acquisition date: IFRS 3.32(b)
95 000
(89 000)
Goodwill
R6 000
93
Chapter 3
The pro forma consolidation journal entry for the elimination of common items and the
recognition of the goodwill is as follows:
C3 Pro forma consolidation journal entry
Dr
R
J1
Share capital (S)(SCE)
Retained earnings (S)(SCE)
Goodwill (S)(SFP)
Investment in S Ltd (P)(SFP)
Elimination of common items and recognition
of goodwill at acquisition
Cr
R
80 000
9 000
6 000
95 000
By netting off the pro forma journal entry against the amounts contained in the separate
statements of financial position of P Ltd and its subsidiary, only the non-common items
remain. These are then added together on a line-by-line basis in the consolidated
statement of financial position. For this procedure, use is again made of a consolidation
worksheet.
C4 Consolidation worksheet: P Ltd and subsidiary
P Ltd
S Ltd
Consolidation
adjustments
Dr
Property, plant and
equipment
Goodwill
Investment in S Ltd
Trade receivables
91 000
–
95 000
42 000
65 000
–
–
44 000
6 000 (J1)
Cr
95 000 (J1)
R228 000 R109 000
Share capital
Retained earnings
Trade and other
payables
200 000
8 000
80 000
9 000
20 000
20 000
Consolidated
156 000
6 000
–
86 000
R248 000
80 000 (J1)
9 000 (J1)
R228 000 R109 000 R95 000
200 000
8 000
40 000
R95 000
R248 000
The last column of the worksheet can now easily be adapted into a consolidated
statement of financial position.
94
Consolidation at acquisition date
P LTD GROUP
CONSOLIDATED STATEMENT OF FINANCIAL POSITION AS AT 1 JANUARY 20.19
ASSETS
Non-current assets
Property, plant and equipment (91 000(P) + 65 000(S))
Goodwill
156 000
6 000
Total non-current assets
Current assets
162 000
Trade receivables (42 000(P) + 44 000(S))
86 000
Total assets
R248 000
EQUITY AND LIABILITIES
Equity attributable to owners of the parent
Share capital (P)
Retained earnings (P)
200 000
8 000
Total equity
208 000
Current liabilities
Trade and other payables (20 000(P) + 20 000(S))
Total equity and liabilities
40 000
R248 000
Comment
Goodwill is an intangible asset that is presented as a non-current asset in the
consolidated statement of financial position.
3.15 Interest acquired at less than the fair value of the identifiable assets
acquired and liabilities assumed of the acquiree
(therefore at a discount)
1
2
It is possible that a parent may acquire the interest in a subsidiary at less than the net
fair value of the identifiable assets, liabilities and contingent liabilities. (In the interest
of brevity, this item is henceforth referred to as acquisition at a discount.) The
possibility of obtaining an interest in a subsidiary at a discount may be as a result of
different factors such as a forced sale in which the seller is acting under compulsion,
or due to the recognition of a contingent liability in terms of IFRS 3.22–.31.
The parent pays less than the fair value of the identifiable assets and liabilities for
the acquisition of the interest in the subsidiary; in other words the net fair value of
the identifiable assets, liabilities and contingent liabilities exceeds the consideration
transferred for the shares acquired. This difference is called a gain from a bargain
purchase. Due to the potential of inappropriately recognising a gain, IFRS requires a
reassessment of the identification and measurement of the assets acquired, the
liabilities assumed and the measurement of the consideration transferred, as
discussed in chapter 2. If after the review process an excess remains, a gain from
95
Chapter 3
the bargain purchase is recognised in profit or loss on the acquisition date
(IFRS 3.34). Such gain on a bargain purchase is attributable to the acquirer
(IFRS 3.34) and is therefore added to the equity at the acquisition date.
In this chapter it will be assumed that such reassessment has been done and that
the shares were obtained at a bargain price, thus requiring the immediate
recognition of the gain from bargain purchase in profit or loss.
Example 3.3
Wholly-owned subsidiary – Interest acquired at a discount
Assume the same information as in example 3.2, except that P Ltd acquired the interest
in S Ltd for R75 000 and that its trade receivables amounted to R62 000.
The following are the condensed statements of financial position of P Ltd and its whollyowned subsidiary S Ltd at 1 January 20.19, the date on which P Ltd acquired all the
shares in S Ltd:
P Ltd
ASSETS
Property, plant and equipment
Investment in S Ltd: 80 000 shares at cost price
Trade receivables
Total assets
EQUITY AND LIABILITIES
Share capital (200 000/80 000 shares)
Retained earnings
Trade and other payables
Total equity and liabilities
S Ltd
91 000
75 000
62 000
65 000
–
44 000
R228 000
R109 000
200 000
8 000
20 000
80 000
9 000
20 000
R228 000
R109 000
Assume that the identifiable assets acquired and the liabilities assumed at acquisition
date are shown at their acquisition-date fair values as determined in terms of IFRS 3.
P Ltd recognised the equity investment in S Ltd in its separate records using the cost
price method.
Ignore tax implications
Solution 3.3
The basic consolidation procedures are once again the same as in the two previous
examples: elimination of the common items and consolidation of the remaining noncommon items on a line-by-line basis. As previously explained, only the consolidated
statement of financial position can be prepared.
The line item “Investment in S Ltd” of R75 000 in the statement of financial position of
P Ltd represents the fair value to P Ltd to acquire the equity in and full control of S Ltd.
96
Consolidation at acquisition date
P Ltd thus purchased equity (net assets) amounting to R89 000 and only paid R75 000,
the gain thus being R14 000. This is clear from the following calculation:
Consideration transferred (Investment at fair value)
75 000
Net recognised values of S Ltd’s identifiable assets
and liabilities
(89 000)
Property, plant and equipment
65 000
Trade receivables
44 000
Trade and other payables
109 000
(20 000)
Gain from bargain purchase
(R14 000)
In practice, the reassessment required by IFRS 3.36 is done at this stage and if the
excess remains, the gain is recognised immediately in profit or loss at the acquisition
date (IFRS 3.34) as an excess of fair value over cost on acquisition (hereafter called
gain from bargain purchase, for the sake of brevity). This gain is regarded as part of the
equity of the subsidiary and added to the other components of equity of the subsidiary.
Calculations
C1 Analysis of owners’ equity of S Ltd
P Ltd 100%
Total
i At acquisition (1/1/20.19)
Share capital
Retained earnings
At acquisition
80 000 (dr)
9 000 (dr)
80 000
9 000
Gain from a bargain purchase – Parent
R89 000
(14 000) (cr)
89 000
(14 000)
Consideration
R75 000 (cr)
R75 000
C2 Proof of calculation of gain from a bargain purchase of S Ltd in terms
of IFRS 3.32
Consideration transferred at acquisition date: IFRS 3.32(a)(i)
75 000
Net of the identifiable assets acquired and liabilities assumed
at acquisition date: IFRS 3.32(b)
(89 000)
Gain from a bargain purchase
The pro forma consolidation journal entry concerned is thus as follows:
(R14 000)
C3 Pro forma consolidation journal entry
Dr
R
J1
Share capital (S)(SCE)
Retained earnings (S)(SCE)
Investment in S Ltd (P)(SFP)
Gain from bargain purchase (S)(P/L)
Elimination of common items and recognition
of gain from bargain purchase at acquisition
Cr
R
80 000
9 000
75 000
14 000
97
Chapter 3
C4 Consolidation worksheet: P Ltd and subsidiary
P Ltd
Consolidation
adjustments
S Ltd
Dr
Property, plant and
equipment
Investment in S Ltd
Trade receivables
91 000
75 000
62 000
65 000
–
44 000
Cr
75 000 (J1)
R228 000 R109 000
Share capital
Retained earnings
Gain from bargain
purchase
Trade and other
payables
200 000
8 000
80 000
9 000
–
–
20 000
20 000
Consolidated
156 000
–
106 000
R262 000
80 000 (J1)
9 000 (J1)
R228 000 R109 000
200 000
8 000
14 000 (J1)
14 000
40 000
R89 000
R89 000
R262 000
The last column of the worksheet can now, once again, be adopted into a consolidated
statement of financial position.
P LTD GROUP
CONSOLIDATED STATEMENT OF FINANCIAL POSITION AS AT 1 JANUARY 20.19
ASSETS
Non-current assets
Property, plant and equipment (91 000(P) + 65 000(S))
Current assets
Trade receivables (62 000(P) + 44 000(S))
Total assets
EQUITY AND LIABILITIES
Equity attributable to owners of the parent
Share capital (P)
Retained earnings (8 000(P) + 14 000(gain from a bargain purchase))
Total equity
Current liabilities
Trade and other payables (20 000(P) + 20 000(S))
Total equity and liabilities
156 000
106 000
R262 000
200 000
22 000
222 000
40 000
R262 000
Comment
The gain resulting from the acquisition of an interest in a subsidiary at less than the fair
value of the identifiable assets and liabilities of the acquiree (called a gain from a
bargain purchase) is recognised in profit or loss on the acquisition date (IFRS 3.34). As
no consolidated statement of profit or loss and other comprehensive income is prepared
in this example, the amount is added to retained earnings at the end of the year.
Remember, any gain (e.g., a gain from a bargain purchase) that was recognised during
a reporting period forms part of “retained earnings at the end of the year” by the end of
that reporting period.
98
Consolidation at acquisition date
Consolidation of the statements of financial position of a parent
and partially-owned subsidiary at acquisition date
3.16 Non-controlling interests (NCI)
1
Where the parent does not acquire the entire issued share capital of a subsidiary,
the owners other than the parent (and its subsidiaries and their nominees) are
referred to as the non-controlling interests (NCI). In the past, the term “minority
interest” was used for this category of owners, but the change in terminology
reflects the fact that the owner of a minority interest in an entity might control that
entity and conversely, that the owners of a majority interest might not control the
entity, as discussed in chapter 1. Non-controlling interests (NCI) are therefore
defined as the equity in a subsidiary not attributable, directly or indirectly, to the
parent (IFRS 10. Appendix A). This can diagrammatically be represented as follows:
P Ltd
70%
S Ltd
2
3
4
30%
NCI
As is the case with the parent, their ownership interests entitle owners other than
the parent to their undivided share of the net assets. As the total equity equals net
assets, it follows that the respective interests of the parent and the non-controlling
interests can be determined simply by allocating to each their respective share of
equity.
In preparing consolidated financial statements, the non-controlling interests in the
net assets of consolidated subsidiaries, as well as the non-controlling interests in
the profit or loss of consolidated subsidiaries for the reporting period, is identified
separately from the parent’s ownership interests in them. Non-controlling interests in
the net assets consist of:
l the amount of the non-controlling interests at the date of the original business
combination (calculated in accordance with IFRS 3); and
l the non-controlling interests’ share of changes in equity since the date of the
business combination.
For the sake of brevity, a subsidiary that is partially owned is hereafter referred to as
a partially-owned subsidiary.
The non-controlling interests shall be presented in the consolidated statement of
financial position within equity, separately from the equity of the owners of the
parent (IFRS 10.22).
Profit or loss, and each component of other comprehensive income, are attributed to
the owners of the parent and to the non-controlling interests. Total comprehensive
income is similarly attributed to the owners of the parent and to the non-controlling
interests, even if this results in the non-controlling interests having a deficit balance
(IFRS 10.B94).
99
Chapter 3
3.17
1
Analysis of owners’ equity
The allocation of the respective interests of the parent and of the non-controlling
interests can conveniently be made by analysing the owners’ equity of S Ltd at
acquisition date in order to determine the following:
l the portion of equity at acquisition attributable to P Ltd; and
l the portion of equity at acquisition attributable to the non-controlling interests.
2
When drawing up a consolidated statement of financial position, the non-controlling
interests shall be taken into account and presented separately as will be clearly seen
from the following examples. As explained earlier in the chapter, the investment in the
subsidiary can be purchased at a consideration higher or lower than the fair value of
the identifiable assets and liabilities of the acquiree at the acquisition date. This would
lead to goodwill or a gain from a bargain purchase arising as a result.
3.18 Recognising and measuring goodwill or a gain from a bargain
purchase
1
In paragraph 3.12 to 3.14 of this chapter, the accounting treatment of goodwill or
gain from a bargain purchase was discussed for the acquisition of a wholly-owned
subsidiary. The matter is complicated where the subsidiary is not wholly owned.
2
IFRS 3 Business Combinations requires in paragraph 32 that the goodwill or gain
from a bargain purchase shall be calculated by the acquirer at the acquisition date, as
the difference between:
(a) the aggregate of:
(i) the consideration transferred (generally acquisition-date fair value)
(IFRS 3.32(a)(i)); and
(ii) the amount of any non-controlling interests in the acquiree (IFRS 3.32 (a)(ii))
and
(b) the net of the acquisition-date amounts of the identifiable assets acquired and
the liabilities assumed.
If (a) exceeds (b), the difference is called “goodwill”.
If (b) exceeds (a), the difference is called a “gain from a bargain purchase”.
The non-controlling interest in (a)(ii) of the calculation above may be measured in
two ways in terms of IFRS.
3
In principle IFRS 3 determines that any non-controlling interests in an aquiree (the
subsidiary) should be measured at their acquisition date fair values. It however
permits the non-controlling interests to be measured at their proportionate share of
the acquiree’s identifiable net assets. If an entity chooses the latter option, only the
goodwill related to the acquirer is recognised (BC 329). The fair value of the noncontrolling interests may be measured, for example, on the basis of active market
prices for shares held by non-controlling shareholders or by applying another
100
Consolidation at acquisition date
valuation technique (BC 207). It is therefore clear that the non-controlling interests
may be measured:
l at the acquisition date fair value; or
l as their proportionate share of the subsidiary’s identifiable net assets (BC 210).
3.19 Acquisition of a partial interest in a subsidiary
1
In the examples that follow, the consolidation once again takes place at the
acquisition date, therefore only the respective statements of financial position of the
parent and partially-owned subsidiary can be consolidated. Example 3.4, however,
contains the consolidated statement of profit or loss and other comprehensive
income and statement of changes in equity so that it can clearly be observed that
neither statement is influenced by the acquisition of a subsidiary on the last day of
the reporting period. In examples 3.5 and 3.6, only the consolidated statements of
financial position are prepared.
2
As in the case of the wholly-owned subsidiary dealt with earlier in this chapter, the
consolidation procedure is illustrated with reference to three situations, but an
additional example is supplied to allow for the measurement of the non-controlling
interests at fair value at the date of acquisition, namely:
l where the consideration of the shares acquired is equal to the pro rata value of
the net assets acquired (i.e. the fair value of the identifiable assets and liabilities
of the acquiree) at the last day of the reporting period. Such an acquisition is
referred to as an acquisition of shares at the fair value of the identifiable assets
and liabilities of the acquiree;
l where the shares in such partially-owned subsidiary are acquired at a premium
(i.e. the consideration is higher than the fair value of the net assets acquired) on
the first day of the reporting period, and the non-controlling interest is measured
as its proportionate share of the identifiable assets and liabilities;
l where the shares in such partially-owned subsidiary are acquired at a premium
(i.e. the consideration is higher than the fair value of the net assets acquired) on
the first day of the reporting period and the non-controlling interest is measured
at fair value at the date of acquisition; and
l where the shares in question are acquired at a discount (i.e. the consideration is
lower than the fair value of the net assets acquired) on the first day of the reporting
period, where the non-controlling interest is measured as its proportionate share
of the identifiable assets and liabilities.
3
To simplify the explanation of the consolidation process, the investment in the
subsidiary is accounted for using the cost method in the separate financial records
of the parent.
101
Chapter 3
3.20 Interest acquired at the fair value of the identifiable assets acquired
and liabilities assumed of the acquiree – NCI measured at their
proportionate share of the subsidiary’s identifiable net assets at
acquisition date
Example 3.4
Partially-owned subsidiary – Interest acquired at the fair value
of the identifiable net assets, NCI measured at their
proportionate share of the identifiable net assets at
acquisition date
The following are the condensed statements of financial position of P Ltd and S Ltd, a
subsidiary which is partially owned, at 30 September 20.18, the acquisition date:
P Ltd
ASSETS
Property, plant and equipment
Investment in S Ltd: 60 000 shares at cost price
Trade receivables
S Ltd
23 000
75 000
112 000
50 000
–
86 000
Total assets
EQUITY AND LIABILITIES
Share capital (100 000/80 000 shares)
Retained earnings
Trade and other payables
R210 000
R136 000
100 000
26 000
84 000
80 000
20 000
36 000
Total equity and liabilities
R210 000
R136 000
EXTRACT FROM THE STATEMENTS OF PROFIT OR LOSS AND OTHER
COMPREHENSIVE INCOME FOR THE YEAR ENDED 30 SEPTEMBER 20.18
P Ltd
S Ltd
Profit before tax
Income tax expense
23 000
(7 000)
20 000
(6 000)
PROFIT FOR THE YEAR
16 000
14 000
–
–
R16 000
R14 000
Other comprehensive income for the year
TOTAL COMPREHENSIVE INCOME FOR THE YEAR
EXTRACT FROM THE STATEMENTS OF CHANGES IN EQUITY
FOR THE YEAR ENDED 30 SEPTEMBER 20.18
Retained earnings
P Ltd
Balance at 1 October 20.17
Changes in equity for 20.18
Total comprehensive income for the year:
Profit for the year
Dividend paid
Balance at 30 September 20.18
102
S Ltd
14 000
8 000
16 000
(4 000)
14 000
(2 000)
R26 000
R20 000
Consolidation at acquisition date
Assume that the identifiable assets acquired and the liabilities assumed at acquisition
date are shown at their acquisition-date fair values as determined in terms of IFRS 3.
P Ltd recognised the equity investment in S Ltd in its separate records using the cost
price method.
P Ltd elected to measure any non-controlling interest in an acquiree at its proportionate
share of the acquiree’s identifiable net assets.
Ignore tax implications.
Solution 3.4
The basic consolidation procedures are once again the same as explained earlier in
this chapter:
l eliminate common items, and
l consolidate the remaining non-common items, on a line-by-line basis.
The 80 000 shares (which make up the issued capital of S Ltd) are held in the following
percentage ratio:
60 000
P Ltd in S Ltd:
= 75%
80 000
20 000
Non-controlling interests in S Ltd:
= 25%
80 000
Comment
The calculation of the percentage ownership in a subsidiary is always based on the
number of shares (not the carrying amount of the investment). It is also assumed that
one vote is attached to every share, as control is assumed to vest in control of the
voting rights on shareholders’ meetings (as discussed in chapter 1) of this work in the
absence of other factors. In Volume 1 it is therefore assumed that the parent exercises
control over the subsidiary as per the definition of control in terms of IFRS 10.
Calculations
C1 Analysis of owners’ equity of S Ltd
Total
i At acquisition (30/9/20.18)
Share capital
Retained earnings
P Ltd 75%
At acquisition
Non-controlling
interests (NCI)
80 000 (dr)
20 000 (dr)
60 000
15 000
20 000
5 000
Purchase difference
100 000
–
75 000
–
R25 000
–
Consideration and NCI
R100 000
R75 000 (cr)
R25 000 (cr)
Comment
As from this point onwards, in this work the abbreviation NCI will be used in the analysis
for the concept “non-controlling interests”.
103
Chapter 3
From the analysis it is clear that no purchase difference arises on acquisition. In terms
of the IFRS 3.32 calculation, it is also clear that there is no purchase difference:
C2 Proof of calculation of purchase difference of S Ltd in terms of IFRS 3.32
Consideration transferred at acquisition date: IFRS 3.32(a)(i)
75 000
Amount of non-controlling interests: IFRS 3.32(a)(ii)
25 000
Net of the identifiable assets acquired and liabilities assumed at acquisition
date: IFRS 3.32(b)
100 000
(100 000)
Purchase difference
R–
With the above analysis as basis, the elimination of the related items can be recorded
by means of pro forma consolidation journal entries.
C3 Pro forma consolidation journal entry
Dr
R
J1
Share capital (S)(SCE)
Retained earnings (S)(SCE)
Investment in S Ltd (P)(SFP)
Non-controlling interests (SFP)
Elimination of common items and recognition
of non-controlling interests at acquisition
Cr
R
80 000
20 000
75 000
25 000
By netting off the pro forma journal entry against the amounts contained in the separate
statements of financial position of P Ltd and S Ltd, the non-common items remain.
Thereafter, the non-common items are added together on a line-by-line basis in the
consolidated statement of financial position.
C4 Consolidation worksheet: P Ltd and subsidiary
Property, plant and
equipment
Investment in S Ltd
Trade receivables
Consolidation adjustments
P Ltd
S Ltd
23 000
75 000
112 000
50 000
–
86 000
Dr
Cr
75 000 (J1)
R210 000 R136 000
Share capital
Retained earnings
Non-controlling
interests
Trade and other
payables
104
100 000
26 000
80 000
20 000
–
–
Consolidated
73 000
–
198 000
R271 000
80 000 (J1)
20 000 (J1)
84 000
36 000
R210 000 R136 000 R100 000
100 000
26 000
25 000 (J1)
25 000
R100 000 (J1)
120 000
R271 000
Consolidation at acquisition date
The last column of the worksheet is now adapted into a consolidated statement of
financial position.
P LTD GROUP
CONSOLIDATED STATEMENT OF FINANCIAL POSITION
AS AT 30 SEPTEMBER 20.18
ASSETS
Non-current assets
Property, plant and equipment (23 000(P) + 50 000(S))
73 000
Current assets
Trade receivables (112 000(P) + 86 000(S))
198 000
Total assets
R271 000
EQUITY AND LIABILITIES
Equity attributable to owners of the parent
Share capital (P)
Retained earnings (P)
100 000
26 000
Non-controlling interests
126 000
25 000
Total equity
151 000
Current liabilities
Trade and other payables (84 000(P) + 36 000(S))
120 000
Total equity and liabilities
R271 000
Comment
In terms of IFRS 10.22, the non-controlling interests shall be presented separately in the
consolidated statement of financial position within equity, from the equity of the owners
of the parent. This can be observed through the total amount for equity which includes
the non-controlling interests.
The consolidated statement of profit or loss and other comprehensive income and
consolidated statement of changes in equity will be as follows: (Keep in mind that the
controlling interest and the non-controlling interests only originated on the last day of
the reporting period and that P Ltd is not entitled to the pre-acquisition profits of S Ltd.)
P LTD GROUP
EXTRACT FROM THE CONSOLIDATED STATEMENT OF PROFIT OR LOSS
AND OTHER COMPREHENSIVE INCOME
FOR THE YEAR ENDED 30 SEPTEMBER 20.18
Profit before tax (only P Ltd)
Income tax expense
23 000
(7 000)
PROFIT FOR THE YEAR
16 000
Other comprehensive income for the year
TOTAL COMPREHENSIVE INCOME FOR THE YEAR
–
R16 000
105
Chapter 3
P LTD GROUP
CONSOLIDATED STATEMENT OF CHANGES IN EQUITY
FOR THE YEAR ENDED 30 SEPTEMBER 20.18
Balance at 1 October 20.17
Changes in equity for 20.18
Total comprehensive income
for the year:
Profit for the year
Dividend paid (P)
Subsidiary acquired at the end
of the reporting period
Balance at 30 September
20.18
Noncontrolling
interests
Total
equity
114 000
–
114 000
16 000
(4 000)
16 000
(4 000)
–
–
16 000
(4 000)
–
–
25 000
25 000
Share
capital
Retained
earnings
Total
100 000
14 000
–
–
–
R100 000 R26 000 R126 000
R25 000 R151 000
Comments
a The statement of profit or loss and other comprehensive income of S Ltd cannot be
consolidated, as P Ltd did not have the power to control S Ltd during the reporting
period. Therefore, P Ltd could not obtain economic benefits from it. The dividend of
R2 000 that was paid by S Ltd therefore is not attributable to P Ltd.
b The concept “non-controlling interests” only exists in relation to the subsidiary. Before
a parent-subsidiary relationship comes into existence, non-controlling interests can
not exist. In this example, the non-controlling interests only come into being on the
last day of the reporting period.
3.21 Interest acquired at a premium – NCI measured at their
proportionate share of the subsidiary’s identifiable net assets at
acquisition date
Example 3.5
Partially-owned subsidiary – Interest acquired at a premium,
NCI measured at their proportionate interest of identifiable net
assets at acquisition date
Assume the same basic information as in example 3.4, with the exception that the
parent acquired the 75% interest in the subsidiary at a premium on the first day of the
next reporting period.
106
Consolidation at acquisition date
The following are the condensed statements of financial position of P Ltd and S Ltd, a
subsidiary which is partially owned, at 1 October 20.18, the acquisition date:
P Ltd
ASSETS
Property, plant and equipment
Investment in S Ltd: 60 000 shares at cost price
Trade receivables
Total assets
EQUITY AND LIABILITIES
Share capital (100 000/80 000 shares)
Retained earnings
Trade and other payables
Total equity and liabilities
S Ltd
23 000
80 000
107 000
50 000
–
86 000
R210 000
R136 000
100 000
26 000
84 000
80 000
20 000
36 000
R210 000
R136 000
Assume that the identifiable assets acquired and the liabilities assumed at acquisition date
are shown at their acquisition-date fair values, as determined in terms of IFRS 3.
P Ltd recognised the equity investment in S Ltd in its separate records using the cost
price method.
P Ltd elected to measure the non-controlling interests of the acquiree at its
proportionate share of the acquiree’s identifiable net assets at acquisition date.
Ignore tax implications.
Solution 3.5
As before, the basic consolidation procedures consist of:
l the elimination of common items; and
l the consolidation of the remaining non-common items on a line-by-line basis.
In order to determine which balances must be eliminated, what the total of the noncontrolling interests is (in view of the fact that P Ltd only owns 75% of the interests) and
to determine the goodwill, the equity must be analysed as follows:
Calculations
C1 Analysis of owners’ equity of S Ltd
Total
i At acquisition (1/10/20.18)
Share capital
Retained earnings
Equity represented by goodwill – Parent
Consideration and NCI
P Ltd 75%
At acquisition
NCI
80 000 (dr)
20 000 (dr)
60 000
15 000
20 000
5 000
100 000
5 000 (dr)
75 000
5 000
25 000
–
R105 000
R80 000 (cr) R25 000 (cr)
107
Chapter 3
Goodwill calculated in the analysis above is measured as a residual. The goodwill
calculation as required by IFRS 3.32 is as follows:
C2 Proof of calculation of goodwill of S 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)
80 000
25 000
105 000
Net of the identifiable assets acquired and liabilities assumed
at acquisition date: IFRS 3.32(b)
(100 000)
Goodwill
R5 000
The relevant pro forma consolidation journal entry is clear from the analysis of the
owners’ equity of S Ltd:
C3 Pro forma consolidation journal entry
Dr
R
J1
Share capital (S)(SCE)
Retained earnings (S)(SCE)
Goodwill (S)(SFP)
Investment in S Ltd (P)(SFP)
Non-controlling interests (SFP)
Elimination of common items and recognition of
goodwill and non-controlling interests at acquisition
Cr
R
80 000
20 000
5 000
80 000
25 000
C4 Consolidation worksheet: P Ltd and subsidiary
Property, plant and
equipment
Goodwill
Investment in S Ltd
Trade receivables
Consolidation adjustments
P Ltd
S Ltd
23 000
–
80 000
107 000
50 000
–
–
86 000
Dr
5 000 (J1)
Cr
80 000 (J1
R210 000 R136 000
Share capital
Retained earnings
Non-controlling
interests
Trade and other
payables
100 000
26 000
80 000
20 000
–
–
84 000
36 000
73 000
5 000
–
193 000
R271 000
80 000 (J1)
20 000 (J1)
R210 000 R136 000 R105 000
108
Consolidated
100 000
26 000
25 000 (J1)
25 000
120 000
R105 000
R271 000
Consolidation at acquisition date
The consolidated statement of financial position is prepared from the information contained
in the worksheet.
P LTD GROUP
CONSOLIDATED STATEMENT OF FINANCIAL POSITION AS AT 1 OCTOBER 20.18
ASSETS
Non-current assets
Property, plant and equipment (23 000(P) + 50 000(S))
Goodwill
73 000
5 000
78 000
Current assets
Trade receivables (107 000(P) + 86 000(S))
Total assets
EQUITY AND LIABILITIES
Equity attributable to owners of the parent
Share capital (P)
Retained earnings (P)
193 000
R271 000
100 000
26 000
Non-controlling interests
126 000
25 000
Total equity
151 000
Current liabilities
Trade and other payables (84 000(P) + 36 000(S))
120 000
Total equity and liabilities
R271 000
Comments
a It is clear that a consolidated statement of profit or loss and other comprehensive
income and statement of changes in equity cannot be prepared, as there has not yet
been any performance in respect of the current reporting period, and no changes in
equity have as yet occurred.
109
Chapter 3
3.22 Interest acquired at a premium – NCI is measured at fair value
at acquisition
Example 3.6
Partially-owned subsidiary – Interest acquired at a premium,
NCI measured at fair value of identifiable net assets at
acquisition date
The following are the condensed statements of financial position of P Ltd and S Ltd, a
subsidiary which is partially owned, at 1 October 20.18, the acquisition date:
P Ltd
ASSETS
Property, plant and equipment
Investment in S Ltd: 60 000 shares at cost price
Trade receivables
S Ltd
123 000
80 000
107 000
50 000
–
86 000
R310 000
R136 000
EQUITY AND LIABILITIES
Share capital
Retained earnings
Trade and other payables
200 000
26 000
84 000
80 000
20 000
36 000
Total equity and liabilities
R310 000
R136 000
Total assets
Assume that the identifiable assets acquired and the liabilities assumed at acquisition
date are shown at their acquisition-date fair values, as determined in terms of IFRS 3.
P Ltd elected to measure any non-controlling interests at fair value at the acquisition
date. On 1 October 20.18 the fair value of the non-controlling interests was R35 000
based on current market prices.
P Ltd recognised the equity investment in S Ltd in its separate records using the cost
price method.
Ignore tax implications.
Solution 3.6
As before, the basic consolidation procedures consist of:
l the elimination of common items; and
l the consolidation of the remaining non-common balances on a line-by-line basis.
In order to determine which balances must be eliminated, what the total non-controlling
interests (in view of the fact that P Ltd only owns 75% of the interests) and goodwill are,
the equity must be analysed as follows:
110
Consolidation at acquisition date
Calculations
C1 Analysis of owners’ equity of S Ltd
Total
P Ltd 75%
NCI
At acquisition
i At acquisition (1/10/20.18)
Share capital
Retained earnings
Equity represented by goodwill – Parent
Equity represented by goodwill – NCI
Consideration and NCI at fair value
80 000 (dr)
20 000 (dr)
60 000
15 000
20 000
5 000
100 000
5 000 (dr)
10 000 (dr)
75 000
5 000
–
25 000
–
10 000
115 000
80 000 (cr)
35 000 (cr)
The goodwill calculation now incorporates the non-controlling interests measured at fair
value:
C2 Proof of calculation of goodwill of S 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)
80 000
35 000
115 000
Net of the identifiable assets acquired and liabilities assumed
at acquisition date: IFRS 3.32(b)
(100 000)
Goodwill (5 000 (Parent) + 10 000 (NCI))
R15 000
The relevant pro forma consolidation journal entry is clear from the analysis of the
equity of S Ltd.
C3 Pro forma consolidation journal entry
Dr
R
J1
Share capital (S)(SCE)
Retained earnings (S)(SCE)
Goodwill (S) (SFP)
Investment in S Ltd (P)(SFP)
Non-controlling interests (SFP)
Elimination of common items and recognition of
goodwill and non-controlling interests measured
at fair value at acquisition
Cr
R
80 000
20 000
15 000
80 000
35 000
111
Chapter 3
C4 Consolidation worksheet: P Ltd and subsidiary
Property, plant and
equipment
Goodwill
Investment in S Ltd
Trade receivables
Consolidation adjustments
P Ltd
S Ltd
123 000
–
80 000
107 000
50 000
–
–
86 000
Dr
15 000 (J1)
Cr
80 000 (J1)
R310 000 R136 000
Share capital
Retained earnings
Non-controlling
interests
Trade and other
payables
200 000
26 000
80 000
20 000
–
–
84 000
36 000
Consolidated
173 000
15 000
–
193 000
R381 000
80 000 (J1)
20 000 (J1)
R310 000 R136 000 R115 000
200 000
26 000
35 000 (J1)
35 000
120 000
R115 000
R381 000
The last column of the worksheet is now adapted into a consolidated statement of
financial position.
P LTD GROUP
CONSOLIDATED STATEMENT OF FINANCIAL POSITION AS AT 1 OCTOBER 20.18
ASSETS
Non-current assets
Property, plant and equipment (123 000(P) + 50 000(S))
Goodwill
173 000
15 000
188 000
Current assets
Trade receivables (107 000(P) + 86 000(S))
Total assets
193 000
R381 000
EQUITY AND LIABILITIES
Equity attributable to owners of the parent
Share capital (P)
Retained earnings (P)
200 000
26 000
Non-controlling interests
226 000
35 000
Total equity
261 000
Current liabilities
Trade and other payables (84 000(P) + 36 000(S))
120 000
Total equity and liabilities
112
R381 000
Consolidation at acquisition date
3.23 Interest acquired at a discount – NCI measured at their proportionate share of the subsidiary’s identifiable net assets at
acquisition date
Example 3.7
Partially-owned subsidiary – Interest acquired at a discount,
NCI measured at their proportionate interest of identifiable net
assets at acquisition date
In this example the 75% interest in the subsidiary is acquired at less than the fair value
of the identifiable assets and liabilities of the acquiree by the parent.
The following are the condensed statements of financial position of P Ltd and subsidiary S Ltd at 1 October 20.18, the date on which P Ltd acquired the interest in S Ltd:
P Ltd
ASSETS
Property, plant and equipment
Investment in S Ltd: 60 000 shares at cost price
Trade receivables
S Ltd
23 000
65 000
122 000
50 000
–
86 000
Total assets
EQUITY AND LIABILITIES
Share capital
Retained earnings
Trade and other payables
R210 000
R136 000
100 000
26 000
84 000
80 000
20 000
36 000
Total equity and liabilities
R210 000
R136 000
Assume that the identifiable assets acquired and the liabilities assumed at acquisition
date are shown at their acquisition-date fair values, as determined in terms of IFRS 3.
P Ltd recognised the equity investment in S Ltd in its separate records using the cost
price method.
P Ltd elected to measure any non-controlling interests in an acquiree at its
proportionate share of the acquiree’s identifiable net assets.
Ignore tax implications.
Solution 3.7
Calculations
C1 Analysis of owners’ equity of S Ltd
Total
P Ltd 75%
NCI
At acquisition
i At acquisition (1/10/20.18)
Share capital
Retained earnings
Gain from a bargain purchase – Parent
Consideration and NCI
80 000 (dr)
20 000 (dr)
60 000
15 000
20 000
5 000
100 000
(10 000) (cr)
75 000
(10 000)
25 000
–
R90 000
R65 000 (cr) R25 000 (cr)
113
Chapter 3
Comment
Compare this analysis with the analysis of the equity of S Ltd in example 3.6 where the
non-controlling interest has a fair value of R35 000. It should be clear that in this
example (as in example 3.5) the non-controlling interests do not have an interest in the
purchase difference.
C2 Proof of calculation of gain from a bargain purchase of S Ltd in terms
of IFRS 3.32
Consideration transferred at acquisition date: IFRS 3.32(a)(i)
65 000
Amount of non-controlling interests: IFRS 3.32(a)(ii)
25 000
90 000
Net of the identifiable assets acquired and liabilities assumed
at acquisition date: IFRS 3.32(b)
(100 000)
Gain from a bargain purchase
(R10 000)
The gain from bargain purchase has no effect on the non-controlling interests.
C3 Pro forma consolidation journal entry
Dr
R
J1
Share capital (S)(SCE)
Retained earnings (S)(SCE)
Investment in S Ltd (P)(SFP)
Gain from a bargain purchase (S)(P/L)
Non-controlling interests (SFP)
Elimination of common items and recognition
of gain from bargain purchase and non-controlling
interests at acquisition
Cr
R
80 000
20 000
65 000
10 000
25 000
C4 Consolidation worksheet: P Ltd and subsidiary
Property, plant and
equipment
Investment in S Ltd
Trade receivables
Consolidation adjustments
P Ltd
S Ltd
23 000
65 000
122 000
50 000
–
86 000
Dr
Cr
65 000 (J1)
R210 000 R136 000
Share capital
Retained earnings
Gain from a bargain
purchase
Non-controlling
interests
Trade and other
payables
73 000
–
208 000
R281 000
100 000
26 000
80 000
20 000
80 000 (J1)
20 000 (J1)
–
–
10 000 (J1)
10 000
–
–
25 000 (J1)
25 000
84 000
36 000
R210 000 R136 000 R100 000
114
Consolidated
100 000
26 000
120 000
R100 000
R281 000
Consolidation at acquisition date
The last column of the worksheet can now easily be adapted into a consolidated
statement of financial position.
P LTD GROUP
CONSOLIDATED STATEMENT OF FINANCIAL POSITION AS AT 1 OCTOBER 20.18
ASSETS
Non-current assets
Property, plant and equipment (23 000(P) + 50 000(S))
73 000
Current assets
Trade receivables (122 000(P) + 86 000(S))
208 000
Total assets
EQUITY AND LIABILITIES
Equity attributable to owners of the parent
Share capital (P)
Retained earnings (26 000 + 10 000(gain from a bargain purchase))
R281 000
100 000
36 000
Non-controlling interests
136 000
25 000
Total equity
161 000
Current liabilities
Trade and other payables (84 000(P) + 36 000(S))
120 000
Total equity and liabilities
R281 000
Comment
As in example 3.3 the gain resulting from the acquisition of an interest in a subsidiary at
less than the fair value of the identifiable assets and liabilities of the acquiree, called a gain
from a bargain purchase, is recognised in profit or loss at acquisition date (IFRS 3 .34)).
As no consolidated statement of profit or loss and other comprehensive income is
prepared in this example, the amount is added to retained earnings at the end of the
year.
115
Chapter 3
Self-assessment questions
Question 3.1
The following are the condensed statements of financial position of P Ltd and whollyowned subsidiary S Ltd at 31 December 20.18, the acquisition date of the shares in
S Ltd by P Ltd:
STATEMENTS OF FINANCIAL POSITION AS AT 31 DECEMBER 20.18
P Ltd
ASSETS
Property, plant and equipment
Investment in S Ltd: 10 000 shares at cost price
Trade receivables
Total assets
EQUITY AND LIABILITIES
Share capital (50 000/10 000 shares)
Retained earnings
Trade and other payables
Total equity and liabilities
S Ltd
25 000
27 000
59 000
12 000
–
28 000
R111 000
R40 000
50 000
40 000
21 000
10 000
20 000
10 000
R111 000
R40 000
Assume that the identifiable assets acquired and the liabilities assumed at acquisition
date are shown at their acquisition-date fair values, as determined in terms of IFRS 3.
P Ltd recognised the equity investment in S Ltd in its separate records using the cost
price method.
Ignore tax implications.
Required
Prepare the consolidated statement of financial position of the P Ltd Group at
31 December 20.18.
116
Consolidation at acquisition date
Suggested solution 3.1
P LTD GROUP
CONSOLIDATED STATEMENT OF FINANCIAL POSITION AS AT 31 DECEMBER 20.18
ASSETS
Non-current assets
Property, plant and equipment (25 000(P) + 12 000(S))
37 000
Current assets
Trade receivables (59 000(P) + 28 000(S))
87 000
Total assets
R124 000
EQUITY AND LIABILITIES
Equity attributable to owners of the parent
Share capital (P)
Retained earnings (40 000(P) + 3 000(gain from a bargain purchase))
50 000
43 000
Total equity
93 000
Current liabilities
Trade and other payables (21 000(P) + 10 000(S))
31 000
Total equity and liabilities
R124 000
Calculations
C1 Analysis of owners’ equity of S Ltd
Total
i
P Ltd 100%
At acquisition
At acquisition (31/12/20.18)
Share capital
Retained earnings
10 000
20 000
10 000
20 000
Gain from a bargain purchase – Parent
30 000
(3 000)
30 000
(3 000)
R27 000
R27 000
Consideration
C2 Proof of calculation of gain from a bargain purchase of S Ltd in terms
of IFRS 3.32
Consideration transferred at acquisition date: IFRS 3.32(a)(i)
27 000
Amount of non-controlling interests: IFRS 3.32(a)(ii)
–
27 000
Net of the identifiable assets acquired and liabilities assumed
at acquisition date: IFRS 3.32(b)
(30 000)
Gain from a bargain purchase
(R3 000)
117
Chapter 3
C3 Pro forma consolidation journal entry
Dr
R
J1
Share capital (S)(SCE)
Retained earnings (S)(SCE)
Investment in S Ltd (P)(SFP)
Gain from a bargain purchase (S)(P/L)
Elimination of common items and recognition of gain
from a bargain purchase at acquisition
Cr
R
10 000
20 000
27 000
3 000
C4 Consolidation worksheet: P Ltd and subsidiary
Property, plant and
equipment
Investment in S Ltd
Trade receivables
Share capital
Retained earnings
Gain from a bargain
purchase
Trade and other
payables
Consolidation adjustments
P Ltd
S Ltd
25 000
27 000
59 000
12 000
–
28 000
R111 000
R40 000
50 000
40 000
10 000
20 000
–
–
21 000
10 000
R111 000
R40 000
Dr
Cr
Consolidated
37 000
–
87 000
27 000 (J1)
R124 000
10 000 (J1)
20 000 (J1)
50 000
40 000
3 000 (J1)
3 000
31 000
R30 000
R30 000
R124 000
Question 3.2
The following are the condensed statements of financial position of P Ltd and its whollyowned subsidiary S Ltd at 31 December 20.18, the acquisition date of the shares in
S Ltd by P Ltd:
STATEMENTS OF FINANCIAL POSITION AS AT 31 DECEMBER 20.18
P Ltd
ASSETS
Property, plant and equipment
Investment in S Ltd: 10 000 shares at cost price
Trade receivables
S Ltd
100 000
60 000
5 000
50 000
–
5 000
Total assets
EQUITY AND LIABILITIES
Share capital (50 000/10 000 shares)
Revaluation surplus
Retained earnings
Trade and other payables
R165 000
R55 000
100 000
20 000
40 000
5 000
20 000
10 000
20 000
5 000
Total equity and liabilities
R165 000
R55 000
118
Consolidation at acquisition date
Assume that the identifiable assets acquired and the liabilities assumed at acquisition
date are shown at their acquisition-date fair values, as determined in terms of IFRS 3.
P Ltd recognised the equity investment in S Ltd in its separate records using the cost
price method.
Ignore tax implications.
Required
Prepare the consolidated statement of financial position of the P Ltd Group at
31 December 20.18.
Suggested solution 3.2
P LTD GROUP
CONSOLIDATED STATEMENT OF FINANCIAL POSITION AS AT 31 DECEMBER 20.18
ASSETS
Non-current assets
Property, plant and equipment (100 000(P) + 50 000(S))
Goodwill (C1)
150 000
10 000
160 000
Current assets
Trade receivables (5 000(P) + 5 000(S))
10 000
Total assets
EQUITY AND LIABILITIES
Equity attributable to owners of the parent
Share capital (P)
Retained earnings (P)
Other components of equity (Revaluation reserve) (P)
R170 000
100 000
40 000
20 000
Total equity
Current liabilities
Trade and other payables (5 000(P) + 5 000(S))
160 000
10 000
Total equity and liabilities
R170 000
Calculations
C1 Analysis of owners’ equity of S Ltd
Total
i At acquisition (31/12/20.18)
Share capital
Revaluation surplus
Retained earnings
Equity represented by goodwill – Parent
Consideration
P Ltd 100%
At acquisition
20 000
10 000
20 000
20 000
10 000
20 000
50 000
10 000
50 000
10 000
R60 000
R60 000
119
Chapter 3
C2 Proof of calculation of goodwill of S 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)
60 000
–
60 000
Net of the identifiable assets acquired and liabilities assumed
at acquisition date: IFRS 3.32(b)
(50 000)
Goodwill
R10 000
C3 Pro forma consolidation journal entry
Dr
R
J1
Share capital (S)(SCE)
Revaluation surplus (SCE)
Retained earnings (S)(SCE)
Investment in S Ltd (P)(SFP)
Goodwill (S)(SFP)
Elimination of common items and recognition of
goodwill at acquisition
20 000
10 000
20 000
10 000
Cr
R
60 000
C4 Consolidation worksheet: P Ltd and subsidiary
Property, plant and
equipment
Investment in S Ltd
Goodwill
Trade receivables
Share capital
Revaluation surplus
Retained earnings
Trade and other
payables
120
P Ltd
S Ltd
100 000
60 000
–
5 000
50 000
–
–
5 000
R165 000
R55 000
100 000
20 000
40 000
20 000
10 000
20 000
5 000
5 000
R165 000
R55 000
Consolidation adjustments
Dr
10 000 (J1)
Cr
60 000 (J1)
Consolidated
150 000
–
10 000
10 000
R170 000
20 000 (J1)
10 000 (J1)
20 000 (J1)
100 000
20 000
40 000
10 000
R60 000
R60 000
R170 000
Consolidation at acquisition date
Question 3.3
The following are the abridged statements of financial position of P Ltd and its
subsidiary at 1 January 20.18, the date at which P Ltd acquired the interest in S Ltd:
STATEMENTS OF FINANCIAL POSITION AS AT 1 JANUARY 20.18
P Ltd
ASSETS
Property, plant and equipment
Investment in S Ltd: 40 000 shares at cost price
Trade receivables
Total assets
EQUITY AND LIABILITIES
Share capital (80 000/50 000 shares)
Revaluation surplus
Retained earnings
Long-term borrowings
Trade and other payables
Total equity and liabilities
S Ltd
32 000
48 000
70 000
40 000
–
50 000
R150 000
R90 000
80 000
18 000
12 000
10 000
30 000
50 000
7 000
8 000
5 000
20 000
R150 000
R90 000
P Ltd elected to measure the non-controlling interests at fair value at acquisition date.
At that date the directors of P Ltd were of the opinion that the non-controlling interests
were worth R3 000 more than their proportionate share of the fair value of the
identifiable assets and liabilities of the acquiree.
Assume that the identifiable assets acquired and the liabilities assumed at acquisition
date are shown at their acquisition-date fair values, as determined in terms of IFRS 3.
P Ltd recognised the equity investment in S Ltd in its separate records using the cost
price method.
Ignore tax implications.
Required
Prepare the consolidated statement of financial position of the P Ltd Group at
1 January 20.18.
121
Chapter 3
Suggested solution 3.3
P LTD GROUP
CONSOLIDATED STATEMENT OF FINANCIAL POSITION AS AT 1 JANUARY 20.18
ASSETS
Non-current assets
Property, plant and equipment (32 000(P) + 40 000(S))
72 000
Current assets
Trade receivables (70 000(P) + 50 000(S))
120 000
Total assets
R192 000
EQUITY AND LIABILITIES
Equity attributable to owners of the parent
Share capital (P)
Retained earnings (12 000 (P) + 1 000(gain from a bargain purchase))
Other components of equity (revaluation surplus) (P)
80 000
13 000
18 000
Non-controlling interests (C1)
111 000
16 000
Total equity
127 000
Non-current liabilities
Long-term borrowings (10 000(P) + 5 000(S))
15 000
Current liabilities
Trade and other payables (30 000(P) + 20 000(S))
50 000
Total equity and liabilities
R192 000
Calculations
C1 Analysis of owners’ equity of S Ltd
Total
i At acquisition (1/1/20.18)
Share capital
Revaluation surplus
Retained earnings
Gain from a bargain purchase – Parent
Equity represented by goodwill – NCI
Consideration and NCI at fair value
122
P Ltd 80%
At acquisition
NCI
50 000
7 000
8 000
40 000
5 600
6 400
10 000
1 400
1 600
65 000
(4 000)
3 000
52 000
(4 000)
13 000
–
3 000
R64 000
R48 000
R16 000
Consolidation at acquisition date
C2 Proof of calculation of gain from a bargain purchase of S Ltd in terms
of IFRS 3.32
Consideration transferred at acquisition date: IFRS 3.32(a)(i)
48 000
Amount of non-controlling interests: IFRS 3.32(a)(ii)
16 000
64 000
Net of the identifiable assets acquired and liabilities assumed
at acquisition date: IFRS 3.32(b)
(65 000)
Gain from a bargain purchase
(R1 000)
C3 Pro forma consolidation journal entry
Dr
R
J1
Share capital (S)(SCE)
Revaluation surplus (S)(SCE)
Retained earnings (S)(SCE)
Investment in S Ltd (P)(SFP)
Gain from a bargain purchase (4 000 – 3 000(NCI))
(S)(P/L)
Non-controlling interests (SFP)
Elimination of common items and recognition
of gain from a bargain purchase and non-controlling
interests at acquisition
50 000
7 000
8 000
Cr
R
48 000
1 000
16 000
C4 Consolidation worksheet: P Ltd and subsidiary
Property, plant and
equipment
Investment in S Ltd
Trade receivables
Share capital
Revaluation surplus
Retained earnings
Non-controlling
interests
Long-term borrowings
Trade and other
payables
P Ltd
S Ltd
32 000
48 000
70 000
40 000
–
50 000
R150 000
R90 000
80 000
18 000
12 000
50 000
7 000
8 000
10 000
5 000
30 000
20 000
R150 000
R90 000
Consolidation adjustments
Dr
Cr
48 000 (J1)
Consolidated
72 000
–
120 000
R192 000
50 000 (J1)
7 000 (J1)
8 000 (J1)
1 000 (J1)
16 000 (J1)
80 000
18 000
13 000
16 000
15 000
50 000
R65 000
R65 000
R192 000
123
4
Consolidation after acquisition date
Consolidation after acquisition contrasted with consolidation
at acquisition date
4.1
4.2
4.3
4.4
4.5
Basic consolidation procedures ...............................................................
Consolidation after acquisition date .........................................................
Distributable profits of an acquired subsidiary in the hands of the
group ........................................................................................................
Investment in subsidiary carried at fair value in the separate records
of the parent .............................................................................................
Example 4.1: Recognition of investment in subsidiary in the separate
records of the parent ......................................................
Intragroup dividend ..................................................................................
127
127
127
127
128
129
Consolidation procedure for the interest in a wholly-owned
subsidiary after acquisition date
4.6
4.7
4.8
4.9
Consolidation of statements of financial position, statements of profit
or loss and other comprehensive income and statements of changes
in equity ...................................................................................................
Interest acquired at the fair value of the identifiable assets acquired
and liabilities assumed .............................................................................
Example 4.2
Interest in wholly-owned subsidiary acquired at fair value
of the identifiable net assets .........................................
Interest acquired at a premium ................................................................
Example 4.3:
Interest acquired at a premium ....................................
Interest acquired at a discount .................................................................
Example 4.4:
Interest acquired at a discount .....................................
133
134
134
140
140
146
146
Consolidation of a partially-owned subsidiary compared
with that of a wholly-owned subsidiary after acquisition
4.10
4.11
Consolidation of a wholly-owned subsidiary after acquisition ..................
Consolidation of a partially-owned subsidiary after acquisition ...............
151
151
125
Chapter 4
Consolidation procedures for the interest in a partially-owned
subsidiary after acquisition date
4.12
Basic consolidation procedures ...............................................................
Example 4.5: Consolidation after acquisition date. Interest obtained
at fair value. P Ltd accounts for investment in terms
of IFRS 9 ........................................................................
Example 4.6: Consolidation after acquisition date, NCI measured
at fair value at acquisition date .......................................
152
153
161
Other movements in equity of the subsidiary since
the acquisition date
4.13
Movement in equity ..................................................................................
Example 4.7: Consolidation where S Ltd’s equity includes
mark-to-market reserve ..................................................
167
168
Self-assessment questions
Question 4.1 .......................................................................................................
Question 4.2 .......................................................................................................
Question 4.3 .......................................................................................................
126
175
181
183
Consolidation after acquisition date
Consolidation after acquisition contrasted with consolidation
at acquisition date
4.1 Basic consolidation procedures
In the previous chapter, the consolidation of the financial statements of a parent and
subsidiary as at the acquisition date of the controlling interest by the parent was
discussed. The basic consolidation procedures were explained in the case of both
wholly-owned subsidiaries and partially-owned subsidiaries where the interest of the
parent was acquired at:
l the fair value of the identifiable assets acquired and liabilities assumed;
l more than the fair value of the identifiable assets acquired and liabilities assumed;
or
l less than the fair value of the identifiable assets acquired and liabilities assumed.
4.2 Consolidation after acquisition date
1
2
Basic procedures still applicable
In this chapter, exactly the same exposition as outlined above is followed to explain
the consolidation of the financial statements of a parent and subsidiary after the
acquisition of the interest in the subsidiary.
The procedures for preparing the consolidated statements after the acquisition date
are in essence exactly the same as those followed with consolidation at acquisition
date, that is:
l eliminate common items; and
l consolidate the remaining non-common items on a line-by-line basis.
Confirmation of commonality
With consolidation after the acquisition date, it is frequently necessary to confirm the
common elements between the investment in the subsidiary in the records of the
parent and the equity of the subsidiary before the normal elimination procedures
can be followed.
4.3 Distributable profits of an acquired subsidiary in the hands of the
group
1
2
Any profits that were earned before the acquisition date, called pre-acquisition
profits, are not distributable in the hands of the group. Such profits are “purchased
profits” and form part of equity that is eliminated on acquisition.
Any profit of the subsidiary arising in the period since acquisition by the parent is
distributable profit from the point of view of the group and is disclosed as such in the
consolidated financial statements. Note, however, that until such time as dividends
are distributed by the subsidiary out of such post-acquisition profit to the parent, this
profit is not available for distribution by the parent itself.
4.4 Investment in subsidiary carried at fair value in the separate records
of the parent
1
After initial recognition, an investment in a subsidiary shall be carried either at its fair
value or at its cost price in the separate records of the parent (IFRS 9.5.2.1). In
127
Chapter 4
2
3
chapter 1 (1.) the accounting treatment of the investment in the subsidiary in the
separate records of the parent is discussed. From this discussion it is clear that an
investment in a subsidiary is normally classified as a financial asset at fair value
through other comprehensive income (OCI) in the records of the parent. Changes in
fair value are recognised in other comprehensive income and accumulated in equity
through the mark-to-market reserve. On consolidation, any fair value adjustments
that were recognised in the parent’s separate records since acquisition must be
reversed to obtain the acquisition-date fair value, i.e. the consideration transferred
for the investment in the subsidiary.
A distinction needs to be made between the reversal of the current period’s
movement against other comprehensive income and movements that occurred in
previous reporting periods, which are reversed against the opening balance of the
mark-to-market reserve in the statement of changes in equity.
The following journals will be done in the separate records of the parent (the
investor) to account for the investment correctly as a financial asset at fair value
through OCI. Thereafter the pro forma journals that must be done at group level to
reverse the fair value adjustments are shown.
Example 4.1
Recognition of investment in subsidiary in the separate
records of the parent
On 1 January 20.18 P Ltd purchased a 70% interest in S Ltd for R100 000 cash. At the
end of that reporting period (31 December 20.18) the fair value of the investment was
R110 000. On 31 December 20.19, the end of the current reporting period, the fair
value of the investment was R130 000.
The recognition of the purchase of the investment and the changes in fair value will be
done as follows in P Ltd’s records (ignore taxation in this example for the sake of
simplicity):
Reporting period ended 31 December 20.18:
Dr
R
1 January 20.18
Investment in S Ltd (SFP)
Bank (SFP)
Recognition of investment in subsidiary
31 December 20.18
Investment in S Ltd (SFP)
Mark-to-market reserve (OCI)
Recognition of fair value adjustment of investment
in subsidiary
128
100 000
10 000
Cr
R
100 000
10 000
Consolidation after acquisition date
Reporting period ended 31 December 20.19:
Dr
R
31 December 20.19
Investment in S Ltd (SFP)
Mark-to-market reserve (OCI)
Recognition of fair value adjustment of investment
in subsidiary
20 000
Cr
R
20 000
On consolidation these fair value adjustments to the investment must be reversed to
determine the fair value of the investment at acquisition (consideration transferred)
through pro forma journal entries. The pro forma journals for the reporting period
ended 31 December 20.19 will be as follows:
Dr
R
J1
J2
31 December 20.19
Mark-to-market reserve – Beginning of year (SCE)
Investment in S Ltd (SFP) (110 000 – 100 000)
Reversal of fair value adjustment on investment
in S Ltd at beginning of the year at group level
Mark-to-market reserve (OCI)
Investment in S Ltd (SFP) (130 000 – 110 000)
Reversal of fair value adjustment on investment in
S Ltd for the reporting period at group level
10 000
20 000
Cr
R
10 000
20 000
After recognition of the pro forma journals above, the investment in S Ltd will be taken
into account in the analysis of the equity at acquisition at the original consideration of
R100 000 for consolidation purposes.
4 The question whether tax should be taken into account on the movements in fair
value in terms of tax allocation principles arises. In this work, deferred tax is
accounted for at the rate applicable to capital gains, i.e. 66,6% of the current tax
rate, for example 66,6% × 28% = 18,7%. It is regarded as a reflection of the
appropriate tax consequences that would follow from the manner in which the entity
expects to recover the carrying amount of this investment, i.e. through sale of the
investment (IAS 12.51). In this chapter tax implications are ignored for the sake of
simplicity and to first illustrate the effect of the accounting reversal of the fair value
adjustments. In chapter five (and further) in this work, however, the reversal of the
fair value adjustment will be adjusted for the tax effect.
4.5 Intragroup dividend
1
IFRS 10.B86(c) requires that all intragroup transactions shall be eliminated on
consolidation. The first example that is discussed in this work is intragroup
dividends.
129
Chapter 4
2
3
4
A dividend represents a distribution of a portion of the company’s profits to its
shareholders in proportion to their shareholding. Dividends are normally declared
from retained earnings (even though they may be distributed from any reserve). It is
important to remember that a dividend is a distribution to the owners of the company
and not an expense; therefore it is included in the statement of changes in equity
and not in the statement of profit or loss and other comprehensive income.
When a dividend is proposed it implies that the directors of a company calculated a
dividend and made a suggestion on what it should be in their opinion. Such a
distribution must be authorised by resolution by the board of directors. The
memorandum of incorporation may also require further approval by the
shareholders at the annual general meeting, which then also needs to be complied
with. Before the proper authorisation has been obtained, no dividend may be
recognised and will also not be presented in the statement of changes in equity.
A dividend is deemed to be declared once it is appropriately authorised as
explained above. At such date the dividend is no longer at the discretion of the
entity. In terms of IFRS, a dividend is recognised when the dividend is declared, for
example by management or the board of directors, if the jurisdiction does not
require further approval (as required by the Companies Act 2008, S46) or when
declaration of the dividend by management or the board of directors, has been
approved by the relevant authority, for example the shareholders (if required by the
statute and MOI) (IFRIC 17.BC 19). As soon as the dividend has been approved,
the company has a present obligation to pay the amount. It is therefore logical that
such dividend should be recognised. Suppose that the board of directors of S Ltd
declared a dividend of R10 000 on 1 March 20.19 in respect of the reporting period
ended 31 December 20.18 and paid the dividend on 15 March 20.19. S Ltd will put
through the following journal in its separate records on 1 March 20.19:
Records of S Ltd:
Dr
R
Cr
R
1 March 20.19
Dividend declared (SCE)
Shareholders for dividend (SFP)
Recognition of dividend declared
10 000
10 000
When payment is made, the following entry is done:
Dr
R
Cr
R
15 March 20.19
Shareholders for dividend (SFP)
Bank (SFP)
Recognition of payment of dividend
5
10 000
10 000
IAS 10.13 determines that if a dividend is declared after the reporting period, but
before the financial statements are authorised for issue, the dividend may not be
recognised as a liability at the end of the reporting period, because no obligation
exists at that time. In terms of IAS 37 Provisions, Contingent Liabilities and
130
Consolidation after acquisition date
6
7
Contingent Assets it does not meet the criteria of a present obligation (.18). Such
dividends that were proposed or declared before the financial statements were
authorised for issue, but not recognised as a distribution to owners during the
reporting period, and the related amount per share are disclosed only in the notes to
the financial statements in accordance with IAS 1 Presentation of Financial (.137).
It is therefore important to note that a final dividend that is only approved after the
end of the reporting period (which is normally the case), is not recognised in the
period to which it relates, but in the following reporting period. With regards to the
example above it means that S Ltd will only recognise the dividend relating to the
20.18 reporting period in the 20.19 reporting period, as no liability existed at
31 December 20.18 to pay a dividend.
The shareholders of a company will in turn recognise the dividend in their separate
records at the date when the other company’s board of directors approved the
dividend. In the case of a listed company an additional requirement should be met,
i.e. that a dividend may only be recognised on the last day to register (when the
shareholder’s right to receive payment has been established) and the dividend has
been approved in terms of S46 of the Companies Act 2008. Such dividend is
recognised as income in the reporting period in which the shareholder becomes
entitled to the dividend (when the right to receive the dividend has been
established). Suppose that P Ltd owns all the shares in S Ltd. This means that P Ltd
becomes entitled to the dividend income on 1 March 20.19. The following journal
will be recorded in the separate records of P Ltd to record the dividend receivable:
Records of P Ltd:
Dr
R
Cr
R
1 March 20.19
Dividend receivable (SFP)
Other income (Dividend received) (P/L)
Recognition of dividend receivable from
subsidiary
8
10 000
10 000
At the date when the dividend is paid (15 March 20.19), and the actual cash flow
occurs, the liability is reversed through the following journal in S Ltd’s separate
records:
S Ltd’s records:
Dr
R
Cr
R
15 March 20.19
Shareholders for dividend (SFP))
Bank (SFP)
Payment of dividend payable
10 000
10 000
131
Chapter 4
9
On the date when the cash is received, the shareholders (P Ltd) will reverse the
asset, dividend receivable, through the following journal:
P Ltd’s records:
Dr
R
Cr
R
15 March 20.19
Bank (SFP))
Dividend receivable (SFP)
Recognition of dividend received in cash
10 000
10 000
10 On consolidation the effect of the transaction above must be eliminated. The
distribution of a dividend by a wholly-owned subsidiary out of profit after acquisition
is, in truth, from the point of view of the group, only a transfer of a portion of the
retained earnings of the subsidiary to the retained earnings of the parent: that is why
it is merely eliminated as an intragroup transaction and the amounts disclosed in the
consolidated statement of financial position are not affected at all by the transaction.
The pro forma journal that should be taken into account on consolidation to
recognise the elimination is as follows:
Pro forma journal on 31 December 20.19:
Dr
R
J1
31 December 20.19
Other income (Dividend received) (P)(P/L)
Dividend declared (S)(SCE)
Elimination of intragroup dividend on
consolidation
10 000
Cr
R
10 000
11 Additional motivation for the elimination of intragroup dividends is as follows:
l The consolidated statement of profit or loss and other comprehensive income in
effect comprises a merger of the statements of profit or loss and other
comprehensive income of the parent and the subsidiary. In order to prevent
duplication of amounts, the dividend received from the subsidiary as it appears in
the records of P Ltd must be eliminated pro forma.
l The consolidated statement of changes in equity is prepared for the owners of
the parent; it can consequently only account for the dividends paid in favour of
the owners of the parent. The group, as an economic entity, cannot pay a
dividend to itself.
l The elimination of the intragroup transactions will cause the line items disclosed
in the consolidated financial statements to be fairly presented. Not eliminating
these items will produce a statement of financial position with potentially
materially misstated line items.
12 In practice the dividend paid as presented in the financial statements (in the
statement of changes in equity) for a particular reporting period will therefore
normally consist of the final dividend of the previous reporting period (that was
declared and paid after the end of that reporting period) as well as any interim
dividend in respect of the current reporting period. An interim dividend that was
declared during a reporting period is however not accounted for until such time as
the dividend is paid, as until that date the dividend declaration may be withdrawn.
132
Consolidation after acquisition date
Consolidation procedure for the interest in a wholly-owned
subsidiary after acquisition date
4.6 Consolidation of statements of financial position, statements
of profit or loss and other comprehensive income and statements
of changes in equity
1
2
3
4
As consolidation takes place at a date after the parent acquired the interest in the
wholly-owned subsidiary, the full set of financial statements have to be
consolidated, namely the statements of financial position, the statements of profit or
loss and other comprehensive income as well as the statements of changes in
equity of the parent and the subsidiary.
The basic consolidation procedures consist of the following:
l elimination of common items;
l elimination of intragroup items;
l consolidation of remaining non-common items on a line-by-line basis.
In chapter 3, attention is paid to the elimination of common items at acquisition date.
This involves:
l the total equity of the subsidiary as at the acquisition date, being eliminated
against the investment in the subsidiary; and
l a purchase difference, namely goodwill or gain from bargain purchase, being
recognised.
In the first part of this chapter, the elimination of intragroup items is introduced with
reference to dividends paid by the subsidiary.
Comment
The elimination of intragroup debts and unrealised profit on intragroup transactions is
explained in chapter 5.
5
Consolidation of statements of profit or loss and other comprehensive
income and statements of changes in equity
As stated above, it follows that because consolidation is carried out on a date after
acquisition, the statement of profit or loss and other comprehensive income and
statement of changes in equity of the subsidiary for the period after acquisition will
be combined with the statement of profit or loss and other comprehensive income
and statement of changes in equity of the parent for the same reporting period, into
a consolidated statement of profit or loss and other comprehensive income and
consolidated statement of changes in equity.
The consolidated statement of profit or loss and other comprehensive income and
consolidated statement of changes in equity of the group will thus include:
l all the disclosable debit and credit items in the statement of profit or loss and
other comprehensive income for the reporting period and statement of changes
in equity of the subsidiary for the period since acquisition; and
133
Chapter 4
6
l the corresponding items in the statement of profit or loss and other
comprehensive income and statement of changes in equity of the parent.
In order to draw up a consolidated statement of profit or loss and other
comprehensive income for a group of entities consisting of separate legal entities
and to present therein the results of the group as a single economic entity, it is
essential that all intragroup and common items be excluded.
In consolidating the statement of changes in equity, the elimination of common
items results in the excision of the retained earnings of the subsidiary as at the
acquisition date from the consolidated retained earnings at the beginning of the
current reporting period. In addition, the elimination of intragroup items results in the
exclusion of dividends received by the parent from the subsidiary from the
statement of profit or loss and other comprehensive income and dividends paid by
the subsidiary from the consolidated statement of changes in equity.
As was done in the preceding chapter, the consolidation procedure will be dealt with
in each of the three sets of circumstances where the interest in the subsidiary was
acquired:
l at the fair value of the identifiable assets acquired and liabilities assumed;
l at a premium; and
l at a discount.
4.7 Interest acquired at the fair value of the identifiable assets acquired
and liabilities assumed
Example 4.2
Interest in wholly-owned subsidiary acquired at fair value
of the identifiable net assets
The following are the condensed statements of financial position of P Ltd and its whollyowned subsidiary S Ltd on 30 June 20.18, one year after P Ltd acquired the interest in
S Ltd:
STATEMENTS OF FINANCIAL POSITION AS AT 30 JUNE 20.18
P Ltd
ASSETS
Property, plant and equipment
Investment in S Ltd: 80 000 shares at fair value
(cost price: R88 000)
Trade receivables
S Ltd
20 000
80 000
90 000
132 000
–
60 000
Total assets
EQUITY AND LIABILITIES
Share capital (100 000/80 000 shares)
Mark-to-market reserve
Retained earnings
Trade and other payables
R242 000
R140 000
100 000
2 000
15 000
125 000
80 000
–
11 000
49 000
Total equity and liabilities
R242 000
R140 000
134
Consolidation after acquisition date
On 1 July 20.17, the date on which P Ltd acquired the interest in S Ltd, the balance of
the retained earnings account of S Ltd amounted to R8 000. There has been no change
in the share capital of S Ltd since 1 July 20.17.
The extracts from the statements of profit or loss and other comprehensive income of
the two companies for the reporting period ended 30 June 20.18 are as follows:
EXTRACT FROM THE STATEMENTS OF PROFIT OR LOSS
AND OTHER COMPREHENSIVE INCOME
FOR THE YEAR ENDED 30 JUNE 20.18
P Ltd
S Ltd
Profit
Dividend received from subsidiary
13 000
4 000
10 000
–
Profit before tax
Income tax expense
17 000
(4 000)
10 000
(3 000)
PROFIT FOR THE YEAR
13 000
7 000
Other comprehensive income:
Mark-to-market reserve (fair value adjustment on investment)
2 000
–
Other comprehensive income for the year
2 000
–
R15 000
R7 000
TOTAL COMPREHENSIVE INCOME FOR THE YEAR
The extracts from the statements of changes in equity of the two companies for the
reporting period ended 30 June 20.18 are as follows:
EXTRACT FROM THE STATEMENTS OF CHANGES IN EQUITY
FOR THE YEAR ENDED 30 JUNE 20.18
Mark-to-market
reserve
P Ltd
Balance at 1 July 20.17
Changes in equity for 20.18
Total comprehensive income for the year:
Profit for the year
Other comprehensive income
Dividend
Balance at 30 June 20.18
Retained earnings
P Ltd
S Ltd
–
7 000
8 000
–
2 000
–
13 000
–
(5 000)
7 000
–
(4 000)
R2 000
R15 000
R11 000
Assume that the identifiable assets acquired and the liabilities assumed at acquisition
date are shown at their acquisition-date fair values, as determined in terms of IFRS 3.
P Ltd classified the equity investment in S Ltd under IFRS 9 in its separate financial
statements and recognised fair value adjustments in a mark-to-market reserve (other
comprehensive income).
Ignore tax implications.
135
Chapter 4
Solution 4.2
A consolidated statement of profit or loss and other comprehensive income and
consolidated statement of changes in equity for the reporting period ended
30 June 20.18, as well as a consolidated statement of financial position at
30 June 20.18, must be prepared.
Note that a relatively comprehensive approach is again followed, comprising:
l an analysis of the owners’ equity of the subsidiary;
l pro forma consolidation journal entries whereby the common and intragroup items
are eliminated; and
l a consolidation worksheet in which the remaining non-common items are
combined on a line-by-line basis.
The analysis of the owners’ equity of S Ltd is now dealt with in successive periods:
i At acquisition date
ii Since acquisition date:
• To beginning of current year
• Current year.
Calculations
C1 Analysis of owners’ equity of S Ltd
P Ltd 100%
Total
i At acquisition (1/7/20.17)
Share capital
Retained earnings
At
80 000 (dr)
8 000 (dr)
80 000
8 000
Purchase difference
88 000
–
88 000
–
Consideration (90 000 – 2 000(J1))
88 000 (cr)
88 000
ii Since acquisition
• To beginning of current year:
Not applicable
• Current year:
Profit for the year (per statement of profit or loss
and other comprehensive income)
Dividend
136
Since
–
–
7 000
(4 000)
7 000
(4 000)
R91 000
R3 000
Consolidation after acquisition date
Comment
a The words “at” and “since” as headings to the column, used to analyse P Ltd’s
interest in S Ltd (100%), are abbreviations for the terms “at acquisition” and “since
acquisition”.
b The period “to the beginning of the current year” falls away for the first reporting
period following the acquisition date as the investment was only obtained at the
beginning of the year.
c The elimination of the investment in P Ltd is done at the original consideration (cost
price). If the fair value adjustment was not reversed, a purchase difference of
R2 000 would have been created. This would be incorrect, as the consideration paid
for the investment equalled the fair value of the net assets taken over.
From the analysis it is clear that there is no purchase difference between the fair value
of the net identifiable assets of the acquiree and the consideration transferred to obtain
the investment.
C2 Proof of calculation of purchase difference of S Ltd in terms of IFRS 3.32
Consideration transferred at acquisition date: IFRS 3.32(a)(i)
88 000
Amount of non-controlling interests: IFRS 3.32(a)(ii)
–
88 000
Net of the identifiable assets acquired and liabilities assumed
at acquisition date: IFRS 3.32(b)
(88 000)
Purchase difference
R–
On the date of acquisition of the interest by the parent in the subsidiary, R88 000 is
eliminated from the equity of the subsidiary as being the opposite side of the balance of
the investment in the subsidiary, in the records of the parent.
C3 Pro forma consolidation journal entries
Dr
R
J1
Mark-to-market reserve (P)(OCI)
Investment in S Ltd (P)(SFP)
Reversal of fair value adjustment on investment
in S Ltd for current year
2 000
J2
Share capital (S)(SCE)
Retained earnings (S)(SCE)
Investment in S Ltd (P)(SFP) (90 000 – 2 000)
Elimination of common items at acquisition
80 000
8 000
Cr
R
2 000
88 000
The analysis of the owners’ equity of S Ltd since acquisition provides the information for
the following consolidation journal entry by means of which the intragroup transaction
(dividend from S Ltd to P Ltd, R4 000) is eliminated:
Dr
R
J3
Dividend received (P)(P/L)
Dividend paid (S)(SCE)
Elimination of intragroup dividend
4 000
Cr
R
4 000
137
Chapter 4
The consolidation procedures can once again be done by means of a consolidation
worksheet.
C4 Consolidation worksheet: P Ltd and subsidiary
P Ltd
S Ltd
Consolidation
adjustments
Dr
Property, plant and
equipment
Investment in S Ltd
Trade receivables
Profit
Dividend from S Ltd
Profit before tax
Income tax expense
Profit for the year
Dividend paid
Retained earnings
For the year
Beginning of the year
End of the year
Share capital
Mark-to-market reserve
Total equity
Trade and other
payables
20 000
90 000
80 000
–
88 000 (J2)
2 000 (J1)
132 000
60 000
R242 000 R140 000
13 000
4 000
17 000
(4 000)
13 000
(5 000)
10 000
–
10 000
(3 000)
7 000
(4 000)
8 000
7 000
15 000
100 000
2 000
117 000
3 000
8 000
11 000
80 000
–
91 000
Cr
4 000 (J3)
4 000 (J3)
100 000
–
192 000
* R292 000
23 000
–
* 23 000
(7 000)
* 16 000
(5 000)
* 11 000
7 000
* 18 000
100 000
–
* 118 000
8 000 (J2)
80 000 (J2)
2 000 (J1)
125 000
49 000
R242 000 R140 000 R92 000
Consolidated
R92 000
174 000
* R292 000
Comment
Note that certain amounts in the consolidated column represent either subtotals or totals
in that column and do not reflect a horizontal totalling of the other columns in the
worksheet. These amounts are identified with an *.
138
Consolidation after acquisition date
The last column of the worksheet can now, once again, be adapted into consolidated
financial statements:
P LTD GROUP
CONSOLIDATED STATEMENT OF FINANCIAL POSITION AS AT 30 JUNE 20.18
ASSETS
Non-current assets
Property, plant and equipment (20 000(P) + 80 000(S))
Current assets
Trade receivables (132 000(P) + 60 000(S))
Total assets
EQUITY AND LIABILITIES
Equity attributable to owners of the parent
Share capital
Retained earnings
100 000
192 000
R292 000
100 000
18 000
Total equity
118 000
Current liabilities
Trade and other payables (125 000(P) + 49 000(S))
174 000
Total equity and liabilities
R292 000
Comment
As the at-acquisition equity of S Ltd was eliminated as part of the basic elimination
journal entry, the equity will be represented by the share capital of P Ltd, the retained
earnings of P Ltd and the growth in retained earnings of S Ltd since acquisition.
P LTD GROUP
EXTRACT FROM THE CONSOLIDATED STATEMENT OF PROFIT OR LOSS
AND OTHER COMPREHENSIVE INCOME
FOR THE YEAR ENDED 30 JUNE 20.18
Profit before tax (17 000(P) + 10 000(S) – 4 000(J2))
Income tax expense (4 000(P) + 3 000(S))
23 000
(7 000)
PROFIT FOR THE YEAR
16 000
Other comprehensive income for the year
–
TOTAL COMPREHENSIVE INCOME FOR THE YEAR
R16 000
Profit attributable to:
Owners of the parent
R16 000
Total comprehensive income attributable to:
Owners of the parent
R16 000
139
Chapter 4
Comment
According to IAS 1 Guidance on Implementing the profit attributable to the owners
should be presented below the statement of profit or loss and other comprehensive
income. In this example, the subsidiary is wholly owned and as the parent is the only
owner, all of the profit is ultimately attributable to the owners of the parent.
P LTD GROUP
EXTRACT FROM THE CONSOLIDATED STATEMENT OF CHANGES IN EQUITY
FOR THE YEAR ENDED 30 JUNE 20.18
Share
capital
Retained
earnings
Total
equity
Balance at 1 July 20.17
Changes in equity for 20.18
Total comprehensive income for the year:
Profit for the year
Dividend
100 000
7 000
7 000
–
–
16 000
(5 000)
16 000
(5 000)
Balance at 30 June 20.18
100 000
*R18 000
R18 000
*
15 000(P) + 3 000(analysis – total) = 18 000
4.8 Interest acquired at a premium
Example 4.3
Interest acquired at a premium
The following are the condensed statements of financial position of P Ltd and
subsidiary S Ltd at 31 December 20.18, two years after P Ltd acquired the interest in
S Ltd:
STATEMENTS OF FINANCIAL POSITION AS AT 31 DECEMBER 20.18
P Ltd
ASSETS
Property, plant and equipment
Investment in S Ltd: 40 000 shares at cost price
Trade receivables
S Ltd
15 000
50 000
70 000
30 000
–
67 000
Total assets
EQUITY AND LIABILITIES
Share capital (100 000/40 000 shares)
Retained earnings
Trade and other payables
R135 000
R97 000
100 000
10 000
25 000
40 000
8 000
49 000
Total equity and liabilities
R135 000
R97 000
On 31 December 20.16, the date at which P Ltd acquired the interest in S Ltd, the credit
balance on retained earnings of S Ltd was R2 500. There has been no change in the
share capital of S Ltd since 31 December 20.16.
140
Consolidation after acquisition date
The statements of profit or loss and other comprehensive income of P Ltd and S Ltd for
the reporting period ended 31 December 20.18 were as follows:
EXTRACT FROM THE STATEMENTS OF PROFIT OR LOSS
AND OTHER COMPREHENSIVE INCOME
FOR THE YEAR 31 DECEMBER 20.18
P Ltd
S Ltd
Profit
Dividend received from subsidiary
34 000
6 000
18 000
–
Profit before tax
Income tax expense
40 000
(16 000)
18 000
(8 000)
PROFIT FOR THE YEAR
24 000
10 000
–
–
R24 000
R10 000
Other comprehensive income
TOTAL COMPREHENSIVE INCOME FOR THE YEAR
The condensed statements of changes in equity of P Ltd and S Ltd for the reporting
period ended 31 December 20.18 are as follows:
EXTRACT FROM THE STATEMENTS OF CHANGES IN EQUITY
FOR THE YEAR ENDED 31 DECEMBER 20.18
Retained earnings
P Ltd
S Ltd
Balance at 1 January 20.18
Changes in equity for 20.18
Total comprehensive income for the year:
Profit for the year
Dividend
5 000
4 000
24 000
(19 000)
10 000
(6 000)
Balance at 31 December 20.18
R10 000
R8 000
Assume that the identifiable assets acquired and the liabilities assumed at acquisition
date are shown at their acquisition-date fair values, as determined in terms of IFRS 3.
P Ltd recognised the equity investment in S Ltd in its separate records using the cost
method.
Ignore tax implications.
Solution 4.3
A consolidated statement of financial position for P Ltd and its subsidiary at
31 December 20.18, as well as a consolidated statement of profit or loss and other
comprehensive income and consolidated statement of changes in equity for the
reporting period ended 31 December 20.18, must be prepared.
Once again a relatively comprehensive approach is adopted in the solution of the
problem. You will notice that use is made of an analysis of owners’ equity of the
subsidiary, pro forma consolidation journal entries and a worksheet.
141
Chapter 4
Calculations
C1 Analysis of owners’ equity of S Ltd
Total
i At acquisition (31/12/2016)
Share capital
Retained earnings
Equity represented by goodwill – Parent
Consideration
ii Since acquisition
• To beginning of current year:
Retained earnings (4 000 – 2 500)
• Current year:
Profit for the year
Dividend
P Ltd 100%
At
Since
40 000 (dr)
2 500 (dr)
40 000
2 500
42 500
7 500 (dr)
42 500
7 500
50 000 (cr)
R50 000
1 500
1 500
10 000
(6 000)
10 000
(6 000)
R55 500
R5 500
Comment
The change in retained earnings since the acquisition date until the beginning of the
current reporting period is calculated as follows:
Retained
earnings
Balance at 1/1/20.18 from statement of changes in equity
Balance at 31/12/20.16 (acquisition date)
4 000
(2 500)
Therefore: Increase until 1/1/20.18
R1 500
C2 Proof of calculation of goodwill of S 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)
50 000
–
50 000
Net of the identifiable assets acquired and liabilities assumed
at acquisition date: IFRS 3.32(b)
(42 500)
Goodwill
R7 500
142
Consolidation after acquisition date
C3 Pro forma consolidation journal entries
Dr
R
J1
J2
Share capital (S)(SCE)
Retained earnings (S)(SCE)
Goodwill (SFP)
Investment in S Ltd (P)(SFP)
Elimination of common items at acquisition date
and recognition of goodwill at acquisition
40 000
2 500
7 500
Dividend received (P)(P/L)
Dividend paid (S)(SCE)
Elimination of intragroup dividends
6 000
Cr
R
50 000
6 000
The pro forma consolidation journal entries are prepared from the foregoing analysis. A
closer look at the analysis will reveal that not all the amounts that appear in the analysis
are accounted for in the pro forma consolidation journal entries.
These amounts, in fact, represent the remaining non-common items which are
combined in the worksheet with corresponding line items of the parent. In accounting
for J1 in the following worksheet, R2 500 of retained earnings (being a common item) is
eliminated; this results in R1 500 of S Ltd’s retained earnings remaining. This last
amount must be combined with the corresponding line item of P Ltd.
143
Chapter 4
C4 Consolidation worksheet: P Ltd and subsidiary
P Ltd
S Ltd
15 000
–
50 000
70 000
30 000
–
–
67 000
R135 000
R97 000
Profit
Dividend from S Ltd
34 000
6 000
18 000
–
Profit before tax
Income tax expense
Profit for the year
Dividend paid
Retained earnings
For the year
Beginning of the year
End of the year
Share capital
Total equity
Trade and other
payables
40 000
(16 000)
24 000
(19 000)
18 000
(8 000)
10 000
(6 000)
5 000
5 000
10 000
100 000
110 000
4 000
4 000
8 000
40 000
48 000
25 000
R135 000
49 000
R97 000
Property, plant and
equipment
Goodwill
Investment S Ltd
Trade receivables
144
Consolidation adjustments
Dr
7 500 (J1)
Cr
50 000 (J1)
Consolidated
45 000
7 500
–
137 000
R189 500
52 000
–
6 000 (J2)
6 000 (J2)
9 000
6 500
15 500
100 000
115 500
2 500 (J1)
40 000 (J1)
R56 000
52 000
(24 000)
28 000
(19 000)
R56 000
74 000
R189 500
Consolidation after acquisition date
The last column of the worksheet can now, once again, be adapted into consolidated
financial statements.
P LTD GROUP
CONSOLIDATED STATEMENT OF FINANCIAL POSITION AS AT 31 DECEMBER 20.18
ASSETS
Non-current assets
Property, plant and equipment (15 000(P) + 30 000(S))
Goodwill
45 000
7 500
52 500
Current assets
Trade receivables (70 000(P) + 67 000(S))
Total assets
EQUITY AND LIABILITIES
Equity attributable to owners of the parent
Share capital
Retained earnings
Total equity
Current liabilities
Trade and other payables (25 000(P) + 49 000(S))
Total equity and liabilities
137 000
R189 500
100 000
15 500
115 500
74 000
R189 500
P LTD GROUP
EXTRACT FROM THE CONSOLIDATED STATEMENT OF PROFIT OR LOSS
AND OTHER COMPREHENSIVE INCOME
FOR THE YEAR ENDED 31 DECEMBER 20.18
Profit before tax (40 000(P) + 18 000(S) – 6 000(J2))
Income tax expense (16 000(P) + 8 000(S))
52 000
(24 000)
PROFIT FOR THE YEAR
28 000
Other comprehensive income for the year
–
TOTAL COMPREHENSIVE INCOME FOR THE YEAR
R28 000
Profit attributable to:
Owners of the parent
R28 000
Total comprehensive income attributable to:
Owners of the parent
R28 000
145
Chapter 4
P LTD GROUP
EXTRACT FROM THE CONSOLIDATED STATEMENT OF CHANGES IN EQUITY
FOR THE YEAR ENDED 31 DECEMBER 20.18
Share
capital
Balance at 1 January 20.18
Changes in equity for 20.18
Total comprehensive income for the year:
Profit for the year
Dividend
Balance at 31 December 20.18
*
Ȝ
Retained
earnings
Total
equity
100 000
*6 500
106 500
–
–
28 000
(19 000)
28 000
(19 000)
R100 000 ȜR15 500
R115 500
(5 000(P) + 1 500(S – analysis – since)) = 6 500
(10 000(P) + 5 500(S – (analysis – total)) = 15 500
4.9 Interest acquired at a discount
Example 4.4
Interest acquired at a discount
The following are the condensed statements of financial position of P Ltd and its
subsidiary S Ltd at 31 December 20.18, two years after P Ltd acquired the interest in
S Ltd:
STATEMENTS OF FINANCIAL POSITION AS AT 31 DECEMBER 20.18
P Ltd
ASSETS
Property, plant and equipment
Investment in S Ltd: 40 000 shares at cost price
Trade receivables
S Ltd
25 000
39 000
70 000
30 000
–
67 000
Total assets
EQUITY AND LIABILITIES
Share capital (100 000/40 000 shares)
Retained earnings
Trade and other payables
R134 000
R97 000
100 000
10 000
24 000
40 000
8 000
49 000
Total equity and liabilities
R134 000
R97 000
On 31 December 20.16, the date at which P Ltd acquired the interest in S Ltd, the credit
balance of the retained earnings account of S Ltd amounted to R2 500. There has been
no change in the share capital of S Ltd since 31 December 20.16.
146
Consolidation after acquisition date
The condensed statements of profit or loss and other comprehensive income of P Ltd
and S Ltd for the reporting period ended 31 December 20.18 were as follows:
EXTRACT FROM THE STATEMENTS OF PROFIT OR LOSS
AND OTHER COMPREHENSIVE INCOME
FOR THE YEAR ENDED 31 DECEMBER 20.18
P Ltd
S Ltd
Profit
Dividend received from subsidiary
34 000
6 000
18 000
–
Profit before tax
Income tax expense
40 000
(16 000)
18 000
(8 000)
PROFIT FOR THE YEAR
24 000
10 000
–
–
R24 000
R10 000
Other comprehensive income for the year
TOTAL COMPREHENSIVE INCOME FOR THE YEAR
The condensed statements of changes in equity of P Ltd and S Ltd for the reporting
period ended 31 December 20.18 are as follows:
EXTRACT FROM THE STATEMENTS OF CHANGES IN EQUITY
FOR THE YEAR ENDED 31 DECEMBER 20.18
Retained earnings
P Ltd
S Ltd
Balance at 1 January 20.18
Changes in equity for 20.18
Total comprehensive income for the year:
Profit for the year
Dividend
5 000
4 000
24 000
(19 000)
10 000
(6 000)
Balance at 31 December 20.18
R10 000
R8 000
Assume that the identifiable assets acquired and the liabilities assumed at acquisition
date are shown at their acquisition-date fair values, as determined in terms of IFRS 3.
P Ltd recognised the equity investment in S Ltd in its separate financial records using
the cost method.
Ignore tax implications.
Solution 4.4
A consolidated statement of financial position of the P Ltd Group as at
31 December 20.18, as well as a consolidated statement of profit or loss and other
comprehensive income and consolidated statement of changes in equity for the
reporting period ended 31 December 20.18, must be prepared.
Once again, the comprehensive approach is adopted in the solution of the problem.
Use is made of an analysis of interests in the subsidiary, pro forma consolidation
journal entries and a worksheet.
147
Chapter 4
Comment
This comprehensive approach is at this stage still being used deliberately. It will soon be
apparent that it is not necessary to use all three of these steps when preparing
consolidated statements.
C1 Analysis of owners’ equity of S Ltd
Total
i At acquisition (31/12/20.16)
Share capital
Retained earnings
Gain from bargain purchase – Parent
Consideration
ii Since acquisition
• To beginning of current year:
Retained earnings (4 000 – 2 500)
• Current year:
Profit for the year
Dividend
P Ltd 100%
At
40 000 (dr)
2 500 (dr)
40 000
2 500
42 500
(3 500)(cr)
42 500
(3 500)
39 000
39 000
Since
1 500
1 500
10 000
(6 000)
10 000
(6 000)
R48 000
R9 000
C2 Proof of calculation of gain from a bargain purchase of S Ltd in terms
of IFRS 3.32
39 000
Consideration transferred at acquisition date: IFRS 3.32(a)(i)
–
Amount of non-controlling interests: IFRS 3.32(a)(ii)
39 000
Net of the identifiable assets acquired and liabilities assumed
at acquisition date: IFRS 3.32(b)
(42 500)
Gain from a bargain purchase
R3 500
From the above analysis it is clear that three consolidation journal entries are required:
C3 Pro forma consolidation journal entries
Dr
R
J1
Share capital (S)(SCE)
Retained earnings (S)(SCE)
Investment in S Ltd (P)(SFP)
Retained earnings (Gain from a bargain purchase)
(S)(SCE)
Elimination of common items at acquisition date and
recognition of gain from a bargain purchase at
acquisition
40 000
2 500
Cr
R
39 000
3 500
continued
148
Consolidation after acquisition date
Dr
R
J2
Dividend received (P)(P/L)
Dividend paid (S)(SCE)
Elimination of intragroup dividend
6 000
Cr
R
6 000
Comment
The gain from a bargain purchase originated at acquisition, that is on 31/12/20.16. This
gain had been included in the consolidated profit or loss for the year ended 31/12/20.16.
However, as the current consolidation has been done for the year ended 31/12/20.18,
the gain that originated on acquisition would now be included in the consolidated
retained earnings at the beginning of the year in the consolidated statement of changes
in equity.
C4 Consolidation worksheet: P Ltd and subsidiary
P Ltd
S Ltd
Consolidation
adjustments
Dr
Property, plant and
equipment
Investment in S Ltd
Trade receivables
Cr
Consolidated
25 000
39 000
70 000
30 000
–
67 000
R134 000
R97 000
Profit
Dividend from S Ltd
34 000
6 000
18 000
–
Profit before tax
Income tax expense
40 000
(16 000)
18 000
(8 000)
Profit for the year
Dividend paid
Retained earnings
For the year
Beginning of the year
24 000
(19 000)
10 000
(6 000)
5 000
5 000
4 000
4 000
2 500 (J1)
End of the year
Share capital
10 000
100 000
8 000
40 000
40 000 (J1)
Total equity
Trade and other
payables
110 000
48 000
119 000
24 000
49 000
73 000
R134 000
R97 000
39 000 (J1)
55 000
–
137 000
R192 000
52 000
–
6 000 (J2)
52 000
(24 000)
R48 500
6 000 (J2)
28 000
(19 000)
3 500 (J1)
9 000
10 000
19 000
100 000
R48 500
R192 000
The last column of the worksheet can now, once again, be adapted into consolidated
financial statements.
149
Chapter 4
P LTD GROUP
CONSOLIDATED STATEMENT OF FINANCIAL POSITION
AS AT 31 DECEMBER 20.18
ASSETS
Non-current assets
Property, plant and equipment (25 000(P) + 30 000(S))
Current assets
Trade receivables (70 000(P) + 67 000(S))
Total assets
EQUITY AND LIABILITIES
Equity attributable to owners of the parent
Share capital
Retained earnings
55 000
137 000
R192 000
100 000
19 000
Total equity
119 000
Current liabilities
Trade and other payables (24 000(P) + 49 000(S))
73 000
Total equity and liabilities
R192 000
P LTD GROUP
EXTRACT FROM THE CONSOLIDATED STATEMENT OF PROFIT OR LOSS
AND OTHER COMPREHENSIVE INCOME
FOR THE YEAR ENDED 31 DECEMBER 20.18
Profit before tax (40 000(P) + 18 000(S) – 6 000(J2))
Income tax expense (16 000(P) + 8 000(S))
52 000
(24 000)
PROFIT FOR THE YEAR
28 000
Other comprehensive income for the year
–
TOTAL COMPREHENSIVE INCOME FOR THE YEAR
R28 000
Profit attributable to:
Owners of the parent
R28 000
Total comprehensive income attributable to:
Owners of the parent
R28 000
150
Consolidation after acquisition date
P LTD GROUP
EXTRACT FROM THE CONSOLIDATED STATEMENT OF CHANGES IN EQUITY
FOR THE YEAR ENDED 31 DECEMBER 20.18
Share
capital
Balance at 1 January 20.18
Changes in equity for 20.18
Total comprehensive income for the year:
Profit for the year
Dividend
Balance at 31 December 20.18
*
Ȝ
Retained
earnings
Total
equity
100 000
*10 000
110 000
–
–
28 000
(19 000)
28 000
(19 000)
R100 000
ȜR19 000
R119 000
(5 000(P) + 1 500(S – analysis) + 3 500 (J1 – Gain from a bargain purchase)) = 10 000
10 000(P) + 5 500(S – analysis) + 3 500 (J1 – Gain from a bargain purchase) = 19 000
Comment
Where a gain from a bargain purchase is created on acquisition, the amount must be
added to the consolidated retained earnings at the beginning and the end of the
reporting period as it is only created on consolidation and forms part of equity.
Consolidation of a partially-owned subsidiary compared
with that of a wholly-owned subsidiary after acquisition
4.10 Consolidation of a wholly-owned subsidiary after acquisition
1
2
3
The first part of this chapter was dedicated to procedures for the consolidation of a
wholly-owned subsidiary after acquisition date.
Since consolidation takes place after the acquisition date, the statements of
financial position, statements of profit or loss and other comprehensive income and
statements of changes in equity of the parent and the subsidiary must be
consolidated. The procedures for the consolidation of statements of profit or loss
and other comprehensive income and statements of changes in equity were
discussed in 4.6.
The consolidation of the statements of financial position, statements of profit or loss
and other comprehensive income and statements of changes in equity of a parent
and subsidiary under three different situations received attention, i.e.:
l interest in subsidiary acquired at the fair value of the identifiable assets and
liabilities acquired;
l interest in subsidiary acquired at a premium; and
l interest in subsidiary acquired at a discount.
In the remainder of this chapter the investment in the subsidiary is carried at fair
value and the fair value adjustments are recognised in the mark-to-market reserve
(refer to par 4.4 earlier in this chapter).
4.11 Consolidation of a partially-owned subsidiary after acquisition
1
The possibility that the interest in a subsidiary is not held in full (i.e. that it was not
wholly owned) is discussed in chapter 3. The rest of this chapter is dedicated to the
151
Chapter 4
2
3
4
consolidation procedures at a date after acquisition of a subsidiary which is partially
owned.
As consolidation takes place on a date after acquisition by the parent of the interest
in the partially-owned subsidiary, the statements of profit or loss and other
comprehensive income, statements of changes in equity and the statements of
financial position of the parent and the subsidiary must be consolidated.
The consolidated statement of profit or loss and other comprehensive income and
the consolidated statement of changes in equity present the trading results and
other changes in equity of the parent and the subsidiary for the relevant reporting
period, for the group as a whole. In order to prepare a consolidated statement of
profit or loss and other comprehensive income and consolidated statement of
changes in equity for a group of companies consisting of separate legal entities,
and to present the results of the group as a single economic entity in such
statement, it is necessary that all common and intragroup items be eliminated.
Subsequently, the remaining non-common income and expense items of the parent
and its subsidiary are combined on a line-by-line basis in the same manner as for a
consolidated statement of financial position in order to prepare the consolidated
statement of profit or loss and other comprehensive income and statement of changes
in equity. The non-controlling interests in the profit or loss and total comprehensive
income of the group for the reporting period are presented in the statement of profit or
loss and other comprehensive income as allocations of profit or loss for the period
(IAS 1.81B).
The consolidated statement of financial position presents the state of affairs and
business of the parent and all its subsidiaries at the relevant reporting date for the
group as a whole. In order to prepare a consolidated statement of financial position
for a group of companies consisting of separate legal entities, and to present therein
the state of affairs of the group as a single economic entity, it is necessary that all
common and intragroup items be eliminated. Subsequently, the remaining assets
and liabilities of the parent and its subsidiary are combined on a line-by-line basis in
order to prepare the consolidated statement of financial position. Non-controlling
interests are presented in the consolidated statement of financial position within
equity, separately from the equity of the owners of the parent (IFRS 10.22).
Consolidation procedures for the interest in a partially-owned
subsidiary after acquisition date
4.12 Basic consolidation procedures
The basic consolidation procedures as applied up to this stage are still followed,
namely:
l elimination of common items;
l elimination of intragroup items; and
l consolidation of the remaining non-common items on a line-by-line basis.
The comprehensive approach (the worksheet approach) is still followed in this chapter
in executing the consolidation procedures, i.e.:
l the analysis of owners’ equity of the subsidiary;
l pro forma consolidation journal entries to eliminate the common and intragroup
items;
152
Consolidation after acquisition date
l
a consolidation worksheet in which:
• the separate financial statements of the parent and its subsidiary are combined;
• the pro forma consolidation journal entries are recorded; and
• the remaining non-common items which represent the consolidated amounts
are added together.
Although in practice the comprehensive approach is most often applied in one or other
form (normally computerised), the method is not ideal for examination purposes.
The consolidation of a partially-owned subsidiary after acquisition will now be explained
with reference to an acquisition at:
l the fair value of the identifiable assets acquired and liabilities assumed, where the
parent accounts for the subsidiary at fair value in its separate records;
l more than the fair value of the identifiable assets acquired and liabilities assumed
and the non-controlling interests are also measured at fair value at acquisition; and
l less than the fair value of the identifiable assets acquired and liabilities assumed
and movements between reserves occur in the reporting period.
Example 4.5
Consolidation after acquisition date. Interest obtained at fair
value. P Ltd accounts for investment in terms of IFRS 9
The following are the condensed financial statements of P Ltd and its subsidiary S Ltd,
which is partially owned, two years after P Ltd acquired 80% of the issued share capital
of S Ltd:
STATEMENTS OF FINANCIAL POSITION AS AT 30 JUNE 20.18
P Ltd
ASSETS
Property, plant and equipment
Investment in S Ltd: 64 000 shares at fair value
(cost price: R70 000)
Trade receivables
S Ltd
15 000
50 000
76 000
119 000
–
86 000
Total assets
EQUITY AND LIABILITIES
Share capital (100 000/80 000 shares)
Retained earnings
Mark-to-market reserve
Trade and other payables
R210 000
R136 000
100 000
14 000
6 000
90 000
80 000
15 000
–
41 000
Total equity and liabilities
R210 000
R136 000
153
Chapter 4
EXTRACT FROM THE STATEMENTS OF PROFIT OR LOSS
AND OTHER COMPREHENSIVE INCOME
FOR THE YEAR ENDED 30 JUNE 20.18
P Ltd
S Ltd
Profit
Dividend received from subsidiary
13 800
3 200
14 500
–
Profit before tax
Income tax expense
17 000
(7 000)
14 500
(5 000)
PROFIT FOR THE YEAR
10 000
9 500
Other comprehensive income
Mark-to-market reserve (fair value adjustment on investment)
1 000
–
Other comprehensive income for the year
TOTAL COMPREHENSIVE INCOME FOR THE YEAR
1 000
–
R11 000
R9 500
EXTRACT FROM THE STATEMENTS OF CHANGES IN EQUITY
FOR THE YEAR ENDED 30 JUNE 20.18
Mark-to-market
reserve
P Ltd
Balance at 1 July 20.17
Changes in equity for 20.18
Total comprehensive income
for the year:
Profit for the year
Other comprehensive income
Dividend
Balance at 30 June 20.18
Retained earnings
P Ltd
S Ltd
5 000
9 000
9 500
–
1 000
–
10 000
–
(5 000)
9 500
–
(4 000)
R6 000
R14 000
R15 000
On 1 July 20.16, the date at which P Ltd acquired the shareholding in S Ltd, the
financial statements of S Ltd showed the following credit balance:
Retained earnings
R7 500
Assume that the identifiable assets acquired and the liabilities assumed at acquisition
date are shown at their acquisition-date fair values, as determined in terms of IFRS 3.
P Ltd elected to measure the non-controlling interests in an acquiree at their
proportionate share of the acquiree’s identifiable net assets at acquisition date.
P Ltd classified the equity investment in S Ltd under IFRS 9 in its separate financial
statements and recognised fair value adjustments in a mark-to-market reserve (other
comprehensive income).
Ignore tax implications.
154
Consolidation after acquisition date
Solution 4.5
Since consolidation takes place after the acquisition date, the analysis of the owners’
equity of S Ltd is apportioned over the following periods:
i At date of acquisition
ii Since date of acquisition:
l To the beginning of the current year
l Current year
C1 Analysis of owners’ equity of S Ltd
Total
i At acquisition (1/7/20.16)
Share capital
Retained earnings
Purchase difference
Consideration (76 000 – 6 000(J1))
and NCI
ii Since acquisition
• To beginning of current year:
Retained earnings (9 500 – 7 500)
• Current year:
Profit for the year
Dividend
P Ltd 80%
At
Since
NCI
80 000
7 500
64 000
6 000
16 000
1 500
87 500
–
70 000
–
17 500
–
87 500
70 000
17 500
2 000
1 600
400
17 900
9 500
(4 000)
7 600
(3 200)
1 900
(800)
R105 000
R6 000
R19 000
C2 Proof of calculation of purchase difference of S Ltd in terms of IFRS 3.32
Consideration transferred at acquisition date: IFRS 3.32(a)(i)
70 000
Amount of non-controlling interests: IFRS 3.32(a)(ii)
17 500
87 500
Net of the identifiable assets acquired and liabilities assumed at acquisition
date: IFRS 3.32(b)
Purchase difference
(87 500)
R–
155
Chapter 4
Comment
The changes in retained earnings from the acquisition date up to the beginning of the
current reporting period are calculated as follows:
Retained
earnings
Balance at 1/7/20.17 in statement of changes in equity
Balance at 30/6/20.16 (acquisition date)
9 500
(7 500)
Thus: Increase to 30/6/20.17
R2 000
C3 Pro forma consolidation journal entries
Dr
R
J1
J2
Cr
R
Mark-to-market reserve – Beginning of year (P)(SCE)
Mark-to-market reserve (P)(OCI)
Investment in S Ltd (P)(SFP)
Reversal of fair value adjustment on investment
in S Ltd
5 000
1 000
Share capital (S)(SCE)
Retained earnings – Beginning of year (S)(SCE)
Investment in S Ltd (76 000 – 6 000(J1)) (P)(SFP)
Non-controlling interests (SFP)
Elimination of owners’ equity of S Ltd on acquisition
80 000
7 500
6 000
70 000
17 500
With regard to the period since acquisition until the beginning of the current reporting
period, the non-controlling interests in the post-acquisition profits and reserves should
be recorded to reflect the portion of the profits attributable to the non-controlling
interests. Consolidation will require a line-by-line aggregation of the items in the
statements of profit or loss and other comprehensive income of the entities, thereby
including 100% of the line items of the subsidiary. This is done to indicate to the user
how the controlling entity used the assets at its disposal to generate profits. This
amount however needs to be diluted as 20% of these profits are not attributable to the
parent, but to the non-controlling interests. This elimination is done by means of the
following journal entries:
Dr
R
J3
156
Retained earnings – Beginning of year (S)(SCE)
Non-controlling interests (SFP)
Recognition of non-controlling interests in the
retained earnings of the subsidiary for the period
1/7/20.16–30/6/20.17 ((9 500 – 7 500) × 20%)
Cr
R
400
400
Consolidation after acquisition date
In respect of the current reporting period the non-controlling interests in the profit of the
subsidiary must be allocated to them. The result of the adjustment is that the total profit
of the group as a whole, as far as the owners of the parent are concerned, is disclosed:
Dr
R
J4
Non-controlling interests (P/L)
Non-controlling interests (SFP)
Recognition of non-controlling interests in the
profit for the year (9 500 × 20%)
1 900
Cr
R
1 900
Finally, it is necessary to eliminate the dividend paid by the subsidiary completely. The
portion which is paid to the parent is cancelled out because, as has already been
explained, it is an intragroup transaction, while the non-controlling interests are debited
because the pro rata portion paid to them represents a reduction of their total interest in
the subsidiary:
Dr
R
J5
Dividend received (P)(P/L)
Non-controlling interests (SFP)
Dividend paid (S)(SCE)
Elimination of intragroup dividend and recognition
of non-controlling interests in the dividend
3 200
800
Cr
R
4 000
157
Chapter 4
The consolidation process is now completed by using the consolidation worksheet.
C4 Consolidation worksheet: P Ltd and subsidiary
P Ltd
Consolidation
adjustments
S Ltd
Dr
Property, plant and
equipment
Investment in S Ltd
Trade receivables
15 000
76 000
50 000
–
Cr
6 000(J1)
70 000 (J2)
Consolidated
65 000
–
119 000
86 000
R210 000
R136 000
Profit
Dividend from S Ltd
13 800
3 200
14 500
–
Profit before tax
Income tax expense
17 000
(7 000)
14 500
(5 000)
28 300
(12 000)
Profit for the year
Other comp
income:
FV gain on fin asset
Total
comprehensive
income
NCI in profit
Dividend
Retained earnings
For the year
At beginning of
year
10 000
9 500
16 300
1 000
–
1 000 (J1)
–
11 000
–
(5 000)
9 500
–
(4 000)
1 900 (J4)
16 300
(1 900)
(5 000)
6 000
5 000
9 000
9 500
End of year
Mark-to-market
reserve –
Beginning of year
Share capital
15 000
15 000
5 000
100 000
–
80 000
5 000(J1)
80 000 (J2)
120 000
–
95 000
–
800 (J5)
90 000
41 000
R210 000
R136 000
Total equity
Non-controlling
interests
Trade and other
payables
158
205 000
R270 000
28 300
–
3 200 (J5)
4 000 (J5)
9 400
7 500 (J2)
400 (J3)
10 600
20 000
–
100 000
17 500 (J2)
400 (J3)
1 900 (J4)
120 000
19 000
131 000
R99 800
R99 800
R270 000
Consolidation after acquisition date
The last column of the worksheet can now easily be adapted into consolidated financial
statements:
P LTD GROUP
CONSOLIDATED STATEMENT OF FINANCIAL POSITION AS AT 30 JUNE 20.18
ASSETS
Non-current assets
Property, plant and equipment (15 000(P) + 50 000(S))
65 000
65 000
Current assets
Trade receivables (119 000(P) + 86 000(S))
Total assets
EQUITY AND LIABILITIES
Equity attributable to owners of the parent
Share capital
Retained earnings
Non-controlling interests
Total equity
Current liabilities
Trade and other payables (90 000(P) + 41 000(S))
Total equity and liabilities
205 000
R270 000
100 000
20 000
120 000
19 000
139 000
131 000
R270 000
P LTD GROUP
EXTRACT FROM THE CONSOLIDATED STATEMENT OF PROFIT OR LOSS
AND OTHER COMPREHENSIVE INCOME
FOR THE YEAR ENDED 30 JUNE 20.18
Profit before tax (17 000(P) + 14 500(S) – 3 200(J4))
Income tax expense (7 000(P) + 5 000(S))
28 300
(12 000)
PROFIT FOR THE YEAR
Other comprehensive income for the year
TOTAL COMPREHENSIVE INCOME FOR THE YEAR
Profit attributable to:
Owners of the parent
Non-controlling interests (analysis)
16 300
–
R16 300
14 400
1 900
R16 300
Total comprehensive income attributable to:
Owners of the parent
Non-controlling interests
14 400
1 900
R16 300
159
Chapter 4
Comment
The profit attributable to the non-controlling interests is obtained from the analysis, i.e.
the portion of profit for the year attributable to the non-controlling interests
(9 500 × 20%). The profit attributable to the owners of the parent is the difference
between the total comprehensive profit for the year, less the portion attributable to the
non-controlling interests (16 300 – 1 900), i.e. the balancing figure.
In the case of the allocation of the total comprehensive income, as there is no other
comprehensive income for the year, the same amounts are used for the distribution of
the total comprehensive income.
Retained
earnings
Total
Noncontrolling
interests
100 000
* 10 600
110 600
@ 17 900
128 500
–
–
14 400
(5 000)
14 400
(5 000)
1 900
(800)
16 300
(5 800)
R100 000
# R20 000
R120 000
’R19 000
R139 000
Share
capital
Balance at
1 July 20.17
Changes in equity
for 20.18
Total comprehensive
income for the year:
Profit for the year
Dividend paid
Balance at
30 June 20.18
¥
*
@
#
’
Total
equity
Analysis
9 000(P) + 1 600(S – analysis) = 10 600
17 500 + 400 = 17 900(analysis)
14 000(P) + 6 000(S – analysis) = 20 000
Analysis
The next example shows the consolidation after acquisition of a partially-owned
subsidiary. However, in this case the non-controlling interests are measured at fair
value at the acquisition date. The basic information is very similar to the previous
example, but it should be regarded as a separate example.
160
Consolidation after acquisition date
Example 4.6
Consolidation after acquisition date, NCI measured at fair value
at acquisition date
The following are the condensed financial statements of P Ltd and its subsidiary S Ltd,
which is partially-owned, two years after P Ltd acquired 75% of the issued share capital of S
Ltd:
STATEMENTS OF FINANCIAL POSITION AS AT 30 JUNE 20.18
P Ltd
ASSETS
Property, plant and equipment
Investment in S Ltd: 60 000 shares at fair value
(cost price: R76 000)
Trade receivables
S Ltd
15 000
78 000
50 000
–
119 000
86 000
Total assets
EQUITY AND LIABILITIES
Share capital (100 000/80 000 shares)
Retained earnings
Mark-to-market reserve
Trade and other payables
R212 000
R136 000
100 000
14 000
2 000
96 000
80 000
15 000
–
41 000
Total equity and liabilities
R212 000
R136 000
EXTRACT FROM THE STATEMENTS OF PROFIT OR LOSS
AND OTHER COMPREHENSIVE INCOME
FOR THE YEAR ENDED 30 JUNE 20.18
P Ltd
S Ltd
Profit
Dividend received from subsidiary
14 000
3 000
14 500
–
Profit before tax
Income tax expense
17 000
(7 000)
14 500
(5 000)
PROFIT FOR THE YEAR
10 000
9 500
–
–
Other comprehensive income for the year
Mark-to-market reserve (Fair value adjustment on investment)
(3 000)
TOTAL COMPREHENSIVE INCOME FOR THE YEAR
R7 000
R9 500
161
Chapter 4
EXTRACT FROM THE STATEMENTS OF CHANGES IN EQUITY
FOR THE YEAR ENDED 30 JUNE 20.18
Mark-tomarket
reserve
P Ltd
Retained earnings
P Ltd
S Ltd
Balance at 1 July 20.17
Changes in equity for 20.18
Total comprehensive income for the year:
Profit for the year
Other comprehensive income
Dividend
5 000
9 000
9 500
–
(3 000)
–
10 000
9 500
(5 000)
(4 000)
Balance at 30 June 20.18
2 000
R14 000
R15 000
On 1 July 20.16, the date at which P Ltd acquired the shareholding in S Ltd, the
financial statements concerned of the latter showed the following credit balance:
Retained earnings
R7 500
P Ltd elected to measure any non-controlling interests in an acquiree at fair value at
acquisition date. At the acquisition date, the directors of P Ltd were of the opinion that
the non-controlling interests were worth R25 000, after a remeasurement was done.
Assume that the identifiable assets acquired and the liabilities assumed at acquisition
date are shown at their acquisition-date fair values, as determined in terms of IFRS 3.
P Ltd classified the equity investment in S Ltd under IFRS 9 in its separate financial
statements and recognised fair value adjustments in a mark-to-market reserve (other
comprehensive income).
Ignore tax implications.
Solution 4.6
The consolidated financial statements of P Ltd and the subsidiary must be prepared for
the reporting period ended 30 June 20.18, as illustrated below.
Since consolidation takes place after the acquisition date, the analysis of the owners’
equity of S Ltd is apportioned over the following periods:
i At date of acquisition
ii Since date of acquisition
l To the beginning of the current year
l Current year
162
Consolidation after acquisition date
Calculations
C1 Analysis of owners’ equity of S Ltd
Total
i At acquisition (1/7/20.16)
Share capital
Retained earnings
Equity represented by goodwill
– Parent
Equity represented by goodwill – NCI
Consideration (78 000 – 5 000(J1) +
3 000(J1)) and NCI
ii Since acquisition
• To beginning of current year:
Retained earnings (9 500 – 7 500)
• Current year:
Profit for the year
Dividend
P Ltd 75%
At
Since
NCI
80 000
7 500
60 000
5 625
20 000
1 875
87 500
65 625
21 875
10 375
3 125
10 375
–
–
3 125
101 000
76 000
25 000
2 000
1 500
500
25 500
9 500
(4 000)
7 125
(3 000)
2 375
(1 000)
108 500
5 625
26 875
C2 Proof of calculation of goodwill of S 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)
76 000
25 000
101 000
Net of the identifiable assets acquired and liabilities assumed
at acquisition date: IFRS 3.32(b)
(87 500)
Goodwill
R13 500
163
Chapter 4
C3 Pro forma consolidation journal entries
Dr
R
Cr
R
J1
Mark-to-market reserve – Beginning of year (P)(SCE)
Mark-to-market reserve (P)(OCI)
Investment in S Ltd (P)(SFP)
Reversal of fair value adjustment on investment
in S Ltd
5 000
J2
Share capital (S)(SCE)
Retained earnings – Beginning of year (S)(SCE)
Goodwill (SFP)
Investment in S Ltd (P)(SFP)
Non-controlling interests (SFP)
Elimination of owners’ equity of S Ltd
on acquisition
80 000
7 500
13 500
J3
Retained earnings – Beginning of year (S)(SCE)
Non-controlling interests (SFP)
Recognition of non-controlling interests in the
retained earnings of the subsidiary for the period
1/7/20.16–30/6/20.17 ((9 500 – 7 500) × 25%)
J4
Non-controlling interests (P/L)
Non-controlling interests (SFP)
Recognition of non-controlling interests
in the profit for the year (9 500 × 25%)
2 375
J5
Dividend received (P)(P/L)
Non-controlling interests (SFP)
Dividend paid (S)(SCE)
Elimination of intragroup dividend and recognition
of non-controlling interests in the dividend
3 000
1 000
164
500
3 000
2 000
76 000
25 000
500
2 375
4 000
Consolidation after acquisition date
C4 Consolidation worksheet: P Ltd and subsidiary
P Ltd
Consolidation
adjustments
S Ltd
Dr
Property, plant and
equipment
Goodwill
Investment in S Ltd
Cr
Consolidated
15 000
50 000
78 000
–
119 000
86 000
R212 000
R136 000
Profit
Dividend from S Ltd
14 000
3 000
14 500
–
Profit before tax
Income tax expense
17 000
(7 000)
14 500
(5 000)
28 500
(12 000)
Profit for the year
FV loss on fin asset
10 000
(3 000)
9 500
–
3 000(J1)
16 500
–
7 000
–
(5 000)
9 500
–
(4 000)
4 000 (J5)
16 500
(2 375)
(5 000)
2 000
9 000
5 500
9 500
11 000
15 000
5 000
100 000
–
80 000
116 000
95 000
–
–
96 000
41 000
Trade receivables
Total comprehensive
income
NCI in profit
Dividend paid
Retained earnings
For the year
At beginning of
year
End of year
Mark-to-market
reserve –
Beginning of year
Share capital
Total equity
Non-controlling
interests
Trade and other
payables
R212 000
13 500(J2)
76 000(J2)
2 000(J1)
65 000
13 500
–
205 000
R283 500
28 500
–
3 000 (J5)
2 375 (J4)
9 125
10 500
7 500 (J2)
500(J3)
19 625
5 000 (J1)
80 000 (J2)
–
100 000
119 625
1 000 (J5) 25 000 (J2)
500 (J3)
2 375 (J4)
R136 000 R112 875
26 875
137 000
R112 875
R283 500
165
Chapter 4
P LTD GROUP
CONSOLIDATED STATEMENT OF FINANCIAL POSITION AS AT 30 JUNE 20.18
ASSETS
Non-current assets
Property, plant and equipment (15 000(P) + 50 000(S))
Goodwill
65 000
13 500
78 500
Current assets
Trade receivables (119 000(P) + 86 000(S))
Total assets
EQUITY AND LIABILITIES
Equity attributable to owners of the parent
Share capital
Retained earnings
205 000
R283 500
100 000
19 625
Non-controlling interests
119 625
26 875
Total equity
146 500
Current liabilities
Trade and other payables (96 000(P) + 41 000(S))
137 000
Total equity and liabilities
R283 500
P LTD GROUP
EXTRACT FROM THE CONSOLIDATED STATEMENT OF PROFIT OR LOSS AND
OTHER COMPREHENSIVE INCOME FOR THE YEAR ENDED 30 JUNE 20.18
Profit before tax (17 000(P) + 14 500(S) – 3 000 (J5))
Income tax expense (7 000(P) + 5 000(S))
28 500
(12 000)
PROFIT FOR THE YEAR
16 500
Other comprehensive income for the year
TOTAL COMPREHENSIVE INCOME FOR THE YEAR
Profit attributable to:
Owners of the parent
Non-controlling interests (analysis)
–
R16 500
14 125
2 375
R16 500
Total comprehensive income attributable to:
Owners of the parent
Non-controlling interests (analysis)
14 125
2 375
R16 500
166
Consolidation after acquisition date
Comment
The amount attributable to the non-controlling interests is obtained from the analysis,
i.e. the portion of profit for the year attributable to the non-controlling interests
(9 500 × 25%). The amount attributable to the owners of the parent is the difference
between the total comprehensive income for the year, less the portion attributable to the
non-controlling interests (16 500 – 2 375), i.e. the balancing figure.
P LTD GROUP
CONSOLIDATED STATEMENT OF CHANGES IN EQUITY
FOR THE YEAR ENDED 30 JUNE 20.18
Balance at 1 July 20.17
Changes in equity for 20.18
Total comprehensive income
for the year:
Profit for the year
Dividend paid
Balance at 30 June 20.18
Share
capital
Retained
earnings
Total
Non-controlling
interests
Total
equity
100 000
* 10 500
110 500
@ 25 500
136 000
–
–
Ž 14 125
(5 000)
14 125
(5 000)
2 375
(1 000)
16 500
(6 000)
R100 000 # R19 625
R119 625
R26 875
R146 500
* 9 000(P) + 1 500(S – analysis) = 10 500
@ Analysis
Ž Consolidated SCI
# 14 000(P) + 5 625(S – analysis) = 19 625
Other movements in equity of the subsidiary since the acquisition
date
4.13 Movement in equity
In the discussion up to this point, movements in the equity of the subsidiary were
restricted to increases in retained earnings from one reporting period to the next. The
equity of a subsidiary can also change due to:
l changes in the mark-to-market reserve where a subsidiary has investments that
are accounted for in terms of IFRS 9;
l the issue or buy-back of shares (discussed in Volume 2, chapter 14); and
l revaluations of property, plant and equipment and financial instruments (discussed
in chapter 6).
In terms of IAS 1.79(b), the nature and purpose of every reserve within equity has to be
disclosed by way of a description. An entity can therefore not create a general reserve
without any purpose
167
Chapter 4
The case will now be addressed where a subsidiary has a mark-to-market reserve that
forms part of equity at acquisition and that has changed since due to the recognition of
fair value adjustments. This reserve is treated exactly the same as retained earnings in
the consolidation process.
Example 4.7
Consolidation where S Ltd’s equity includes mark-to-market
reserve
The following are the financial statements of P Ltd and its subsidiary for 20.18:
STATEMENTS OF FINANCIAL POSITION AS AT 31 DECEMBER 20.18
P Ltd
ASSETS
Property, plant and equipment
Investment in S Ltd: 40 000 shares at fair value
Financial asset (at fair value through OCI)
Trade receivables
Cash and cash equivalents
Total assets
EQUITY AND LIABILITIES
Share capital (100 000/50 000 shares)
Mark-to-market reserve
Retained earnings
Trade and other payables
Total equity and liabilities
S Ltd
99 400
49 800
–
15 000
15 200
45 000
–
20 000
23 800
10 000
R179 400
R98 800
100 000
5 000
49 400
25 000
50 000
4 000
28 800
16 000
R179 400
R98 800
STATEMENTS OF PROFIT OR LOSS AND OTHER COMPREHENSIVE INCOME
FOR THE YEAR ENDED 31 DECEMBER 20.18
P Ltd
S Ltd
Profit before investment income
Dividend received
40 000
6 400
24 000
–
Profit before tax
Income tax expense
46 400
(12 000)
24 000
(7 200)
PROFIT FOR THE YEAR
34 400
16 800
Mark-to-market reserve
3 200
2 500
Other comprehensive income for the year
3 200
2 500
Other comprehensive income
TOTAL COMPREHENSIVE INCOME FOR THE YEAR
168
R37 600
R19 300
Consolidation after acquisition date
EXTRACTS FROM THE STATEMENTS OF CHANGES IN EQUITY
FOR THE YEAR ENDED 31 DECEMBER 20.18
Mark-to-market reserve
P Ltd
Balance at 1 January 20.18
Changes in equity for 20.18
Total comprehensive income for the
year:
Profit for the year
Other comprehensive income
Dividend
Balance at 31 December 20.18
S Ltd
1 800
1 500
3 200
2 500
5 000
4 000
Retained earnings
P Ltd
S Ltd
25 000
20 000
34 400
16 800
(10 000)
(8 000)
R49 400
R28 800
Additional information
P Ltd paid R44 800 for its interest in S Ltd on 1 January 20.16 when the latter had
retained earnings of R5 000 and a mark-to-market reserve of R1 000. The capital has
remained unchanged since that date.
P Ltd classified the equity investment in S Ltd under IFRS 9 in its separate financial
statements and recognised fair value adjustments in a mark-to-market reserve (other
comprehensive income).
P Ltd elected to measure non-controlling interests in an acquiree at their proportionate
share of the acquiree’s identifiable net assets.
The following information is relevant to the dividends of S Ltd:
Final dividend paid (paid 15 February 20.18)
R3 000
Interim dividend (paid 31 July 20.18)
R5 000
R6 000
Final dividend declared (registration date for payment – 31 January 20.19)
Ignore tax implications.
Solution 4.7
When the equity of the subsidiary contains more than one reserve, a distinction should
be made between such reserves in the analysis to simplify the preparation of the
consolidated financial statements.
169
Chapter 4
Calculations
C1 Analysis of owners’ equity of S Ltd
i At acquisition (1/1/20.16)
Share capital
Mark-to-market reserve
Retained earnings
Purchase difference
Consideration (49 800 – 5 000(J1)) and
NCI
ii Since acquisition
• To beginning of current year:
Mark-to-market reserve (1 500 – 1 000)
Retained earnings (20 000 – 5 000)
• Current year:
Profit for the year
Mark-to-market reserve
Final dividend paid
Interim dividend paid
Total
P Ltd 80%
At
Since
NCI
50 000
1 000
5 000
40 000
800
4 000
10 000
200
1 000
56 000
–
44 800
–
11 200
–
56 000
R44 800
11 200
500
15 000
400MM
12 000BV
100
3 000
14 300
16 800
2 500
(3 000)
(5 000)
13 440BV
2 000MM
(2 400)BV
(4 000)BV
3 360
500
(600)
(1 000)
R82 800
R19 040BV
R2 400MM
R16 560
C2 Proof of calculation of purchase difference of S Ltd in terms of IFRS 3.32
44 800
Consideration transferred at acquisition date: IFRS 3.32(a)(i)
11 200
Amount of non-controlling interests: IFRS 3.32(a)(ii)
56 000
Net of the identifiable assets acquired and liabilities assumed
at acquisition date: IFRS 3.32(b)
Goodwill
170
(56 000)
R–
Consolidation after acquisition date
C3 Pro forma consolidation journal entry
Dr
R
J1
Cr
R
Mark-to-market reserve – Beginning of year (P)(SCE)
Mark-to-market reserve (P)(OCI)
Investment in S Ltd (P)(SFP)
Reversal of fair value adjustment on investment in
S Ltd
1 800
3 200
Share capital (S)(SCE)
Retained earnings (S)(SCE)
Mark-to-market reserve (S)(SCE)
Investment in S Ltd (P)(SFP)
Non-controlling interests (SFP)
Elimination of owners’ equity at acquisition of S Ltd
50 000
5 000
1 000
J3
Mark to market reserve – Beginning of year (S)(SCE)
Non-controlling interests (SFP)
Recognition of non-controlling interests in mark-tomarket reserve of S Ltd for the period since
acquisition until beginning of the year
100
J4
Retained earnings – Beginning of year (S)(SCE)
Non-controlling interests (SFP)
Recognition of non-controlling interests in retained
earnings of S Ltd for the period since
acquisition until beginning of the year
3 000
J5
Non-controlling interests (P/L)
Non-controlling interests (SFP)
Recognition of non-controlling interests in S Ltd’s
profit for the period
3 360
J6
Other comprehensive income attributable to noncontrolling interests (OCI)
Non-controlling interests (SFP)
Recognition of non-controlling interests in
movement in S Ltd’s mark-to-market reserve for the
period
500
Dividend received (P) (4 000 + 2 400)
Non-controlling interests (SFP) (1 000 + 600)
Dividend paid (S) (5 000 + 3 000)
Elimination of intragroup dividend and recognition
of dividend paid to non-controlling interests
6 400
1 600
J2
J7
5 000
44 800
11 200
100
3 000
3 360
500
8 000
171
Chapter 4
C4 Consolidation worksheet: P Ltd and subsidiary
P Ltd
S Ltd
Consolidation
adjustments
Dr
Property, plant and
equipment
Investment in S Ltd
Cr
Consolidated
99 400
49 800
45 000
–
–
15 000
20 000
23 800
15 200
10 000
25 200
R179 400
R98 800
R228 400
Profit
Dividend from S Ltd
40 000
6 400
24 000
–
Profit before tax
Income tax expense
46 400
(12 000)
24 000
(7 200)
Profit for the year
FV gain on fin asset
34 400
3 200
16 800
2 500
Financial asset
Trade receivables
Cash and cash
equivalents
5 000(J1)
44 800(J2)
64 000
(19 200)
19 300
–
(10 000)
–
(8 000)
Retained earnings
For the year
At beginning of year
27 600
25 000
11 300
20 000
52 600
1 800
31 300
1 500
100 000
50 000
1 800(J1)
1 000(J2)
100(J3)
50 000(J2)
154 400
–
82 800
–
1 600(J7)
25 000
16 000
R179 400
R98 800
Trade and other
payables
172
44 800
2 000
3 200(J1)
500(J6)
37 600
Total equity
Non-controlling
interests
20 000
38 800
64 000
–
6 400(J7)
Total
comprehensive
income
Non-controlling
interests
Dividend paid
End of year
Mark-to-market
reserve –
Beginning of year
Share capital
144 400
–
46 800
3 360(J5)
8 000(J7)
(3 360)
(10 000)
33 440
5 000(J2)
3 000(J4)
37 000
70 440
400
100 000
11 200(J2)
100(J3)
3 000(J4)
3 360(J5)
500(J6)
170 840
16 560
41 000
R75 960
R75 960
R228 400
Consolidation after acquisition date
The consolidated financial statements of the P Ltd group for the reporting period ended
31 December 20.18 will be prepared as follows:
P LTD GROUP
CONSOLIDATED STATEMENT OF FINANCIAL POSITION
AS AT 31 DECEMBER 20.18
ASSETS
Non-current assets
Property, plant and equipment (99 400(P) + 45 000(S))
Financial asset (S)
144 400
20 000
164 400
Current assets
Trade receivables (15 000(P) + 23 800(S))
Cash and cash equivalents (15 200(P) + 10 000(S))
38 800
25 200
64 000
Total assets
R228 400
EQUITY AND LIABILITIES
Equity attributable to owners of the parent
Share capital
Mark-to-market reserve
Retained earnings
100 000
2 400
68 440
Non-controlling interests
170 840
16 560
Total equity
187 400
Current liabilities
Trade and other payables (25 000(P) +16 000(S))
41 000
Total equity and liabilities
R228 400
173
Chapter 4
P LTD GROUP
EXTRACT FROM THE CONSOLIDATED STATEMENT OF PROFIT OR LOSS
AND OTHER COMPREHENSIVE INCOME
FOR THE YEAR ENDED 31 DECEMBER 20.18
Profit before tax (46 400(P) + 24 000(S) – 6 400(J6))
Income tax expense (12 000(P) + 7 200(S))
64 000
(19 200)
PROFIT FOR THE YEAR
44 800
Other comprehensive income for the year
Mark-to-market reserve
–
2 500
R47 300
TOTAL COMPREHENSIVE INCOME FOR THE YEAR
Total comprehensive income attributable to:
Owners of the parent
Non-controlling interests
41 440
3 360
R44 800
Total comprehensive income attributable to:
Owners of the parent (41 440 + 2 000)
43 440
Non-controlling interests (3 360 + 500)
3 860
R47 300
P LTD GROUP
CONSOLIDATED STATEMENT OF CHANGES IN EQUITY
FOR THE YEAR ENDED 31 DECEMBER 20.18
MarkRetained
tomarket earnings
reserve
Share
capital
Balance at
1 January 20.18
Changes in equity
for 20.18
Total comprehensive
income for the
year:
Profit for the year:
Mark-to-market
reserve
Dividend
100 000
Ŷ 400
–
–
_
2 000
Total
(Analysis)
25 000(P) + 12 000(S – analysis) = 37 000
(Analysis)
49 400(P) + 19 040(S – analysis) = 68 440
174
Total
equity
# 37 000
137 400
14 300
151 700
41 440
41 440
3 360
44 800
–
(10 000)
2 000
(10 000)
500
(1 600)
2 500
(11 600)
Balance at
31 December 20.18 R100 000 ƇR 2 400 * R68 440 R170 840
Ŷ
#
Ƈ
*
Noncontrolling
interests
R16 560 R187 400
Consolidation after acquisition date
Self-assessment questions
Question 4.1
On 1 July 20.14, P Ltd acquired all the shares in S Ltd at R52 000. At that date, the
balance on S Ltd’s retained earnings account amounted to R12 000. The share capital
amounted to R40 000 and no shares have been issued since that date.
The following are the condensed statements of financial position of P Ltd and
subsidiary S Ltd at 31 December 20.18:
STATEMENTS OF FINANCIAL POSITION AS AT 31 DECEMBER 20.18
P Ltd
ASSETS
Property, plant and equipment
Investment in S Ltd: 4 000 shares at fair value
(cost price: R56 000)
Trade receivables
S Ltd
41 000
35 000
60 000
29 000
–
52 000
Total assets
EQUITY AND LIABILITIES
Share capital (8 000/4 000 shares)
Mark-to-market reserve
Retained earnings
Long-term borrowings
Trade and other payables
R130 000
R87 000
80 000
4 000
18 000
10 000
18 000
40 000
–
18 000
2 000
27 000
Total equity and liabilities
R130 000
R87 000
The statements of profit or loss and other comprehensive income of the two companies
for the reporting period ended 31 December 20.18 are as follows:
EXTRACT FROM THE STATEMENTS OF PROFIT OR LOSS
AND OTHER COMPREHENSIVE INCOME
FOR THE YEAR ENDED 31 DECEMBER 20.18
P Ltd
S Ltd
Profit
Dividend received
18 500
3 000
10 000
–
Profit before tax
Income tax expense
21 500
(5 500)
10 000
(3 000)
PROFIT FOR THE YEAR
Other comprehensive income
Items that will not be reclassified to profit or loss
Mark-to-market reserve (fair value adjustment on investment)
16 000
7 000
1 500
–
Other comprehensive income for the year
TOTAL COMPREHENSIVE INCOME FOR THE YEAR
1 500
–
R17 500
R7 000
175
Chapter 4
The statements of changes in equity for the reporting period ended 31 December 20.18
are as follows:
EXTRACT FROM THE STATEMENTS OF CHANGES IN EQUITY
FOR THE YEAR ENDED 31 DECEMBER 20.18
Mark-tomarket
reserve
P Ltd
Balance at 1 January 20.18
Changes in equity for 20.18
Total comprehensive income for the year:
Profit for the year
Other comprehensive income for the year
Dividend
Balance at 31 December 20.18
Retained
earnings
P Ltd
S Ltd
2 500
10 000
14 000
–
1 500
–
16 000
–
(8 000)
7 000
–
(3 000)
R4 000
R18 000
R18 000
Assume that the identifiable assets acquired and the liabilities assumed at acquisition
date are shown at their acquisition-date fair values, as determined in terms of IFRS 3.
P Ltd elected to measure the non-controlling interests in an acquiree at their
proportionate share of the acquiree’s identifiable net assets at acquisition date.
P Ltd classified the equity investment in S Ltd under IFRS 9 in its separate financial
statements and recognised fair value adjustments in a mark-to-market reserve (other
comprehensive income).
Ignore tax implications.
Required
Prepare the consolidated financial statements of the P Ltd Group for the reporting
period ended 31 December 20.18.
176
Consolidation after acquisition date
Suggested solution 4.1
P LTD GROUP
CONSOLIDATED STATEMENT OF FINANCIAL POSITION AS AT
31 DECEMBER 20.18
ASSETS
Non-current assets
Property, plant and equipment (41 000(P) + 35 000(S))
Goodwill
Current assets
Trade receivables (29 000(P) + 52 000(S))
76 000
4 000
80 000
81 000
Total assets
EQUITY AND LIABILITIES
Equity attributable to owners of the parent
Share capital (P)
Retained earnings
R161 000
Total equity
Non-current liabilities
Long-term borrowings (10 000(P) + 2 000(S))
104 000
Current liabilities
Trade and other payables (18 000(P) + 27 000(S))
Total equity and liabilities
80 000
24 000
12 000
45 000
R161 000
P LTD GROUP
EXTRACT FROM THE CONSOLIDATED STATEMENT OF PROFIT OR LOSS
AND OTHER COMPREHENSIVE INCOME
FOR THE YEAR ENDED 31 DECEMBER 20.18
Profit before tax (21 500(P) + 10 000(S) – 3 000(div))
Income tax expense (5 500(P) + 3 000(S))
28 500
(8 500)
PROFIT FOR THE YEAR
Other comprehensive income for the year
20 000
–
TOTAL COMPREHENSIVE INCOME FOR THE YEAR
R20 000
Profit attributable to:
Owners of the parent
R20 000
Total comprehensive income attributable to:
Owners of the parent
R20 000
177
Chapter 4
P LTD GROUP
EXTRACT FROM THE CONSOLIDATED STATEMENT OF CHANGES IN EQUITY
FOR THE YEAR ENDED 31 DECEMBER 20.18
Share
capital
Balance at 1 January 20.18
Changes in equity for 20.18
Total comprehensive income for the year:
Profit for the year
Dividend
Balance at 31 December 20.18
Retained
earnings
Total
equity
80 000
*12 000
92 000
–
–
20 000
(8 000)
20 000
(8 000)
R80 000
ȜR24 000
R104 000
*10 000(P) + 2 000(S – analysis) = 12 000
Ȝ18 000(P) + 6 000(S – analysis) = 24 000
Calculations
C1 Analysis of owners’ equity of S Ltd
Total
i At acquisition (1/7/20.14)
Share capital
Retained earnings
Equity represented by goodwill – Parent
Consideration (60 000 – 4 000(J1))
ii Since acquisition
• To beginning of current year:
Retained earnings (14 000 – 12 000)
• Current year:
Profit for the year
Dividend
178
P Ltd 100%
At
40 000
12 000
40 000
12 000
52 000
4 000
52 000
4 000
56 000
R56 000
Since
2 000
2 000
7 000
(3 000)
7 000
(3 000)
R62 000
R6 000
Consolidation after acquisition date
C2 Proof of calculation of goodwill of S 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)
56 000
–
56 000
Net of the identifiable assets acquired and liabilities assumed
at acquisition date: IFRS 3.32(b)
(52 000)
Goodwill
R4 000
C3 Pro forma consolidation journal entries
Dr
R
J1
J2
J3
Mark-to-market reserve – Beginning of year (P)(SCE)
Mark-to-market reserve (P)(OCI)
Investment in S Ltd (P)(SFP)
Reversal of fair value adjustment on investment
in S Ltd
2 500
1 500
Share capital (S)(SCE)
Retained earnings – Beginning of year (S)(SCE
Goodwill (SFP)
Investment in S Ltd (P)(SFP)
Elimination of owners’ equity of S Ltd
on acquisition
40 000
12 000
4 000
Dividend received (P)(P/L)
Dividend paid (S)(SCE)
Elimination of intragroup dividend and recognition
of non-controlling interests in the dividend
3 000
Cr
R
4 000
56 000
3 000
179
Chapter 4
C4 Consolidation worksheet: P Ltd and subsidiary
P Ltd
Consolidation
adjustments
S Ltd
Dr
Cr
Consolidated
Property, plant and
equipment
Goodwill
Investment in S Ltd
41 000
35 000
60 000
–
Trade receivables
29 000
52 000
R130 000
R87 000
Profit
Dividend from S Ltd
18 500
3 000
10 000
–
Profit before tax
Income tax expense
21 500
(5 500)
10 000
(3 000)
28 500
(8 500)
Profit for the year
Other
comprehensive
income:
Gain on financial
asset at FV
through OC1
Total
comprehensive
income
Dividend
Retained earnings
For the year
At beginning of
year
16 000
7 000
20 000
1 500
–
17 500
(8 000)
7 000
(3 000)
9 500
10 000
4 000
14 000
19 500
18 000
2 500
80 000
–
40 000
102 000
58 000
104 000
10 000
2 000
12 000
18 000
27 000
45 000
R130 000
R87 000
End of year
Mark-to-market
reserve –
Beginning of year
Share capital
Total equity
Long-term
borrowings
Trade and other
payables
180
4 000 (J2)
4 000 (J1)
56 000 (J2)
76 000
4 000
–
81 000
R161 000
28 500
–
3 000 (J3)
1 500 (J1)
–
3 000 (J3)
20 000
(8 000)
12 000
12 000
12 000 (J2)
24 000
2 500 (J1)
40 000 (J2)
R63 000
–
80 000
R63 000
R161 000
Consolidation after acquisition date
Question 4.2
On 1 January 20.14 S Ltd was incorporated with an authorised share capital of 150 000
shares. Shares were issued as follows:
1 January 20.15
100 000 shares at R1 each
1 January 20.16
50 000 shares at R1,20 each
On 1 January 20.18, P Ltd purchased 120 000 of these shares for R155 000, at which
date S Ltd’s mark-to-market reserve was R15 000, and the retained earnings amounted
to R12 000.
The following represents the abridged statement of financial position of S Ltd at
31 December 20.18:
S LTD
STATEMENT OF FINANCIAL POSITION AS AT 31 DECEMBER 20.18
ASSETS
Property, plant and equipment
Financial assets
Trade receivables
140 000
60 000
55 000
Total assets
EQUITY AND LIABILITIES
Share capital (150 000 shares)
Mark-to-market reserve
Retained earnings
Trade and other payables
R255 000
Total equity and liabilities
R255 000
160 000
20 000
18 000
57 000
Assume that the identifiable assets acquired and the liabilities assumed at acquisition
date are shown at their acquisition-date fair values, as determined in terms of IFRS 3.
P Ltd elected to measure the non-controlling interests in an acquiree at their
proportionate share of the acquiree’s identifiable net assets at acquisitioin date.
P Ltd classified the equity investment in S Ltd under IFRS 9 in its separate financial
statements and recognised fair value adjustments in a mark-to-market reserve (other
comprehensive income).
Ignore tax implications.
Required
Prepare an analysis of the owners’ equity of S Ltd at 31 December 20.18.
181
Chapter 4
Suggested solution 4.2
Analysis of owners’ equity of S Ltd
Total
i At acquisition (1/1/20.18)
Share capital (1)
Mark-to-market reserve
Retained earnings
P Ltd 80%
At
Since
NCI
160 000
15 000
12 000
128 000
12 000
9 600
32 000
3 000
2 400
187 000
149 600
37 400
5 400
5 400
–
Consideration and NCI
192 400
R155 000
37 400
ii Since acquisition
• Current year:
Profit for the year (2)
Mark-to-market reserve (3)
6 000
5 000
Equity represented by goodwill
– Parent
R203 400
(1)
(2)
(3)
1 200
1 000
R4 800 RE R39 600
R4 000 MM
100 000 + (50 000 × 1,2) = 160 000
18 000 – 12 000 = 6 000
20 000 – 15 000 = 5 000
Proof of calculation of goodwill 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)
Net of the identifiable assets acquired and liabilities assumed at
acquisition date IFRS 3.32(b):
Goodwill
182
4 800 RE
4 000 MM
155 000
37 400
192 400
(187 000)
R5 400
Consolidation after acquisition date
Question 4.3
The following represents the abridged financial statements of P Ltd and its subsidiary
S Ltd:
STATEMENTS OF FINANCIAL POSITION AS AT 31 DECEMBER 20.18
P Ltd
ASSETS
Property, plant and equipment
Investment in S Ltd: 48 000 shares at fair value
(cost: R330 000)
Financial assets
Trade receivables
Inventories
Bank
S Ltd
390 000
400 000
350 000
–
255 000
80 000
55 000
–
60 000
105 000
165 000
–
Total assets
EQUITY AND LIABILITIES
Share capital (75 000/60 000 shares)
Mark-to-market reserve
Retained earnings
Long-term borrowings
Trade and other payables
Bank overdraft
R1 130 000
R730 000
300 000
20 000
375 000
225 000
210 000
–
240 000
10 000
240 000
150 000
50 000
40 000
Total equity and liabilities
R1 130 000
R730 000
STATEMENTS OF PROFIT OR LOSS AND OTHER COMPREHENSIVE INCOME
FOR THE YEAR ENDED 31 DECEMBER 20.18
P Ltd
S Ltd
Revenue
Cost of sales
945 000
(472 500)
1 500 000
(750 000)
Gross profit
Other expenses
Dividend received from S Ltd
472 500
(202 500)
96 000
750 000
(450 000)
–
Profit before tax
Income tax expense
366 000
(108 000)
300 000
(120 000)
PROFIT FOR THE YEAR
258 000
180 000
Other comprehensive income
Items that will not be reclassified to profit or loss
Mark-to-market reserve
(fair value adjustment on investment)
5 000
2 000
Other comprehensive income for the year
5 000
2 000
R263 000
R182 000
TOTAL COMPREHENSIVE INCOME FOR THE YEAR
183
Chapter 4
EXTRACT FROM THE STATEMENTS OF CHANGES IN EQUITY
FOR THE YEAR ENDED 31 DECEMBER 20.18
Mark-to-market reserve
P Ltd
S Ltd
Retained earnings
P Ltd
S Ltd
Balance at 1 January 20.18
Changes in equity for 20.18
Total comprehensive income
for the year:
Profit for the year
Other comprehensive income
for the year
Dividend
15 000
8 000
225 000
180 000
–
–
258 000
180 000
5 000
–
2 000
–
–
(108 000)
–
(120 000)
Balance at 31 December 20.18
R20 000
R10 000 R375 000
R240 000
Additional information
On 1 January 20.15, the date on which P Ltd acquired the interest in S Ltd, the equity of
S Ltd consisted of:
Share capital
R240 000
Mark-to-market reserve
R4 000
Retained earnings
R135 000
P Ltd elected to measure non-controlling interests at fair value at the acquisition date.
On 1 January 20.15 the directors were of the opinion that the non-controlling interests’
shares were worth R6,50 each, based on market prices.
Assume that the identifiable assets acquired and the liabilities assumed at acquisition
date are shown at their acquisition-date fair values, as determined in terms of IFRS 3.
P Ltd classified the equity investment in S Ltd under IFRS 9 in its separate financial
statements and recognised fair value adjustments in a mark-to-market reserve (other
comprehensive income). Ignore tax implications.
Required
Prepare consolidated financial statements for the P Ltd Group for the reporting period
ended 31 December 20.18.
184
Consolidation after acquisition date
Suggested solution 4.3
P LTD GROUP
CONSOLIDATED STATEMENT OF FINANCIAL POSITION AS AT
31 DECEMBER 20.18
ASSETS
Non-current assets
Property, plant and equipment (390 000(P) + 400 000(S))
Financial assets
Goodwill (C2)
790 000
60 000
29 000
879 000
Current assets
Inventories (80 000(P) + 165 000(S))
Trade receivables (255 000(P) + 105 000(S))
Bank (P)
245 000
360 000
55 000
660 000
Total assets
EQUITY AND LIABILITIES
Equity attributable to owners of the parent
Share capital (P)
Retained earnings
Other components of equity (Mark-to-market reserve)
R1 539 000
300 000
459 000
4 800
Non-controlling interests (C1)
763 800
100 200
Total equity
864 000
Non-current liabilities
Long-term borrowings (225 000 (P) + 150 000 (S))
375 000
Current liabilities
Trade and other payables (210 000(P) + 50 000(S))
Bank overdraft (S)
260 000
40 000
Total current liabilities
300 000
Total liabilities
Total equity and liabilities
675 000
R1 539 000
185
Chapter 4
P LTD GROUP
CONSOLIDATED STATEMENT OF PROFIT OR LOSS AND OTHER COMPREHENSIVE
INCOME FOR THE YEAR ENDED 31 DECEMBER 20.18
Revenue (945 000(P) + 1 500 000(S))
Cost of sales (472 500(P) + 750 000(S))
2 445 000
(1 222 500)
Gross profit
Other expenses (202 500(P) + 450 000(S))
1 222 500
(652 500)
Profit before tax
Income tax expense (108 000(P) + 120 000(S))
570 000
(228 000)
PROFIT FOR THE YEAR
Other comprehensive income to profit or loss
Items that will not be reclassified
Mark-to-market reserve (fair value adjustment on investment)
342 000
Other comprehensive income for the year
TOTAL COMPREHENSIVE INCOME FOR THE YEAR
Profit attributable to:
Owners of the parent
Non-controlling interests
2 000
2 000
R344 000
306 000
36 000
R342 000
Total comprehensive income attributable to:
Owners of the parent (306 000(profit) + 1 600(OCI))
Non-controlling interests (36 000(profit) + 400(OCI))
307 600
36 400
R344 000
186
Consolidation after acquisition date
P LTD GROUP
CONSOLIDATED STATEMENT OF CHANGES IN EQUITY
FOR THE YEAR ENDED 31 DECEMBER 20.18
Share
capital
Retained
earnings
Mark-tomarket
reserve
Total
Noncontrolling
interests
Total
equity
Balance at
300 000 * 261 000 @3 200 564 200
#87 800 652 000
1 January 20.18
Changes in equity
for 20.18
Total comprehensive
income for the
year:
Profit for the year
–
306 000
– 306 000
36 000 342 000
Other comprehensive
income for the year
–
–
1 600
–
400
2 000
Dividend paid
– (108 000)
– (108 000)
(24 000) (132 000)
Balance at
31 December
R300 000 ƇR459 000 ŶR4 800 R763 800 ƔR100 200 R864 000
20.18
* 225 000(P) + 36 000(S – analysis) = 261 000
@ (S – analysis)
# (Analysis)
Ƈ 375 000(P) + 84 000(S – analysis) = 459 000
Ŷ (S – analysis)
Ɣ (Analysis)
187
Chapter 4
Calculations
C1 Analysis of owners’ equity of S Ltd
Total
P Ltd 80%
At
i At acquisition (1/1/20.15)
Share capital
Mark-to-market reserve
Retained earnings
Equity represented by goodwill
– Parent and NCI
Consideration (350 000 – 20 000)
and NCI (*12 000 × R6,50)
ii Since acquisition
• To beginning of current year:
Retained earnings (180 000 – 135 000)
Mark-to-market reserve (8 000 – 4 000)
• Current year:
Profit for the year
Dividend
Mark-to-market reserve
NCI
Since
240 000
4 000
135 000
192 000
3 200
108 000
48 000
800
27 000
379 000
303 200
75 800
29 000
26 800
2 200
408 000
R330 000
*78 000
45 000
4 000
36 000RE
3 200MM
9 000
800
87 800
180 000
(120 000)
2 000
144 000RE
(96 000)RE
1 600MM
36 000
(24 000)
400
R519 000
R84 000RE R100 200
R4 800MM
C2 Proof of calculation of goodwill of S 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)
330 000
78 000
408 000
Net of the identifiable assets acquired and liabilities assumed
at acquisition date: IFRS 3.32(b)
(379 000)
Goodwill
R29 000
188
Consolidation after acquisition date
C3 Pro forma consolidation journal entries
Dr
R
J1
J2
Cr
R
Mark-to-market reserve – Beginning of year (P)(SCE)
Mark-to-market reserve (P)(OCI)
Investment in S Ltd (P)(SFP)
Reversal of fair value adjustment on investment
in S Ltd
15 000
5 000
Share capital (S)(SCE)
Mark-to-market reserve (S)(SCE)
Retained earnings – Beginning of year (S)(SCE)
Goodwill (SFP)
Investment in S Ltd (350 000 – 20 000(J1)) (P)(SFP)
Non-controlling interests (SFP)
Elimination of owners’ equity of S Ltd on acquisition
240 000
4 000
135 000
29 000
J3
Retained earnings – Beginning of year (S)(SCE)
Non-controlling interests (SFP)
Recognition of non-controlling interests in the
retained earnings of the subsidiary for the period
1/1/20.15–31/12/20.17 ((180 000 – 135 000) × 20%)
9 000
J4
Mark-to-market reserve – Beginning of year (S)(SCE)
Non-controlling interests (SFP)
Recognition of non-controlling interests in the
movement in mark-to-market reserve of the
subsidiary for the period 1/7/20.16–30/6/20.17
800
20 000
330 000
78 000
9 000
800
((8 000 – 4 000) × 20%)
J5
Non-controlling interests (P/L)
Non-controlling interests (SFP)
Recognition of non-controlling interests in the
profit for the year (180 000 × 20%)
36 000
J6
Other comprehensive income attributable to the
non-controlling interests (OCI)
Non-controlling interests (SFP)
Recognition of non-controlling interests in the
movement of S Ltd’s mark-to-market reserve
for the year (2 000 × 20%)
400
J7
Dividend received (P)(P/L)
Non-controlling interests (SFP)
Dividend paid (S)(SCE)
Elimination of intragroup dividend and recognition
of non-controlling interests in the dividend
36 000
400
96 000
24 000
120 000
189
Chapter 4
C4 Consolidation worksheet: P Ltd and subsidiary
Property, plant and
equipment
Financial assets
Goodwill
Investment in S Ltd
Inventories
Trade receivables
Bank
Consolidation adjustments
P Ltd
S Ltd
390 000
–
350 000
400 000
60 000
–
–
80 000
255 000
55 000
R1 130 000
165 000
105 000
–
R730 000
Dr
29 000(J2)
Cr
20 000(J1)
330 000(J2)
Consolidated
790 000
60 000
29 000
–
245 000
360 000
55 000
R1 539 000
Revene
Cost of sales
Gross profit
Other expenses
Dividend from S Ltd
945 000 1 500 000
(472 500) (750 000)
472 500
750 000
(202 500) (450 000)
96 000
–
Profit before tax
Income tax expense
366 000
(108 000)
300 000
(120 000)
Profit for the year
FV gain on fin asset
258 000
5 000
180 000
2 000
Total comprehensive income
Non-controlling
interests
Dividend
Retained earnings
For the year
At beginning of
year
End of year
Mark-to-market
reserve –
Beginning of year
Share capital
Total equity
Non-controlling
interests
263 000
182 000
–
–
(108 000)
155 000
(120 000)
62 000
225 000
180 000
380 000
242 000
15 000
300 000
695 000
–
8 000
240 000
490 000
–
225 000
150 000
375 000
210 000
–
R 1 130 000
50 000
40 000
R730 000
260 000
40 000
R594 200 R1 539 000
Long-term
borrowings
Trade and other
payables
Bank overdraft
190
2 445 000
(1 222 500)
1 222 5000
(652 500)
–
96 000(J7)
570 000
(228 000)
342 000
2 000
5 000(J1)
344 000
36 000(J5)
400(J6)
(36 400)
120 000(J7)
135 000(J2)
9 000(J3)
261 000
460 600
15 000(J1)
4 000(J2)
800(J4)
240 000(J2)
24 000(J7)
R594 200
(108 000)
199 600
3 200
300 000
78 000(J2)
9 000(J3)
800(J4)
36 000(J5)
400(J6)
100 200
5
Intragroup transactions
Intragroup transactions within a group of entities
5.1
Intragroup transactions ............................................................................
193
Intragroup balances
5.2
5.3
5.4
Elimination of intragroup balances ...........................................................
Elimination of transaction costs at acquisition of investment
in subsidiary ...........................................................................................
Bank overdrafts and guarantees ..............................................................
193
195
197
The direct method of preparing consolidated financial
statements
5.5
The direct method ....................................................................................
Example 5.1: The direct method for implementing the basic
consolidation procedures ...............................................
197
198
Intragroup transactions within a group
5.6
Intragroup sales of trading inventories and other assets .........................
204
Intragroup transactions involving trading inventories
5.7
5.8
5.9
5.10
5.11
5.12
5.13
Unrealised profit in closing inventories ....................................................
Example 5.2: Elimination of unrealised profit in closing inventories .....
Unrealised profit in opening inventories ...................................................
Example 5.3: Unrealised profit where the parent sells .........................
Example 5.4: Unrealised profit where the subsidiary sells ...................
Intragroup profit in inventories at acquisition date ...................................
Losses on intragroup inventories .............................................................
Inventories written down to net realisable value ......................................
General approach to tax in respect of the allocation of income tax
and the elimination of unrealised profit ....................................................
Allocation of income tax in respect of unrealised profit in inventories .....
Example 5.5: Allocation of tax and the elimination of unrealised
profit included in closing inventories...............................
Example 5.6: Allocation of income tax and the elimination of
unrealised profit included in opening and closing
inventories ......................................................................
204
208
212
213
215
224
224
224
226
227
227
228
191
Chapter 5
5.14
Allocation of income tax in respect of fair value adjustments
on financial assets at fair value through OCI ...........................................
Example 5.7: Income tax allocation and reversal of fair value
adjustment on financial asset at fair value through OCI .
Example 5.8: Income tax on unrealised intragroup profit .....................
229
230
232
Property, plant and equipment held by entities in the group
5.15
5.16
5.17
5.18
5.19
5.20
Disclosure of the carrying amount of property, plant and equipment
in the consolidated statement of financial position ..................................
Property, plant and equipment acquired from other entities
in the group ..............................................................................................
Intragroup gain on non-depreciable property, plant and equipment ........
Example 5.9: Non-depreciable property acquired from the parent .......
Intragroup gain on depreciable property, plant and equipment ...............
Example 5.10: Sale of property, plant and equipment to a
partially-owned subsidiary ..............................................
Example 5.11: Consolidation adjustment for intragroup sales
of depreciable property, plant and equipment
with the subsidiary as the selling entity ..........................
Allocation of income tax and the elimination of unrealised gain
included in depreciable property, plant and equipment ...........................
Example 5.12: Allocation of income tax on unrealised gain included
in depreciable property, plant and equipment ................
Example 5.13: Allocation of income tax and intragroup transactions .....
Tax implications – Different cases where property, plant and
equipment are sold ..................................................................................
Example 5.14: Carrying amount and tax base agree .............................
Example 5.15: Asset sold at price exceeding original cost .....................
Example 5.16: Carrying amount and tax base differ ...............................
Example 5.17: Comprehensive example in respect of the elimination
of unrealised gain and the relevant tax implications ......
Example 5.18: The elimination of unrealised gain and the subsequent
sale of the property, plant and equipment ......................
237
237
238
238
240
241
242
249
249
252
258
258
259
260
261
298
Self-assessment questions
Question 5.1 ..........................................................................................................
Question 5.2 ..........................................................................................................
192
301
306
Intragroup transactions
Intragroup transactions within a group of entities
5.1 Intragroup transactions
1
This chapter is dedicated to the discussion of intragroup transactions.
Attention will first be given to the elimination of intragroup balances, such as
intragroup loans, and then to intragroup sales involving profits. Three types of
intragroup sales are discussed:
l the sale of inventories;
l the sale of non-depreciable property; and
l the sale of depreciable property, plant and equipment.
Each type of sale will first be discussed without taking the tax implications into
account in order to explain the principle clearly. The tax effect of intragroup sales is
explained thereafter.
Intragroup balances
5.2 Elimination of intragroup balances
1
2
In terms of IFRS 10.B86(c) all intragroup assets and liabilities, equity, income and
expenses relating to transactions between entities of the group must be eliminated
on consolidation. Examples of such intragroup balances are amounts receivable/
payable between entities in the group. Such intragroup balances are mainly the
result of:
l intragroup rendering of services, for example management and payroll services;
and
l intragroup borrowings
The recording of such transactions in the individual (separate) records of the parent
and the subsidiary represents mirror images of the same transaction. As soon as
the financial statements of the parent and the subsidiary are consolidated, and the
group is regarded as one economic and reporting entity, it is logical to set-off these
balances. From the new reporting entity’s (the group) perspective you cannot enter
into a transaction with yourself. The following consolidation journal entry is an
example of the elimination of intragroup balances which arose from a loan by the
parent to a subsidiary:
Dr
R
Loan from parent (S)(SFP)
Loan to subsidiary (P)(SFP)
Elimination of intragroup loan
100 000
Cr
R
100 000
The elimination of intragroup balances ensures that the assets and liabilities of the
group are not overstated per individual line item for disclosure purposes in the
consolidated statement of financial position.
Comment
P = Parent
S = Subsidiary
193
Chapter 5
3
The accompanying interest on the loan should also be eliminated. Suppose interest
was charged on the loan at 8% for the full year. The elimination journal will be as
follows:
Dr
R
Finance income (P)(P/L)
Finance costs (S)(P/L)
Elimination of intragroup interest (100 000 × 8% × 12/12)
4
8 000
Cr
R
8 000
Other transactions incurred between entities within the group should be eliminated
in a similar manner. The following consolidation journal entry is for example
prepared on consolidation to eliminate intragroup rent where S Ltd paid rent to
P Ltd. On consolidation, the group is regarded as one reporting entity, and once
again the group as entity cannot pay rent to itself and should therefore be
eliminated:
Dr
R
Other income (P)(P/L)
Other expenses (S)(P/L)
Elimination of intragroup rent
20 000
Cr
R
20 000
Comments
The consolidation journal to eliminate intragroup management fees is the same as the
journal above, but the description refers to the elimination of intragroup management
fees.
5
6
Consideration must be given to the effect of the elimination of intragroup
transactions, such as those reflected in the journals above relating to the intragroup
interest and rent on the non-controlling interests in a partially-owned subsidiary. As
neither the profit nor the net assets of the group is affected by the pro forma
consolidation journals above, the non-controlling interests will also not be
influenced. In the example above a similar amount is debited and credited against
the profit of the group on consolidation and therefore the non-controlling interests
are not influenced by the elimination.
Another example of intragroup balances is debentures. Debentures issued by one
entity which are held by another entity in the same group (intragroup debentures)
are eliminated from the consolidated statement of financial position in the same way
as intragroup receivable and payable amounts: the value of the issued debentures
is set off against the debentures held by the other entity in the same group. Both the
parent (P Ltd) and the subsidiary (S Ltd) would have to comply with IFRS 9
Financial Instruments. This standard requires the investment in debentures and
the debenture liability to be accounted for at amortised cost.
194
Intragroup transactions
The pro forma consolidation journal entry, where S Ltd issued debentures to P Ltd to
the value of R10 000, would therefore be as follows:
Dr
R
J1
Debenture liability (S)(SFP)
Investment in debentures (P)(SFP)
Elimination of intragroup debentures
10 000
Cr
R
10 000
5.3 Elimination of transaction costs at acquisition of investment in
subsidiary
1
2
3
Transaction costs on the acquisition of an investment in a subsidiary (transaction
costs on a financial asset) pose a particularly interesting case where consolidated
financial statements are prepared. As discussed in chapter 1.15 (4) transaction
costs on financial assets are defined as incremental costs that are directly
attributable to the acquisition, issue or disposal of a financial asset (IAS 39.AG13).
An incremental cost is one that would not have been incurred if the entity had not
acquired, issued or disposed of the financial asset (IFRS Glossary). Transaction
costs are typically fees and commissions paid to agents and brokers, levies of
regulatory services and securities exchanges, and transfer taxes and duties. Such
costs are capitalised against the investment in the subsidiary in the separate
financial statements of the parent if they are measured i.t.o. IFRS 9 using the fair
value through other comprehensive income measurement (this also applies to the
cost method). However, if the investment in the subsidiary is measured at fair value
through profit or loss, the transaction costs are immediately expensed in profit or
loss.
IFRS 3 Business Combinations on the other hand determines that acquisitionrelated costs are expensed in the consolidated financial statements in the period in
which they are incurred. Acquisition-related costs are defined as costs the acquirer
incurs to effect a business combination. Those costs include finder’s fees; advisory,
legal, accounting, valuation and other professional or consulting fees; as well as
general administrative costs, including the costs of maintaining an internal
acquisition department (IFRS 3.53).
The problem that needs to be dealt with on consolidation is the transaction costs
that were capitalised in the separate statement of financial position of the parent (if
the financial asset is measured at fair value though other comprehensive income)
but need to be expensed in the consolidated financial statements in order to comply
with IFRS 3. This is done by reversing the costs that were capitalised and
expensing them on a pro forma basis. Where an investment in a subsidiary is
measured at fair value through profit or loss there is no problem, as both transaction
costs on the acquisition of the investment, as well as acquisition-related costs on
the business combination are expensed.
Explanatory example
P Ltd obtained an 80% interest in S Ltd at 1 January 20.18 at R80 000. At the
acquisition date P Ltd classified the investment in S Ltd as held at fair value through
195
Chapter 5
other comprehensive income. The following costs, paid in cash, were incurred that
relate to the acquisition:
Brokerage
R1 600
Transfer taxes
R200
Valuation fees
R4 200
The journal entry in the separate records of P Ltd at 1 January 20.18 will be as follows:
Dr
R
Investment in S Ltd (SFP)
Valuation expense (P/L)
Bank (SFP)
Recognition of investment in S Ltd and capitalisation of
transaction costs (80 000 + 1 600 + 200)
81 800
4 200
Cr
R
86 000
Comment
The transaction costs in the example are the brokerage and transfer duties, i.e.
incremental costs that would not have been incurred if the entity had not acquired the
shares in S Ltd. In terms of IFRS 9 such costs are capitalised where the financial asset
is measured at fair value through other comprehensive income. The valuation costs fall
under the broader definition of acquisition-related costs in IFRS 3 and are expensed.
In terms of IFRS 3 the brokerage and transfer taxes are expensed in the consolidated
financial statements. This implies that these transaction costs should be reversed
against the investment in S Ltd and expensed through a pro forma journal on
consolidation.
Pro forma consolidation journal entry
Dr
R
Transaction costs on FIs (P)(P/L)
Investment in S Ltd (P)(SFP)
Reversal of transaction costs incurred on acquisition of
investment in S Ltd
1 800
Cr
R
1 800
Comments
No pro forma consolidation journal entry is required for the valuation expense
(acquisition-related cost i.t.o. IFRS 3), as it should be expensed in both the separate
financial statements of the parent and the consolidated financial statements of the
group.
196
Intragroup transactions
5.4 Bank overdrafts and guarantees
On consolidation, the bank overdraft of one entity in the group should only be set off
against the favourable bank balance of another entity in the group, if both entities have
their accounts at the same bank and when all of the following three conditions have
been met:
l both entities have bank accounts at the same financial institution;
l the bank itself would set off the two accounts against each other in terms of an
agreement between the two entities concerned and the bank; and
l the group has the intention to settle the amounts on a net basis.
It is clear that the set off of bank accounts within a group does not constitute intragroup
transactions and requires special treatment.
Comment
Even without considering the conditions stated above, the offsetting of items should not
be done in consolidated financial statements based on the requirements of IAS 1:
An entity shall not offset assets and liabilities or income and expenses, unless required
or permitted by an IFRS (IAS 1.32).
An entity reports separately both assets and liabilities, and income and expenses.
Offsetting in the statement of profit or loss and other comprehensive income or financial
position, except when offsetting reflects the substance of the transaction or other event,
detracts from the ability of users both to understand the transactions, other events and
conditions that have occurred and to assess the entity’s future cash flows (IAS 1.33).
Any note to the financial statements of an entity in the group, concerning a contingent
liability in respect of a guarantee made in favour of another entity in the group, falls
away on consolidation because both the item guaranteed and the net assets backing
such guarantee will now appear in the consolidated statements of the group, which is
regarded as one entity for reporting purposes.
The direct method of preparing consolidated financial statements
5.5 The direct method
In the remainder of this chapter the direct method is applied to prepare consolidated
financial statements. The direct method involves the preparation of a set of
consolidated financial statements without the utilisation of a worksheet. To prepare the
consolidated financial statements, the following individual financial statements of both
the parent and the subsidiary are required:
l statements of profit or loss and other comprehensive income;
l statements of changes in equity; and
l statements of financial position.
In addition, pro forma journals for the elimination of intragroup items and transactions
and the analysis of the equity of the subsidiary are prepared to do the consolidation of
the financial statements.
An example containing intragroup balances will be discussed next using the direct
method for the first time.
197
Chapter 5
Example 5.1
The direct method for implementing the basic consolidation
procedures
The following are the abridged statements of financial position, statements of profit or loss
and other comprehensive income and statements of changes in equity of P Ltd and the
partially-owned subsidiary, S Ltd:
STATEMENTS OF FINANCIAL POSITION AS AT 31 DECEMBER 20.18
P Ltd
ASSETS
Property, plant and equipment
Investment in S Ltd: 64 000 shares at fair value
(cost price: R90 000)
Investment in S Ltd: Loan
Inventories
Trade receivables
Bank
S Ltd
80 000
150 000
120 000
50 000
65 000
55 000
30 000
–
–
55 000
35 000
–
Total assets
EQUITY AND LIABILITIES
Share capital (100 000/80 000 shares)
Retained earnings
Mark-to-market reserve
Long-term borrowings
Loan from P Ltd
Trade and other payables
Bank overdraft
R400 000
R240 000
100 000
125 000
30 000
75 000
–
70 000
–
80 000
90 000
–
–
50 000
10 000
10 000
Total equity and liabilities
R400 000
R240 000
EXTRACT FROM THE STATEMENTS OF PROFIT OR LOSS
AND OTHER COMPREHENSIVE INCOME
FOR THE YEAR ENDED 31 DECEMBER 20.18
P Ltd
S Ltd
Profit
Dividend received from S Ltd
90 000
32 000
100 000
–
Profit before tax
Income tax expense
122 000
(36 000)
100 000
(30 000)
PROFIT FOR THE YEAR
86 000
70 000
Other comprehensive income for the year
Items that will not be reclassified to profit or loss
Mark-to-market reserve (fair value adjustment on investment)
5 000
–
Other comprehensive income for the year
5 000
–
R91 000
R70 000
TOTAL COMPREHENSIVE INCOME FOR THE YEAR
198
Intragroup transactions
EXTRACT FROM THE STATEMENTS OF CHANGES IN EQUITY
FOR THE YEAR ENDED 31 DECEMBER 20.18
Mark-tomarket
reserve
P Ltd
Balance at 1 January 20.18
Changes in equity for 20.18
Total comprehensive income for the year:
Profit for the year
Other comprehensive income
Dividends
Balance at 31 December 20.18
Retained earnings
P Ltd
S Ltd
25 000
75 000
60 000
–
5 000
–
86 000
–
(36 000)
70 000
–
(40 000)
R30 000
R125 000
R90 000
On 1 January 20.15, the date on which P Ltd acquired the interest in S Ltd, the equity of
S Ltd was as follows:
Share capital
R80 000
Retained earnings
R45 000
P Ltd elected to measure the non-controlling interests in an acquiree at their
proportionate share of the acquiree’s identifiable net assets at acquisition date.
P Ltd classified the equity investment in S Ltd under IFRS 9 in its separate financial
statements and recognised fair value adjustments in a mark-to-market reserve (other
comprehensive income).
Ignore tax implications.
199
Chapter 5
Solution 5.1
The consolidated financial statements of the P Ltd Group can be prepared as follows by
applying the direct method of consolidation:
P LTD GROUP
CONSOLIDATED STATEMENT OF FINANCIAL POSITION
AS AT 31 DECEMBER 20.18
ASSETS
Non-current assets
Property, plant and equipment (80 000(P) + 150 000(S))
230 000
230 000
Current assets
Inventories (65 000(P) + 55 000(S))
Trade receivables (55 000(P) + 35 000(S))
Bank (P)
120 000
90 000
30 000
240 000
Total assets
EQUITY AND LIABILITIES
Equity attributable to owners of the parent
Share capital (P)
Retained earnings
R470 000
100 000
171 000
Non-controlling interests
271 000
34 000
Total equity
305 000
Non-current liabilities
Long-term borrowings (P)
75 000
Current liabilities
Trade and other payables (70 000(P) + 10 000(S))
Bank overdraft (S)
80 000
10 000
Total current liabilities
90 000
Total liabilities
165 000
Total equity and liabilities
200
R470 000
Intragroup transactions
Comments
a Calculations are shown in brackets but do not form part of the financial statements.
b It is not necessary to record all the pro forma consolidation journal entries, but the
aggregate effect of all the pro forma journals is accounted for, for example the
elimination of intragroup dividends and debts is done although the pro forma
consolidation journal entries are not shown. Usually at least those journal entries
which have an effect on the subsidiary’s equity are shown.
c The intragroup loan does not appear in the consolidated statement of financial position.
d The positive bank balance of P Ltd and the bank overdraft of S Ltd may not be set
off; as there is no evidence of P Ltd providing a guarantee for the bank overdraft of
S Ltd or an agreement with the bank in terms of which the amounts may be set off.
e The mark-to-market reserve in the parent’s records has been eliminated together
with the reversal of the fair value adjustment in other comprehensive income in
connection with the investment in S Ltd.
P LTD GROUP
EXTRACT FROM THE CONSOLIDATED STATEMENT OF PROFIT OR LOSS
AND OTHER COMPREHENSIVE INCOME
FOR THE YEAR ENDED 31 DECEMBER 20.18
Profit before tax (122 000(P + 100 000(S)) – 32 000(div))
Income tax expense (36 000(P) + 30 000(S))
190 000
(66 000)
PROFIT FOR THE YEAR
Other comprehensive income for the year
124 000
–
TOTAL COMPREHENSIVE INCOME FOR THE YEAR
Profit attributable to:
Owners of the parent (Balancing figure)
Non-controlling interests (Analysis)
R124 000
110 000
14 000
R124 000
Total comprehensive income attributable to:
Owners of the parent
Non-controlling interests
110 000
14 000
R124 000
Comment
The profit for the year attributable to the non-controlling interests is obtained from the
analysis of the equity of S Ltd (Calculation C1). The amount attributable to the owners of
the parent is the difference between the total profit for the year and the amount
attributable to NCI.
As there is no other comprehensive income for the reporting period in this example, the
attributable total comprehensive income is the same as the attributable profit for the
year.
201
Chapter 5
P LTD GROUP
CONSOLIDATED STATEMENT OF CHANGES IN EQUITY
FOR THE YEAR ENDED 31 DECEMBER 20.18
Share
capital
Balance at
1 January 20.18
Changes in equity
for 20.18
Total comprehensive
income for the year:
Profit for the year
Dividend paid
Balance at
31 December 20.18
*
¨
Retained
earnings
Total
Noncontrolling
interests
Total
equity
100 000
* 97 000
197 000
28 000
225 000
–
–
110 000
(36 000)
110 000
(36 000)
14 000
(8 000)
124 000
(44 000)
R100 000
¨ R171 000
R271 000
R34 000 R305 000
75 000(P) + 12 000(S – analysis) + 10 (gain from a bargain purchase) = 97 000
125 000(P) + 36 000(S – analysis) + 10 (gain from a bargain purchase) = 171 000
Calculations
C1 Analysis of owners’ equity of S Ltd
Total
i At acquisition (2/1/20.15)
Share capital
Retained earnings
P Ltd 80%
At
Since
NCI
80 000
45 000
64 000
36 000
16 000
9 000
125 000
(10 000)
100 000
(10 000)
25 000
–
(120 000 – 30 000(J1)) and NCI
115 000
R90 000
25 000
ii Since acquisition
• To beginning of current year:
Retained earnings (60 000 – 45 000)
15 000
12 000
3 000
28 000
70 000
(40 000)
56 000
(32 000)
14 000
(8 000)
R160 000
R36 000
R34 000
Gain from a bargain purchase – Parent
Consideration
• Current year:
Profit for the year
Dividend
202
Intragroup transactions
C2 Proof of calculation of gain from a bargain purchase of S Ltd in terms
of IFRS 3.32
Consideration transferred at acquisition date: IFRS 3.32(a)(i)
90 000
Amount of non-controlling interests: IFRS 3.32(a)(ii)
25 000
115 000
Net of the identifiable assets acquired and liabilities assumed
at acquisition date: IFRS 3.32(b)
(125 000)
Gain from a bargain purchase
R10 000
C3 Pro forma consolidation journal entry
Dr
R
J1
Mark-to-market reserve – Beginning of year (P)(SCE)
Mark-to-market reserve (P)(OCI)
Investment in S Ltd (P)(SFP)
Reversal of fair value adjustment
25 000
5 000
J2
Loan from P Ltd (S)(SFP)
Investment in S Ltd: Loan (P)(SFP)
Elimination of intragroup loan
50 000
J3
Share capital (S)(SCE)
Retained earnings (S)(SCE)
Retained earnings – Beginning of year
(Gain from a bargain purchase) (SCE)
Investment in S Ltd (P)(SFP)
Non-controlling interests (SFP)
Elimination of owners’ equity at acquisition of S Ltd
80 000
45 000
J4
Retained earnings – Beginning of year (S)(SCE)
Non-controlling interests (SFP)
Recognition of non-controlling interests in retained
earnings of the subsidiary for the period since
acquisition until beginning of current reporting
period
3 000
J5
Non-controlling interests (P/L)
Non-controlling interests (SFP)
Recognition of non-controlling interests in profit
for the year
14 000
J6
Dividend received (P)(P/L)
Non-controlling interests (SFP)
Dividend paid (S)(SCE)
Elimination of intragroup dividend and recognition
of non-controlling interests in the dividend
32 000
8 000
Cr
R
30 000
50 000
10 000
90 000
25 000
3 000
14 000
40 000
203
Chapter 5
Intragroup transactions within a group
5.6 Intragroup sales of trading inventories and other assets
1
2
3
It frequently happens that sales of trading inventories and other assets take place
between entities in a group. This is expected, as one of the benefits of a business
combination is to benefit from the synergies within the group. The selling entity will
record such sales and reflect its profit (if any) in its individual profit or loss in the
normal way. From the perspective of the group as an accounting entity, the same
principle applies that was identified earlier in this chapter, namely that one cannot
sell goods and make a profit out of oneself. From the point of view of the
consolidated entity (the group), the profit cannot be recognised until the inventories
or other assets (acquired from another entity in the group) are sold to a third party
outside the group or used. Only then does the profit realise from the perspective of
the group as an entity. IFRS 10.B86(c) requires that intragroup balances and
transactions, including income, expenses and dividends, are eliminated in full to
ensure that individual consolidated line items in the consolidated financial
statements are not misstated. Profits or losses resulting from intragroup
transactions that are recognised as part of the cost price of assets, such as
inventories and fixed assets are eliminated in full.
Profits (or losses) which are not realised in terms of transactions with a party
outside the group, or used within the group, are considered, insofar as it concerns
the group, to be unrealised intragroup profits (or losses) and must be eliminated
when drawing up the consolidated financial statements. The group will only realise
the profit or loss on the sale of the asset once the group realises the economic
benefits associated with the asset. If the asset is trading inventory, the benefits will
be realised upon the sale thereof to an outside party and if the asset is property,
plant and equipment that will be used by the group, the economic benefits will be
realised by using the asset. The elimination of such unrealised profits or losses and
the appropriate adjustments on consolidation are discussed in the remainder of this
chapter.
Each type of intragroup sale will be discussed by initially ignoring the tax effect to
clearly illustrate the principle of the elimination of intragroup profits. Thereafter, the
tax effect will be introduced.
Intragroup transactions involving trading inventories
5.7 Unrealised profit in closing inventories
One of the most common forms of intragroup transactions is the sale (usually at a
profit) of inventories by one entity to another in the same group. Where part of such
inventories is still held by the purchasing entity at the end of the reporting period, the
following applies:
The total profit or loss arising from transactions within the group, to the extent that such
profit or loss is not realised, is excluded in the determination of the total group profit (or
loss) or of the interest of the parent in the profit (or loss) of any subsidiary.
204
Intragroup transactions
1 Application of entity approach
In accordance with the entity approach, we wish to submit that the logical application of
this rule requires that the total amount of unrealised intragroup profit be debited against
the profit of the selling entity and credited against the inventories of the purchasing
entity. The format of the statement of profit or loss and other comprehensive income,
however, requires that the relevant line items, namely revenue and cost of sales of the
selling entity, must be adjusted, not only the profit of the selling entity. The adjustment
of the individual line items in the statement of profit or loss and other comprehensive
income will lead to a decrease in the consolidated profit.
2 Tax implications
In the interests of simplifying the initial discussions, tax implications in respect of
unrealised profit are initially ignored.
Explanatory example
P Ltd sold inventories to S Ltd at cost price plus 25%. At the end of the reporting period,
S Ltd had R50 000 of inventories on hand which were purchased from P Ltd. Total
sales of inventories from P Ltd to S Ltd during the current reporting period amounted to
R100 000.
Ignore tax implications.
The pro forma consolidation journal entry for the elimination of the unrealised intragroup
sales is as follows:
Dr
R
Revenue (P)(P/L)
Cost of sales (S)(P/L)
Elimination of intragroup sales
100 000
Cr
R
100 000
Comment
The above journal entry corrects the figures for revenue and cost of sales as presented
in the separate financial statements of the entities, as both would be overstated from the
group’s perspective. The pro forma consolidation journal entry has no effect on the
consolidated profit of the group as an equal debit and credit is recognised in the profit
before tax of the consolidated entity. It does however have the effect of showing the line
items, (consolidated) revenue and (consolidated) cost of sales to parties outside the
group correctly.
The next step is to eliminate the unrealised profit contained in the closing inventories
through the following pro forma journal:
Dr
R
Cost of sales (P)(P/L)
Inventories (S)(SFP)
Elimination of the unrealised intragroup profit included in
the closing inventories of S Ltd (50 000 × 25/125)
10 000
Cr
R
10 000
205
Chapter 5
Comment
a Only the profit on inventories at the end of the reporting period that was purchased
from an entity within the group has to be eliminated. The inventories that have
already been sold to outside parties have already realised.
b P Ltd sold the inventories to S Ltd at cost price (CP) plus 25%. As the inventories
were recognised in S Ltd’s records at the selling price (SP) (125%), the profit
“contained” in the selling price can be determined through the following ratio:
CP + profit = SP
100 + 25 = 125
The unrealised profit is determined as 25/125 × SP, therefore 25/125 × 50 000 = R10 000
c For profit or loss and equity items, it is important to indicate in the pro forma journal
who the buyer and seller were. If the subsidiary was the seller, the effect of the pro
forma journal needs to be taken into account before the profit (or loss) or equity
component can be analysed for consolidation purposes. In the example above P Ltd
was the seller which would have no effect on the analysis of the equity of the
subsidiary and thus no effect on NCI.
The effect of the above journal entry is that the total amount of the unrealised
intragroup profit is debited against the consolidated cost of sales, which leads to a
decrease in the consolidated profit of the group.
3 Elimination of unrealised profit where a sale is made by a partially-owned
subsidiary
The elimination of the amount of the unrealised intragroup profit in closing inventories,
where a subsidiary which is partially owned is the seller, is not influenced by the
existence of the non-controlling interests. The total (100%) unrealised intragroup profit
is still eliminated as a debit against the cost of sales of the seller and a credit against
the inventories of the purchasing entity. On consolidation, 100% of each line item
should be consolidated and therefore 100% of the transaction should be eliminated.
Explanatory example
P Ltd has inventories on hand amounting to R100 000 (at cost price to P Ltd) which
was purchased from S Ltd (in which P Ltd has a 90% interest). S Ltd makes a profit of
25% on the cost price of goods sold to P Ltd. The total sales of inventories from S Ltd
to P Ltd during the current reporting period amounted to R250 000.
Ignore tax implications.
The pro forma consolidation journal entry to eliminate the intragroup sales is as follows:
Dr
R
Revenue (S)(P/L)
Cost of sales (P)(P/L)
Elimination of intragroup sales
206
250 000
Cr
R
250 000
Intragroup transactions
The above journal entry has no effect on the consolidated profit of the group, but has
the effect that the consolidated line items, revenue and cost of sales to parties outside
the group are correctly presented.
Dr
R
Cost of sales (S)(P/L)
Inventories (P)(SFP)
Elimination of unrealised intragroup profit included
in the closing inventories of P Ltd (100 000 × 25/125)
20 000
Cr
R
20 000
The effect of the above journal entry is that the full amount of the unrealised intragroup
profit is debited against the consolidated cost of sales, which leads to a decrease in the
consolidated profit of the group. The non-controlling interests in the profit of S Ltd for
the current reporting period is calculated after the profit of S Ltd has been reduced by
the above debit.
4 Determination of non-controlling interests
Suppose in the above example that the profit of S Ltd was R80 000 after tax. The noncontrolling interests in the profit for the reporting period will then be calculated as
follows:
Profit for the year
Unrealised profit
80 000
(20 000)
60 000
Non-controlling interests in profit (60 000 × 10%)
R6 000
It is thus clear that when the intragroup sales are made by a subsidiary with noncontrolling interests, a portion of the unrealised intragroup profit is allocated to the noncontrolling interests. If the unrealised intragroup profit had not been taken into account,
the non-controlling interests in the current reporting period’s profit would have been
R8 000 (10% × R80 000).
This interest is, however, reduced by the non-controlling interests in the unrealised
intragroup profit, namely R2 000 (10% × R20 000). The final effect of the consolidation
journal entry is thus that the consolidated profit is only reduced by the share of the
parent in the unrealised intragroup profit.
5 Rationale for debiting the non-controlling interests with a pro rata portion
of unrealised profit
Certain experts object to debiting the non-controlling interests with a pro rata portion of
the unrealised profit. They submit that, from the point of view of the non-controlling
interests, their share of the intragroup profit is in fact realised. Although this is so from
the point of view of the separate legal person, this point of view does not take into
account the fact that the consolidated group is a single economic entity.
The effect, as well as the reasonableness of the point of view followed in this book, is
clear from example 5.2 below.
207
Chapter 5
Example 5.2
Elimination of unrealised profit in closing inventories
The following are the abridged financial statements of P Ltd and subsidiary S Ltd, which
is partially owned:
STATEMENTS OF FINANCIAL POSITION AS AT 30 JUNE 20.18
P Ltd
S Ltd
85 000
10 000
130 000
–
30 000
106 000
Total assets
EQUITY AND LIABILITIES
Share capital (100 000/80 000shares)
Mark-to-market reserve
Retained earnings
Trade and other payables
R225 000
R136 000
100 000
15 000
26 000
84 000
80 000
–
20 000
36 000
Total equity and liabilities
R225 000
R136 000
ASSETS
Investment in S Ltd: 64 000 shares at fair value
Inventories
Trade receivables
STATEMENTS OF PROFIT OR LOSS AND OTHER COMPREHENSIVE INCOME
FOR THE YEAR ENDED 30 JUNE 20.18
P Ltd
S Ltd
Revenue
Cost of sales
100 000
(50 000)
80 000
(40 000)
Gross profit
Other expenses
50 000
(33 000)
40 000
(29 500)
Profit before tax
Income tax expense
17 000
(7 000)
10 500
(5 000)
PROFIT FOR THE YEAR
10 000
5 500
Mark-to-market reserve (fair value adjustment on investment)
5 000
–
Other comprehensive income for the year
5 000
–
R15 000
R5 500
Other comprehensive income
Items that will not be reclassified to profit or loss
TOTAL COMPREHENSIVE INCOME FOR THE YEAR
208
Intragroup transactions
EXTRACT FROM THE STATEMENTS OF CHANGES IN EQUITY
FOR THE YEAR ENDED 30 JUNE 20.18
Mark-tomarket
reserve
P Ltd
Balance at 1 July 20.17
Changes in equity for 20.18
Total comprehensive income for the year:
Profit for the year
Other comprehensive income for the year
Dividend
Balance at 30 June 20.18
Retained
earnings
P Ltd
S Ltd
10 000
21 000
14 500
–
5 000
–
10 000
–
(5 000)
5 500
–
–
R15 000
R26 000 R20 000
Since 1 July 20.17, P Ltd has been purchasing all its inventories from S Ltd at a profit
mark-up of 25% on the cost of the goods. These goods are inventories in the records of
S Ltd. Total sales from S Ltd to P Ltd during the current reporting period amounted to
R50 000.
On 1 July 20.15, the date on which P Ltd acquired the interest in S Ltd for R70 000, the
retained earnings of the latter amounted to R7 500. The share capital has remained
unchanged since that date.
P Ltd classified the equity investment in S Ltd under IFRS 9 in its separate financial
statements and recognised fair value adjustments in a mark-to-market reserve (other
comprehensive income).
P Ltd elected to measure the non-controlling interests in an acquiree at their
proportionate share of the acquiree’s identifiable net assets at acquisition date.
Ignore tax implications.
209
Chapter 5
Solution 5.2
A consolidated statement of financial position of the P Ltd Group at 30 June 20.18, as
well as a consolidated statement of profit or loss and other comprehensive income and
consolidated statement of changes in equity for the reporting period ended
30 June 20.18, will be prepared as follows:
P LTD GROUP
CONSOLIDATED STATEMENT OF FINANCIAL POSITION AS AT 30 JUNE 20.18
ASSETS
Current assets
Inventories (10 000(P) + 30 000(S) – 2 000(J3))
Trade receivables (130 000(P) + 106 000(S))
Total assets
EQUITY AND LIABILITIES
Equity attributable to owners of the parent
Share capital
Retained earnings
Non-controlling interests
Total equity
Current liabilities
Trade and other payables (84 000(P) + 36 000(S))
Total equity and liabilities
38 000
236 000
274 000
R274 000
100 000
34 400
134 400
19 600
154 000
120 000
R274 000
P LTD GROUP
CONSOLIDATED STATEMENT OF PROFIT OR LOSS
AND OTHER COMPREHENSIVE INCOME
FOR THE YEAR ENDED 30 JUNE 20.18
Revenue (100 000(P) + 80 000(S) – 50 000(J2))
Cost of sales (50 000(P) + 40 000(S) – 50 000(J2) + 2 000(J3))
130 000
(42 000)
Gross profit
Other expenses (33 000(P) + 29 500(S))
88 000
(62 500)
Profit before tax
Income tax expense (7 000(P) + 5 000(S))
25 500
(12 000)
PROFIT FOR THE YEAR
Other comprehensive income for the year
TOTAL COMPREHENSIVE INCOME FOR THE YEAR
Profit attributable to:
Owners of the parent
Non-controlling interests
13 500
–
R13 500
Total comprehensive income attributable to:
Owners of the parent
Non-controlling interests
210
12 800
700
R13 500
12 800
700
R13 500
Intragroup transactions
P LTD GROUP
CONSOLIDATED STATEMENT OF CHANGES IN EQUITY
FOR THE YEAR ENDED 30 JUNE 20.18
Total
Noncontrolling
interests
Total
equity
*26 600
126 600
18 900
145 500
12 800
(5 000)
12 800
(5 000)
700
–
13 500
(5 000)
R100 000 ŻR34 400
R134 400
R19 600
R154 000
Share
capital
Retained
earnings
100 000
–
–
Balance at 1 July 20.17
Changes in equity for 20.18
Total comprehensive income
for the year:
Profit for the year
Dividend paid
Balance at 30 June 20.18
*
Ż
21 000 + 5 600 (analysis) = 26 600
26 000 + 8 400 (analysis) = 34 400
Calculations
C1 Analysis of owners’ equity of S Ltd
Total
i At acquisition (1/7/20.15)
Share capital
Retained earnings
Purchase difference
Consideration
(85 000 – 15 000(J1)) and NCI
ii Since acquisition
• To beginning of current year:
Retained earnings (14 500 – 7 500)
• Current year:
Profit for the year (5 500 – 2 000(J3))
P Ltd 80%
At
Since
NCI
80 000
7 500
64 000
6 000
16 000
1 500
87 500
–
70 000
–
17 500
–
87 500
R70 000
17 500
7 000
5 600
1 400
18 900
3 500
2 800
700
R98 000
R8 400
R19 600
C2 Proof of calculation of purchase difference of S Ltd in terms of IFRS 3.32
Consideration transferred at acquisition date: IFRS 3.32(a)(i)
70 000
Amount of non-controlling interests: IFRS 3.32(a)(ii)
17 500
Net of the identifiable assets acquired and liabilities assumed
at acquisition date: IFRS 3.32(b)
Purchase difference
87 500
(87 500)
R–
211
Chapter 5
C3 Pro forma consolidation journal entries
Dr
R
J1
Cr
R
Mark-to-market reserve – Beginning of year (P)(SCE)
Mark-to-market reserve (P)(OCI)
Investment in S Ltd (P)(SFP)
Reversal of fair value adjustment
10 000
5 000
J2
Revenue (S)(P/L)
Cost of sales (P)(P/L)
Elimination of intragroup sales
50 000
J3
Cost of sales (S)(P/L)
Inventories (P)(SFP)
Elimination of the unrealised intragroup profit
included in the closing inventories of P Ltd
2 000
15 000
50 000
2 000
(10 000 × 25/125)
Comment
a J2 has no effect on the consolidated profit, therefore it is not included in the analysis
of S Ltd’s owner’s equity.
b Where the subsidiary is the seller, the pro forma consolidation journal entry for the
elimination of the unrealised intragroup profit is recognised before commencing with
the analysis of the equity of the subsidiary
c Where the direct method is applied, the pro forma journal entry is directly accounted
for in the analysis (see J1 and J3).
d The following consolidation journals do not have to be prepared when the direct
method is applied, as all the required information can be obtained directly from the
analysis of the equity of the subsidiary.
Further pro forma consolidation journal entries
Dr
R
J4
J5
J6
Cr
R
Share capital (S)(SCE)
Retained earnings (S)(SCE)
Investment in S Ltd (P)(SFP)
Non-controlling interests (SFP)
Elimination of equity of S Ltd at acquisition date
80 000
7 500
Retained earnings – Beginning of year (S)(SCE)
Non-controlling interests (SFP)
Recognition of non-controlling interests
in the retained earnings of the subsidiary
for the reporting period 1/7/20.15–30/6/20.17
1 400
Non-controlling interests (P/L)
Non-controlling interests (SFP)
Recognition of the non-controlling interests
in the profit for the yea
700
70 000
17 500
1400
700
5.8 Unrealised profit in opening inventories
1
Up to this point in the discussion, only intragroup profit in inventories still on hand at
the end of the reporting period has been discussed. Because the closing inventories
212
Intragroup transactions
2
of one reporting period are the opening inventories of the following reporting period,
the elimination of unrealised profit at the end of (say) 20.17 necessarily affects the
balance of the consolidated retained earnings brought forward from 20.17, as well
as the consolidated profit of 20.18. It must be remembered that each entity in the
group is a separate entity and that each entity in the group draws up its own
separate financial statements within this framework. The consolidation journal
entries are pro forma adjustments processed to draft the consolidated financial
statements. The entities in the group thus do not recognise intragroup adjustments
in their own separate financial statements.
The consolidated financial statements for 20.18 are prepared from the separate
financial statements of the entities in the group. Should there have been an
adjustment on consolidation at the end of 20.17 for unrealised intragroup profit, an
adjustment must be made to ensure that the consolidated retained earnings at the
beginning of 20.18 are in agreement with the closing consolidated balance of 20.17
This adjustment is made on the assumption that the inventories on hand at the end
of 20.17 were sold during 20.18 to parties outside the group and that the intragroup
profit has thus realised. This comprises no new concepts; it is simply a question of
procedures: the consolidated results at the end of one reporting period must simply,
by means of pro forma consolidation journal entries, be brought forward in the
consolidation process of the following reporting period.
Example 5.3
Unrealised profit where the parent sells
S Ltd purchased all its inventories from P Ltd at cost price plus 33䱩 %. The inventories
on hand in the records of S Ltd were as follows:
31 December 20.17
R20 000
31 December 20.18
R25 000
Total sales of inventories from P Ltd to S Ltd were as follows:
20.17 R50 000
20.18 R80 000
Ignore tax implications.
Solution 5.3
The required pro forma consolidation journal entries are as follows:
31 December 20.17 – Pro forma consolidation journal entries
Dr
R
J1
Revenue (P)(P/L)
Cost of sales (S)(P/L)
Elimination of intragroup sales
50 000
J2
Cost of sales (P)(P/L)
Inventories (S)(SFP)
Elimination of unrealised profit in the closing
inventories of S Ltd (20 000 × 33,3/133,3)
5 000
Cr
R
50 000
5 000
213
Chapter 5
First ensure that the consolidated retained earnings at the beginning of 20.18 agree
with the consolidated retained earnings at the end of 20.17:
31 December 20.18 – Pro forma consolidation journal entries
Dr
R
J1
Retained earnings – Beginning of year (P)(SCE)
Cost of sales (P)(P/L)
Adjustment to ensure that the consolidated retained
earnings at the beginning of 20.18 is in agreement
with the consolidated retained earnings at the
end of 20.17
5 000
Cr
R
5 000
Comment
This journal can be explained as follows, as it is a combination of the following two pro
forma journals:
At the beginning of the reporting period the following pro forma journal is done:
R
Retained earnings – Beginning of year (P)(SCE)
Inventories (S)(SFP)
Adjustment to ensure that the consolidated retained
earnings at the beginning 20.18 are in agreement with
the consolidated retained earnings at the end of 20.17.
R
5 000
5 000
Once the inventories are sold by the S Ltd, the following pro forma journal would be
recorded on date of sale to account for the realisation of the profit:
R
Inventories (S)(SFP)
Cost of sales (P)(P/L)
Recognition of realisation of profit
R
5 000
5 000
By the end of the reporting period the pro forma journal (as shown above) is put through
instead.
Now eliminate intragroup sales and unrealised profit in closing inventories for the
current reporting period:
Dr
R
J2
Revenue (P)(P/L)
Cost of sales (S)(P/L)
Elimination of intragroup sales during the current
reporting period
80 000
J3
Cost of sales (P)(P/L)
Inventories (S)(SFP)
Elimination of unrealised profit in the closing
inventories of S Ltd at 31/12/20.18 (25 000 × 33,3/133,3)
6 250
Cr
R
80 000
6 250
The elimination of unrealised profit in essence comprises the deferment of the
recognition of the profit from one reporting period to the following reporting period
(compare J2 of 20.17 with J1 of 20.18 above). In the above example, the parent was
the seller, thus the intragroup profit is included in the profit or loss of the parent. As a
result, the intragroup adjustments are not taken into account in the analysis of the
214
Intragroup transactions
equity of S Ltd and have no effect on any possible non-controlling interests in S Ltd.
This is also clear from the pro forma consolidation journal entries of the example, where
each time only the profit or loss of P Ltd is affected.
Where the subsidiary is, however, the selling entity, the pro forma journals must be
taken into account before the analysis of the equity is done and a portion of the
unrealised intragroup profit is appropriated to the non-controlling interests in the
subsidiary, as will be clear from the following example:
Example 5.4
Unrealised profit where the subsidiary sells
The following are the abridged financial statements of P Ltd and subsidiary S Ltd for the
reporting periods 20.17 and 20.18:
STATEMENTS OF FINANCIAL POSITION AS AT 31 DECEMBER
P Ltd
20.17
S Ltd
20.18
20.17
20.18
70 000
30 000
62 500
75 000
40 000
102 500
–
20 000
60 000
–
30 000
55 000
Total assets
EQUITY AND LIABILITIES
Share capital (100 000/50 000 shares)
Mark-to-market reserve
Retained earnings
R162 500
R217 500
R80 000
R85 000
100 000
2 500
60 000
100 000
7 500
110 000
50 000
50 000
30 000
35 000
Total equity and liabilities
R162 500
R217 500
R80 000
R85 000
ASSETS
Investment in S Ltd:
45 000 shares at fair value
Inventories
Trade receivables
STATEMENTS OF PROFIT OR LOSS AND OTHER COMPREHENSIVE INCOME
FOR THE YEAR ENDED 31 DECEMBER
P Ltd
S Ltd
20.17
20.18
20.17
20.18
Revenue
Cost of sales
70 000
(35 000)
90 000
(20 000)
50 000
(25 000)
60 000
(30 000)
Gross profit
Other expenses
35 000
(15 000)
70 000
(10 000)
25 000
(15 000)
30 000
(18 000)
Profit before tax
Income tax expense
20 000
(5 000)
60 000
(10 000)
10 000
(5 000)
12 000
(7 000)
PROFIT FOR THE YEAR
Other comprehensive income
Mark-to-market reserve
(fair value adjustment on investment)
Other comprehensive income
for the year
TOTAL COMPREHENSIVE INCOME
FOR THE YEAR
15 000
50 000
5 000
5 000
2 500
5 000
–
–
2 500
5 000
–
–
R17 500
R55 000
R5 000
R5 000
215
Chapter 5
EXTRACT FROM THE STATEMENTS OF CHANGES IN EQUITY
FOR THE YEAR ENDED 31 DECEMBER
Mark-to-market
reserve
P Ltd
Balance at 1 January
20.17/20.18
Changes in equity for
20.1720.18
Total comprehensive income
for the year:
Profit for the year
Other comprehensive income
for the year
Balance at
31 December 20.17/20.18
Retained earnings
P Ltd
S Ltd
20.17
20.18
20.17
20.18
20.17
20.18
–
2 500
45 000
60 000
25 000
30 000
–
–
15 000
50 000
5 000
5 000
2 500
5 000
–
–
–
–
R2 500 R7 500 R60 000 R110 000 R30 000 R35 000
P Ltd acquired its interest in S Ltd on 1 January 20.17 at R67 500.
Intragroup sales of inventories (S Ltd to P Ltd at cost price plus 25%) were as follows:
20.17 R30 000
20.18 R20 000
P Ltd had the following inventories on hand, which were purchased from S Ltd:
31 December 20.17
R10 000
31 December 20.18
R15 000
P Ltd classified the equity investment in S Ltd under IFRS 9 in its separate financial
statements and recognised fair value adjustments in a mark-to-market reserve (other
comprehensive income).
P Ltd elected to measure the non-controlling interests in an acquiree at their
proportionate share of the acquiree’s identifiable net assets at acquisition date.
Ignore tax implications.
216
Intragroup transactions
Solution 5.4
The consolidated financial statements of the P Ltd Group for the reporting periods
ended 31 December 20.17 and 20.18 will be prepared as follows by applying the direct
method:
Reporting period ended 31 December 20.17:
P LTD GROUP
CONSOLIDATED STATEMENT OF FINANCIAL POSITION
AS AT 31 DECEMBER 20.17
ASSETS
Current assets
Inventories (30 000(P) + 20 000(S) – 2 000(J3))
Trade receivables (62 500(P) + 60 000(S))
48 000
122 500
170 500
Total assets
EQUITY AND LIABILITIES
Equity attributable to owners of the parent
Share capital (P)
Retained earnings (SCE)
R170 500
100 000
62 700
Non-controlling interests (Analysis)
162 700
7 800
Total equity
170 500
Total equity and liabilities
R170 500
Comment
The figures and acronyms in brackets fulfil the role of a worksheet and are not intended
for publication.
217
Chapter 5
P LTD GROUP
CONSOLIDATED STATEMENT OF PROFIT OR LOSS
AND OTHER COMPREHENSIVE INCOME
FOR THE YEAR ENDED 31 DECEMBER 20.17
Revenue (70 000(P) + 50 000(S) – 30 000(J2))
Cost of sales (35 000(P) + 25 000(S) – 30 000(J2) + 2 000(J3))
90 000
(32 000)
Gross profit
Other expenses (15 000(P) + 15 000(S))
58 000
(30 000)
Profit before tax
Income tax expense (5 000(P) + 5 000(S))
28 000
(10 000)
PROFIT FOR THE YEAR
Other comprehensive income for the year
18 000
–
TOTAL COMPREHENSIVE INCOME FOR THE YEAR
R18 000
Profit attributable to:
Owners of the parent (Balancing figure)
Non-controlling interests
17 700
300
R18 000
Total comprehensive income attributable to:
Owners of the parent (Balancing figure)
Non-controlling interests (Analysis)
17 700
300
R18 000
P LTD GROUP
CONSOLIDATED STATEMENT OF CHANGES IN EQUITY
FOR THE YEAR ENDED 31 DECEMBER 20.17
Share
capital
Balance at 1 January 20.17
Changes in equity for 20.17
Total comprehensive income
for the year:
Profit for the year
Acquisition of subsidiary
Balance at
31 December 20.17
Retained
earnings
Total
Noncontrolling
interests
Total
equity
100 000
45 000
145 000
–
145 000
–
–
17 700
–
17 700
–
300
7 500
18 000
7 500
R100 000
R62 700
R162 700
R7 800
R170 500
Comment
As control of the subsidiary was obtained in the current reporting period (on
1 January 20.17), the non-controlling interests should be presented in the
consolidated financial statements for the period.
218
Intragroup transactions
Calculations
C1 Analysis of owners’ equity of S Ltd
P Ltd 90%
Total
i At acquisition (1/1/20.17)
Share capital
Retained earnings
Purchase difference
Consideration (70 000 – 2 500(J1)) and NCI
ii Since acquisition
• To beginning of current year :
None (control acquired on 1/1/20.17)
• Current year:
Profit for the year (5 000 – 2 000(J3))
At
NCI
Since
50 000
25 000
45 000
22 500
5 000
2 500
75 000
–
67 500
–
7 500
–
75 000
R67 500
7 500
–
–
–
3 000
2 700
300
R78 000
R2 700
R7 800
C2 Proof of calculation of purchase difference of S Ltd in terms of IFRS 3.32
Consideration transferred at acquisition date: IFRS 3.32(a)(i)
67 500
Amount of non-controlling interests: IFRS 3.32(a)(ii)
7 500
75 000
Net of the identifiable assets acquired and liabilities assumed
at acquisition date: IFRS 3.32(b)
(75 000)
Purchase difference
R–
C3 Pro forma consolidation journal entries
Dr
R
J1
Mark-to-market reserve (P)(OCI)
Investment in S Ltd (P)(SFP)
Reversal of fair value adjustment (70 000 – 67 500)
2 500
J2
Revenue (S)(P/L)
Cost of sales (P)(P/L)
Elimination of intragroup sales
30 000
J3
Cost of sales (S)(P/L)
Inventories (P)(SFP)
Elimination of the unrealised intragroup profit
included in the closing inventories of P Ltd
2 000
Cr
R
2 500
30 000
2 000
(10 000 × 25/125)
continued
219
Chapter 5
Dr
R
J4
J5
Cr
R
Share capital (S)(SCE)
Retained earnings (S)(SCE)
Investment in S Ltd (P)(SFP)
Non-controlling interests (SFP)
Elimination of owners’ equity at acquisition of S Ltd
50 000
25 000
Non-controlling interests (P/L)
Non-controlling interests (SFP)
Recognition of non-controlling interests in profit for
the year
300
67 500
7 500
300
Reporting period ended 31 December 20.18:
P LTD GROUP
CONSOLIDATED STATEMENT OF FINANCIAL POSITION
AS AT 31 DECEMBER 20.18
ASSETS
Current assets
Inventories (40 000(P) + 30 000(S) – 3 000(J3))
Trade receivables (102 500(P) + 55 000(S))
67 000
157 500
224 500
Total assets
R224 500
EQUITY AND LIABILITIES
Equity attributable to owners of the parent
Share capital (P)
Retained earnings (SCE)
100 000
116 300
Non-controlling interests (SCE)
216 300
8 200
Total equity
Total equity and liabilities
220
224 500
R224 500
Intragroup transactions
P LTD GROUP
CONSOLIDATED STATEMENT OF PROFIT OR LOSS
AND OTHER COMPREHENSIVE INCOME
FOR THE YEAR ENDED 31 DECEMBER 20.18
Revenue (90 000(P) + 60 000(S) – 20 000(J3))
Cost of sales (20 000(P) + 30 000(S) – 20 000(J3) – 2 000(J2) + 3 000(J4))
130 000
(31 000)
Gross profit
Other expenses (10 000(P) + 18 000(S))
99 000
(28 000)
Profit before tax
Income tax expense (10 000(P) + 7 000(S))
71 000
(17 000)
PROFIT FOR THE YEAR
Other comprehensive income for the year
54 000
–
TOTAL COMPREHENSIVE INCOME FOR THE YEAR
R54 000
Profit attributable to:
Owners of the parent (Balancing figure)
Non-controlling interests (Analysis)
53 600
400
R54 000
Total comprehensive income attributable to:
Owners of the parent (Balancing figure)
Non-controlling interests
53 600
400
R54 000
P LTD GROUP
CONSOLIDATED STATEMENT OF CHANGES IN EQUITY
FOR THE YEAR ENDED 31 DECEMBER 20.18
Share
capital
Balance at 1 January 20.18
Changes in equity for 20.18
Total comprehensive income
for the year:
Profit for the year
Balance at
31 December 20.18
Retained
earnings
Total
Noncontrolling
interests
Total
equity
100 000
*62 700
162 700
7 800
170 500
–
53 600
53 600
400
54 000
R100 000 ŽR116 300 R216 300
R8 200
R224 500
* 60 000 + 2 700 (analysis) = 62 700
Ž 110 000 + 6 300 (analysis) = 116 300
221
Chapter 5
Calculations
C1 Analysis of owners’ equity of S Ltd
P Ltd 90%
Total
i At acquisition (1/1/20.17)
Share capital
Retained earnings
Purchase difference
Consideration (75 000 – 7 500(J1)) and NCI
ii Since acquisition
• To beginning of current year :
Retained earnings
(30 000 – 25 000 – 2 000(J2))
At
Since
50 000
25 000
45 000
22 500
5 000
2 500
75 000
–
67 500
–
7 500
–
75 000
R67 500
7 500
3 000
2 700
(5 000 + 2 000(J2) – 3 000(J4))
300
7 800
• Current year :
Profit for the year
NCI
4 000
3 600
400
R82 000
R6 300
R8 200
C2 Proof of calculation of purchase difference of S Ltd in terms of IFRS 3.32
Consideration transferred at acquisition date: IFRS 3.32(a)(i)
67 500
Amount of non-controlling interests: IFRS 3.32(a)(ii)
7 500
Net of the identifiable assets acquired and liabilities assumed
at acquisition date: IFRS 3.32(b)
Purchase difference
222
75 000
(75 000)
R–
Intragroup transactions
C3 Pro forma consolidation journal entries
Dr
R
J1
Mark-to-market reserve – Beginning of year (P)(SCE)
(70 000 – 67 500)
Mark-to-market reserve (P)(OCI) (75 000 – 70 000)
Investment in S Ltd (P)(SFP) (75 000 – 67 500)
Reversal of fair value adjustment
Cr
R
2 500
5 000
J2
Retained earnings – Beginning of year (S)(SCE)
Cost of sales (S)(P/L)
Adjustment to ensure that the consolidated retained
earnings at the beginning of 20.18 are in agreement
with the consolidated retained earnings at the end of
20.17
2 000
J3
Revenue (S)(P/L)
Cost of sales (P)(P/L)
Elimination of intragroup sales for the current
reporting period
20 000
J4
Cost of sales (S)(P/L)
Inventories (P)(SFP)
Elimination of unrealised intragroup profit included
in inventories of P Ltd at 31/12/20.18 (15 000 × 25/125)
3 000
J5
Share capital (S)(SCE)
Retained earnings (S)(SCE)
Investment in S Ltd (P)(SFP)
Non-controlling interests (SFP)
Elimination of owners’ equity at acquisition of S Ltd
50 000
25 000
J6
Retained earnings – Beginning of year (S)(SCE)
Non-controlling interests (SFP)
Recognition of non-controlling interests in retained
earnings of the subsidiary for the period since
acquisition until beginning of current year
300
J7
Non-controlling interests (P/L)
Non-controlling interests (SFP)
Recognition of non-controlling interests in profit for
the reporting period
400
7 500
2 000
20 000
3 000
67 500
7 500
300
400
Comment
Note that J2 only moves the R2 000 to the current reporting period – the reporting
period in which the inventories are sold to parties outside the group, thus realising the
profit.
223
Chapter 5
5.9 Intragroup profit in inventories at acquisition date
Intragroup profit in inventories at acquisition date should not be eliminated, because it is
as a result of transactions before the entities became part of the same group, i.e.
reporting entity.
5.10 Losses on intragroup inventories
As in the case of profits on intragroup sales, losses on intragroup sales cannot, from
the point of view of consolidation, be regarded as necessarily realised. Unless the net
realisable value of the inventories is lower than the cost price of the goods to the
purchasing entity (and therefore leads to impairment), intragroup losses must be added
back to the value of the inventories of the entity at the end of the reporting period, as
well as to the profit of the entity which sold the goods.
5.11 Inventories written down to net realisable value
In terms of IAS 2 Inventories, inventories shall be valued at the lower of cost price and
net realisable value (.9). The following is applicable should the carrying amount of
goods on hand acquired from other entities in the group be written down from the
purchase price (to the entity having the goods on hand) to the net realisable value:
l If the amount written off is the same as or more than the amount which would
normally have been eliminated by way of adjustment for unrealised profit on such
goods, the (written down) value of the inventories will be equal to or less than the
cost price of the goods to the entity in the group which sold the goods to the other.
It will thus be equal to or less than cost price to the group. No further reduction
would therefore be necessary.
l If the write-down to net realisable value is less than the intragroup unrealised profit,
the difference must still be eliminated.
Explanatory example
S Ltd (subsidiary) sells inventories to P Ltd (parent) at cost plus 25%. The closing
inventories in the records of P Ltd on 31 December 20.18 are R50 000. On
31 December 20.18, P Ltd writes the inventories down to net realisable value at that
date of R39 000 in its separate records. Ignore tax implications.
The journal entry in the records of P Ltd at 31 December 20.18 is as follows:
Dr
R
Cost of sales (Loss on write down of inventories to net
realisable value) (P/L)
Inventories (SFP)
Inventories written down to their net realisable value
at the end of the reporting period according to IAS 2
requirements
11 000
Cr
R
11 000
As the write-down exceeds the intragroup profit, and the net realisable value of the
inventories (R39 000) is now less than the original cost price to the group
(R50 000 × 100/125 = R40 000), no further pro forma consolidation journal entry is
required in respect of the elimination of unrealised profit.
224
Intragroup transactions
Comment
The following table illustrates this principle clearly:
Inventory
at selling price
Value according to group
Net realisable
value
R
R
R
50 000
40 000
39 000
(50 000 × 100/125)
Write-down in P Ltd’s records
Unrealised profit
R11 000
R10 000
As the value should be R40 000 from the group’s perspective and the net realisable
value is lower (R39 000), no further pro forma consolidation journal is required for
consolidation purposes.
If P Ltd did not recognise the write-down to net realisable value in its individual records,
the unrealised intragroup profit would firstly have to be eliminated and then the write
down would have to be done on a pro forma basis as follows:
Dr
R
Cost of sales (S)(P/L)
Inventories (P)(SFP)
Elimination of unrealised profit included in closing
inventories (50 000 x 25/125)
10 000
Cr
R
10 000
and
Dr
R
Cost of sales (Loss on write down of inventories to net
realisable value) (S)(P/L)
Inventories (P)(SFP)
Inventories written down to their net realisable value
at the end of the reporting period according to IAS 2
requirements (40 000 – 39 000)
1 000
Cr
R
1 000
Explanatory example
S Ltd (subsidiary) sells inventories to P Ltd (the parent) at cost plus 25%. The closing
inventories in the records of P Ltd at 31 December 20.18 are R50 000. At
31 December 20.18, P Ltd writes the inventories down to net realisable value at
31 December 20.18 of R44 000 in its separate records. Ignore tax implications. The
journal entry in the records of P Ltd at 31 December 20.18 is as follows:
225
Chapter 5
Dr
R
Cost of sales (Loss on write down of inventories to net
realisable value) (P/L)
Inventories (SFP)
Inventories written down to their net realisable value
at the end of the reporting period according to IAS 2
requirements
Cr
R
6 000
6 000
The net realisable value of the inventories (R44 000) is more than the original cost price
to the group (R50 000 × 100/125 = R40 000) and therefore a further pro forma
consolidation journal entry is required in respect of the elimination of unrealised profit.
Dr
R
Cost of sales (S)(P/L) (44 000 – 40 000)
Inventories (P)(SFP)
Elimination of unrealised profit in the closing inventories
of P Ltd at 31 December 20.18
4 000
Comment
The following table illustrates this principle clearly:
Inventory at
Net realisable
selling price
value
R
R
50 000
Write-off to net realisable
value
Unrealised profit from
group’s perspective
Additional elimination of
unrealised profit required
through pro forma
consolidation journal
Cr
R
4 000
Value according
to group
R
44 000
40 000
R 6000
R10 000
R4 000
5.12 General approach to tax in respect of the allocation of income tax
and the elimination of unrealised profit
1
As had been explained earlier in the chapter, unrealised intragroup profits or losses
are eliminated on consolidation. In the RSA, however, intragroup profits and losses
are taxable or deductible in the same way as any other profits or losses, as each
entity in the group submits its own tax return and will be taxed on its taxable income.
226
Intragroup transactions
2
3
If accordingly no adjustment to the consolidated tax expense is made in the group
statements, such tax expense, because of the elimination of unrealised intragroup
profits or losses, will be disproportionately high (or low) in relation to the profit
before tax of the group. It is thus appropriate that an adjustment be made in respect
of the tax in order to allocate the tax to the reporting period in which the credit (or
debit) is taken for the deferred (unrealised) profit (or loss).
The question which now arises is how this adjustment should be dealt with in the
consolidated financial statements. The deferred tax account is debited (or credited)
with the amount of tax concerned because the purpose with the creation of a
deferred tax account is inter alia to carry just such a temporary difference. IAS 12
Income Taxes applies to the temporary differences that originate on the elimination
of unrealised profits or losses. The tax on the deferred amount is therefore
recognised against deferred tax as a temporary difference. Care must be taken,
however, should such an item be shown as an asset, that it is in fact recoverable
(as in the case of a debit balance on deferred tax). IFRS 10.B86 specifically
requires that IAS 12 Income Taxes shall be applied to temporary differences that
arise from the elimination of profits and losses resulting from intragroup
transactions.
In consolidated financial statements, temporary differences are determined by
comparing the carrying amounts of assets and liabilities in the consolidated financial
statements with the appropriate tax base. The tax base of the inventories is the cost
of the inventories to the entity that legally owns the asset. From the group’s
perspective the carrying amount of the inventories is the amount at which the selling
entity originally purchased the goods.
5.13 Allocation of income tax in respect of unrealised profit
in inventories
It is now necessary to give attention to the tax effect of unrealised profit originating from
the sale of inventories.
The basic principles concerning the allocation of tax and the elimination of unrealised
profit included in inventories are explained here using three examples.
Example 5.5
Allocation of tax and the elimination of unrealised profit
included in closing inventories
S Ltd (a partially-owned subsidiary) sold inventories for the first time to its parent, P Ltd,
during the reporting period ended 28 February 20.18, at a profit mark-up of 25% on cost
price. On 28 February 20.18, inventories to the value of R100 000 (at cost to P Ltd)
were still on hand. The company tax rate is 28%. Total sales from S Ltd to P Ltd for the
current reporting period amounted to R200 000.
227
Chapter 5
Solution 5.5
The necessary pro forma consolidation journal entries will be as follows:
Dr
R
Cr
R
J1
Revenue (S)(P/L)
Cost of sales (P)(P/L)
Elimination of intragroup sales
200 000
J2
Cost of sales (S)(P/L)
Inventories (P)(SFP)
Elimination of unrealised intragroup profit included
in closing inventories of P Ltd (100 000 × 25/125)
20 000
J3
Deferred tax (S)(SFP)
Income tax expense (S)(P/L)
Adjustment for deferred tax on R20 000
unrealised intragroup profit (20 000 × 28%)
5 600
200 000
20 000
5 600
Comment
The deferred tax on the unrealised profit can be explained as follows in terms of
IAS 12.11:
In the records of P Ltd (the purchaser) the inventories would have had the following
accounting and tax values:
Carrying
amount
Tax base
Temporary
difference
Deferred tax
@ 28%
R100 000
R100 000
R0
R0
For the group, after the pro forma journals had been taken into account, the values
would be as follows:
Carrying
amount
Tax base
Temporary
difference
Deferred tax
@ 28%
R80 000
R100 000
(R20 000)
R5 600dr
The DTA changes from R0 to R5,6, therefore requiring a debit adjustment of R5 600.
Comment
The net adjustment after tax amounts to R14 400 and a portion of the after tax
adjustment is allocated via the analysis of S Ltd’s owner’s equity to non-controlling
interests.
Example 5.6
Allocation of income tax and the elimination of unrealised
profit included in opening and closing inventories
Assume that at 28 February 20.19 (i.e. a year later than in example 5.5) P Ltd had
inventories on hand to the value of R150 000 (at cost price to P Ltd) which it had
acquired from S Ltd at the same profit mark-up as during the previous reporting period.
228
Intragroup transactions
Total sales of inventories from S Ltd to P Ltd for the current reporting period amounted
to R300 000. Again assume a company tax rate of 28%.
Solution 5.6
Based on the FIFO cost formula, it is assumed that the inventories which P Ltd had on
hand at 28 February 20.18 were sold entirely during the course of the current reporting
period. The following consolidation journal entries will be necessary at 28 February
20.19:
Dr
R
J1
Retained earnings – Beginning of year (S)(SCE)
Deferred tax (S)(SFP)
Cost of sales (S)(P/L)
Adjustment to ensure that the consolidated
retained earnings at the beginning of 20.19 are in
agreement with the consolidated retained earnings
at the end of 20.18
14 400
5 600
J2
Income tax expense (S)(P/L)
Deferred tax (S)(SFP)
Tax implications of realisation of unrealised profit
in opening inventories of P Ltd
5 600
J3
Revenue (S)(P/L)
Cost of sales (P)(P/L)
Elimination of intragroup sales
300 000
J4
Cost of sales (S)(P/L
Inventories (P)(SFP)
Elimination of unrealised intragroup profit included
in P Ltd’s closing inventories (150 000 × 25/125)
30 000
J5
Deferred tax (S)(SFP)
Income tax expense (S)(P/L)
Adjustment of deferred tax on R30 000
unrealised intragroup profit (30 000 × 28%)
8 400
Cr
R
20 000
5 600
300 000
30 000
8 400
Comment
By 28 February 20.19 the inventories on hand at the end of the previous reporting
period are assumed to have been sold. The intragroup profit has therefore realised from
the group’s perspective and furthermore the taxation has therefore become payable,
necessitating the recognition of a tax expense (J2 above) and the reversal of the
temporary differences.
5.14 Allocation of income tax in respect of fair value adjustments
on financial asset at fair value through OCI
The accounting treatment of financial assets at fair value through OCI was discussed in
chapter 4 (4.4). As the effect of taxation on intragroup transactions is introduced, the
tax implications of fair value adjustments to financial assets at fair value through OCI
229
Chapter 5
also warrant attention. In terms of tax requirements, capital gains tax is payable when a
financial asset at fair value through OCI (the investment in the subsidiary) is sold to a
third party. (See IAS12.51 on the assumption that the carrying amount of the
investment will ultimately be recovered through sale.) Deferred tax is therefore taken
into account at the capital gains rate on any gains or losses on financial asset at fair
value through OCI. The capital gains tax rate is calculated as 66,6% of the company tax
rate, as 66,6% of the capital gain is taxable. As the tax rate is set at 28% in this work,
the capital gains tax rate will be 18,6% (66,6% × 28%).
At the end of every reporting period, the investment in the subsidiary is measured at fair
value in the parent’s individual financial statements. Gains or losses on the
remeasurement of financial assets are recognised in OCI through the mark-to-market
reserve. On consolidation of the financial statements of the parent and the subsidiary,
the mark-to-market reserve is reversed to determine the original consideration
transferred to obtain the controlling interest in the subsidiary at the acquisition date.
The deferred tax that was taken into account on any gains or losses on financial assets
at fair value through OCI must also be reversed on consolidation of the financial
statements of the parent and the subsidiary.
Example 5.7
Income tax allocation and reversal of fair value adjustment on
financial asset at fair value through OCI
On 2 January 20.17 P Ltd acquired an 80% interest in S Ltd at R8 000. P Ltd classifies
the investment in terms of IFRS 9 in its separate financial statements and recognises
fair value adjustments in a mark-to-market reserve (other comprehensive income).
On 31 December 20.17 the fair value of the investment in S Ltd was R9 500.
On 31 December 20.18 the fair value of the investment in S Ltd was R10 000.
Assume a company tax rate of 28% and that 66,6% of the capital gain is subject to
capital gains tax.
Solution 5.7
Reporting period ended 31 December 20.17:
On consolidation the following pro forma journal is done to reverse the movement in the
fair value of the investment during 20.17, to determine the consideration paid at
acquisition date:
Dr
R
Mark-to-market reserve – Beginning of year (P)(OCI)
Investment in S Ltd (P)(SFP) (9 500 – 8 000)
Reversal of fair value gain on investment in S Ltd
at the end of the reporting period at group level
230
1 500
Cr
R
1 500
Intragroup transactions
The tax effect will be as follows:
Dr
R
Deferred tax (P)(SFP)
Income tax expense of OCI (P)(OCI) (1 500 × 66,6% × 28%)
Recognition of deferred tax on reversal of fair value gain
on investment in S Ltd at the end of the reporting period at
group level
Cr
R
280
280
Comment
The deferred tax on the movement in the fair value of the investment can be explained
as follows in terms of IAS 12.11:
In the records of P Ltd (the investor) the investment would have had the following
accounting and tax values:
Carrying
amount
Tax base
Temporary
difference
Deferred tax
@ 66,6% × 28%
9 500
8 000
1 500
280cr
For the group, after the pro forma journals had been taken into account, the values
would be as follows:
Carrying
amount
Tax base
Temporary
difference
Deferred tax
@ 14%
8 000
8 000
0
0
The deferred tax balance needs to be adjusted from R280 to R0, therefore requiring a
debit adjustment of R280.
Reporting period ended 31 December 20.18:
When the consolidation of P Ltd and S Ltd is done for the reporting period ending on
31 December 20.18, the total movement in the fair value of the investment must be
reversed in two steps to determine the actual consideration transferred on acquisition.
For this purpose, the following pro forma consolidation journals are prepared:
Dr
R
Mark-to-market reserve – Beginning of year (P)(SCE)
(1 500 × (100% – 18,6%)
Deferred tax (P)(SFP) (1 500 × 66,6% × 28%)
Investment in S Ltd (P)(SFP) (9 500 – 8 000)
Reversal of fair value adjustment on investment in S Ltd at
beginning of reporting period at group level
1 220
280
Cr
R
1 500
continued
231
Chapter 5
Dr
R
Cr
R
Mark-to-market reserve (P)(OCI) (10 000 – 9 500)
Investment in S Ltd (P)(SFP)
Reversal of fair value adjustment on investment in S Ltd
for current reporting period at group level
500
Deferred tax (P)(SFP) (500 × 66,6% × 28%)
Income tax expense of OCI (P)(OCI)
Deferred tax effect of reversal of fair value adjustment on
investment in S Ltd for current reporting period at group
level
93
500
93
The explanation in example 5.7 serves as basis for the fair value adjustments to the
investment in example 5.8 which follows:
Example 5.8
Income tax on unrealised intragroup profit
The following are the abridged financial statements of P Ltd and its subsidiary S Ltd for
the reporting period ended 31 December 20.18:
STATEMENTS OF FINANCIAL POSITION AS AT 31 DECEMBER 20.18
P Ltd
ASSETS
Investment in S Ltd: 8 000 shares at fair value (20.17 – R9 500)
Inventories
Trade receivables
S Ltd
10 000
15 000
9 000
–
15 000
6 200
Total assets
EQUITY AND LIABILITIES
Share capital (10 000/10 000 shares)
Mark-to-market reserve
Retained earnings
Deferred tax
R34 000
R21 200
10 000
1 627
20 400
1 973
10 000
–
11 200
–
Total equity and liabilities
R34 000
R21 200
232
Intragroup transactions
STATEMENTS OF PROFIT OR LOSS AND OTHER COMPREHENSIVE INCOME
FOR THE YEAR ENDED 31 DECEMBER 20.18
P Ltd
S Ltd
Revenue
Cost of sales
50 000
(25 000)
60 000
(40 000)
Gross profit
Other expenses
25 000
(5 000)
20 000
(10 000)
Profit before tax
Income tax expense (28%)
20 000
(5 600)
10 000
(2 800)
PROFIT FOR THE YEAR
Other comprehensive income:
Items that will not be reclassified to profit or loss
Mark-to-market reserve (fair value adjustment on investment)
Income tax relating to items not reclassified
14 400
7 200
500
(93)
–
–
Other comprehensive income for the year, net of tax
407
–
TOTAL COMPREHENSIVE INCOME FOR THE YEAR
R14 807
R7 200
EXTRACT FROM THE STATEMENTS OF CHANGES IN EQUITY
FOR THE YEAR ENDED 31 DECEMBER 20.18
Mark-to-market
reserve
P Ltd
Balance at 1 January 20.18
Changes in equity for 20.18
Total comprehensive income for the year:
Profit for the year
Other comprehensive income for the year
Balance at 31 December 20.18
Retained
earnings
P Ltd
S Ltd
1 220
6 000
4 000
–
407
14 400
–
7 200
–
R1 627
R20 400
R11 200
P Ltd acquired the interest in S Ltd on S Ltd’s incorporation on 1 January 20.17 at
R8 000.
Since 12 January 20.18, S Ltd has acquired all its inventories from P Ltd at cost price
plus 25%. S Ltd’s total inventories have therefore been acquired from P Ltd during the
reporting period. Total sales of inventories from P Ltd to S Ltd during the reporting
period ended 31/12/20.18 amounted to R30 000.
P Ltd classified the equity investment in S Ltd under IFRS 9 in its separate financial
statements and recognised fair value adjustments in a mark-to-market reserve (other
comprehensive income).
Assume that the identifiable assets acquired and the liabilities assumed at acquisition
date are shown at their acquisition-date fair values, as determined in terms of IFRS 3.
P Ltd elected to measure the non-controlling interests in an acquiree at their
proportionate share of the acquiree’s identifiable net assets at acquisition date.
Assume a company tax rate of 28% and that 66,6% of a capital gain is subject to capital
gains tax.
233
Chapter 5
Solution 5.8
P LTD GROUP
CONSOLIDATED STATEMENT OF FINANCIAL POSITION
AS AT 31 DECEMBER 20.18
ASSETS
Current assets
Inventories (15 000(P) + 15 000(S) – 3 000(J5))
Trade receivables (9 000(P) + 6 200(S))
27 000
15 200
42 200
Total assets
EQUITY AND LIABILITIES
Equity attributable to owners of the parent
Share capital
Retained earnings
Non-controlling interests
Total equity
Non-current liabilities
Deferred tax (1 973 – 280(J1) – 93(J3) – 840(J6))
Total equity and liabilities
R42 200
10 000
27 200
37 200
4 240
41 440
760
R42 200
P LTD GROUP
CONSOLIDATED STATEMENT OF PROFIT OR LOSS
AND OTHER COMPREHENSIVE INCOME
FOR THE YEAR ENDED 31 DECEMBER 20.18
Revenue (50 000(P) + 60 000(S) – 30 000(J4))
Cost of sales (25 000(P) + 40 000(S) – 30 000(J4) + 3 000(J5))
80 000
(38 000)
Gross profit
Other expenses (5 000(P) + 10 000(S))
42 000
(15 000)
Profit before tax
Income tax expense (5 600(P) + 2 800(S) – 840(J6))
27 000
(7 560)
PROFIT FOR THE YEAR
Other comprehensive income for the year
19 440
–
TOTAL COMPREHENSIVE INCOME FOR THE YEAR
Profit attributable to:
Owners of the parent
Non-controlling interests
R19 440
18 000
1 440
R19 440
Total comprehensive income attributable to:
Owners of the parent
Non-controlling interests
18 000
1 440
R19 440
234
Intragroup transactions
P LTD GROUP
CONSOLIDATED STATEMENT OF CHANGES IN EQUITY
FOR THE YEAR ENDED 31 DECEMBER 20.18
Share
capital
Balance at 1 January 20.18
Changes in equity for 20.18
Total comprehensive income
for the year:
Profit for the year
Balance at 31 December 20.18
Retained
earnings
Total
Noncontrolling
interests
Total
equity
10 000
*9 200
19 200
2 800
22 000
–
18 000
18 000
1 440
19 440
R10 000 ŽR27 200
R37 200
R4 240
R41 440
* 6 000 + 3 200 (analysis) = 9 200
Ž 20 400 + 8 960 (analysis) – 3 000(J5) + 840(J6) = 27 200
Comment
As P Ltd is the seller of the inventories, the unrealised profit that was eliminated on
consolidation should be taken into account when the balances of the consolidated
retained earnings are calculated.
Calculations
C1 Analysis of owners’ equity of S Ltd
Total
i At acquisition (1/1/20.17)
Share capital
Retained earnings
Purchase difference
Consideration
(10 000 – 1 500(J1) – 500(J2)) and NCI
ii Since acquisition
• To beginning of current year :
Retained earnings (4 000 – 0)
• Current year :
Profit for the year
P Ltd 80%
At
Since
NCI
10 000
–
8 000
–
2 000
–
10 000
–
8 000
–
2 000
–
10 000
R8 000
2 000
4 000
3 200
800
2 800
7 200
5 760
1 440
R21 200
R8 960
R4 240
Comment
As P Ltd is the seller, the intragroup sale of inventories has no effect on the analysis of
the equity of S Ltd.
235
Chapter 5
C2 Proof of calculation of purchase difference of S Ltd in terms of IFRS 3 .32
Consideration transferred at acquisition date: IFRS 3.32(a)(i)
8 000
Amount of non-controlling interests: IFRS 3.32(a)(ii)
2 000
10 000
Net of the identifiable assets acquired and liabilities assumed
at acquisition date: IFRS 3.32(b)
(10 000)
Purchase difference
R–
C3 Pro forma consolidation journal entries
Dr
R
J1
Mark-to-market reserve – Beginning of year
(P)(SCE)(1 500 × (100% - (66,6% × 28%))
Deferred tax (P)(SFP) (1 500 × (66,6% × 28%)
Investment in S Ltd (P)(SFP) (9 500 – 8 000)
Reversal of fair value adjustment on investment
in S Ltd at beginning of reporting period at group
level
Cr
R
1 220
280
J2
Mark-to-market reserve (P)(OCI) (10 000 – 9 500)
Investment in S Ltd (P)(SFP)
Reversal of fair value adjustment on investment in
S Ltd for current reporting period at group level
500
J3
Deferred tax (P)(SFP)(500 × 66,6% × 28%)
Income tax expense of OCI (P)(OCI)
Tax effect of reversal of fair value adjustment on
investment in S Ltd for current reporting period at
group level
93
J4
Revenue (P)(P/L)
Cost of sales (S)(P/L)
Elimination of intragroup sales
30 000
J5
Cost of sales (P)(P/L)
Inventories (S)(SFP)
Elimination of unrealised intragroup profit included
in the closing inventories of S Ltd at 31/12/20.18
3 000
1 500
500
93
30 000
3 000
(15 000 × 25/125)
J6
Deferred tax (P)(SFP)
Income tax expense (P)(P/L)
Deferral of the applicable tax on the unrealised
intragroup profit (3 000 × 28%)
J7
Share capital (S)(SCE)
Investment in S Ltd (P)(SFP)
Non-controlling interests (SFP)
Elimination of owners’ equity at acquisition of S Ltd
840
10 000
840
8 000
2 000
continued
236
Intragroup transactions
Dr
R
Cr
R
J8
Retained earnings – Beginning of year (S)(SCE)
Non-controlling interests (SFP)
Recognition of non-controlling interests in retained
earnings of the subsidiary for the period since
acquisition until beginning of current reporting
period
800
J9
Non-controlling interests (P/L)
Non-controlling interests (SFP)
Recognition of non-controlling interests in profit for
the year
1 440
800
1 440
Property, plant and equipment held by entities in the group
5.15 Disclosure of the carrying amount of property, plant and equipment
in the consolidated statement of financial position
As consolidated financial statements combine the information contained in the separate
financial statements of the parent and of the subsidiaries, the consolidated statement of
financial position must show, in respect of property, plant and equipment, the total gross
carrying amount of such assets and the total accumulated depreciation as per the
separate statements of financial position of the entities in the group, despite the fact
that certain of these assets were in fact purchased by the subsidiary before the date on
which the parent acquired its controlling interest in the subsidiary. The reason for this is
that, on consolidation, a new reporting entity is created, namely the group. All the assets
are now viewed as belonging to the entity, i.e. the group. As discussed before, from the
perspective of the group, intragroup transactions between the different entities,
irrespective of whether the parent sold to the subsidiary or vice versa, had for all intents
and purposes not occurred from the group’s perspective. The principle is that one
cannot enter into transactions with oneself, nor make a profit out of oneself. For this
reason all intragroup profits (or losses) should be eliminated on consolidation.
Constantly keep in mind the entity concept when intragroup transactions are discussed.
5.16 Property, plant and equipment acquired from other entities
in the group
Where property, plant and equipment are acquired from other entities within the group a
distinction must be drawn between intragroup gains earned on:
l property, plant and equipment which are not subject to depreciation (nondepreciable property); and
l property, plant and equipment which are subject to depreciation (depreciable
property, plant and equipment).
A further distinction that warrants attention is whether the selling entity is a trader in
property, plant and equipment, in which case it constitutes inventories in its records. If,
however, the selling entity is a non-trader of such items, the property, plant and
equipment is classified as the latter in its records.
In the initial discussion, the seller is a non-trader and therefore the item that is sold
forms part of property, plant and equipment.
237
Chapter 5
5.17 Intragroup gain on non-depreciable property, plant and equipment
Should one entity in the group sell a non-depreciable property to another entity in the
group at a gain, the full intragroup gain must, as long as the asset is held within the
group, be eliminated for consolidation purposes. The reason is that a gain on the sale
of a non-depreciable property, plant and equipment item will only be regarded as
realised when the asset is sold to a third party outside the group. Regardless of
whether the asset was sold by the parent or by a wholly-owned subsidiary to another
entity in the group, the full amount of the unrealised gain is reversed and debited
against the group gain. The sale of property has no income tax implications (it however
has capital gains tax implications which are initially ignored for the sake of simplicity).
Example 5.9
Non-depreciable property acquired from the parent
Assume that P Ltd sold property (which originally cost R100 000) to S Ltd, a whollyowned subsidiary, at R150 000 on 2 January 20.17. S Ltd sold the property at
R250 000 on 30 June 20.18 to a third party. P Ltd’s reporting period ends on
31 December.
Solution 5.9
The following pro forma journal entries will be required on consolidation:
31 December 20.17 – Pro forma consolidation journal entry
Dr
R
Other income (Gain on sale of property) (P)(P/L)
Property (S)(SFP)
Elimination of the unrealised intragroup gain included
in the property of S Ltd
50 000
Cr
R
50 000
Comment
From the perspective of the group, the transaction did not take place and the carrying
amount of the property is still R100 000. It is clear that the carrying amount of the
property (as presented in S Ltd’s statement of financial position at R150 000) should be
reduced by R50 000. Furthermore, the gain on the sale that was recognised by P Ltd in
its profit or loss, is now deemed to be unrealised from the perspective of the group (as a
third party was not involved), and should therefore be reversed.
The gain on sale of property will be included in the line item, “other income” in the profit
or loss section of the statement of profit or loss and other comprehensive income.
238
Intragroup transactions
31 December 20.18 – Pro forma consolidation journal entry
Dr
R
Retained earnings – Beginning of year (P)(SCE)
Property (S)(SFP)
Adjustment to ensure that the consolidated retained
earnings at the beginning of 20.18 are in agreement with
the consolidated retained earnings at the end of 20.17
50 000
Cr
R
50 000
Comment
In 20.17 the consolidated profit for that reporting period was debited with the unrealised
gain of R50 000. The resulting effect was that the retained earnings at the end of 20.17
were reduced by the unrealised gain. The retained earnings at the end of 20.17 became
the retained earnings at the beginning of 20.18. As the asset is still owned within the
group, and the gain is still regarded as unrealised (reasons above), the adjustment
needs to be repeated with reference to the 20.18 line items.
31 December 20.19 – Pro forma consolidation journal entry
Dr
R
Retained earnings – Beginning of year (P)(SCE)
Other income (Gain on sale of property) (P)(P/L)
Adjustment to ensure that the consolidated retained
earnings at the beginning of 20.19 are in agreement with
the consolidated retained earnings at the end of 20.18
as well as to give recognition to the fact that the
unrealised intragroup gain has been realised by the
disposal of the asset during 20.19
50 000
Cr
R
50 000
Comment
In 20.19 when the property is sold to a third party, the following applies:
In S Ltd’s records a gain of R100 000 is shown, i.e. R250 000 – R150 000 (price at
which S Ltd purchased property intragroup from P Ltd).
From the perspective of the group the gain should however be R150 000, i.e. R250 000
– R100 000 (original cost to the group). By recognising the pro forma journal above, the
correct gain of R150 000 (100 000 + 50 000 (pro forma adjustment)) is recognised in the
consolidated profit or loss.
From the three pro forma journals above, it is clear that in the year of the intragroup
sale of property, the gain on the sale of property will be shown at R50 000 in P Ltd’s
profit or loss for 20.17, but no such item will appear in the 20.17 consolidated profit or
loss, as a result of the recording of the appropriate journal entry. When the property is
eventually sold to a third party in 20.19, the gain on the sale of property will appear as
R100 000 in the profit or loss of S Ltd for 20.19, but as R150 000 in the consolidated
profit or loss for 20.19.
239
Chapter 5
It is once again clear that the elimination of unrealised gain, in essence, shifts the
applicable gain to the reporting period where the gain is realised as a result of a
transaction with a party outside the group.
In the case where the subsidiary is the selling entity of property to another entity in the
group, the pro forma journals will remain unchanged, but the adjustment to equity will
have to be taken into account before the equity of the subsidiary is analysed. The noncontrolling interest will therefore be affected with “their share” of the unrealised gain
while the entity still holds the property, or the realised gain in the reporting period that
the property is sold.
5.18 Intragroup gain on depreciable property, plant and equipment
1
2
3
As already stated, any unrealised gain on property, plant and equipment which were
purchased from another entity in the group, must be eliminated in the same way as
unrealised profit in inventories which is still on hand at the end of the reporting
period. In addition, the excessive amount of depreciation in the case of property,
plant and equipment which are subject to depreciation, must be written back.
Intragroup profit on inventories and gains on property, plant and equipment, such as
land, which is not subject to depreciation, is only realised when the assets are sold
to an entity outside the group. However, physical transfer is unnecessary in the
case of property, plant and equipment subject to depreciation. An unrealised gain
on depreciable property, plant and equipment is “realised” through the process of
depreciation (or by sale to an entity outside the group (third party)) as depreciation
represents the expired portion of the future economic benefits contained in property,
plant and equipment. To the extent that depreciation is merely the allocation of the
cost (which represents the future economic benefits) of the asset over its expected
useful life, from an accounting point of view, the realisation of intragroup gain on
such assets comes about only in the sense that the unrealised gain is expunged
over the same period. That portion of intragroup gain which is accounted for in the
depreciation figure of any reporting period is accordingly realised when the products
or services produced by means of the use of depreciable assets are sold to third
parties.
Assume that P Ltd sells inventories to a wholly-owned subsidiary, S Ltd, at a profit
of R5 000. Should the subsidiary sell one-fifth of the inventories in each of the
following five reporting periods to outsiders, one-fifth of the unrealised profit would
be realised in every reporting period. Should P Ltd sell equipment which cost
R40 000 to S Ltd at a gain of R5 000 and the latter recognises depreciation at the
rate of 20% per annum on the cost price (for S Ltd) of the equipment (that is one
fifth in each year according to the straight-line method), S Ltd would recognise
R9 000 annually (1/5 × R45 000) until the equipment has been written off in full by
the end of the fifth year. For consolidation purposes, the unrealised gain (R5 000) is
eliminated and the equipment written off at R8 000 per annum (based on the
supposition that the group will apply the same depreciation rate). Therefore, onefifth of the unrealised gain can be regarded as being realised annually and included
in the group gain. This comes about by writing back the excess depreciation
annually (R9 000 – R8 000 = R1 000).
240
Intragroup transactions
4
Should the asset be sold by the parent or by a wholly-owned subsidiary to another
entity in the group, the full amount of unrealised gain is set off against the
consolidated gain. No allocation of the unrealised intragroup gain is made to the
possible non-controlling interests. Should the unrealised gain or a part thereof be
realised later, there is once again no allocation to the non-controlling interests.
Example 5.10
Sale of property, plant and equipment to a partially-owned
subsidiary
At 31 December 20.18, the end of the reporting period, P Ltd holds an interest of 80%
in S Ltd. On 2 January 20.18, P Ltd sold certain equipment which originally cost
R10 000 to S Ltd for R15 000. S Ltd recognises depreciation on this equipment on a
straight-line basis at a rate of 20% per annum.
Solution 5.10
The pro forma consolidation journal entry is as follows:
Dr
R
Other income (Gain on sale of equipment) (P)(P/L)
Equipment (S)(SFP)
Elimination of unrealised intragroup gain included in the
equipment of S Ltd on 31/12/20.18
5 000
Cr
R
5 000
This journal entry indicates that it is the gain on sale of equipment (which will be
included in the line item “other income”) of P Ltd that is debited; as a result, no
allocation is made to the non-controlling interests in S Ltd. This in fact means that the
consolidated gain is reduced by the full unrealised intragroup gain.
Dr
R
Accumulated depreciation: Equipment (S)(SFP)
Other expenses (Depreciation) (P)(P/L)
Recognition of the portion of the unrealised intragroup
gain “realised” by the depreciation process during 20.18
1 000
Cr
R
1 000
(5 000 × 20%)
Because the full unrealised intragroup gain is set off against the consolidated gain, the
full realised portion of the unrealised intragroup gain must be set off against the
consolidated gain. No allocation is made to the non-controlling interests in S Ltd.
Similarly to the case of inventories, the two pro forma journals that were discussed
above affect the consolidated retained earnings (in this case for 20.18). When the
consolidated financial statements are prepared for the following reporting period
(20.19), it must first be ensured that the consolidated retained earnings at the beginning
of 20.19 agree with the consolidated retained earnings at the end of 20.18. This is
accomplished through the following pro forma journal entry:
241
Chapter 5
Dr
R
Retained earnings – Beginning of year (P) (SCE) (5 000 – 1 000)
Accumulated depreciation: Equipment (S)(SFP)
Equipment (S)(SFP)
Adjustment to ensure that the consolidated retained
earnings at the beginning of 20.19 agrees with the
consolidated retained earnings of 20.18.
Cr
R
4 000
1 000
5 000
Comment
This pro forma consolidation journal is purely a combination of the two pro forma
journals that were prepared for the consolidation of the previous reporting period, but in
relation to the current reporting period’s (20.19) figures and financial statements.
5
Should the asset be sold by a partially-owned subsidiary to another entity in the
group, the relevant portion of the unrealised gain, as in the case of inventories in
similar circumstances, must be allocated to the non-controlling interests in the
subsidiary. As and when the unrealised gain is realised, a portion thereof is once
again allocated to the non-controlling interests in the subsidiary.
Example 5.11
Consolidation adjustment for intragroup sales of depreciable
property, plant and equipment with the subsidiary as the
selling entity
The following are the abridged financial statements of P Ltd and its subsidiary S Ltd for
the reporting periods 20.18 and 20.19:
STATEMENTS OF FINANCIAL POSITION AS AT 31 DECEMBER
P Ltd
S Ltd
20.18
20.19
20.18
20.19
ASSETS
Plant at cost price
Accumulated depreciation
20 000
(2 000)
20 000
(4 000)
40 000
(4 000)
40 000
(8 000)
Investment in S Ltd: 45 000 shares
Trade receivables
18 000
67 500
74 500
16 000
67 500
106 500
36 000
–
45 000
32 000
–
54 000
Total assets
EQUITY AND LIABILITIES
Share capital (100 000/50 000 shares)
Retained earnings
R160 000
R190 000
R81 000
R86 000
100 000
60 000
100 000
90 000
50 000
31 000
50 000
36 000
Total equity and liabilities
R160 000
R190 000
R81 000
R86 000
242
Intragroup transactions
STATEMENTS OF PROFIT OR LOSS AND OTHER COMPREHENSIVE INCOME
FOR THE YEAR ENDED 31 DECEMBER
P Ltd
S Ltd
20.18
20.19
20.18
20.19
Revenue
Cost of sales
50 000
(25 000)
120 000
(60 000)
25 000
(12 500)
30 000
(15 000)
Gross profit
Depreciation
Other income
Other expenses
25 000
(2 000)
15 800
(18 000)
60 000
(2 000)
11 600
(28 000)
12 500
(4 000)
8 300
(8 500)
15 000
(4 000)
7 900
(12 000)
Profit before tax
20 800
41 600
8 300
6 900
Income tax expense
(5 800)
(11 600)
(2 300)
(1 900)
PROFIT FOR THE YEAR
15 000
30 000
6 000
5 000
–
–
–
–
R15 000
R30 000
R6 000
R5 000
Other comprehensive income for the year
TOTAL COMPREHENSIVE INCOME
FOR THE YEAR
EXTRACT FROM THE STATEMENTS OF CHANGES IN EQUITY
FOR THE YEAR ENDED 31 DECEMBER
Retained earnings
P Ltd
20.18
S Ltd
20.19
60 000
20.18
20.19
25 000
31 000
Balance at 1 January 20.18/20.19
Changes in equity for 20.18/20.19
Total comprehensive income for the year:
Profit for the year
45 000
15 000
30 000
6 000
5 000
Balance at 31 December 20.18/20.19
R60 000
R90 000
R31 000
R36 000
P Ltd purchased all its plant from S Ltd on the acquisition date, 1 January 20.18. The
plant did not form part of S Ltd’s inventories. S Ltd realised a gain of R2 500 on the
transaction. Depreciation is provided annually on the straight line basis at a rate of 10%
per annum.
P Ltd recognised the equity investment in S Ltd in its separate records using the cost
price method.
Assume that the identifiable assets acquired and the liabilities assumed at acquisition
date are shown at their acquisition-date fair values, as determined in terms of IFRS 3.
P Ltd elected to measure the non-controlling interests in an acquiree at their
proportionate share of the acquiree’s identifiable net assets at acquisition date.
Ignore tax implications.
243
Chapter 5
Solution 5.11
The consolidated financial statements of the P Ltd Group for the reporting periods
ended 31 December 20.18 and 31 December 20.19 will be as follows:
Reporting period ended 31 December 20.18
P LTD GROUP
CONSOLIDATED STATEMENT OF FINANCIAL POSITION
AS AT 31 DECEMBER 20.18
ASSETS
Non-current assets
Plant (20 000(P) + 40 000(S) – 2 500(J1))
Accumulated depreciation (2 000(P) + 4 000(S) – 250(J2))
57 500
(5 750)
51 750
Current assets
Trade receivables (74 500(P) + 45 000(S))
Total assets
119 500
R171 250
EQUITY AND LIABILITIES
Equity attributable to owners of the parent
Share capital
Retained earnings
100 000
63 375
Non-controlling interests
163 375
7 875
Total equity
171 250
Total equity and liabilities
244
R171 250
Intragroup transactions
P LTD GROUP
CONSOLIDATED STATEMENT OF PROFIT OR LOSS
AND OTHER COMPREHENSIVE INCOME
FOR THE YEAR ENDED 31 DECEMBER 20.18
Revenue (50 000(P) + 25 000(S))
Cost of sales (25 000(P) + 12 500(S))
75 000
(37 500)
Gross profit
Other income (15 800(P) + 8 300(S) – 2 500(J1))
Other expenses (18 000(P) + 8 500(S) + (2 000(P) + 4 000(S)(depreciation))
37 500
21 600
(32 250)
– 250(J2)
Profit before tax
Income tax expense (5 800(P) + 2 300(S))
26 850
(8 100)
PROFIT FOR THE YEAR
Other comprehensive income for the year
TOTAL COMPREHENSIVE INCOME FOR THE YEAR
Profit attributable to:
Owners of the parent
Non-controlling interests
18 750
–
R18 750
18 375
375
R18 750
Total comprehensive income attributable to:
Owners of the parent
Non-controlling interests
18 375
375
R18 750
P LTD GROUP
CONSOLIDATED STATEMENT OF CHANGES IN EQUITY
FOR THE YEAR ENDED 31 DECEMBER 20.18
Share
capital
Balance at 1 January 20.18
Changes in equity for 20.18
Total comprehensive income
for the year:
Profit for the year
Acquisition of subsidiary
Balance at
31 December 20.18
Retained
earnings
Total
Noncontrolling
interests
Total
equity
100 000
45 000
145 000
–
145 000
–
–
18 375
–
18 375
–
375
7 500
18 750
7 500
R100 000
R63 375
R163 375
R7 875
R171 250
245
Chapter 5
Calculations
C1 Analysis of owners’ equity of S Ltd
P Ltd 90%
Total
i At acquisition (1/1/20.18)
Share capital
Retained earnings
Purchase difference
Consideration and NCI
ii Since acquisition
• To beginning of current year :
None (control acquired on 1/1/20.18)
• Current year :
Profit for the year
(6 000 – 2 500(J1) + 250(J2))
At
NCI
Since
50 000
25 000
45 000
22 500
5 000
2 500
75 000
–
67 500
–
7 500
–
75 000
R67 500
7 500
–
–
–
3 750
3 375
375
R78 750
R3 375
R7 875
C2 Proof of calculation of purchase difference of S Ltd in terms of IFRS 3 .32
Consideration transferred at acquisition date: IFRS 3.32(a)(i)
67 500
Amount of non-controlling interests: IFRS 3.32(a)(ii)
7 500
75 000
Net of the identifiable assets acquired and liabilities assumed
at acquisition date: IFRS 3.32(b)
(75 000)
Purchase difference
R–
C3 Pro forma consolidation journal entries
Dr
R
Cr
R
J1
Other income (Gain on sale of plant) (S)(P/L)
Plant (P)(SFP)
Elimination of the unrealised intragroup gain
included in the plant of P Ltd at 31/12/20.18
2 500
J2
Accumulated depreciation: Plant (P)(SFP)
Other expenses (Depreciation) (S)(P/L)
Recognition of the portion of the unrealised
intragroup gain realised in 20.18
250
J3
Share capital (S)(SCE)
Retained earnings (S)(SCE)
Investment in S Ltd (P)(SFP)
Non-controlling interests (SFP)
Elimination of owners’ equity at acquisition of S Ltd
J4
246
Non-controlling interests (P/L)
Non-controlling interests (SFP)
Recognition of non-controlling interests in profit
for the year
50 000
25 000
375
2 500
250
67 500
7 500
375
Intragroup transactions
Comment
Because S Ltd is the selling entity, the “other income” within profit or loss of S Ltd is
debited with the unrealised intragroup gain. Similarly, the realised portion is credited to
the “other expenses” of S Ltd. This procedure ensures that a portion of the unrealised
intragroup gain is allocated to the non-controlling interest in S Ltd, just as a portion of
the realised portion is allocated to the non-controlling interest in S Ltd.
Reporting period ended 31 December 20.19
P LTD GROUP
CONSOLIDATED STATEMENT OF FINANCIAL POSITION
AS AT 31 DECEMBER 20.19
ASSETS
Non-current assets
Plant (20 000(P) + 40 000(S) – 2 500(J1))
Accumulated depreciation (4 000(P) + 8 000(S) – 500(J2))
57 500
(11 500)
46 000
Current assets
Trade receivables (106 500(P) + 54 000(S))
160 500
Total assets
EQUITY AND LIABILITIES
Equity attributable to owners of the parent
Share capital
Retained earnings
R206 500
100 000
98 100
Non-controlling interests
198 100
8 400
Total equity
206 500
Total equity and liabilities
R206 500
P LTD GROUP
CONSOLIDATED STATEMENT OF CHANGES IN EQUITY
FOR THE YEAR ENDED 31 DECEMBER 20.19
Share
capital
Balance at 1 January 20.19
Changes in equity for
20.19
Total comprehensive
income for the year:
Profit for the year
Balance at
31 December 20.19
Retained
earnings
Total
Noncontrolling
interests
Total
equity
100 000
*63 375
163 375
7 875
171 250
–
34 725
34 725
525
35 250
R100 000
ŽR98 100
R198 100
R8 400
R206 500
* 60 000 + 3 375 (analysis) = 63 375
Ž 90 000 + 8 100 (analysis) = 98 100
247
Chapter 5
P LTD GROUP
CONSOLIDATED STATEMENT OF PROFIT OR LOSS
AND OTHER COMPREHENSIVE INCOME
FOR THE YEAR ENDED 31 DECEMBER 20.19
Revenue (120 000(P) + 30 000(S))
Cost of sales (60 000(P) + 15 000(S))
150 000
(75 000)
Gross profit
Other income (11 600(P) + 7 900(S))
Other expenses
75 000
19 500
(45 750)
(28 000(P) + 12 000(S) + (2 000(P) + 4 000(S) – (depreciation) 250(J2))
Profit before tax
Income tax expense (11 600(P) + 1 900(S))
48 750
(13 500)
PROFIT FOR THE YEAR
Other comprehensive income for the year
35 250
–
TOTAL COMPREHENSIVE INCOME FOR THE YEAR
R35 250
Profit attributable to:
Owners of the parent
Non-controlling interests
34 725
525
R35 250
Total comprehensive income attributable to:
Owners of the parent
Non-controlling interests
34 725
525
R35 250
Calculations
C1 Analysis of owners’ equity of S Ltd
Total
i At acquisition (1/1/20.18)
Share capital
Retained earnings
Purchase difference
Consideration and NCI
ii Since acquisition
• To beginning of current year:
Retained earnings
(31 000 – 25 000 – 2 250(J1))
• Current year :
Profit for the year (5 000 + 250(J2))
248
P Ltd 90%
At
Since
NCI
50 000
25 000
45 000
22 500
5 000
2 500
75 000
–
67 500
–
7 500
–
75 000
R67 500
7 500
3 750
3 375
375
7 875
5 250
4 725
525
R84 000
R8 100
R8 400
Intragroup transactions
C2 Proof of calculation of purchase difference of S Ltd in terms of IFRS 3.32
Consideration transferred at acquisition date: IFRS 3.32(a)(i)
67 500
Amount of non-controlling interests: IFRS 3.32(a)(ii)
7 500
Net of the identifiable assets acquired and liabilities assumed
at acquisition date: IFRS 3.32(b)
75 000
(75 000)
Purchase difference
R–
C3 Pro forma consolidation journal entries
Dr
R
J1
J2
Retained earnings – Beginning of year (S)(SCE)
Accumulated depreciation: Plant (P)(SFP)
Plant (P)(SFP)
Adjustments to ensure that the consolidated
balances concerned at the beginning of 20.19 are
in agreement with the adjusted balances at the
end of 20.18
Accumulated depreciation: Plant (P)(SFP)
Other expenses (Depreciation) (S)(P/L)
Recording of the portion of the unrealised
intra-group gain realised in 20.19
Cr
R
2 250
250
250
2 500
250
5.19 Allocation of income tax and the elimination of unrealised gain
included in depreciable property, plant and equipment
As in the case of inventories, deferred taxation is calculated on the elimination of the
intragroup unrealised profit on the sale of property, plant and equipment. The intragroup
gain on the sale of a depreciable asset is realised by means of the periodical and
continuous depreciation of the asset. The related deferred tax will thus reduce as the
depreciation is written off on an asset of which the carrying value includes unrealised
gain. In the discussion below, it is assumed that the selling entity trades in the relevant
depreciable property, plant and equipment (inventories in the records of the selling
entity).
Example 5.12
Allocation of income tax on unrealised gain included
in depreciable property, plant and equipment
On 31 December 20.18, P Ltd purchased all its plant at R20 000 from S Ltd, a
subsidiary in which it holds a 90% interest. S Ltd is a manufacturer of plant and realised
a gain of R5 000 on this particular transaction. Depreciation is provided for by using the
straight-line basis at a rate of 10% on cost. Assume a company tax rate of 28%.
249
Chapter 5
Solution 5.12
The necessary pro forma consolidation journal entries for the reporting periods ending
31 December 20.18, 20.19 and 20.20 will be recorded as follows:
(a) At 31 December 20.18
Dr
R
Cr
R
J1
Revenue (S)(P/L)
Cost of sales (S)(P/L)
Plant (P)(SFP)
Elimination of intragroup sale and of unrealised
intragroup gain included in P Ltd’s plant
on 31/12/20.18
20 000
J2
Deferred tax (SFP)
Income tax expense (S)(P/L)
Recognition of deferred tax on unrealised intragroup
gain included in P Ltd’s plant (5 000 × 28%)
1 400
15 000
5 000
1 400
Comment
When one item that is classified as inventory in the records of the seller is sold to
another entity within the group, the gross profit included in the selling price must be
eliminated as it is regarded as being unrealised. This is done by adjusting both the
revenue and cost of sales line items, i.e. the selling price is debited against revenue and
the cost price is credited against cost of sales. The tax adjustment is subsequently
done.
(b) At 31 December 20.19
Dr
R
J1
Retained earnings – Beginning of year (S)(SCE)
(20 000 – 15 000 – 1 400)
Deferred tax (SFP)
Plant (P)(SFP)
Adjustment to ensure that the consolidated balances
at the beginning of 20.19 are in agreement with the
adjusted balances at the end of 20.18
Cr
R
3 600
1 400
J2
Accumulated depreciation – Plant (SFP)
Other expenses (Depreciation) (S)(P/L)
Recognition of the portion of unrealised intragroup
gain realised during the reporting period ended
31/12/20.19 (5 000 × 10%)
500
J3
Income tax expense (S)(P/L)
Deferred tax (SFP)
Writing back of deferred tax (500 × 28%)
140
250
5 000
500
140
Intragroup transactions
The first journal is a combination of the two pro forma journals that were taken into
account in the prior reporting period on consolidation. The realised portion of the gain is
then pro forma credited to the depreciation (“other expenses”) of S Ltd in 20.19, and the
tax provision pro forma adjusted in the statement of profit or loss and other
comprehensive income of S Ltd. As the subsidiary is the seller, in this way, it is ensured
that the non-controlling interests in S Ltd bear and receive their appropriate allocations
of the unrealised gain, later realisations and tax adjustments.
(c) At 31 December 20.20
Dr
R
J1
Retained earnings – Beginning of year (S)(SCE)
(3 600 – 500 + 140)
Deferred tax (SFP) (1 400 – 140)
Accumulated depreciation – Plant (SFP)
Plant (P)(SFP)
Adjustment to ensure that the consolidated
balances concerned at the beginning of 20.20
are in agreement with the adjusted balances
at the end of 20.19
Cr
R
3 240
1 260
500
J2
Accumulated depreciation – Plant (SFP)
Other expenses (Depreciation) (S)(P/L)
Recognition of the portion of unrealised intragroup
gain realised during the reporting period ended
31/12/20.19 (5 000 × 10%)
500
J3
Income tax expense (S)(P/L)
Deferred tax (SFP)
Reversal of deferred tax (500 × 28%)
140
5 000
500
140
Comment
It should be clear that the unrealised profit realises over the duration of the useful life of
the asset through the reversal of the excess depreciation. By the end of the useful life
the full profit would have realised from the perspective of the group, and no further pro
forma journals would be required
251
Chapter 5
Example 5.13
Allocation of income tax and intragroup transactions
P Ltd acquired a 70% interest in S Ltd on 1 January 20.15 for R24 500, when the
retained earnings of the latter amounted to R25 000. P Ltd was of the opinion that the
assets of S Ltd were shown at fair values at this date.
The following are the abridged financial statements of the two entities at
31 December 20.18:
STATEMENTS OF FINANCIAL POSITION AS AT 31 DECEMBER 20.18
P Ltd
ASSETS
Plant:
S Ltd
19 000
18 000
Gross carrying amount
Accumulated depreciation
60 000
(41 000)
40 000
(22 000)
Investment in S Ltd at fair value
Inventories
Trade receivables
26 900
17 000
28 700
–
15 000
30 000
Total assets
EQUITY AND LIABILITIES
Share capital
Mark-to-market reserve
Retained earnings
Deferred tax
Trade and other payables
R91 600
R63 000
25 000
1 953
45 000
8 447
11 200
10 000
–
38 600
6 000
8 400
Total equities and liabilities
R91 600
R63 000
STATEMENTS OF PROFIT OR LOSS AND OTHER COMPREHENSIVE INCOME
FOR THE YEAR ENDED 31 DECEMBER 20.18
P Ltd
S Ltd
Revenue
Cost of sales
40 000
(20 000)
30 000
(15 000)
Gross profit
Other expenses
20 000
(13 300)
15 000
(10 000)
Profit before tax
Income tax expense (28%)
6 700
(1 900)
5 000
(1 400)
PROFIT FOR THE YEAR
Other comprehensive income
Items that will not be reclassified to profit or loss
Mark-to-market reserve
(fair value adjustment on investment)
Income tax relating to items not reclassified
4 800
3 600
400
(75)
–
–
Other comprehensive income for the year, net of tax
325
–
TOTAL COMPREHENSIVE INCOME FOR THE YEAR
R5 125
R3 600
252
Intragroup transactions
EXTRACT FROM THE STATEMENTS OF CHANGES IN EQUITY
FOR THE YEAR ENDED 31 DECEMBER 20.18
Balance at 1 January 20.18
Changes in equity for 20.18
Total comprehensive income for the year:
Profit for the year
Other comprehensive income for the year
Balance at 31 December 20.18
Mark-tomarket
reserve
Retained earnings
P Ltd
P Ltd
S Ltd
1 628
40 200
35 000
–
325
4 800
–
3 600
–
R1 953
R45 000
R38 600
S Ltd, a manufacturer of plants, sold a plant with a manufacturing cost of R6 000 to
P Ltd for R10 000 on 1 January 20.17. P Ltd recognises depreciation on the plant on
the straight-line basis at a rate of 20% per annum.
P Ltd sells trading inventories to S Ltd at a profit mark-up of 25% on cost. The following
figures relate to these intragroup inventories transactions:
l Intragroup inventories included in the inventories of S Ltd (also inventories in the
records of P Ltd):
At 1 January 20.18
R6 000
At 31 December 20.18
R5 000
l Sales of inventories by P Ltd to S Ltd during 20.18 amounted to R10 000.
l It may be assumed that the inventories on hand at 1 January 20.18 were sold
during 20.18.
Assume a company tax rate of 28% and that 66,6% of a capital gain is subject to capital
gains tax. .
P Ltd classified the equity investment in S Ltd under IFRS 9 in its separate financial
statements and recognised fair value adjustments in a mark-to-market reserve (other
comprehensive income).
P Ltd elected to measure any non-controlling interests in an acquiree as its proportional
share of the acquiree’s identifiable net assets at acquisition date.
Assume that the identifiable assets acquired and the liabilities assumed at acquisition
date are shown at their acquisition-date fair values, as determined in terms of IFRS 3.
253
Chapter 5
Solution 5.13
The consolidated financial statements of the group for 20.18 can be prepared as
follows:
P LTD GROUP
CONSOLIDATED STATEMENT OF FINANCIAL POSITION
AS AT 31 DECEMBER 20.18
ASSETS
Non-current assets
Plant (60 000(P) + 40 000(S) – 4 000(J4))
Accumulated depreciation (41 000(P) + 22 000(S) – 800(J4) – 800(J5))
Current assets
Inventories (17 000(P) + 15 000(S) – 1 000(J10))
Trade receivables (28 700(P) + 30 000(S))
96 000
(61 400)
34 600
31 000
58 700
89 700
Total assets
EQUITY AND LIABILTIES
Equity attributable to owners of the parent
Share capital
Retained earnings
Non-controlling interests
Total equity
Non-current liabilities
Deferred tax (8 447(P) + 6 000(S) – 372(J1) – 75(J3) – 896(J4) + 224(J7) – 336(J7)
+ 336(J8) – 280(J11))
R124 300
25 000
52 591
77 591
14 061
91 652
13 048
Current liabilities
Trade and other payables (11 200(P) + 8 400(S))
19 600
Total liabilities
32 648
Total equity and liabilities
254
R124 300
Intragroup transactions
P LTD GROUP
CONSOLIDATED STATEMENT OF PROFIT OR LOSS
AND OTHER COMPREHENSIVE INCOME
FOR THE YEAR ENDED 31 DECEMBER 20.18
Revenue (40 000(P) + 30 000(S) – 10 000(J9))
Cost of sales (20 000(P) + 15 000(S) – 1 200(J7) – 10 000(J9) + 1 000(J10))
60 000
(24 800)
Gross profit
Other expenses (13 300(P) + 10 000(S) – 800(J5))
35 200
(22 500)
Profit before tax
Income tax expense (1 900(P) + 1 400(S) + 224(J6) + 336(J8) – 280(J11))
12 700
(3 580)
PROFIT FOR THE YEAR
Other comprehensive income for the year
9 120
–
TOTAL COMPREHENSIVE INCOME FOR THE YEAR
Profit attributable to:
Owners of the parent
Non-controlling interests
R9 120
7 867
1 253
R9 120
Total comprehensive income attributable to:
Owners of the parent
Non-controlling interests
7 867
1 253
R9 120
P LTD GROUP
CONSOLIDATED STATEMENT OF CHANGES IN EQUITY
FOR THE YEAR ENDED 31 DECEMBER 20.18
Balance at 1 January 20.18
Changes in equity for 20.18
Total comprehensive income
for the year:
Profit for the year
Balance at 31 December 20.18
Total
Noncontrolling
interests
Total
equity
69 118
12 808
81 668
–
7 867
7 867
R25 000 ŽR52 591 R77 591
1 253
R14 061
9 120
R91 652
Share
capital
Retained
earnings
25 000
*44 724
* 40 200 + 5 388 (analysis) – 864(J7) = 44 724
Ž 45 000 + 8 311 (analysis) – 864(J7) + 1 200(J7) – 336(J8) – 1 000(J10) + 280(J11) = 52 591
255
Chapter 5
Comment
It is important to note in this example that the subsidiary sold a plant to the parent, while
the parent sold inventories to the subsidiary. All the journals that affected the profit or
loss of the subsidiary (journals 4 to 6) were taken into account in the analysis of the
equity of S Ltd. On the other hand, the intragroup profit that was eliminated against the
profit or loss of the parent (journals 7 to 11) does not affect the analysis of the equity of
S Ltd. However, these journals must be taken into account when preparing the
consolidated financial statements. Special attention must be paid to the recognition of
the journal affecting the retained earnings of the parent (J4) when determining the
consolidated retained earnings at the beginning of the reporting period.
Calculations
C1 Analysis of owners’ equity of S Ltd
Total
i At acquisition (1/1/20.15)
Share capital
Retained earnings
Purchase difference
Consideration (26 900 – 2 000(J1)
– 400(J2)) and NCI
ii Since acquisition
• To beginning of current year :
Retained earnings (10 000 – 2 304 (J4))
• Current year :
Profit for the year (3 600 + 800(J5) – 224(J6))
P Ltd 70%
At
Since
NCI
10 000
25 000
7 000
17 500
3 000
7 500
35 000
–
24 500
–
10 500
–
35 000 R24 500
10 500
7 696
5 388
2 308
12 808
4 176
R46 872
2 923
1 253
R8 311 R14 061
C2 Proof of calculation of purchase difference of S Ltd in terms of IFRS 3.32
Consideration transferred at acquisition date: IFRS 3.32(a)(i)
24 500
Amount of non-controlling interests: IFRS 3.32(a)(ii)
10 500
Net of the identifiable assets acquired and liabilities assumed
at acquisition date: IFRS 3.32(b)
Purchase difference
256
35 000
(35 000)
R–
Intragroup transactions
C3 Pro forma consolidation journal entries
Dr
R
J1
Mark-to-market reserve – Beginning of year (P)(SCE)
(2 000 × (100% – (66,6% × 28%)))
Deferred tax (P)(SFP)(2 000 × 66,6% × 28%)
Investment in S Ltd (P)(SFP)(26 500 – 24 500)
Cr
R
1 628
372
2 000
or (1 720 × 100/81,3)
Reversal of fair value adjustment on investment
in S Ltd at beginning of the reporting period
J2
Mark-to-market reserve(P)(OCI)
Investment in S Ltd (SFP)
Reversal of fair value adjustment on investment
in S Ltd for current reporting period (26 900 – 26 500)
400
400
or (344 × 100/81,3)
J3
Deferred tax (P)(SFP)(400 × 66,6% × 28%)
Income tax expense of OCI (OCI)
Tax effect of reversal of fair value adjustment
on investment in S Ltd for current reporting period
J4
Retained earnings – Beginning of year (S)(SCE)
[(4 000 – 1 120) – (800 – 224)]
Deferred tax (S)(SFP) (1 120 – 224)
Accumulated depreciation (SFP) (4 000 × 20%)
Plant (SFP) (10 000 – 6 000)
Adjustment to ensure that the relevant consolidated
balances at the beginning of 20.18 are in agreement
with the adjusted balances at the end of 20.17
75
2 304
896
800
J5
Accumulated depreciation (SFP)
Other expenses (Depreciation) (S)(P/L)
Reversal of excessive depreciation in respect
of unrealised gain in plant of P Ltd (4 000 × 20%)
800
J6
Income tax expense (S)(P/L)
Deferred tax (S)(SFP)
Reversal of the deferred tax attributable to gain now
realised through written-off depreciation (800 × 28%)
224
J7
Retained earnings – Beginning of year (P)(SCE)
(1 200 × 72%)
Deferred tax (P)(SFP) (1 200 × 28%)
Cost of sales (P)(P/L) (6 000 × 25/125)
Elimination of unrealised gain in opening
inventories
864
336
75
4 000
800
224
1 200
continued
257
Chapter 5
Dr
R
Cr
R
J8
Income tax expense (P)(P/L)
Deferred tax (P)(SFP)
Tax implication of unrealised gain in opening
inventories that realises in the current reporting
period
336
J9
Revenue (P)(P/L)
Cost of sales (S)(P/L)
Elimination of intragroup sales
10 000
J10
Cost of sales (P)(P/L)
Inventories (S)(SFP)
Elimination of unrealised gain in closing inventories
1 000
336
10 000
1 000
(5 000 × 25/125)
J11
Deferred tax (P)(SFP)
Income tax expense (P)(P/L)
Tax implication of the unrealised gain in the closing
inventories of P Ltd (1 000 × 28%)
280
J12
Share capital (S)(SCE)
Retained earnings (S)(SCE)
Investment in S Ltd (P)(SFP)
Non-controlling interests (SFP)
Elimination of owners’ equity at acquisition of S Ltd
10 000
25 000
J13
Retained earnings – Beginning of year (S)(SCE)
Non-controlling interests (SFP)
Recognition of non-controlling interests in retained
earnings of the subsidiary for the period since
acquisition until beginning of current reporting
period
2 308
J14
Non-controlling interests (P/L)
Non-controlling interests (SFP)
Recognition of non-controlling interests in profit
of the subsidiary for the period
1 253
280
24 500
10 500
2 308
1 253
5.20 Tax implications – Different cases where property, plant and
equipment are sold
Example 5.14
Carrying amount and tax base agree
S Ltd sells a plant with a carrying amount and tax base (value) of R15 000 (original cost
price R25 000) for R20 000 on 1 January 20.18 to P Ltd. P Ltd depreciates the machine
at a rate of 20% per annum on the straight-line basis.
Assume a company tax rate of 28%.
258
Intragroup transactions
Solution 5.14
The unrealised profit which must be eliminated is R5 000. S Ltd will, however, pay tax
of R1 400 on the recoupment of R5 000 (20 000 – 15 000).
The pro forma consolidation journal entries on 31 December 20.18 are as follows:
Dr
R
J1
Other expenses (Gain on sale of plant) (S)(P/L)
Cr
R
5 000
(20 000 – 15 000)
Plant (P)(SFP)
Elimination of unrealised intragroup profit included
in P Ltd’s plant
5 000
J2
Deferred tax (S)(SFP) (5 000 × 28%)
Income tax expense (S)(P/L)
Tax implications of the elimination of unrealised
intragroup profit included in P Ltd’s plant
1 400
J3
Accumulated depreciation (SFP) (5 000 × 20%)
Other expenses (Depreciation) (S)(P/L)
Realisation of a part of the unrealised intragroup
profit included in the plant of P Ltd
1 000
J4
Income tax expense (S)(P/L) (1 000 × 28%)
Deferred tax (S)(SFP)
Tax on realisation of a part of the unrealised
intragroup profit included in the plant of P Ltd
280
Example 5.15
1 400
1 000
280
Asset sold at price exceeding original cost
On 1 January 20.18, S Ltd sold a plant with a carrying amount and tax base of R15 000
(original cost price R20 000) to P Ltd for R25 000. P Ltd depreciates machinery at 20%
per annum on the straight-line basis. Assume a company tax rate of 28%.
259
Chapter 5
Solution 5.15
The unrealised profit which must be eliminated is R10 000. The tax recoupment is
limited to R5 000 ((20 000 – 15 000) × 28%). Capital gains tax is payable on 66,6% of
the gain (excess over original cost price) ((25 000 – 20 000) × 66,6% × 28%).
The pro forma consolidation journal entries on 31 December 20.18 are as follows:
Dr
R
J1
Other income (Gain on sale of plant) (S)(P/L)
(25 000 – 15 000)
Plant (P)(SFP)
Elimination of unrealised intragroup profit included
in the plant of P Ltd
J2
Deferred tax (S)(SFP) (5 000 × 28%(recoupment))
+ (5 000 × 66,6% × 28%(CGT))
Income tax expense (S)(P/L)
Tax implications of the elimination of unrealised
profit included in the intragroup profit of P Ltd
J3
Accumulated depreciation (SFP)(10 000 × 20%)
Other expenses (Depreciation) (S)(P/L)
Realisation of a part of the unrealised intragroup
profit included in the plant of P Ltd
J4
Income tax expense (S)(P/L)
((5 000 × 20% × 28%) + (5 000 × 20% × 66,6% × 28%))
Deferred tax (S)(SFP)
Tax on realisation of a part of the unrealised
intragroup profit included in the plant of P Ltd
Example 5.16
Cr
R
10 000
2 333
2 000
10 000
2 333
2 000
467
467
Carrying amount and tax base differ
S Ltd sells a plant with a carrying amount of R15 000 and a tax base of R12 000
(original cost price R25 000) to P Ltd for R20 000. P Ltd depreciates machinery at 20%
on the straight-line basis.
Assume a company tax rate of 28%.
Solution 5.16
The unrealised profit which must be eliminated is R5 000. The tax expense which must
be eliminated on consolidation is R1 400; this is determined as follows:
Current tax on recoupment (8 000 × 28%)
2 240
Balance on the deferred tax account attributable to the difference
between the carrying amount and the tax base of the machinery
now reversed as the machine is sold (3 000 × 28%).
(840)
R1 400
260
Intragroup transactions
The pro forma consolidation journal entries on 31 December 20.18 are as follows:
Dr
R
J1
Other income (Gain on sale of plant) (S)(P/L)
(20 000 – 15 000)
Plant (P)(SFP)
Elimination of unrealised intragroup profit included
in the plant of P Ltd
Cr
R
5 000
J2
Deferred tax (SFP) ((8 000 – 3000) × 28%)
Income tax expense (S)(P/L)
Tax implications of the elimination of unrealised
intragroup profit included in the plant of P Ltd
1 400
J3
Accumulated depreciation (SFP) (5 000 × 20%)
Other expenses (Depreciation) (S)(P/L)
Realisation of a part of the unrealised intragroup
profit included in the plant of P Ltd
1 000
J4
Income tax expense (S)(P/L) (5000 × 20% × 28%)
Deferred tax (SFP)
Tax on realisation of a part of the unrealised
intragroup profit included in the plant of P Ltd
280
Example 5.17
5 000
1 400
1 000
280
Comprehensive example in respect of the elimination of
unrealised gain and the relevant tax implications
The discussion up to this point has been confined to the case where the selling entity is
a dealer in plant. The case is now discussed where the selling entity is not a dealer in
the relevant depreciable property, plant and equipment. Where the selling entity is not a
dealer in plant, the following cases can be distinguished:
261
Chapter 5
Alternative 1
Inventories sold as inventories
The following are the abridged financial statements of P Ltd and its subsidiary S Ltd for
the reporting periods ended 31 December 20.18 and 20.19:
STATEMENTS OF FINANCIAL POSITION AS AT 31 DECEMBER
P Ltd
20.18
ASSETS
Investment in S Ltd: 45 000 shares
at fair value (cost: R67 500)
Equipment
Inventories
Trade receivables
S Ltd
20.19
20.18
20.19
67 500
20 000
30 000
52 500
67 500
40 000
40 000
72 500
–
10 000
20 000
60 000
–
14 000
30 000
50 000
Total assets
EQUITY AND LIABILITIES
Share capital (100 000/50 000 shares)
Retained earnings
Deferred tax
R170 000
R220 000
R90 000
R94 000
100 000
60 000
10 000
100 000
110 000
10 000
50 000
30 000
10 000
50 000
34 000
10 000
Total equity and liabilities
R170 000
R220 000
R90 000
R94 000
STATEMENTS OF PROFIT OR LOSS AND OTHER COMPREHENSIVE INCOME
FOR THE YEAR ENDED 31 DECEMBER
P Ltd
S Ltd
20.18
20.19
20.18
20.19
Revenue
Cost of sales
70 000
(35 000)
169 000
(84 500)
50 000
(25 000)
60 000
(30 000)
Gross profit
Other expenses
35 000
(14 200)
84 500
(15 000)
25 000
(18 050)
30 000
(29 500)
Profit before tax
Income tax expense
20 800
(5 800)
69 500
(19 500)
6 950
(1 950)
5 500
(1 500)
PROFIT FOR THE YEAR
Other comprehensive income for the year
15 000
–
50 000
–
5 000
–
4 000
–
R15 000
R50 000
R5 000
R4 000
TOTAL COMPREHENSIVE INCOME
FOR THE YEAR
262
Intragroup transactions
EXTRACT FROM THE STATEMENTS OF CHANGES IN EQUITY
FOR THE YEAR ENDED 31 DECEMBER
Retained earnings
P Ltd
20.18
S Ltd
20.19
20.18
20.19
Balance at 1 January 20.18/20.19
Changes in equity for 20.18/20.19
Total comprehensive income for the year:
Profit for the year
45 000
60 000
25 000
30 000
15 000
50 000
5 000
4 000
Balance at 31 December 20.18/20.19
R60 000
R110 000
R30 000
R34 000
P Ltd recognised the equity investment in S Ltd in its separate financial records using
the cost price method.
P Ltd elected to measure any non-controlling interests in an acquiree at its proportional
share of the acquiree’s identifiable net assets at acquisition date.
Assume that the identifiable assets acquired and the liabilities assumed at acquisition
date are shown at their acquisition-date fair values, as determined in terms of IFRS 3.
P Ltd obtained its interest in S Ltd on 1 January 20.18 at R67 500.
Intragroup sales (S Ltd to P Ltd at cost price plus 25%) were as follows:
20.18 R30 000
20.19 R50 000
P Ltd had the following items, which were bought from S Ltd, on hand at:
31 December 20.18
R10 000
31 December 20.19
R15 000
The items are inventories in the records of S Ltd (seller).
The items are inventories in the records of P Ltd (buyer).
The cost price of the investment in S Ltd equals the fair value of the investment.
Assume a company tax rate of 28%.
Assume that SARS accepts the buyer’s cost price as the new tax cost.
263
Chapter 5
Solution 5.17 – Alternative 1
The consolidated financial statements of the P Ltd Group for the reporting period ended
31 December 20.18 and 31 December 20.19, will be prepared as follows:
Reporting period ended 31 December 20.18
P LTD GROUP
CONSOLIDATED STATEMENT OF FINANCIAL POSITION
AS AT 31 DECEMBER 20.18
ASSETS
Non-current assets
Equipment (20 000(P) + 10 000(S))
30 000
Current assets
Inventories (30 000(P) + 20 000(S) – 2 000(J2))
Trade receivables (52 500(P) + 60 000(S))
48 000
112 500
160 500
Total assets
EQUITY AND LIABILITIES
Equity attributable to owners of the parent
Share capital
Retained earnings
Non-controlling interests
Total equity
Non-current liabilities
Deferred tax (10 000(P) + 10 000(S) – 560(J3))
Total equity and liabilities
264
R190 500
100 000
63 204
163 204
7 856
171 060
19 440
R190 500
Intragroup transactions
P LTD GROUP
CONSOLIDATED STATEMENT OF PROFIT OR LOSS
AND OTHER COMPREHENSIVE INCOME
FOR THE YEAR ENDED 31 DECEMBER 20.18
Revenue (70 000(P) + 50 000(S) – 30 000(J1))
Cost of sales (35 000(P) + 25 000(S) – 30 000(J1) + 2 000(J2))
90 000
(32 000)
Gross profit
Other expenses (14 200(P) + 18 050(S))
58 000
(32 250)
Profit before tax
Income tax expense (5 800(P) + 1 950(S) – 560(J3))
25 750
(7 190)
PROFIT FOR THE YEAR
Other comprehensive income for the year
18 560
–
TOTAL COMPREHENSIVE INCOME FOR THE YEAR
R18 560
Profit attributable to:
Owners of the parent
Non-controlling interests
18 204
356
R18 560
Total comprehensive income attributable to:
Owners of the parent
Non-controlling interests
18 204
356
R18 560
P LTD GROUP
CONSOLIDATED STATEMENT OF CHANGES IN EQUITY
FOR THE YEAR ENDED 31 DECEMBER 20.18
Share
capital
Balance at 1 January 20.18
Changes in equity for 20.18
Total comprehensive income
for the year:
Profit for the year
Acquisition of subsidiary
Balance at
31 December 20.18
Retained
earnings
Total
Noncontrolling
interests
Total
equity
100 000
45 000
145 000
–
145 000
–
–
18 204
–
18 204
–
356
7 500
18 560
7 500
R100 000
R63 204 R163 204
R7 856 R171 060
265
Chapter 5
Calculations
C1 Analysis of owners’ equity of S Ltd
P Ltd 90%
Total
i At acquisition (1/1/20.18)
Share capital
Retained earnings
Purchase difference
Consideration and NCI
ii Since acquisition
• To beginning of current year :
None (control acquired on 1/1/20.18)
• Current year :
Profit for the year
(5 000 – 2 000(J2) + 560(J3))
At
NCI
Since
50 000
25 000
45 000
22 500
5 000
2 500
75 000
–
67 500
–
7 500
–
75 000
R67 500
7 500
–
–
–
3 560
3 204
356
R78 560
R3 204
R7 856
C2 Proof of calculation of purchase difference of S Ltd in terms of IFRS 3.32
Consideration transferred at acquisition date: IFRS 3.32(a)(i)
67 500
Amount of non-controlling interests: IFRS 3.32(a)(ii)
7 500
75 000
Net of the identifiable assets acquired and liabilities assumed
at acquisition date: IFRS 3.32(b)
(75 000)
Purchase difference
R–
C3 Pro forma consolidation journal entries
Dr
R
Cr
R
J1
Revenue (S)(P/L)
Cost of sales (P)(P/L)
Elimination of intragroup sales
30 000
J2
Cost of sales (S)(P/L)
Inventories (P)(SFP)
Elimination of unrealised gain included in the
closing inventories of P Ltd (10 000 × 25/125)
2 000
J3
Deferred tax (S)(SFP)
Income tax expense (S)(P/L)
Tax implication of the elimination of the unrealised
gain included in the closing inventories of P Ltd
560
30 000
2 000
560
(2 000 × 28%)
continued
266
Intragroup transactions
Dr
R
J4
J5
Share capital (S)(SCE)
Retained earnings (S)(SCE)
Investment in S Ltd (P)(SFP)
Non-controlling interests (SFP)
Elimination of owners’ equity at acquisition of S Ltd
Non-controlling interests (P/L)
Non-controlling interests (SFP)
Recognition of non-controlling interests in profit
of the subsidiary for the period
Cr
R
50 000
25 000
356
67 500
7 500
356
Reporting period ended 31 December 20.19
P LTD GROUP
CONSOLIDATED STATEMENT OF FINANCIAL POSITION
AS AT 31 DECEMBER 20.19
ASSETS
Non-current assets
Equipment (40 000(P) + 14 000(S))
54 000
Current assets
Inventories (40 000(P) + 30 000(S) – 3 000(J4))
Trade receivables (72 500(P) + 50 000(S))
67 000
122 500
189 500
Total assets
R243 500
EQUITY AND LIABILITIES
Equity attributable to owners of the parent
Share capital
Retained earnings
100 000
116 156
Non-controlling interests
216 156
8 184
Total equity
Non-current liabilities
Deferred tax (10 000(P) + 10 000(S) – 560(J1) + 560(J2) – 840(J5))
Total equity and liabilities
224 340
19 160
R243 500
267
Chapter 5
P LTD GROUP
CONSOLIDATED STATEMENT OF PROFIT OR LOSS
AND OTHER COMPREHENSIVE INCOME
FOR THE YEAR ENDED 31 DECEMBER 20.19
Revenue (169 000(P) + 60 000(S) – 50 000(J3))
Cost of sales (84 500(P) + 30 000(S) – 50 000(J3) – 2 000(J1) + 3 000(J4))
179 000
(65 500)
Gross profit
Other expenses (15 000(P) + 24 500(S))
113 500
(39 500)
Profit before tax
Income tax expense (19 500(P) + 1 500(S) + 560(J2) – 840(J5))
74 000
(20 720)
PROFIT FOR THE YEAR
Other comprehensive income for the year
53 280
–
TOTAL COMPREHENSIVE INCOME FOR THE YEAR
R53 280
Profit attributable to:
Owners of the parent
Non-controlling interests
52 952
328
R53 280
Total comprehensive income attributable to:
Owners of the parent
Non-controlling interests
52 952
328
R53 280
P LTD GROUP
CONSOLIDATED STATEMENT OF CHANGES IN EQUITY
FOR THE YEAR ENDED 31 DECEMBER 20.19
Share
capital
Balance at 1 January 20.19
Changes in equity for 20.19
Total comprehensive
income for the year:
Profit for the year
Balance at
31 December 20.19
268
Retained
earnings
Total
Noncontrolling
interests
Total
equity
100 000
63 204
163 204
7 856
171 060
–
52 952
52 952
328
53 280
R100 000 R116 156
R216 156
R8 184
R224 340
Intragroup transactions
Calculations
C1 Analysis of owners’ equity of S Ltd
P Ltd 90%
Total
i At acquisition (1/1/20.18)
Share capital
Retained earnings
Purchase difference
Consideration and NCI
ii Since acquisition
• To beginning of current year :
Retained earnings
(30 000 – 25 000 – 1 440(J1))
• Current year :
Profit for the year (4 000 + 2 000(J1) – 560(J2)
– 3 000(J4) + 840(J5))
At
Since
NCI
50 000
25 000
45 000
22 500
5 000
2 500
75 000
–
67 500
–
7 500
–
75 000
R67 500
7 500
3 560
3 204
356
7 856
3 280
2 952
328
R81 840
R6 156
R8 184
C2 Proof of calculation of purchase difference of S Ltd in terms of IFRS 3.32
Consideration transferred at acquisition date: IFRS 3.32(a)(i)
67 500
Amount of non-controlling interests: IFRS 3.32(a)(ii)
7 500
75 000
Net of the identifiable assets acquired and liabilities assumed
at acquisition date: IFRS 3.32(b)
(75 000)
Purchase difference
R–
C3 Pro forma consolidation journal entries
Dr
R
J1
Retained earnings – Beginning of year (S)(SCE)
(2 000 × 72%)
Deferred tax (SFP) (2 000 × 28%)
Cost of sales (S)(P/L) (10 000 × 25/125)
Adjustment to ensure that the consolidated retained
earnings at the beginning of 20.19 is in agreement
with the consolidated retained earnings at the end of
20.18
1 440
560
Cr
R
2 000
continued
269
Chapter 5
Dr
R
Cr
R
J2
Income tax expense (S)(P/L)
Deferred tax (S)(SFP)
Tax implications of realisation of unrealised gain
included in opening inventories of P Ltd
560
J3
Revenue (S)(P/L)
Cost of sales (P)(P/L)
Elimination of intragroup sales
50 000
J4
Cost of sales (S)(P/L)
Inventories (P)(SFP)
Elimination of the unrealised gain included in the
closing inventories of P Ltd (15 000 × 25/125)
3 000
J5
Deferred tax (S)(SFP)
Income tax expense (S)(P/L)
Tax implication of the elimination of the unrealised
gain included in the closing inventories of P Ltd
840
560
50 000
3 000
840
(3 000 × 28%)
J6
Share capital (S)(SCE)
Retained earnings (S)(SCE)
Investment in S Ltd (P)(SFP)
Non-controlling interests (SFP)
Elimination of owners’ equity at acquisition of S Ltd
50 000
25 000
J7
Retained earnings – Beginning of year (S)(SCE)
Non-controlling interests (SFP)
Recognition of non-controlling interests in retained
earnings of the subsidiary for the period since
acquisition until beginning of current reporting
period
356
J8
Non-controlling interests (P/L)
Non-controlling interests (SFP)
Recognition of non-controlling interests in profit
of the subsidiary for the period
328
270
67 500
7 500
356
328
Intragroup transactions
Alternative 2
Equipment sold as inventories
The following are the abridged financial statements of P Ltd and its subsidiary S Ltd, for
the reporting periods ended 31 December 20.18 and 20.19
STATEMENTS OF FINANCIAL POSITION AS AT 31 DECEMBER
P Ltd
20.18
S Ltd
20.19
20.18
20.19
67 500
20 000
30 000
52 500
67 500
40 000
40 000
72 500
–
10 000
20 000
60 000
–
14 000
30 000
50 000
Total assets
EQUITY AND LIABILITIES
Share capital (100 000/50 000 shares)
Retained earnings
Deferred tax
R170 000
R220 000
R90 000
R94 000
100 000
60 000
10 000
100 000
110 000
10 000
50 000
30 000
10 000
50 000
34 000
10 000
Total equity and liabilities
R170 000
R220 000
R90 000
R94 000
ASSETS
Investment in S Ltd: 45 000 shares at fair
value (cost: R67 500)
Equipment
Inventories
Trade receivables
STATEMENTS OF PROFIT OR LOSS AND OTHER COMPREHENSIVE INCOME
FOR THE YEAR ENDED 31 DECEMBER
P Ltd
S Ltd
20.18
20.19
20.18
20.19
Revenue
Cost of sales
70 000
(35 000)
169 000
(84 500)
50 000
(25 000)
60 000
(30 000)
Gross profit
Other expenses
35 000
(14 200)
84 500
(15 000)
25 000
(18 050)
30 000
(24 500)
Profit before tax
Income tax expense
20 800
(5 800)
69 500
(19 500)
6 950
(1 950)
5 500
(1 500)
PROFIT FOR THE YEAR
15 000
50 000
5 000
4 000
–
–
–
–
R15 000
R50 000
R5 000
R4 000
Other comprehensive income
for the year
TOTAL COMPREHENSIVE INCOME
FOR THE YEAR
271
Chapter 5
EXTRACT FROM THE STATEMENTS OF CHANGES IN EQUITY
FOR THE YEAR ENDED 31 DECEMBER
Retained earnings
P Ltd
20.18
S Ltd
20.19
20.18
20.19
Balance at 1 January 20.18/20.19
Changes in equity for 20.18/20.19
Total comprehensive income for the year:
Profit for the year
45 000
60 000
25 000
30 000
15 000
50 000
5 000
4 000
Balance at 31 December 20.18/20.19
R60 000
R110 000
R30 000
R34 000
P Ltd recognised the equity investment in S Ltd in its separate financial records using
the cost price method.
P Ltd elected to measure any non-controlling interests in an acquiree at its proportional
share of the acquiree’s identifiable net assets at acquisition date.
Assume that the identifiable assets acquired and the liabilities assumed at acquisition
date are shown at their acquisition-date fair values, as determined in terms of IFRS 3.
P Ltd obtained its interest in S Ltd on 1 January 20.18 at R67 500.
P Ltd had the following items, which were bought from S Ltd at cost price plus 25%, on
hand at:
31 December 20.18
R10 000
31 December 20.19
R15 000
The items were equipment in the records of S Ltd (seller).
The items are inventories in the records of P Ltd (buyer).
Assume a company tax rate of 28%.
Assume that SARS accepts the buyer’s cost price as the new tax cost.
272
Intragroup transactions
Solution 5.17 – Alternative 2
The consolidated financial statements of the P Ltd Group for the reporting periods
ended 31 December 20.18 and 31 December 20.19 will be prepared as follows:
Reporting period ended 31 December 20.18
P LTD GROUP
CONSOLIDATED STATEMENT OF FINANCIAL POSITION
AS AT 31 DECEMBER 20.18
ASSETS
Non-current assets
Equipment (20 000(P) + 10 000(S))
Current assets
Inventories (30 000(P) + 20 000(S) – 2 000(J1))
Trade receivables (52 500(P) + 60 000(S))
30 000
48 000
112 500
160 500
Total assets
EQUITY AND LIABILITIES
Equity attributable to owners of the parent
Share capital
Retained earnings
Non-controlling interests
Total equity
Non-current liabilities
Deferred tax (10 000(P) + 10 000(S) – 560(J3))
Total equity and liabilities
R190 500
100 000
63 204
163 204
7 856
171 060
19 440
R190 500
273
Chapter 5
P LTD GROUP
CONSOLIDATED STATEMENT OF PROFIT OR LOSS
AND OTHER COMPREHENSIVE INCOME
FOR THE YEAR ENDED 31 DECEMBER 20.18
Revenue (70 000(P) + 50 000(S))
Cost of sales (35 000(P) + 25 000(S))
120 000
(60 000)
Gross profit
Other income and expenses (14 200(P) + 18 050(S) + 2 000(J1))
60 000
(34 250)
Profit before tax
Income tax expense (5 800(P) + 1 950(S) – 560(J2))
25 750
(7 190)
PROFIT FOR THE YEAR
Other comprehensive income for the year
18 560
–
TOTAL COMPREHENSIVE INCOME FOR THE YEAR
Profit attributable to:
Owners of the parent
Non-controlling interests
R18 560
18 204
356
R18 560
Total comprehensive income attributable to:
Owners of the parent
Non-controlling interests
18 204
356
R18 560
P LTD GROUP
CONSOLIDATED STATEMENT OF CHANGES IN EQUITY
FOR THE YEAR ENDED 31 DECEMBER 20.18
Share
capital
Balance at 1 January 20.18
Changes in equity for 20.18
Total comprehensive income
for the year:
Profit for the year
Acquisition of subsidiary
Balance at
31 December 20.18
274
Retained
earnings
Total
Noncontrolling
interests
Total
equity
100 000
45 000
145 000
–
145 000
–
–
18 204
–
18 204
–
356
7 500
18 560
7 500
R100 000
R63 204
R163 204
R7 856
R171 060
Intragroup transactions
Calculations
C1 Analysis of owners’ equity of S Ltd
P Ltd 90%
Total
i At acquisition (1/1/20.18)
Share capital
Retained earnings
Purchase difference
Consideration and NCI
ii Since acquisition
• To beginning of current year :
None (control acquired on 1/1/20.18)
• Current year :
Profit for the year
At
NCI
Since
50 000
25 000
45 000
22 500
5 000
2 500
75 000
–
67 500
–
7 500
–
75 000
R67 500
7 500
–
–
–
3 560
3 204
356
R78 560
R3 204
R7 856
(5 000 – 2 000(J1) + 560(J2))
C2 Proof of calculation of purchase difference of S Ltd in terms of IFRS 3.32
Consideration transferred at acquisition date: IFRS 3.32(a)(i)
67 500
Amount of non-controlling interests: IFRS 3.32(a)(ii)
7 500
75 000
Net of the identifiable assets acquired and liabilities assumed
at acquisition date: IFRS 3.32(b)
(75 000)
Purchase difference
R–
C3 Pro forma consolidation journal entries
Dr
R
Cr
R
J1
Other income (Gain on sale of equipment) (S)(P/L)
Inventories (P)(SFP)
Elimination of the unrealised profit included in the
closing inventories of P Ltd (10 000 × 25/125)
2 000
J2
Deferred tax (S)(SFP)
Income tax expense (S))P/L)
Tax implications of the deferral of the unrealised
profit included in the closing inventories of P Ltd
560
2 000
560
(2 000 × 28%)
continued
275
Chapter 5
Dr
R
J3
J4
Share capital (S)(SCE)
Retained earnings (S)(SCE)
Investment in S Ltd (P)(SFP)
Non-controlling interests (SFP)
Elimination of owners’ equity at acquisition of S Ltd
Non-controlling interests (P/L)
Non-controlling interests (SFP)
Recognition of non-controlling interests in profit
of the subsidiary for the period
Cr
R
50 000
25 000
356
67 500
7 500
356
Reporting period ended 31 December 20.19
P LTD GROUP
CONSOLIDATED STATEMENT OF FINANCIAL POSITION
AS AT 31 DECEMBER 20.19
ASSETS
Non-current assets
Equipment (40 000(P) + 14 000(S))
54 000
Current assets
Inventories (40 000(P) + 30 000(S) – 3 000(J3))
Trade receivables (72 500(P) + 50 000(S))
67 000
122 500
Total current assets
189 500
Total assets
EQUITY AND LIABILITIES
Equity attributable to owners of the parent
Share capital
Retained earnings
R243 500
100 000
116 156
Non-controlling interests
216 156
8 184
Total equity
224 340
Non-current liabilities
Deferred tax (10 000(P) + 10 000(S) – 840(J4))
19 160
Total equity and liabilities
276
R243 500
Intragroup transactions
P LTD GROUP
CONSOLIDATED STATEMENT OF PROFIT OR LOSS
AND OTHER COMPREHENSIVE INCOME
FOR THE YEAR ENDED 31 DECEMBER 20.19
Revenue (169 000(P) + 60 000(S))
Cost of sales (84 500(P) + 30 000(S))
229 000
(114 500)
Gross profit
Other expenses (15 000(P) + 24 500(S) – 2 000(J1) + 3 000(J3))
114 500
(40 500)
Profit before tax
Income tax expense (19 500(P) + 1 500(S) + 560(J2) – 840(J4))
74 000
(20 720)
PROFIT FOR THE YEAR
Other comprehensive income for the year
53 280
–
TOTAL COMPREHENSIVE INCOME
R53 280
Profit attributable to:
Owners of the parent
Non-controlling interests
52 952
328
R53 280
Total comprehensive income attributable to:
Owners of the parent
Non-controlling interests
52 952
328
R53 280
P LTD GROUP
CONSOLIDATED STATEMENT OF CHANGES IN EQUITY
FOR THE YEAR ENDED 31 DECEMBER 20.19
Share
capital
Balance at
1 January 20.19
Changes in equity
for 20.19
Total comprehensive
income for the year:
Profit for the year
Balance at
31 December 20.19
Retained
earnings
Total
Noncontrolling
interests
Total
equity
100 000
63 204
163 204
7 856
171 060
–
52 952
52 952
328
53 280
R100 000
R116 156
R216 156
R8 184
R224 340
277
Chapter 5
Calculations
C1 Analysis of owners’ equity of S Ltd
Total
i At acquisition (1/1/20.18)
Share capital
Retained earnings
Purchase difference
Consideration and NCI
ii Since acquisition
• To beginning of current year :
Retained earnings
(30 000 – 25 000 – 1 440(J1))
• Current year:
Profit for the year (4 000 + 2 000(J1) –
560(J2) – 3 000(J3) + 840(J4))
P Ltd 90%
At
Since
NCI
50 000
25 000
45 000
22 500
5 000
2 500
75 000
–
67 500
–
7 500
–
75 000
R67 500
7 500
3 560
3 204
356
7 856
3 280
2 952
328
R81 840
R6 156
R8 184
C2 Proof of calculation of purchase difference of S Ltd in terms of IFRS 3.32
Consideration transferred at acquisition date: IFRS 3.32(a)(i)
67 500
Amount of non-controlling interests: IFRS 3.32(a)(ii)
7 500
Net of the identifiable assets acquired and liabilities assumed
at acquisition date: IFRS 3.32(b)
Purchase difference
278
75 000
(75 000)
R–
Intragroup transactions
C3 Pro forma consolidation journal entries
Dr
R
J1
Retained earnings – Beginning of year
(S)(SCE)(2 000 × 72%)
Deferred tax (S)(SFP)(2 000 × 28%)
Other income (Gain on sale of equipment) (S)(P/L)
Cr
R
1 440
560
2 000
(10 000 × 25/125)
Adjustment to ensure that the consolidated retained
earnings at the beginning of 20.19 are in agreement
with the consolidated retained earnings at the
end of 20.18
J2
Income tax expense (S)(P/L)
Deferred tax (S)(SFP)
Tax implications of realisation of unrealised profit
included in opening inventories of P Ltd
560
J3
Other income (Gain on sale of equipment) (S)(P/L)
Inventories (P)(SFP)
Elimination of the unrealised profit included in the
closing inventories of P Ltd (15 000 × 25/125)
3 000
J4
Deferred tax (S)(SFP)
Income tax expense (S)(P/L)
Tax implication of the elimination of the unrealised
profit included in the closing inventories of P Ltd
840
560
3 000
840
(3 000 × 28%)
J5
Share capital (S)(SCE)
Retained earnings (S)(SCE)
Investment in S Ltd (P)(SFP)
Non-controlling interests (SFP)
Elimination of owners’ equity at acquisition of S Ltd
50 000
25 000
J6
Retained earnings – Beginning of year (S)(SCE)
Non-controlling interests (S)(SFP)
Recognition of non-controlling interests in retained
earnings of the subsidiary for the period since
acquisition until beginning of current reporting
period
356
J7
Non-controlling interests (P/L)
Non-controlling interests (SFP)
Recognition of non-controlling interests in profit
of the subsidiary for the period
328
67 500
7 500
356
328
279
Chapter 5
Alternative 3
Inventories sold as equipment
The following are the abridged financial statements of P Ltd and its subsidiary S Ltd, for
the reporting periods ended 31 December 20.18 and 20.19
STATEMENTS OF FINANCIAL POSITION AS AT 31 DECEMBER
P Ltd
ASSETS
Investment in S Ltd: 45 000
share at fair value (cost: R67 500)
Equipment
Inventories
Trade receivables
Total assets
EQUITY AND LIABILITIES
Share capital (100 000/50 000 shares)
Retained earnings
Deferred tax
Total equity and liabilities
S Ltd
20.18
20.19
20.18
20.19
67 500
20 000
30 000
52 500
R170 000
67 500
40 000
40 000
72 500
R220 000
–
10 000
20 000
60 000
R90 000
–
14 000
30 000
50 000
R94 000
100 000
60 000
10 000
R170 000
100 000
110 000
10 000
R220 000
50 000
30 000
10 000
R90 000
50 000
34 000
10 000
R94 000
STATEMENTS OF PROFIT OR LOSS AND OTHER COMPREHENSIVE INCOME
FOR THE YEAR ENDED 31 DECEMBER
P Ltd
S Ltd
20.18
20.19
20.18
20.19
Revenue
Cost of sales
70 000
(35 000)
169 000
(84 500)
50 000
(25 000)
60 000
(30 000)
Gross profit
Other expenses
35 000
(14 200)
84 500
(15 000)
25 000
(18 050)
30 000
(24 500)
Profit before tax
Income tax expense
20 800
(5 800)
69 500
(19 500)
6 950
(1 950)
5 500
(1 500)
PROFIT FOR THE YEAR
15 000
50 000
5 000
4 000
–
–
–
–
R15 000
R50 000
R5 000
R4 000
Other comprehensive income
for the year
TOTAL COMPREHENSIVE INCOME
FOR THE YEAR
280
Intragroup transactions
EXTRACT FROM THE STATEMENTS OF CHANGES IN EQUITY
FOR THE YEAR ENDED 31 DECEMBER
Retained earnings
P Ltd
20.18
S Ltd
20.19
20.18
20.19
Balance at 1 January 20.18/20.19
Changes in equity for 20.18/20.19
Total comprehensive income for the year:
Profit for the year
45 000
60 000
25 000
30 000
15 000
50 000
5 000
4 000
Balance at 31 December 20.18/20.19
R60 000
R110 000
R30 000
R34 000
P Ltd recognised the equity investment in S Ltd in its separate financial records using
the cost price method.
P Ltd elected to measure any non-controlling interests in an acquiree at its proportional
share of the acquiree’s identifiable net assets at acquisition date.
Assume that the identifiable assets acquired and the liabilities assumed at acquisition
date are shown at their acquisition-date fair values, as determined in terms of IFRS 3.
P Ltd acquired its interest in S Ltd on 1 January 20.18 at R67 500.
P Ltd bought items to the value of R10 000 from S Ltd on 1 January 20.18 (cost plus
25%).
P Ltd bought items to the value of R15 000 from S Ltd on 1 January 20.19 (cost plus
25%).
The items are inventories in the records of S Ltd (seller).
The items are equipment in the records of P Ltd (buyer).
Depreciation on equipment is provided according to the straight-line method at 10% per
year.
Assume a company tax rate of 28%.
Assume that SARS accepts the buyer’s cost price as the new tax cost.
281
Chapter 5
Solution 5.17 – Alternative 3
The consolidated financial statements of the P Ltd Group for the reporting periods
ended 31 December 20.18 and 31 December 20.19 will be prepared as follows:
Reporting period ended 31 December 20.18
P LTD GROUP
CONSOLIDATED STATEMENT OF FINANCIAL POSITION
AS AT 31 DECEMBER 20.18
ASSETS
Non-current assets
Equipment (20 000(P) + 10 000(S) – 2 000(J1) + 200(J3))
28 200
Current assets
Inventories (30 000(P) + 20 000(S))
Trade receivables (52 500(P) + 60 000(S))
50 000
112 500
162 500
Total assets
EQUITY AND LIABILITIES
Equity attributable to owners of the parent
Share capital
Retained earnings
Non-controlling interests
Total equity
Non-current liabilities
Deferred tax (10 000(P) + 10 000(S) – 560(J2) + 56(J4))
Total equity and liabilities
282
R190 700
100 000
63 334
163 334
7 870
171 204
19 496
R190 700
Intragroup transactions
P LTD GROUP
CONSOLIDATED STATEMENT OF PROFIT OR LOSS
AND OTHER COMPREHENSIVE INCOME
FOR THE YEAR ENDED 31 DECEMBER 20.18
Revenue (70 000(P) + 50 000(S) – 10 000(J1))
Cost of sales (35 000(P) + 25 000(S) – 8 000(J1))
110 000
(52 000)
Gross profit
Other expenses (14 200(P) + 18 050(S) – 200(J3))
58 000
(32 050)
Profit before tax
Income tax expense (5 800(P) + 1 950(S) – 560(J3) + 56(J4))
25 950
(7 246)
PROFIT FOR THE YEAR
Other comprehensive income for the year
18 704
–
TOTAL COMPREHENSIVE INCOME FOR THE YEAR
Profit attributable to:
Owners of the parent
Non-controlling interests
R18 704
18 334
370
R18 704
Total comprehensive income attributable to:
Owners of the parent
Non-controlling interests
18 334
370
R18 704
P LTD GROUP
CONSOLIDATED STATEMENT OF CHANGES IN EQUITY
FOR THE YEAR ENDED 31 DECEMBER 20.18
Share
capital
Balance at 1 January 20.18
Changes in equity for 20.18
Total comprehensive income
for the year:
Profit for the year
Acquisition of subsidiary
Balance at
31 December 20.18
Retained
earnings
Total
Noncontrolling
interests
Total
equity
100 000
45 000
145 000
–
145 000
–
–
18 334
–
18 334
–
370
7 500
18 704
7 500
R100 000
R63 334
R163 334
R7 870
R171 204
283
Chapter 5
Calculations
C1 Analysis of owners’ equity of S Ltd
P Ltd 90%
Total
i At acquisition (1/1/20.18)
Share capital
Retained earnings
Purchase difference
Consideration and NCI
ii Since acquisition
• To beginning of current year :
None (control acquired on 1/1/20.18)
• Current year :
Profit for the year (5 000 – 2 000(J1)
+ 560(J2) + 200(J3) – 56(J4))
At
50 000
25 000
75 000
–
75 000
NCI
Since
45 000
22 500
67 500
–
R67 500
5 000
2 500
7 500
–
7 500
–
–
–
3 704
R78 704
3 334
R3 334
370
R7 870
C2 Proof of calculation of purchase difference of S Ltd in terms of IFRS 3.32
Consideration transferred at acquisition date: IFRS 3.32(a)(i)
67 500
Amount of non-controlling interests: IFRS 3.32(a)(ii)
7 500
75 000
Net of the identifiable assets acquired and liabilities assumed
at acquisition date: IFRS 3.32(b)
(75 000)
Purchase difference
R–
C3 Pro forma consolidation journal entries
Dr
R
J1
Revenue (S)(P/L)
Cost of sales (S)(P/L)
Equipment (P)(SFP)
Elimination of intragroup sales and the unrealised gain
included in the equipment of P Ltd (10 000 × 25/125)
10 000
J2
Deferred tax (S)(SFP)
Income tax expense (S)(P/L)
Tax implication of the elimination of the unrealised gain
included in the equipment of P Ltd (2 000 × 28%)
560
J3
Accumulated depreciation (P)(SFP)
Other expenses (Depreciation) (S)(P/L)
Realisation of the unrealised gain included in the
equipment of P Ltd as a result of depreciation (2 000 × 10%)
200
Cr
R
8 000
2 000
560
200
continued
284
Intragroup transactions
Dr
R
Cr
R
J4
Income tax expense (S)(P/L)
Deferred tax (S)(SFP)
Tax implications of the realisation of unrealised gain
included in the equipment of P Ltd as a result of
depreciation (200 × 28%)
56
J5
Share capital (S)(SCE)
Retained earnings (S)(SCE)
Investment in S Ltd (P)(SFP)
Non-controlling interests (SFP)
Elimination of owners’ equity at acquisition of S Ltd
50 000
25 000
J6
Non-controlling interests (P/L)
Non-controlling interests (SFP)
Recognition of non-controlling interests in profit
of the subsidiary for the period
56
67 500
7 500
370
370
Reporting period ended 31 December 20.19
P LTD GROUP
CONSOLIDATED STATEMENT OF FINANCIAL POSITION
AS AT 31 DECEMBER 20.19
ASSETS
Non-current assets
Equipment (40 000(P) + 14 000(S) – 2 000(J1) + 200(J1) + 200(J2) –
3 000(J4) + 300(J6))
Current assets
Inventories (40 000(P) + 30 000(S))
Trade receivables (72 500(P) + 50 000(S))
49 700
70 000
122 500
192 500
Total assets
EQUITY AND LIABILITIES
Equity attributable to owners of the parent
Share capital
Retained earnings
Non-controlling interests
Total equity
Non-current liabilities
Deferred tax
(10 000(P) + 10 000(S) – 504(J1) + 56(J3) – 840(J5) + 84(J7))
Total equity and liabilities
R242 200
100 000
115 314
215 314
8 090
223 404
18 796
R242 200
285
Chapter 5
P LTD GROUP
CONSOLIDATED STATEMENT OF PROFIT OR LOSS
AND OTHER COMPREHENSIVE INCOME
FOR THE YEAR ENDED 31 DECEMBER 20.19
Revenue (169 000(P) + 60 000(S) – 15 000(J4))
Cost of sales (84 500(P) + 30 000(S) – 12 000(J4))
214 000
(102 500)
Gross profit
Other expenses (15 000(P) + 24 500(S) – 200(J2) – 300(J6))
111 500
(39 000)
Profit before tax
Income tax expense (19 500(P) + 1 500(S) + 56(J3) – 840(J5) + 84(J7))
72 500
(20 300)
PROFIT FOR THE YEAR
Other comprehensive income for the year
52 200
–
TOTAL COMPREHENSIVE INCOME FOR THE YEAR
R52 200
Profit attributable to:
Owners of the parent
Non-controlling interests
51 980
220
R52 200
Total comprehensive income attributable to:
Owners of the parent
Non-controlling interests
51 980
220
R52 200
P LTD GROUP
CONSOLIDATED STATEMENT OF CHANGES IN EQUITY
FOR THE YEAR ENDED 31 DECEMBER 20.19
Share
capital
Balance at 1 January 20.19
Changes in equity for 20.19
Total comprehensive
income for the year:
Profit for the year
Balance at 31 December
20.19
286
Retained
earnings
Total
Noncontrolling
interests
Total
equity
100 000
63 334
163 334
7 870
171 204
–
51 980
51 980
220
52 200
R100 000
R115 314 R215 314
R8 090 R223 404
Intragroup transactions
Calculations
C1 Analysis of owners’ equity of S Ltd
Total
i At acquisition (1/1/20.18)
Share capital
Retained earnings
Purchase difference
Consideration and NCI
ii Since acquisition
• To beginning of current year :
Retained earnings
(30 000 – 25 000 – 1 296(J1))
P Ltd 90%
At
Since
50 000
25 000
45 000
22 500
5 000
2 500
75 000
–
67 500
–
7 500
–
75 000
R67 500
7 500
3 704
3 334
370
7 870
• Current year :
Profit for the year
(4 000 + 200(J2) – 56(J3) – 15 000 +
12 000(J4) + 840(J5) + 300J6) – 120(J7))
NCI
2 200
1 980
220
R80 904
R5 314
R8 090
C2 Proof of calculation of purchase difference of S Ltd in terms of IFRS 3.32
Consideration transferred at acquisition date: IFRS 3.32(a)(i)
67 500
Amount of non-controlling interests: IFRS 3.32(a)(ii)
7 500
75 000
Net of the identifiable assets acquired and liabilities assumed
at acquisition date: IFRS 3.32(b)
(75 000)
Purchase difference
R–
C3 Pro forma consolidation journal entries
Dr
R
J1
Retained earnings – Beginning of year
(S)(SCE)(2 000 – 560 – 200 + 56)
Deferred tax (S)(SFP)(56 – 56)
Accumulated depreciation (SFP)(2 000 × 10%)
Equipment (P)(SFP)
Adjustment to ensure that the consolidated retained
earnings at the beginning of 20.19 is in agreement
with the consolidated retained earnings at the end
of 20.18
1 296
504
200
Cr
R
2 000
continued
287
Chapter 5
Dr
R
J2
Accumulated depreciation (P)(SFP)
Other expenses (Depreciation) (S)(P/L)
Realisation of unrealised gain included in
equipment of P Ltd as a result of depreciation
Cr
R
200
200
(2 000 × 10%)
J3
Income tax expense (S)(P/L)
Deferred tax (S)(SFP)
Tax implication of the realisation of unrealised gain
included in equipment of P Ltd as a result of
depreciation (200 × 28%)
56
J4
Revenue(S)(P/L)
Cost of sales (S)(P/L)
Equipment (P)(SFP)
Elimination of intragroup sales and unrealised gain
included in the equipment of P Ltd (15 000 × 25/125)
15 000
J5
Deferred tax (S)(SFP)
Income tax expense (S)(P/L)
Tax implication of the elimination of the unrealised
gain included in the equipment of P Ltd (3 000 × 28%)
840
J6
Accumulated depreciation (P)(SFP)
Other expenses (Depreciation)(S)(P/L)
Realisation of unrealised gain included in
equipment of P Ltd as a result of depreciation
300
56
12 000
3 000
840
300
(3 000 × 10%)
J7
Income tax expense (S)(P/L)
Deferred tax (S)(SFP)
Tax implication of the realisation of unrealised
gain included in equipment of P Ltd as a result
of depreciation (300 × 28%)
J8
Share capital (S)(SCE)
Retained earnings (S)(SCE)
Investment in S Ltd (P)(SFP)
Non-controlling interests (SFP)
Elimination of owners’ equity at acquisition of S Ltd
50 000
25 000
J9
Retained earnings – Beginning of year (S)(SCE)
Non-controlling interests (SFP)
Recognition of non-controlling interests in retained
earnings of the subsidiary for the period since
acquisition until beginning of current reporting
period
370
J10
Non-controlling interests (P/L)
Non-controlling interests (SFP)
Recognition of non-controlling interests in profit
of the subsidiary for the period
220
288
84
84
67 500
7 500
370
220
Intragroup transactions
Alternative 4
Equipment sold as equipment
The following are the abridged financial statements of P Ltd and its subsidiary, S Ltd,
for the reporting periods ended 31 December 20.18 and 20.19:
STATEMENTS OF FINANCIAL POSITION AS AT 31 DECEMBER
P Ltd
20.18
ASSETS
Investment in S Ltd: 45 000 shares at fair
value (cost: R67 500)
Equipment
Inventories
Trade receivables
Total assets
EQUITY AND LIABILITIES
Share capital (100 000/50 000 shares)
Retained earnings
Deferred tax
Total equity and liabilities
S Ltd
20.19
20.18
20.19
67 500
20 000
30 000
52 500
67 500
40 000
40 000
72 500
–
10 000
20 000
60 000
–
14 000
30 000
50 000
R170 000
R220 000
R90 000
R94 000
100 000
60 000
10 000
100 000
110 000
10 000
50 000
30 000
10 000
50 000
34 000
10 000
R170 000
R220 000
R90 000
R94 000
STATEMENTS OF PROFIT OR LOSS AND OTHER COMPREHENSIVE INCOME
FOR THE YEAR ENDED 31 DECEMBER
P Ltd
S Ltd
20.18
20.19
20.18
20.19
Revenue
Cost of sales
70 000
(35 000)
169 000
(84 500)
50 000
(25 000)
60 000
(30 000)
Gross profit
Other expenses
35 000
(14 200)
84 500
(15 000)
25 000
(18 050)
30 000
(24 500)
Profit before tax
Income tax expense
20 800
(5 800)
69 500
(19 500)
6 950
(1 950)
5 500
(1 500)
PROFIT FOR THE YEAR
15 000
50 000
5 000
4 000
–
–
–
–
R15 000
R50 000
R5 000
R4 000
Other comprehensive income
for the year
TOTAL COMPREHENSIVE INCOME
FOR THE YEAR
289
Chapter 5
EXTRACT FROM THE STATEMENTS OF CHANGES IN EQUITY
FOR THE YEAR ENDED 31 DECEMBER
Retained earnings
P Ltd
20.18
S Ltd
20.19
60 000
20.18
20.19
25 000
30 000
Balance at 1 January 20.18/20.19
Changes in equity for 20.18/20.19
Total comprehensive income
for the year:
Profit for the year
45 000
15 000
50 000
5 000
4 000
Balance at 31 December 20.18/20.19
R60 000
R110 000
R30 000
R34 000
P Ltd recognised the equity investment in S Ltd in its separate financial records using
the cost price method.
P Ltd elected to measure any non-controlling interests in an acquiree at its proportional
share of the acquiree’s identifiable net assets at acquisition date.
Assume that the identifiable assets acquired and the liabilities assumed at acquisition
date are shown at their acquisition-date fair values, as determined in terms of IFRS 3.
P Ltd obtained its interest in S Ltd on 1 January 20.18 at R67 500.
P Ltd bought items to the value of R10 000 from S Ltd on 1 January 20.18 (cost plus
25%).
P Ltd bought items to the value of R15 000 from S Ltd on 1 January 20.19 (cost plus
25%).
The items are equipment in the records of S Ltd (seller).
The items are equipment in the records of P Ltd (buyer).
Depreciation on equipment is provided at 10% per annum according to the straight-line
method.
Assume a company tax rate of 28%.
Assume that SARS accepts the buyer’s cost price as the new tax cost.
290
Intragroup transactions
Solution 5.17 – Alternative 4
The consolidated financial statements of the P Ltd Group for the reporting periods
ended 31 December 20.18 and 31 December 20.19 will be prepared as follows:
Reporting period ended 31 December 20.18
P LTD GROUP
CONSOLIDATED STATEMENT OF FINANCIAL POSITION AS AT 31 DECEMBER 20.18
ASSETS
Non-current assets
Equipment (20 000(P) + 10 000(S) – 2 000(J1) + 200(J3))
28 200
Current assets
Inventories (30 000(P) + 20 000(S))
Trade receivables (52 500(P) + 60 000(S))
50 000
112 500
162 500
Total assets
EQUITY AND LIABILITIES
Equity attributable to owners of the parent
Share capital
Retained earnings
Non-controlling interests
Total equity
Non-current liabilities
Deferred tax (10 000(P) + 10 000(S) – 560(J2) + 56(J4))
Total equity and liabilities
R190 700
100 000
63 334
163 334
7 870
171 204
19 496
R190 700
291
Chapter 5
P LTD GROUP
CONSOLIDATED STATEMENT OF PROFIT OR LOSS
AND OTHER COMPREHENSIVE INCOME
FOR THE YEAR ENDED 31 DECEMBER 20.18
Revenue (70 000(P) + 50 000(S))
Cost of sales (35 000(P) + 25 000(S))
120 000
(60 000)
Gross profit
Other expenses (14 200(P) + 18 050(S) + 2 000(J1) – 200(J3))
60 000
(34 050)
Profit before tax
Income tax expense (5 800(P) + 1 950(S) – 560(J2) + 56(J4))
25 950
(7 246)
PROFIT FOR THE YEAR
Other comprehensive income for the year
18 704
–
TOTAL COMPREHENSIVE INCOME FOR THE YEAR
R18 704
Profit attributable to:
Owners of the parent
Non-controlling interests
18 334
370
R18 704
Total comprehensive income attributable to:
Owners of the parent
Non-controlling interests
18 334
370
R18 704
P LTD GROUP
CONSOLIDATED STATEMENT OF CHANGES IN EQUITY
FOR THE YEAR ENDED 31 DECEMBER 20.18
Share
capital
Balance at 1 January 20.18
Changes in equity for 20.18
Total comprehensive
income for the year:
Profit for the year
Acquisition of subsidiary
Balance at
31 December 20.18
292
Retained
earnings
Total
Noncontrolling
interests
Total
equity
100 000
45 000
145 000
–
145 000
–
–
18 334
–
18 334
–
370
7 500
18 704
7 500
R63 334 R163 334
R7 870
R171 204
R100 000
Intragroup transactions
Calculations
C1 Analysis of owners’ equity of S Ltd
P Ltd 90%
Total
i At acquisition (1/1/20.18)
Share capital
Retained earnings
Purchase difference
Consideration and NCI
ii Since acquisition
• To beginning of current year :
None (control acquired on 1/1/20.18)
• Current year :
Profit for the year (5 000 – 2 000(J1) + 560(J2)
+ 200(J3) – 56(J4))
At
NCI
Since
50 000
25 000
45 000
22 500
5 000
2 500
75 000
–
67 500
–
7 500
–
75 000
R67 500
7 500
–
–
–
3 704
3 334
370
R78 704
R3 334
R7 870
C2 Proof of calculation of purchase difference of S Ltd in terms of IFRS 3.32
Consideration transferred at acquisition date: IFRS 3.32(a)(i)
67 500
Amount of non-controlling interests: IFRS 3.32(a)(ii)
7 500
75 000
Net of the identifiable assets acquired and liabilities assumed
at acquisition date: IFRS 3.32(b)
(75 000)
Purchase difference
R–
C3 Pro forma consolidation journal entries
Dr
R
Cr
R
J1
Other income (Gain on sale of equipment) (S)(P/L)
Equipment (P)(SFP)
Elimination of the unrealised gain included in the
equipment of P Ltd (10 000 × 25/125)
2 000
J2
Deferred tax (S)(SFP)
Income tax expense (S)(P/L)
Tax implication of the elimination of the unrealised
gain included in the equipment of P Ltd
560
2 000
560
(2 000 × 28%)
J3
Accumulated depreciation (P)(SFP)
Other expenses (Depreciation) (S)(P/L)
Realisation of the unrealised gain included in the
equipment or P Ltd as a result of depreciation
200
200
(2 000 × 10%)
continued
293
Chapter 5
Dr
R
J4
Income tax expense (S)(P/L)
Deferred tax (S)(SFP)
Tax implications of the realisation of unrealised
gain included in the equipment of P Ltd
as a result of depreciation (200 × 40%)
J5
Share capital (S)(SCE)
Retained earnings (S)(SCE)
Investment in S Ltd (P)(SFP)
Non-controlling interests (SFP)
Elimination of owners’ equity at acquisition
of S Ltd
J6
Non-controlling interests (P/L)
Non-controlling interests (SFP)
Recognition of non-controlling interests in profit
of the subsidiary for the period
Cr
R
56
50 000
25 000
370
56
67 500
7 500
370
Reporting period ended 31 December 20.19
P LTD GROUP
CONSOLIDATED STATEMENT OF FINANCIAL POSITION
AS AT 31 DECEMBER 20.19
ASSETS
Non-current assets
Equipment (40 000(P) + 14 000(S) – 2 000(J1) + 200(J1) + 200(J2) –
3 000(J4) + 300(J6))
Current assets
Inventories (40 000(P) + 30 000(S))
Trade receivables (72 500(P) + 50 000(S))
49 700
70 000
122 500
192 500
Total assets
EQUITY AND LIABILITIES
Equity attributable to owners of the parent
Share capital
Retained earnings
R242 200
100 000
115 314
Non-controlling interests
215 314
8 090
Total equity
223 404
Non-current liabilities
Deferred tax
(10 000(P) + 10 000(S) – 504(J1) + 56(J3) – 840(J5) + 84(J7))
Total equity and liabilities
294
18 796
R242 200
Intragroup transactions
P LTD GROUP
CONSOLIDATED STATEMENT OF PROFIT OR LOSS
AND OTHER COMPREHENSIVE INCOME
FOR THE YEAR ENDED 31 DECEMBER 20.19
Revenue (169 000(P) + 60 000(S))
Cost of sales (84 500(P) + 30 000(S))
229 000
(114 500)
Gross profit
Other expenses (15 000(P) + 24 500(S) + 3 000(J4) – 300(J6) – 200(J2))
114 500
(42 000)
Profit before tax
Income tax expense (19 500(P) + 1 500(S) + 56(J3) – 840(J5) + 84(J7))
72 500
(20 300)
PROFIT FOR THE YEAR
Other comprehensive income for the year
52 200
–
TOTAL COMPREHENSIVE INCOME FOR THE YEAR
R52 200
Profit attributable to:
Owners of the parent
Non-controlling interests
51 980
220
R52 200
Total comprehensive income attributable to:
Owners of the parent
Non-controlling interests
51 980
220
R52 200
P LTD GROUP
CONSOLIDATED STATEMENT OF CHANGES IN EQUITY
FOR THE YEAR ENDED 31 DECEMBER 20.19
Balance at 1 January 20.19
Changes in equity for 20.19
Total comprehensive income
for the year:
Profit for the year
Balance at 31 December
20.19
Noncontrolling
interests
Ordinary
share
capital
Retained
earnings
100 000
63 334
163 334
7 870
171 204
–
51 980
51 980
220
52 200
R100 000 R115 334 R215 314
R8 090
R223 404
Total
Total
equity
295
Chapter 5
Calculations
C1 Analysis of owners’ equity of S Ltd
Total
i At acquisition (1/1/20.18)
Share capital
Retained earnings
Purchase difference
Consideration and NCI
ii Since acquisition
• To beginning of current year :
Retained earnings
(30 000 – 25 000 – 1 296(J1))
• Current year :
Profit for the year (4 000 – 3 000 + 200(J2)
– 56(J3)) + 840(J5) + 300(J6) – 84(J7)
P Ltd 90%
At
Since
NCI
50 000
25 000
45 000
22 500
5 000
2 500
75 000
–
67 500
–
7 500
–
75 000
R67 500
7 500
3 704
3 334
370
7 870
2 200
1 980
220
R80 904
R5 314
R8 090
C2 Proof of calculation of purchase difference of S Ltd in terms of IFRS 3.32
Consideration transferred at acquisition date: IFRS 3.32(a)(i)
67 500
Amount of non-controlling interests: IFRS 3.32(a)(ii)
7 500
75 000
Net of the identifiable assets acquired and liabilities assumed
at acquisition date: IFRS 3.32(b)
(75 000)
Purchase difference
R–
C3 Pro forma consolidation journal entries
Dr
R
J1
J2
Retained earnings – Beginning of year
(S)(SCE)(2 000 – 560 – 200 + 56)
Deferred tax (SFP)(560 – 56)
Accumulated depreciation (SFP)(2 000 × 10%)
Equipment (P)(SFP)
Adjustment to ensure that the consolidated
retained earnings at the beginning of 20.19 are
in agreement with the consolidated retained
earnings at the end of 20.18
Accumulated depreciation (P)(SFP)
Other expenses (Depreciation) (S)(P/L)
Realisation of unrealised gain included in
equipment of P Ltd as a result of depreciation
Cr
R
1 296
504
200
200
2 000
200
(2 000 × 10%)
continued
296
Intragroup transactions
Dr
R
J3
Income tax expense (S)(P/L)
Deferred tax (S)(SFP)
Tax implication of the realisation of unrealised gain
included in equipment of P Ltd as a result of
depreciation (200 × 28%)
J4
Other income (Gain on sale of equipment) (S)(P/L)
Equipment (P)(SFP)
Elimination of unrealised gain included in the
equipment of P Ltd (15 000 × 25/125)
J5
Deferred tax (S)(SFP)
Income tax expense (S)(P/L)
Tax implication of the elimination of the unrealised
gain included in the equipment of P Ltd
Cr
R
56
3 000
840
56
3 000
840
(3 000 × 28%)
J6
Accumulated depreciation (P)(SFP)
Other expenses (depreciation) (S)(P/L)
Realisation of unrealised gain included in
equipment of P Ltd as a result of depreciation
300
300
(3 000 × 10%)
J7
Income tax expense (S)(P/L)
Deferred tax (S)(SFP)
Tax implication of the realisation of unrealised
gain included in equipment of P Ltd as a result
of depreciation (300 × 28%)
84
J8
Share capital (S)(SCE)
Retained earnings (S)(SCE)
Investment in S Ltd (P)(SFP)
Non-controlling interests (SFP)
Elimination of owners’ equity at acquisition of S Ltd
50 000
25 000
J9
Retained earnings – Beginning of year (S)(SCE)
Non-controlling interests (SFP)
Recognition of non-controlling interests in retained
earnings of the subsidiary for the period since
acquisition until beginning of current reporting
period
370
J10
Non-controlling interests (P/L)
Non-controlling interests (SFP)
Recognition of non-controlling interests in profit
of the subsidiary for the period
220
84
67 500
7 500
370
220
297
Chapter 5
Example 5.18
The elimination of unrealised gain and the subsequent sale
of the property, plant and equipment
The parent, P Ltd, sold a plant to a 70% subsidiary on 1 January 20.18 for R20 000.
The original cost price of the plant was R15 000. The subsidiary, S Ltd, classifies the
plant as property, plant and equipment. The parent, P Ltd, classifies the plant as
inventories.
The remaining useful life of the plant was set at five years on 1 January 20.18. S Ltd
sold this plant on 30 June 20.19 for R18 000.
The reporting period of the group ends on 31 December.
Assume a company tax rate of 28%.
Solution 5.18
The pro forma consolidation journal entries for the preparation of the consolidated
financial statements of P Ltd and its subsidiary for the different reporting periods are as
follows:
Reporting period ended 31 December 20.18
Dr
R
Cr
R
J1
Revenue (P)(P/L)
Cost of sales (P)(P/L)
Property, plant and equipment (SFP)
Elimination of the intragroup sales and the
unrealised gain included in plant of S Ltd
20 000
J2
Deferred tax (P)(SFP)
Income tax expense (P)(P/L)
Tax implication of the elimination of the unrealised
gain included in the plant of S Ltd
1 400
15 000
5 000
1 400
(5 000 × 28%)
J3
Accumulated depreciation (S)(SFP)
Other expenses (Depreciation) (P)(P/L)
Realisation of the unrealised gain included in the
plant of S Ltd, through depreciation
J4
Income tax expense (P)(P/L)
Deferred tax (P)(SFP)
Tax implication of the realisation of the unrealised
gain included in the plant of S Ltd through
depreciation (1 000 × 28%)
1 000
1 000
(5 000 × 20%)
298
280
280
Intragroup transactions
Reporting period ended 31 December 20.19:
Dr
R
J1
Retained earnings – Beginning of the year (P)(SCE)
(5 000 – 1 400 – 1 000 + 280)
Accumulated depreciation (S)(SFP)(5 000 × 20%)
Deferred tax (P)(SFP) (1 400 – 280)
Property, plant and equipment (SFP)
Adjustment to ensure that the consolidated
retained earnings at the beginning of 20.19 are in
agreement with the consolidated retained earnings
at the end of 20.18
J2
Accumulated depreciation (S)(SFP)
Other expenses (Depreciation) (P)(P/L)
Realisation of the unrealised gain included
in the plant of S Ltd, through depreciation
Cr
R
2 880
1 000
1 120
500
5 000
500
(5 000 × 20% × 6/12)
J3
Income tax expense (P)(P/L)
Deferred tax (P)(SFP)
Tax implication of the realisation of the unrealised
gain included in the plant of S Ltd, through
depreciation (500 × 28%)
140
J4
Property, plant and equipment (SFP)
Accumulated depreciation (SFP) (1 000 + 500)
Other income (Gain on sale of plant) (P)(P/L)
Adjustment to the consolidated gain on the sale of
the plant
5 000
J5
Income tax expense (P)(P/L)
Deferred tax (P)(SFP)
Adjustment for tax payable on the balance of
unrealised intragroup gain realised through sale of
the plant (3 500 × 28%)
980
140
1 500
3 500
980
299
Chapter 5
Comment
The deferred tax that is created when the profit is eliminated is the tax effect for the
seller that is deferred to be recognised in future when the profit of the group is
recognised when the asset is sold. The deferred tax is measured with reference to the
tax effect for the seller at the date of sale. As the related asset is inventories in the
records of the seller (P), deferred tax is measured at the current company tax rate
(28%).
The following table shows the relevant figure for the pro forma journals:
S Ltd’s
separate
records
300
Pro forma
amount
Deferred
taxation @
28%
Group
Transfer price from P to S
20 000
5 000
(1 400)
15 000
Depreciation for 20.18
(4 000)
(1 000)
280
(3 000)
Balance 31/12/20.18
16 000
4 000
(1 120)
12 000
Depreciatiion for 20.19
(2 000)
(500)
140
(1 500)
Balance 30/6/20.19
14 000
3 500
(980)
10 500
Selling price to 3rd party
18 000
–
–
18 000
Profit
4 000
3 500
980
7 500
Intragroup transactions
Self-assessment questions
Question 5.1
On 1 January 20.15 P Ltd purchased 75% of the shares in S Ltd for R90 000. At that
stage S Ltd’s equity consisted of the following:
Share capital
R100 000
Retained earnings
R20 000
The abridged statements of profit or loss and other comprehensive income of the two
entities for the reporting period ended 31 December 20.18 are as follows:
P Ltd
S Ltd
Revenue
Cost of sales
400 000
(240 000)
255 000
(153 000)
Gross profit
Depreciation
Other expenses
160 000
(20 000)
(84 500)
102 000
(8 000)
(52 400)
Profit before tax
Income tax expense
55 500
(15 500)
41 600
(11 600)
PROFIT FOR THE YEAR
40 000
30 000
–
–
R40 000
R30 000
Other comprehensive income for the year
TOTAL COMPREHENSIVE INCOME FOR THE YEAR
An extract from the abridged statements of changes in equity of the two entities for the
reporting period ended 31 December 20.18 is as follows:
Retained earnings
P Ltd
Balance at 1 January 20.18
Changes in equity for 20.18
Total comprehensive income for the year:
Profit for the year
Ordinary dividend
Balance at 31 December 20.18
S Ltd
58 000
50 000
40 000
(8 000)
30 000
–
R90 000
R80 000
On 31 December 20.18, the following items, inter alia, appeared in the two entities’
statements of financial position:
Plant: Cost price
Accumulated depreciation
Inventories at cost
P Ltd
S Ltd
200 000
(80 000)
80 000
(32 000)
R120 000
R48 000
R40 000
R12 000
301
Chapter 5
Additional information
1 Included in S Ltd’s plant is a machine sold on 1 January 20.16 by PLtd to S Ltd.
P Ltd realised a gain of R20 000 on this transaction and the machine was classified
as equipment in P Ltd’s records. Plant and equipment are depreciated at 10% per
year on the straight-line basis.
2 Since May 20.15, P Ltd has purchased all its inventories from S Ltd at the normal
selling prices, determined by S Ltd at cost price plus 25%. Total sales from S Ltd to
P Ltd for the reporting period ended 31 December 20.18 amounted to R164 000.
3 At 31 December 20.17, the inventories on hand of P Ltd were R30 000 (valued at
cost price for P Ltd).
4 P Ltd recognised the equity investment in S Ltd in its separate financial records
using the cost price method.
5 P Ltd elected to measure the non-controlling interests in an acquiree at their
proportionate share of the acquiree’s identifiable net assets at acquisition date.
6 Ignore the tax implications.
Required
(a) Prepare the abridged consolidated statement of profit or loss and other
comprehensive income and consolidated statement of changes in equity of the
P Ltd Group for the reporting period ended 31 December 20.18; and
(b) Present the following items as they shall appear in the consolidated statement of
financial position of the P Ltd Group at 31 December 20.18:
l plant; and
l inventories.
Suggested solution 5.1
P LTD GROUP
EXTRACT FROM THE CONSOLIDATED STATEMENT OF FINANCIAL POSITION
AS AT 31 DECEMBER 20.18
ASSETS
Non-current assets
Property, plant and equipment (200 000(P) + 80 000(S) – 80 000(P) – 32 000(S) +
2 000(J1) – 20 000(J1) + 2 000(J2))
Current assets
Inventories (40 000(P) + 12 000(S) – 8 000(J4))
Total assets
302
152 000
44 000
R196 000
Intragroup transactions
P LTD GROUP
CONSOLIDATED STATEMENT OF PROFIT OR LOSS
AND OTHER COMPREHENSIVE INCOME
FOR THE YEAR ENDED 31 DECEMBER 20.18
Revenue (400 000(P) + 255 000(S) – 164 000(J5))
Cost of sales
491 000
(231 000)
(240 000(P) + 153 000(S) – 164 000(J5) – 6 000(J3) + 8 000(J4))
Gross profit
Other expenses (84 500(P) + 52 400(S))
Depreciation (20 000(P) + 8 000(S) – 2 000(J2))
260 000
(136 900)
(26 000)
Profit before tax
Income tax expense (15 500(P) + 11 600(S))
97 100
(27 100)
PROFIT FOR THE YEAR
Other comprehensive income for the year
70 000
–
TOTAL COMPREHENSIVE INCOME FOR THE YEAR
R70 000
Profit attributable to:
Owners of the parent
Non-controlling interests
63 000
7 000
R70 000
Total comprehensive income attributable to:
Owners of the parent
Non-controlling interests
63 000
7 000
R70 000
P LTD GROUP
EXTRACT FROM THE CONSOLIDATED STATEMENT OF CHANGES IN EQUITY
FOR THE YEAR ENDED 31 DECEMBER 20.18
Balance at 1 January 20.18
(58 000(P) + 18 000(S) - 16 000(J1))
Changes in equity for 20.18
Total comprehensive income for the year:
Profit for the year
Dividend paid
Balance at 31 December 20.18
(90 000(P) + 39 000(S) - 16 000(J1) + 2 000(J2))
Retained
earnings
Noncontrolling
interests
60 000
36 000
63 000
(8 000)
7 000
–
R115 000
R43 000
303
Chapter 5
Comment
As information on P Ltd’s equity is unavailable, only an extract from the statement of
changes in equity is shown.
Take note of the effect of unrealised profit where the parent or the subsidiary sells. If the
parent is the seller, the effect of the unrealised profit on consolidated retained earnings
should be taken into account separately.
Calculations
C1 Analysis of owners’ equity of S Ltd
Total
i At acquisition (1/7/20.15)
Share capital
Retained earnings
Purchase difference
Consideration and NCI
ii Since acquisition
• To beginning of current year:
Retained earnings
(50 000 – 20 000 – 6 000(J3))
• Current year:
Profit for the year
(30 000 + 6 000(J3) – 8 000(J4))
P Ltd 75%
At
Since
NCI
100 000
20 000
75 000
15 000
25 000
5 000
120 000
–
90 000
–
30 000
–
120 000
R90 000
30 000
24 000
18 000
6 000
36 000
28 000
21 000
7 000
R172 000
R39 000
R43 000
C2 Proof of calculation of purchase difference of S Ltd in terms of IFRS 3.32
Consideration transferred at acquisition date: IFRS 3.32(a)(i)
90 000
Amount of non-controlling interests: IFRS 3.32(a)(ii)
30 000
Net of the identifiable assets acquired and liabilities assumed
at acquisition date: IFRS 3.32(b)
Purchase difference
304
120 000
(120 000)
R–
Intragroup transactions
C3 Pro forma consolidation journal entries
Dr
R
J1
Retained earnings – Since acquisition (P)(SCE)
(20 000 – 2 000)
Accumulated depreciation (S)(SFP) (20 000 × 10% × 2yrs)
Plant (S)(SFP) (Given)
Elimination of unrealised gain in plant to ensure
that the balances at the beginning of 20.18 agree
with those at the end of 20.17
J2
J3
J4
J5
J6
J7
J8
Accumulated depreciation (S)(SFP)
Depreciation (P)(P/L)
Depreciation that realises in 2.18 (20 000 × 10%)
Retained earnings – Beginning of year (S)(SCE)
Cost of sales (S)(P/L)
Elimination of unrealised profit in opening
inventories) (30 000 × 25/125)
Cost of sales (S)(P/L)
Inventories (P)(SFP)
Elimination of unrealised profit in closing
inventories (40 000 × 25/125)
Revenue (S)(P/L)
Cost of sales (P)(P/L)
Elimination of intragroup sales
Share capital (S)(SCE)
Retained earnings (S)(SCE)
Investment in S Ltd (P)(SFP)
Non-controlling interests (SFP)
Elimination of owners’ equity at acquisition of S Ltd
Retained earnings – Beginning of year (S)(SCE)
Non-controlling interests (SFP)
Recognition of non-controlling interests in retained
earnings of the subsidiary for the period since
acquisition until beginning of current reporting
period
Non-controlling interests (P/L)
Non-controlling interests (SFP)
Recognition of non-controlling interests in profit
for the year
16 000
4 000
2 000
6 000
8 000
164 000
100 000
20 000
1 500
7 500
Cr
R
20 000
2 000
6 000
8 000
164 000
90 000
30 000
1 500
7 500
305
Chapter 5
Question 5.2
The abridged financial statements of P Ltd and S Ltd for the reporting period ended
30 June 20.18 are as follows:
STATEMENTS OF FINANCIAL POSITION AS AT 30 JUNE 20.18
P Ltd
ASSETS
Fixed property
Plant
Gross carrying amount
Accumulated depreciation
S Ltd
140 000
12 800
97 000
10 000
20 000
(7 200)
25 000
(15 000)
Furniture
5 000
3 000
Gross carrying amount
Accumulated depreciation
Investment in S Ltd at fair value: 75 000 shares (cost:
R105 000)
Investment in unlisted shares
Current account: S Ltd
Trade receivables
Inventories
Bank
10 000
(5 000)
10 000
(7 000)
105 000
–
–
20 000
45 000
16 000
53 850
25 000
–
23 000
28 000
63 750
Total assets
EQUITY AND LIABILITIES
Share capital (200 000/100 000 shares)
Retained earnings
Current account: P Ltd
Dividend payable
Trade and other payables
R397 650
R249 750
200 000
154 650
–
10 000
33 000
100 000
98 000
8 750
15 000
28 000
Total equity and liabilities
R397 650
R249 750
STATEMENTS OF PROFIT OR LOSS AND OTHER COMPREHENSIVE INCOME
FOR THE YEAR ENDED 30 JUNE 20.18
P Ltd
S Ltd
Revenue
Cost of sales
200 000
(110 000)
150 000
(110 000)
Gross profit
Other expenses
Dividend received
Interest received
90 000
(30 150)
11 250
4 800
40 000
(9 050)
1 000
–
Profit before tax
Income tax expense
75 900
(21 250)
31 950
(8 950)
PROFIT FOR THE YEAR
Other comprehensive income for the year
54 650
–
23 000
–
R54 650
R23 000
TOTAL COMPREHENSIVE INCOME FOR THE YEAR
306
Intragroup transactions
EXTRACT FROM THE STATEMENTS OF CHANGES IN EQUITY
FOR THE YEAR ENDED 30 JUNE 20.18
Retained earnings
P Ltd
Balance at 1 July 20.18
Changes in equity for 20.18
Total comprehensive income for the year:
Profit for the year
Ordinary dividend paid and provided
Balance at 30 June 20.18
S Ltd
120 000
90 000
54 650
(20 000)
23 000
(15 000)
R154 650
R98 000
Additional information
1 P Ltd acquired the interest in S Ltd on 30 June 20.15 when the equity of S Ltd was
as follows:
Share capital
R100 000
Retained earnings
R35 000
2 On 1 January 20.16, P Ltd sold non-depreciable fixed property with an original cost
price of R50 000 to S Ltd for R57 000. The property is classified as property, plant
and equipment and is still in the possession of S Ltd.
3 On 30 June 20.17, S Ltd sold furniture that cost R12 500 and on which accumulated
depreciation to the amount of R2 500 was recognised, to P Ltd for R10 000. P Ltd
classifies this furniture under property, plant and equipment.
4 S Ltd purchases all its inventories from P Ltd at cost price plus 25%. Total
inventories to the value of R75 000 were sold to S Ltd by P Ltd during the reporting
period. Inventories in the records of S Ltd were R25 000 on 1 July 20.17. At the end
of the reporting period, S Ltd still owed P Ltd R23 000 in respect of the inventories
purchased from P Ltd. These amounts are included in trade receivables and trade
and other payables.
5 On 30 June 20.16, S Ltd sold 2 machines with a carrying amount of R18 000 each
to P Ltd for a total amount of R40 000. P Ltd uses the plant in the production of
inventories. Both companies write off depreciation on plant at 20% per annum on
the diminishing balance method. On 29 June 20.18, P Ltd sold one of the machines
at a slight profit that was set off against other expenses.
6 Assume a company tax rate of 28%.
7 P Ltd recognised the equity investment in S Ltd in its separate financial records
using the cost price method.
8 P Ltd elected to measure any non-controlling interests in an acquiree at their
proportional share of the acquiree’s identifiable net assets at acquisition date.
Required
Prepare the consolidated financial statements of the P Ltd Group for the reporting
period ended 30 June 20.18.
307
Chapter 5
Suggested solution 5.2
P LTD GROUP
CONSOLIDATED STATEMENT OF FINANCIAL POSITION AS AT 30 JUNE 20.18
ASSETS
Non-current assets
Fixed property (140 000(P) + 97 000(S) – 7 000(J1))
Plant:
Gross carrying amount (20 000(P) + 25 000(S) – 4 000(J9) + 2 000(J12))
Accumulated depreciation
(7 200(P) + 15 000(S) – 800(J9) – 640(J10) + 720(J12))
Furniture:
Gross carrying amount (10 000(P) + 10 000(S) – 2 500(J2))
Accumulated depreciation (5 000(P) + 7 000(S) – 2 500(J2))
Goodwill (C2)
Financial asset
Deferred tax
(1 568(J5) + 1 400(J6) – 1 400(J7) + 896(J9) – 180(J11) – 358(J13))
230 000
21 520
43 000
(21 480)
8 000
17 500
(9 500)
3 750
25 000
1 926
290 196
Current assets
Inventories (16 000(P) + 28 000(S) – 5 600(J4))
Trade receivables (45 000(P) + 23 000(S) – 23 000(J8))
Bank (53 850(P) + 63 750(S))
38 400
45 000
117 600
201 000
Total assets
EQUITY AND LIABILITIES
Equity attributable to owners of the parent
Share capital (P)
Retained earnings
Non-controlling interests (C1)
R491 196
200 000
190 176
390 176
49 270
Total equity
Current liabilities
Trade and other payables (33 000(P) + 28 000(S) – 23 000(J8))
Provision for dividend
Dividend payable to non-controlling interests
439 446
Total current liabilities
51 750
Total equity and liabilities
308
38 000
10 000
3 750
R491 196
Intragroup transactions
P LTD GROUP
CONSOLIDATED STATEMENT OF PROFIT OR LOSS
AND OTHER COMPREHENSIVE INCOME
FOR THE YEAR ENDED 30 JUNE 20.18
Revenue (200 000(P) + 150 000(S) – 75 000(J3))
Cost of sales
275 000
(110 000(P) + 110 000(S) – 75 000(J3) + 5 600(J4) – 5 000(J6))
(145 600)
Gross profit
Other expenses (30 150(P) + 9 050(S) – 640(J10) – 1 280(J12))
Interest received (P)
Dividends received
129 400
(37 280)
4 800
1 000
Profit before tax
Income tax expense
97 920
(30 570)
(21 250(P) + 8 950(S) – 1 568(J5) + 1 400(J7) + 180(J11) + 358(J13))
PROFIT FOR THE YEAR
Other comprehensive income for the year
67 350
–
TOTAL COMPREHENSIVE INCOME FOR THE YEAR
R67 350
Profit attributable to:
Owners of the parent
Non-controlling interests
61 254
6 096
R67 350
Total comprehensive income attributable to:
Owners of the parent
Non-controlling interests
61 254
6 096
R67 350
P LTD GROUP
CONSOLIDATED STATEMENT OF CHANGES IN EQUITY
FOR THE YEAR ENDED 30 JUNE 20.18
Share
capital
Balance at 1 January
20.18
Changes in equity
for 20.18
Total comprehensive
income for the year:
Profit for the year
Dividend paid
Balance at
31 December 20.18
Total
Noncontrolling
interests
Total
equity
148 922
348 922
46 924
395 846
61 254
(20 000)
61 254
(20 000)
6 096
(3 750)
67 350
(23 750)
R190 176
R390 176
R49 270
R439 446
Retained
earnings
@
200 000
–
–
R200 000
#
@ 120 000(P) + 39 522(C2) – 7 000(J1) – 3 600(J6) = 148 922
# Test: 154 650(P) – 7 000(J1) – 5 600(J4) + 1 568(J5) + 46 558(C1) = 190 176
309
Chapter 5
Calculations
C1 Analysis of owners’ equity of S Ltd
P Ltd 75%
Total
i At acquisition (30/6/20.15)
Share capital
Retained earnings
Equity represented by goodwill – Parent
Consideration and NCI
ii Since acquisition
• To beginning of current year:
Retained earnings
(90 000 – 35 000 – 2 304(J9))
• Current year:
Profit after tax (23 000 + 640(J10)
– 180(J11) + 1 280(J12) – 358(J13))
Dividend
At
Since
NCI
100 000
35 000
75 000
26 250
25 000
8 750
135 000
3 750
101 250
3 750
33 750
–
138 750
R105 000
33 750
52 696
39 522
13 174
46 924
24 382
(15 000)
18 286
(11 250)
6 096
(3 750)
R200 828
R46 558
R49 270
C2 Proof of calculation of goodwill of S 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)
105 000
33 750
138 750
Net of the identifiable assets acquired and liabilities assumed
at acquisition date: IFRS 3.32(b)
(135 000)
Goodwill
R3 750
C3 Pro forma consolidation journal entries
Dr
R
J1
Retained earnings (P)(SCE)
Property (S)(SFP)
Unrealised gain made by P Ltd from the sale
of property to S Ltd
7 000
J2
Accumulated depreciation: Furniture (S)(SFP)
Furniture (S)(SFP)
Transfer of furniture from S Ltd to P Ltd –
derecognition in records of S Ltd and recognition
in records of P Ltd
2 500
J3
Revenue (P)(P/L
Cost of sales (S)(P/L)
Elimination of intragroup sales
75 000
Cr
R
7 000
2 500
75 000
continued
310
Intragroup transactions
Dr
R
J4
Cost of sales (P)(P/L)
Inventories (S)(SFP)
Unrealised profit in closing inventories
Cr
R
5 600
5 600
(28 000 × 25/125)
J5
Deferred tax (P)(SFP)
Income tax expense (P)(P/L)
Tax on unrealised profit in closing inventories
1 568
1 568
(5 600 × 28%)
J6
J7
Deferred tax (P)(SFP)(5 000 × 28%)
Retained earnings (P)(SCE) (5 000 × 72%)
Cost of sales (P)(P/L) (25 000 × 25/125)
Unrealised profit in opening inventories realised
in current reporting period
1 400
3 600
Income tax expense (P)(P/L)
Deferred tax (P)(SFP)
Tax on unrealised profit in opening inventories
1 400
5 000
1 400
(5 000 × 28%)
J8
Trade and other payables (S)(SFP)
Trade receivables (P)(SFP)
Elimination of intragroup debt
23 000
J9
Retained earnings(S)(SCE) (4 000 × 4/5 × 72%)
Deferred tax (S)(SFP) (4 000 × 4/5 × 28%)
Accumulated depreciation (SFP) (4 000 × 20%)
Plant (SFP) (40 000 – 18 000 × 2))
Correction of opening balances with unrealised
gain on intragroup plant
2 304
896
800
Accumulated depreciation (SFP)
Depreciation (S)(P/L)
Realisation of a portion of the unrealised gain
through the write-off of depreciation on the plant
640
J10
23 000
4 000
640
((4 000 – 800) × 20%)
J11
Income tax expense (S)(P/L)
Deferred tax (S)(SFP)
Recognition of tax on excessive depreciation
180
180
(640 × 40%)
J12
J13
Plant (4 000/2)
Other income (gain on sale)(S)(P/L) (balancing)
Accumulated depreciation ((800 + 640)/2)
and
Income tax expense (S)(P/L) (1 280 × 40%)
Deferred tax (S)(SFP)
Realisation of unrealised gain through sale of plant
from the group, remove balances from records
2 000
358
1 280
720
358
continued
311
Chapter 5
Dr
R
J14
Cr
R
Share capital (S)(SCE)
Retained earnings (S)(SCE)
Goodwill (SFP)
Investment in S Ltd (P)(SFP)
Non-controlling interests (SFP)
Elimination of owners’ equity at acquisition of S Ltd
100 000
35 000
3 750
J15
Retained earnings – Beginning of year (S)(SCE)
Non-controlling interests (SFP)
Recognition of non-controlling interests in retained
earnings of the subsidiary for the period since
acquisition until beginning of current year
13 174
J16
Non-controlling interests (P/L)
Non-controlling interests (SFP)
Recognition of non-controlling interests in profit
for the reporting period
6 096
J17
Dividend received (P)(P/L)
Non-controlling interests (SFP)
Dividend paid (S)(SCE)
Elimination of intragroup dividend
11 250
3 750
105 000
33 750
13 174
6 096
15 000
Comment
J2 is a combination of the following journals:
In the records of P Ltd
Furniture (SFP)
Bank (SFP)
Sale of furniture to S Ltd
10 000
10 000
In the records of S Ltd:
Accumulated depreciation (SFP)
Bank (SFP)
Furniture (SFP)
Derecognition of furniture sold to S Ltd at carrying amount
C4 Unrealised profit included in inventories and plant
Inventories
Gross
Unrealised profit
1 July 20.17
R25 000
R5 000
30 June 20.18
R28 000
R5 600
312
2 500
10 000
Tax
R1 400
R1 568
12 500
Net
R3 600
R4 032
Intragroup transactions
Plant
30/6/ 20.16 Gross carrying amount
30/6/ 20.17 Depreciation
P Ltd
20 000
(4 000)
Group
Gross
18 000
2 000
(3 600)
(400)
Carrying amount
29/6/ 20.18 Depreciation
16 000
(3 200)
14 400
(2 880)
Carrying amount
R12 800
*
Selling price
Tax
560
(112)
Net
1 440
(288)
1 600
(320)
448
(90)
1 152
(230)
R11 520
1 280
(1 280)
358
(358)
922
(922)
*
R–
R–
R–
* The adjustment against the profit or loss of P Ltd will be R1 280, regardless of the selling price of
the plant.
313
6
Adjustments and sundry aspects
of group statements
Introduction .....................................................................................................
319
Basic consolidation procedures.............................................................
320
Adjustments at acquisition date
6.1
6.2
6.3
6.4
6.5
Recognition of the identifiable assets, liabilities and contingent
liabilities of the subsidiary at their fair values ...........................................
Example 6.1: Recording of revaluation in records of subsidiary ...........
Revaluation at acquisition date of property, plant and equipment
not subject to depreciation .......................................................................
Example 6.2: Pro forma revaluation of subsidiary’s land and buildings
at acquisition date ..........................................................
Example 6.3: Pro forma revaluation of subsidiary’s assets at acquisition
date .................................................................................
Subsequent sale of property, plant and equipment which had been
revalued at acquisition date – Revaluation not recognised in records
of subsidiary .............................................................................................
Example 6.4: Subsequent sale of property, plant and equipment,
which was revalued on acquisition .................................
Revaluation at acquisition date of depreciable property, plant and
equipment ...............................................................................................
Example 6.5: Revaluation of plant and detailed journal entries ............
Example 6.6: Revaluation of plant and detailed journal entries
for subsequent periods ...................................................
Revaluation of inventory at acquisition date ...........................................
Example 6.7: Revaluation of inventory and detailed journal entries .....
Example 6.8: Revaluation of current asset (property) at acquisition
date ................................................................................
323
324
326
327
330
334
335
339
339
343
344
345
346
315
Chapter 6
Impairment of goodwill
6.6
6.7
6.8
6.9
Significance of goodwill ..........................................................................
Impairment losses ...................................................................................
Losses from the changes in the fair value of the equity investments
of the parent .............................................................................................
Impairment losses and non-controlling interests ....................................
Example 6.9: Impairment of goodwill – Difference between
non-controlling interests measured at proportionate
share of identifiable net assets and non-controlling
interests measured at fair value ......................................
Example 6.10: Impairment of goodwill – Non-controlling interests
measured at proportionate share of identifiable net
assets .............................................................................
Example 6.11: Impairment of goodwill – Non-controlling interests
measured at fair value.....................................................
350
351
351
352
353
355
362
Losses of a subsidiary
6.10
6.11
6.12
Accumulated losses of subsidiary at acquisition date .............................
Example 6.12: Accumulated losses of a subsidiary at acquisition
date ................................................................................
Post-acquisition losses of subsidiaries ...................................................
Example 6.13: Accumulated losses of a subsidiary since acquisition
date ................................................................................
Assessed loss of a subsidiary at acquisition date ...................................
Example 6.14: Income tax loss (assessed loss) of a subsidiary
at acquisition date ..........................................................
367
367
369
370
372
373
Insolvent subsidiaries
6.13
6.14
The legal liability of the shareholders of an insolvent subsidiary ............
Accounting for an insolvent subsidiary ...................................................
376
377
Acquisition of an insolvent subsidiary
6.15
Basic consolidation procedures ..............................................................
Example 6.15: Consolidation where shares are acquired in an
insolvent subsidiary ........................................................
379
380
Insolvency of a subsidiary after acquisition
6.16
Basic consolidation procedures ..............................................................
Example 6.16: Consolidation of a subsidiary that becomes insolvent
after acquisition date ......................................................
384
385
Preference shares
6.17
6.18
316
Characteristics ........................................................................................
Liability versus equity ..............................................................................
389
391
Adjustments and sundry aspects of group statements
Consolidation procedures where the capital of the subsidiary
includes preference shares
6.19
6.20
The treatment of preference shares and their profit-sharing
preferential right when preparing consolidated financial statements ......
Example 6.17: Issued preference shares of acquiree with limited
preference on liquidation of the acquiree ......................
Example 6.18: Issued preference shares of acquiree with preference
on liquidation of the acquiree .........................................
Example 6.19 All preference shares are held by non-controlling
interests and preference shares have limited rights on
liquidation .......................................................................
The calculation of non-controlling interests in the profit of the current
reporting period of a subsidiary with preference share capital ...............
Example 6.20: All preference shares are held by non-controlling
interests and there are no accrued or outstanding
dividends ........................................................................
Example 6.21: Calculation of the non-controlling interests in the profit
of the current reporting period of a subsidiary with
issued preference shares ...............................................
Example 6.22: Consolidation procedures: Preference shares of the
subsidiary held by both the parent and non-controlling
interests ..........................................................................
392
393
394
395
397
398
404
408
Treatment of preference dividends of subsidiaries
6.21
6.22
6.23
Situations to be considered .....................................................................
Preference dividends outstanding at the end of the reporting period .....
Example 6.23: Treatment of preference dividends outstanding at the
end of the reporting period .............................................
Accrued preference dividends on acquisition of preference shares
in a subsidiary .........................................................................................
414
414
415
421
Self-assessment questions
Question 6.1 ........................................................................................................
Question 6.2 ......................................................................................................................
Question 6.3 ........................................................................................................
422
429
437
317
Adjustments and sundry aspects of group statements
Introduction
In the preceding chapters, the main focus was on the basic consolidation procedures
applicable to the preparation of consolidated financial statements at the acquisition date
and after the acquisition date, both in the case of wholly-owned subsidiaries and nonwholly-owned subsidiaries. There was also a discussion of intragroup transactions
and how they impact on consolidated financial statements. In the discussion of the
above matters, the set-up of the examples was deliberately kept as simple as
possible with a view to the analysis of the relevant principles and concepts, in order to
facilitate the learning process.
IFRS 3 addresses the methods used to account for business combinations and was
discussed in detail in chapter 2. IFRS 10 establishes principles for the presentation
and preparation of consolidated financial statements and is used to affect the
consolidation process after the acquisition of the business combination. During the
process of consolidating a subsidiary in terms of IFRS 10, IFRS 3 is applied to
determine the following at the acquisition date:
l the fair values of the identifiable assets acquired and liabilities assumed at the
acquisition date;
l the fair value of the consideration of the business combination;
l the recognition and measurement of the non-controlling interests in the acquiree;
and
l the recognition and measurement of the goodwill acquired in the business
combination or the gain from a bargain purchase.
Before proceeding in later chapters with the more complex consolidation problems that
often arise in practice, it is necessary to focus on specific aspects that arise from the
fact that the consideration paid for the acquisition of the shares in the subsidiary is
determined by the parent with reference to the fair value of the identifiable assets and
liabilities of the subsidiary at the acquisition date.
Until now it has been assumed that the fair values of the assets and liabilities of the
subsidiary at the acquisition date were equal to the carrying amounts of the said items
at that date (excluding chapter 2). In this context, it has already been indicated that the
difference between the consideration given (cost price) of the shares in the subsidiary
and the interest of the parent in the fair value of the identifiable assets and liabilities
of the subsidiary is recognised as goodwill or as a gain from a bargain purchase.
This chapter will discuss certain sundry aspects, namely:
l the recognition and measurement of the identifiable assets acquired, liabilities
assumed and contingent liabilities of the subsidiary at their fair values at the
acquisition date;
l the impairment of goodwill;
l any losses incurred by the subsidiary, as well as the procedures to be followed in
the case of an insolvent subsidiary; and
l the consolidation procedures should the equity of the subsidiary include preference
share capital, as well as the treatment of preference dividends paid by the
subsidiary.
319
Chapter 6
It is important to realise that the issue at the acquisition of a subsidiary is the acquisition
of control over the assets, liabilities and operating activities of the subsidiary. An
interest in the net assets of the subsidiary is acquired and as a result of the ploughback of retained earnings by the subsidiary, the net assets increase. In the preparation
of consolidated financial statements, the analysis of the owners’ interest of the
subsidiary represents the equity side of the basic accounting equation (i.e. the owners’
interest represents the opposite of net assets (Equity = Assets – Liabilities)). The
essential issues in the analysis of owners’ equity are:
l the measurement of the identifiable assets, liabilities and contingent liabilities of the
subsidiary at their fair values at the acquisition date;
l the measurement of goodwill or a gain from a bargain purchase at the acquisition
date;
l the measurement of the non-controlling interests in the net assets of the subsidiary
at the reporting date; and
l the division of the increase in retained earnings and other items of comprehensive
income of the subsidiary arising from the operating activities of the subsidiary,
between the parent and non-controlling interests since acquisition date.
Basic consolidation procedures
The consolidation procedures for the consolidated financial statements can be
summarised as follows:
l The consolidated statement of financial position is prepared by adding 100% of the
carrying amounts (or the fair value if there was an adjustment to fair value as at the
business combination date) of the identifiable assets and liabilities of the subsidiary
as at the reporting date on a line-for-line basis to the carrying amounts of the
corresponding assets and liabilities of the parent. The consolidated statement of
financial position therefore consists of 100% of the assets and liabilities of the
subsidiary and 100% of the assets and liabilities of the parent. By adding the
statements of financial position of the parent and the subsidiary together, it means that
the investment of the parent in the shares of the subsidiary are still included in the
combined results, but now through the inclusion of the assets and liabilities of the
subsidiary. The intragroup items are eliminated, namely the equity of the subsidiary
and the investment in the subsidiary in the records of the parent (see chapter 3,3
and 3.4). The parent and the subsidiary are combined into one entity which means that
the equity investment in the subsidiary needs to be eliminated (IFRS 10.B86(b)).
The following at-acquisition pro forma consolidation journal entry is prepared to
eliminate the parent’s investment in the subsidiary:
Dr
R
Share capital
Retained earnings
Investment in S Ltd (wholly-owned subsidiary of P Ltd)
320
Cr
R
xxx
xxx
xxx
Adjustments and sundry aspects of group statements
Comment
a Take note that the pro forma consolidation journal entry is not recorded in the
accounting records of either the parent or the subsidiary.
b The above treatment is in accordance with the principle contained in
IFRS 10.B86(a) that the consolidated financial statements combine like items of
assets, liabilities, equity, income, expenses and cash flows of the parent with
those of its subsidiaries. Therefore the consolidated financial statements present
financial information about the group as that of a single entity.
c After the abovementioned pro forma consolidation journal entry has been
processed, the consolidated statement of financial position will only reflect the
share capital of the parent.
l
l
l
l
The difference in the carrying amount of the parent’s investment in each subsidiary
(consideration for the business combination – cost of the shares in the subsidiary)
and the parent’s portion of equity of each subsidiary at acquisition date is
recognised pro forma as goodwill or as a gain from a bargain purchase. However,
it is important to realise that the recognition of goodwill (based on the
measurement of the non-controlling interests at their proportionate share of the
acquiree’s identifiable net assets) or a gain from a bargain purchase only bears
relation to the owners of the parent. As discussed in chapter 2, the non-controlling
interests can be measured at its fair value which affects the calculation of goodwill.
Goodwill thus recognised also bears relation to the non-controlling interests.
The like items of assets and liabilities of the parent are combined with that of the
subsidiary. The obligation to eliminate intragroup loans/debts does not detract from
this basic combination (discussed in chapter 5).
Should the parent not own the full issued share capital of the subsidiary, the above
basic combination still applies; however, it is necessary to recognise and show
separately the non-controlling interests in the net assets of the subsidiary (i.e.
separate from the interest of the parent in the equity of subsidiary).
The following at-acquisition pro forma consolidation journal entry is prepared to
eliminate the parent’s investment in the subsidiary:
Dr
R
Share capital
Retained earnings
Goodwill (refer to chapter 2)
Investment in S Ltd (partial subsidiary of P Ltd)
Non-controlling interest in subsidiary
l
l
Cr
R
xxx
xxx
xxx
xxx
xxx
The carrying amount of the assets of the parent are affected (as discussed in
chapter 5) by the elimination of unrealised profits where the subsidiary was the
selling entity and, should the parent be the selling entity, then the carrying amount
of the assets of the subsidiary will be affected.
The consolidated statement of profit or loss and other comprehensive income is
prepared by combining 100% of the revenue and expenses of the subsidiary on a
line-for-line basis with the corresponding items of the parent. The like items of
321
Chapter 6
income and expenses of the parent are combined with that of the subsidiary. The
dividends received from the subsidiary as reflected in the records of the parent, are
eliminated.
l Subsequently, the non-controlling interests in the profit for the year of the
subsidiary are deducted to obtain the profit for the year of the group attributable to
the shareholders of the parent. The non-controlling interests in profit for the year as
deducted in the consolidated statement of profit or loss and other comprehensive
income are added to the non-controlling interests in the consolidated statement of
financial position.
l Any other movements that have taken place during the current year in other
components of equity of the subsidiary are divided between the parent and noncontrolling interests on the basis of the equity interest of each. The parent’s share
of the other components of equity of the subsidiary is added to the corresponding
other components of equity of the parent, while the portion of the non-controlling
interests is added to the non-controlling interests as reflected in the consolidated
statement of financial position.
l The net movement from the acquisition date up to the beginning of the current
financial year in each of the other components of equity of the subsidiary (the
opposite of the net increase that had occurred in the net assets of the subsidiary
during the year) is divided between the parent and the non-controlling interests on
the basis of the equity interest of each. The share of the parent is added to the
corresponding other components of equity of the parent, while the portion of the
non-controlling interests is added to the non-controlling interests as reflected in the
consolidated statement of financial position.
The contents of the consolidated statement of profit or loss and other comprehensive
income and statement of financial position as well as the basic consolidation procedures
may be summarised as follows:
CONSOLIDATED FINANCIAL STATEMENTS
100%
100%
AND
100%
100%
AND
322
of assets and liabilities of P Ltd which includes:
l loan to S Ltd
but with the omission of:
l the consideration for the S Ltd business combination (cost price of shares
in S Ltd)
of assets and liabilities of all S Ltd’s which are subsidiaries at year end which
includes:
l loan from P Ltd (the loan accounts contra on consolidation)
bring into account for all S Ltd’s which are subsidiaries at year end:
l non-controlling interests
l goodwill/gain from a bargain purchase
of revenue and expenses of P Ltd
but with the omission of:
l dividends received from S Ltd
(the full interest received from S Ltd contras in the disclosable items)
of the revenue and expenses of all S Ltd’s for the period that S Ltd’s are
subsidiaries
bring into account:
l non-controlling interests in profit for all S Ltd’s for the period that such
S Ltd’s are subsidiaries
Adjustments and sundry aspects of group statements
Comment
P = Parent
S = Subsidiary/Subsidiaries
Adjustments at acquisition date
6.1 Recognition of the identifiable assets, liabilities and contingent
liabilities of the subsidiary at their fair values
l
l
l
The application of the acquisition method requires that the acquirer recognise on
the acquisition date, the fair values of the identifiable assets acquired and liabilities
assumed of the subsidiary(a) at the acquisition date (IFRS 3.10 and paragraph
2.6.2). In addition the acquirer also recognises and measures any non-controlling
interests in the acquiree(b).
The goodwill will be recognised as the excess of the consideration paid for the
acquisition plus the amount of non-controlling interests recognised ((b) above) over
the acquisition date amounts of the fair values of identifiable assets acquired and
liabilities assumed of the subsidiary ((a) above). Should (a) be in excess of the sum
of the consideration paid and (b), then a gain from a bargain purchase will be recognised.
If the fair values of the assets and liabilities of the subsidiary differ from the
carrying amounts in the records of the subsidiary, these carrying amounts must be
adjusted for purposes of the preparation of the consolidated financial statements
every time a consolidation is performed.
The consideration paid by the parent for the shares in the subsidiary is in many
cases affected by the fair value of the assets of the subsidiary. Sometimes it
happens that the fair value of the assets (especially land and buildings) differs
materially at the acquisition date from the carrying amounts, as recorded in the
accounting records of the subsidiary. In such a case, the parent can follow one of two
possible approaches, namely:
• to revalue the assets in the records of the subsidiary; or
• to revalue the assets pro forma upon consolidation.
1 Revaluations recorded in the records of the subsidiary
The first approach is for the subsidiary to revalue its asset at the acquisition date in
accordance with the values that were placed on it in the determination of the purchase
consideration. This alternative is possible if it is the groups’ accounting policy to revalue
its assets in terms of IAS 16 Property, Plant and Equipment. If so, then no special
adjustments are needed on consolidation, since the requirement that the assets of the
subsidiary must be recognised at their fair values in the consolidated financial
statements is met via the revaluation in the records of the subsidiary.
323
Chapter 6
Example 6.1
Recording of revaluation in records of subsidiary
On 1 March 20.18, P Ltd acquired an 80% interest in S Ltd, and the abridged
statements of financial position of the two companies on 28 February 20.19 are as
follows:
STATEMENTS OF FINANCIAL POSITION AS AT 28 FEBRUARY 20.19
P Ltd
ASSETS
Land
Investment in S Ltd at fair value
Trade receivables
Total assets
EQUITY AND LIABILITIES
Share capital (20 000/10 000 shares)
Revaluation surplus (25 000 × 81,352% (1))
Retained earnings:
On 1/3/20.18
Since acquisition
Deferred tax (25 000 × 66,6% × 28%)
Total equity and liabilities
S Ltd
–
34 000
36 000
50 000
–
20 000
R70 000
R70 000
20 000
–
10 000
20 338
30 000
20 000
–
7 500
27 500
4 662
R70 000
R70 000
(1) (100% – 18,648%(66,6% × 28%))
On the date on which P Ltd acquired the interest in S Ltd, land of S Ltd with a carrying
amount of R25 000 was valued at R50 000. S Ltd revalued the asset in its accounting
records. Assume that the value of the land has subsequently remained unchanged.
P Ltd classified the equity investment in S Ltd under IFRS 9 in its separate financial
statements and recognised fair value adjustments in a mark-to-market reserve (other
comprehensive income).
P Ltd elected to measure the non-controlling interests at their proportionate share of the
acquiree’s identifiable net assets at the acquisition date.
The company tax rate is 28% and capital gains tax (CGT) is calculated at 66,6%
thereof.
324
Adjustments and sundry aspects of group statements
Solution 6.1
The consolidated statement of financial position of the P Ltd Group is prepared as
follows:
P LTD GROUP
CONSOLIDATED STATEMENT OF FINANCIAL POSITION
AS AT 28 FEBRUARY 20.19
ASSETS
Non-current assets
Land (S)
Goodwill
50 000
3 730
53 730
Current assets
Trade receivables (36 000(P)) + 20 000(S))
56 000
Total assets
R109 730
EQUITY AND LIABILITIES
Equity attributable to owners of the parent
Share capital
Retained earnings (30 000(P) + 20 000(P) + 22 000(S))
20 000
72 000
Non-controlling interests
92 000
13 068
Total equity
105 068
Non-current liabilities
Deferred tax (S)
4 662
Total equity and liabilities
R109 730
Calculations
C1 Analysis of owners’ equity of S Ltd
Total
i At acquisition (1/3/20.18)
Share capital
Revaluation surplus
Retained earnings
P Ltd 80%
At
Since
NCI
10 000
20 338
7 500
8 000
16 270
6 000
2 000
4 068
1 500
Equity represented by goodwill – parent
37 838
3 730
30 270
3 730
7 568
–
Consideration and NCI
41 568
R34 000
7 568
ii Since acquisition
• Current year:
Profit for the year
27 500
22 000
5 500
R69 068
R22 000
R13 068
325
Chapter 6
Comment
a The recognition of deferred tax is required by the provisions of the accounting
statement IAS 12 Income Taxes.
b S Ltd recorded the revaluation of land as follows on 1 March 20.18:
Dr
R
Land (50 000 – 25 000)
Deferred tax (SFP) (25 000 × 66,6% × 28%)
Revaluation surplus (OCI)
Land revalued after valuation on 1/3/20.18
Cr
R
25 000
4 662
20 338
c The fair value of the (only) asset of S Ltd was therefore also taken into consideration
by P Ltd in the determination of the purchase price of the shares in the subsidiary.
Take note that a pro rata portion of the revaluation surplus is apportioned to the noncontrolling interests.
C2 Proof of calculation of goodwill of S 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)
34 000
7 568
41 568
Net of the identifiable assets acquired and liabilities assumed at acquisition
date: IFRS 3.32(b)
(37 838)
Goodwill
R3 730
2 Revaluations not recorded in records of subsidiary
A second approach is to revalue the assets of the subsidiary pro forma for the
preparation of the consolidated financial statements. This would entail not making any
entry in the accounting records of the subsidiary for the revaluation. If this approach is
followed, the assets of the subsidiary at consolidation must first be adjusted pro forma
to the values that were placed on them for the determination of the purchase price
(consideration). This has to be done for every consolidation until the investment is sold.
The income and expenses that relate to the abovementioned asset would be based on
the values attributable to the asset at the acquisition date. An example of this would be
depreciation. The depreciation on the revalued asset will be based on the revalued
amount of the asset as at the date of acquisition (i.e. the increased carrying amount of
the asset).
The discussion and examples that follow only relate to the second approach.
6.2 Revaluation at acquisition date of property, plant and equipment
not subject to depreciation
The consideration paid by the parent for the shares in a subsidiary is determined by the
value placed by the parent on the underlying value of the subsidiary’s net assets.
Should the fair value at the acquisition date of land of the subsidiary be higher than the
carrying amount thereof, the purchase consideration will include a surplus which will
require the adjustment of the carrying amount of the land to the fair value thereof.
326
Adjustments and sundry aspects of group statements
When an asset is revalued the carrying amount of the asset increases but the tax
base thereof does not. The deferred tax obligation that arises on the revaluation of an
asset is based on the manner in which the entity expects to recover the carrying
amount of the asset (IAS 12 Incomes Taxes). Land being a non-depreciable asset
can only be recovered by means of a sale of the land. The deferred tax raised on the
revaluation surplus of land must therefore reflect the tax consequences of selling the
land. The sale of land results in a capital gain which will attract capital gains tax which
will result in 66,6% of the gain being taxable at the current company tax rate.
Example 6.2
Pro forma revaluation of subsidiary’s land and buildings
at acquisition date
On 1 January 20.18, P Ltd acquired an 80% interest in S Ltd. The abridged statements
of financial position of the two companies on 31 December 20.18 were as follows:
STATEMENTS OF FINANCIAL POSITION AS AT 31 DECEMBER 20.18
P Ltd
ASSETS
Land and buildings
Investment in S Ltd at fair value
Trade receivables
Total assets
EQUITY AND LIABILITIES
Share capital (20 000/10 000 shares)
Retained earnings:
Balance at 1 January 20.18
Profit for the year for 20.18
Total equity and liabilities
S Ltd
24 200
48 000
28 800
25 000
–
7 000
R101 000
R32 000
20 000
10 000
61 000
20 000
12 000
10 000
R101 000
R32 000
On the acquisition date, the assets of S Ltd consisted only of land and buildings.
Carrying
amount
R5 000
R20 000
Fair
value
R22 160
R50 000
Land
Buildings (factory building)
The value of the land has subsequently remained unchanged.
P Ltd classified the equity investment in S Ltd under IFRS 9 in its separate financial
statements and recognised fair value adjustments in a mark-to-market reserve (other
comprehensive income).
P Ltd elected to measure the non-controlling interests in the acquiree at their fair value
of R12 000 on the acquisition date.
The company tax rate is 28% and capital gains tax (CGT) is calculated at 66,6%
thereof.
327
Chapter 6
Solution 6.2
The consolidated statement of financial position of the P Ltd Group at 31 December
20.18 will be drawn up as follows:
P LTD GROUP
CONSOLIDATED STATEMENT OF FINANCIAL POSITION
AS AT 31 DECEMBER 20.18
ASSETS
Non-current assets
Land and buildings (24 200(P) + 25 000(S) + 17 160(J1) + 30 000(J1))
Goodwill
96 360
2 440
98 800
Current assets
Trade receivables (28 800(P) + 7 000(S))
Total assets
35 800
R134 600
EQUITY AND LIABILITIES
Equity attributable to owners of the parent
Share capital (P)
Retained earnings (61 000(P) + 20 000(P) + 8 000(S)
20 000
89 000
109 000
14 000
123 000
Non-controlling interests
Total equity
Non-current liabilities
Deferred tax (J1)
Total equity and liabilities
11 600
R134 600
Calculations
C1 Analysis of owners’ equity of S Ltd
P Ltd 80%
Total
i At acquisition (1/1/20.18)
Share capital
Revaluation surplus (1)(J1)
Retained earnings
Equity represented by goodwill
– Parent and NCI
Consideration and NCI
ii Since acquisition
• Current year:
Profit for the year
(2)
(3)
At
NCI
10 000
35 560
12 000
8 000
28 448
9 600
2 000
7 112
2 400
57 560
46 048
11 512
2 440
1 952
488
60 000
R48 000
12 000
10 000
8 000
2 000
R70 000
R8 000
R14 000
(1) 81,352% (22 160 – 5 000) + 72% (50 000 – 20 000) = 35 560
(2) 100% – (66,6% × 28%) = 81,352%
(3) 100% – 28% = 72%
328
Since
Adjustments and sundry aspects of group statements
Comment
A part of the surplus, which is derived from the pro forma revaluation, is allocated to
the non-controlling interests. This is in accordance with the principle contained in
IFRS 10.B86(a) that the consolidated financial statements combine like items of assets,
liabilities, equity, income, expenses and cash flows of the parent with those of the
subsidiary. Therefore the consolidated financial statements present financial information
about the group as that of a single entity.
C2 Proof of calculation of goodwill 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)
48 000
12 000
60 000
Net of the identifiable assets acquired and liabilities assumed
at acquisition date: IFRS 3.32(b)
(57 560)
Goodwill
R2 440
C3 Pro forma consolidation journal entries
At acquisition journals
J1
Land (S)(SFP) (22 160 – 5 000)
Buildings (S)(SFP) (50 000 – 20 000)
Deferred tax (S)(SFP)
Dr
R
17 160
30 000
((17 160 × 66,6% × 28%) + (30 000 × 28%))
11 600
35 560
Revaluation surplus (S)(SCE)
Revaluation of land and buildings of subsidiary at
acquisition date
J2
J3
Share capital (S)(SCE)
Revaluation surplus (S)(SCE)
Retained earnings (S)(SCE)
Goodwill (S)(SFP) (parent and NCI)(1 952 + 488)
Investment in S Ltd (P)(SFP)
Non-controlling interests (S)(SFP)
Main elimination journal in respect of S Ltd at
acquisition date
Since acquisition journals
Non-controlling interests (S)(P/L)
Non-controlling interests (S)(SFP)
Allocation of the non-controlling interests’ portion of
current year's profit in respect of S Ltd
Cr
R
10 000
35 560
12 000
2 440
48 000
12 000
2 000
2 000
329
Chapter 6
Example 6.3
Pro forma revaluation of subsidiary’s assets at acquisition date
On 1 January 20.17, P Ltd acquired a 60% interest in S Ltd. The abridged statements
of financial position of the two companies on 31 December 20.18 were as follows:
STATEMENTS OF FINANCIAL POSITION AS AT 31 DECEMBER 20.18
P Ltd
S Ltd
80 000
130 000
68 200
190 000
28 800
110 000
140 000
133 000
–
37 000
R497 000
R420 000
180 000
100 000
140 000
155 000
22 000
210 000
95 000
15 000
R497 000
R420 000
On the acquisition date, the net assets of S Ltd consisted of the following:
Carrying
amount
Land
80 000
Buildings (factory building)
92 000
Equity investments
66 000
Trade receivables
44 000
Trade payables
(26 000)
Fair
value
125 045
105 000
86 000
35 000
(26 000)
R256 000
R325 045
ASSETS
Land
Buildings
Equity investments
Investment in S Ltd at fair value
Trade receivables
Total assets
EQUITY AND LIABILITIES
Share capital (180 000/100 000 shares)
Retained earnings:
Balance at 1 January 20.18
Profit for the year for 20.18
Trade payables
Total equity and liabilities
The value of the land has subsequently remained unchanged.
The remaining useful life of the building at the acquisition date is 13 years.
P Ltd classified the equity investment in S Ltd under IFRS 9 in its separate financial
statements and recognised fair value adjustments in a mark-to-market reserve (other
comprehensive income).
P Ltd elected to measure the non-controlling interests in the acquiree at their
acquisition date fair value of R125 000.
The company tax rate is 28% and capital gains tax (CGT) is calculated at 66,6%
thereof.
330
Adjustments and sundry aspects of group statements
Solution 6.3
The consolidated statement of financial position and consolidated statement of changes
in equity of the P Ltd Group at 31 December 20.18 will be drawn up as follows:
P LTD GROUP
CONSOLIDATED STATEMENT OF FINANCIAL POSITION
AS AT 31 DECEMBER 20.18
ASSETS
Non-current assets
Land and buildings (80 000(P) + 110 000(S) + 130 000(P) + 140 000(S)
516 045
221 200
3 205
740 450
+ 45 045(J1) + 13 000(J1) – 1 000(J5) – 1 000(J7))
Equity investments (68 200(P) + 133 000(S) + 20 000(J1))
Goodwill
Current assets
Trade receivables (28 800(P) + 37 000(S))
Total assets
65 800
R806 250
EQUITY AND LIABILITIES
Equity attributable to owners of the parent
Share capital (P)
Retained earnings
180 000
387 424
567 424
186 616
754 040
Non-controlling interests
Total equity
Non-current liabilities
Deferred tax (15 770(J1) – 2 520(J2) + 2 520(J4) – 280(J5) – 280(J8))
Current liabilities
Trade payables (22 000(P) + 15 000(S))
Total liabilities
15 210
37 000
52 210
Total equity and liabilities
R806 250
P LTD GROUP
CONSOLIDATED STATEMENT OF CHANGES IN EQUITY
FOR THE YEAR ENDED 31 DECEMBER 20.18
Balance at 1 January 20.18
Changes in equity for 20.18
Total comprehensive income
for the year:
Profit for the year
Balance at 31 December 20.18
Share
capital
Retained
earnings
180 000
*175 856
Total
Noncontrolling
interests
Total
equity
355 856
148 904
504 760
– ^211 568 211 568
37 712 249 280
R180 000 R387 424 R567 424 R186 616 R754 040
* 140 000(P) + 35 856(S) = 175 856
^ 155 000(P) + 94 280(S) – 37 712(J9) = 211 568
331
Chapter 6
Calculations
C1 Calculation of revaluation surplus and adjustment to retained earnings
at acquisition
Fair
value
Carrying
Difference
amount
Tax
rate
Tax
effect
After
tax
Land
Buildings
Equity investments
125 045
105 000
86 000
R316 045
80 000
92 000
66 000
R238 000
45 045
13 000
20 000
R78 045
18,648%
28%
18,648%
(8 400)
(3 640)
(3 730)
(R15 770)
36 645
9 360
16 270
R62 275
Trade receivables
Trade payables
35 000
(26 000)
44 000
(26 000)
(9 000)
–
28%
28%
R2 520
–
(R6 480)
–
R9 000
R18 000
(R9 000)
R2 520
(R6 480)
Net asset value
Share capital
256 000
(100 000)
Retained earnings
(at acquisition)
R156 000
C2 Analysis of owners’ equity of S Ltd
Total
i At acquisition (1/1/20.17)
Share capital
Revaluation surplus (C1)(Refer to J1)
Retained earnings (2)
P Ltd 60%
At
Since
NCI
100 000
62 275
149 520
60 000
37 365
89 712
40 000
24 910
59 808
Fair value of net assets (1)
Equity represented by goodwill
– Parent and NCI
311 795
187 077
124 718
3 205
2 923
282
Consideration and NCI
315 000 R190 000
125 000
ii Since acquisition
Retained earnings (3)
• Current year:
Profit for the year (4)
59 760
35 856
23 904
148 904
94 280
R469 040
56 568
37 712
R92 424 R186 616
(1) 325 045(given) – 15 770(J1)(C1) + 2 520(J2)(C1) = 311 795(after deferred tax has been brought
into account)
(2) 311 795 – 100 000 – 62 275 = 149 520 or 156 000(C1) – 6 480(J2) = 149 520
(3) 210 000 – 149 520 – 720(J5) = 59 760 or 210 000 – 156 000(C1) + 6 480(J4) – 720(J5) = 59 760
(4) 95 000 – 1 000(J7) + 280(J8) = 94 280
332
Adjustments and sundry aspects of group statements
C3 Proof of calculation of goodwill 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)
190 000
125 000
315 000
Net of the identifiable assets acquired and liabilities assumed
at acquisition date: IFRS 3.32(b)
(311 795)
Goodwill
R3 205
C4 Pro forma consolidation journal entries
At acquisition journals
J1 Land (S)(SFP) (125 045 – 80 000)
Buildings (S)(SFP) (105 000 – 92 000)
Equity investments (S)(SFP) (86 000 – 66 000)
Deferred tax (S)(SFP) ((45 045 × 66,6% × 28%) +
Dr
R
Cr
R
45 045
13 000
20 000
15 770
62 275
(13 000 × 28%) + (20 000 × 66,6% × 28%))
Revaluation surplus
Revaluation of non-current assets of subsidiary
at acquisition date
J2 Retained earnings (at acquisition) (S)(SCE)
(9 000 × 72%(after-tax))
Deferred tax (S)(SFP) (9 000 × 28%)
Trade receivables (35 000(FV) – 44 000(CA))
Revaluation of trade receivables of subsidiary at
acquisition date
J3 Share capital (S)(SCE)
Revaluation surplus (S)(SCE)
Retained earnings (S)(SCE)
Goodwill (SFP)
Investment in S Ltd (P)(SFP)
Non-controlling interests (S)(SFP)
Main elimination journal entry at acquisition date
of S Ltd
Since acquisition journals
J4 Trade receivables
Retained earnings (at acquisition) (S)(SCE)
Deferred tax (S)(SFP) (9 000 × 28%)
Reversal of trade receivables of subsidiary after
acquisition
J5 Retained earnings (S)(SCE) ((13 000/13) × 72%)
Deferred tax (S)(SFP) (1 000 × 28%)
Accumulated depreciation (S)(SFP)
Additional depreciation for 20.17 due to fair value
adjustment
6 480
2 520
100 000
62 275
149 520
3 205
9 000
720
280
9 000
190 000
125 000
6 480
2 520
1 000
continued
333
Chapter 6
Dr
R
J6 Retained earnings – Beginning of year (S)(SCE)
Non-controlling interests (S)(SFP)
Allocation of non-controlling interests' portion of retained
earnings (beginning of year)
23 904
J7 Depreciation (S)(P/L) (13 000/13)
Accumulated depreciation (S)(SFP)
Additional depreciation for 20.18 due to fair value
adjustment
1 000
J8 Deferred tax (S)(SFP) (1 000 × 28%)
Income tax expense (S)(P/L)
Income tax on additional deprecation for 20.18 due to fair
value adjustment
280
J9 Non-controlling interests (S)(SCI)
Non-controlling interests (S)(SFP)
Allocation of non-controlling interests' portion of current
year's profit ((95 000 – 1 000(J7) + 280(J8)) × 40%)
37 712
Cr
R
23 904
1 000
280
37 712
6.3 Subsequent sale of property, plant and equipment which had been
revalued at acquisition date – Revaluation not recognised in records
of subsidiary
l
l
l
l
334
Should the parent at the acquisition date of the subsidiary, for the purpose of
determining the consideration for the shares, value the land and buildings of the
subsidiary at a higher amount than its carrying amount (and such revaluation is not
recorded in the records of the subsidiary), such revaluation must be taken into
account on a pro forma basis in the annual drafting of the consolidated financial
statements, even if such land and buildings are no longer owned by the subsidiary.
It also follows that the gain or loss on the sale of the land and buildings will not be
the same for the group as for the subsidiary, because the cost price of the asset for
the group will differ from the cost price of the asset for the subsidiary. The gain or
loss in the hands of the subsidiary is the selling price less the cost price, whilst the
gain or loss for the group will be the selling price less the valuation of the asset at
the acquisition date (being the date of the business combination).
The pro forma revaluation of property, plant and equipment at the acquisition date
determines the amount of goodwill, and such goodwill is not altered merely
because the subsidiary no longer owns the property, plant and equipment. This
entails that the pro forma revaluation surplus arising from the initial revaluation at
the acquisition date should annually be brought into account on consolidation even
though the subsidiary no longer owns the property, plant and equipment concerned.
A revaluation surplus is thus credited annually (using the acquisition date as the
effective date) with the increased amount created by the original revaluation. The
corresponding pro forma debit is dealt with as follows:
• The property, plant and equipment concerned is debited as long as it is owned
by the parent.
Adjustments and sundry aspects of group statements
• The gain on sale of property, plant and equipment is debited in the year in which
the property, plant and equipment is sold.
• The retained earnings since acquisition of the subsidiary at the beginning of the
reporting period concerned is debited in the year which follows on the financial
year in which the particular property, plant and equipment was sold.
Example 6.4
Subsequent sale of property, plant and equipment, which was
revalued on acquisition
P Ltd paid R360 000 for an 80% interest in S Ltd on 1 January 20.16 when the latter’s
owners’ equity comprised the following:
Share capital (110 000 shares)
R110 000
Retained earnings
R175 000
On the acquisition date, P Ltd valued the land and buildings of S Ltd, with a carrying
amount of R250 000, at R350 000. This revaluation was not recorded in the books of
S Ltd.
The abridged statements of financial position of P Ltd and S Ltd at 31 December 20.18
are as follows:
STATEMENTS OF FINANCIAL POSITION AS AT 31 DECEMBER 20.18
ASSETS
Property, plant and equipment
Investment in S Ltd at fair value
Trade receivables
Total assets
EQUITY AND LIABILITIES
Share capital (90 000/110 000 shares)
Mark-to-market reserve
Retained earnings:
Balance on 1 January 20.18
Profit for the year
Gain on sale of land and buildings
Total equity and liabilities
P Ltd
S Ltd
113 000
380 000
74 000
562 500
–
87 500
R567 000
R650 000
90 000
20 000
110 000
–
342 000
115 000
–
290 000
100 000
150 000
R567 000
R650 000
P Ltd classified the equity investment in S Ltd under IFRS 9 in its separate financial
statements and recognised fair value adjustments in a mark-to-market reserve (other
comprehensive income).
The full fair value adjustment of R20 000 was made in the current year.
P Ltd elected to measure the non-controlling interests in the acquiree at their
proportionate share of the acquiree’s identifiable net assets at the acquisition date.
During 20.18, S Ltd sold the land and buildings referred to above for R400 000.
Ignore all deferred tax implications.
335
Chapter 6
Solution 6.4
The abridged financial statements of the P Ltd Group for the year ended 31 December
20.18 will be compiled as follows:
P LTD GROUP
CONSOLIDATED STATEMENT OF FINANCIAL POSITION
AS AT 31 DECEMBER 20.18
ASSETS
Non-current assets
Property, plant and equipment (113 000(P) + 562 500(S))
Goodwill
Current assets
Trade receivables (74 000(P) + 87 500(S))
Total assets
EQUITY AND LIABILITIES
Equity attributable to owners of the parent
Share capital (P)
Retained earnings (342 000(P) + 115 000(P) + 212 000(S))
675 500
52 000
727 500
161 500
R889 000
90 000
669 000
Non-controlling interests
759 000
130 000
Total equity
889 000
Total equity and liabilities
R889 000
P LTD GROUP
EXTRACT FROM THE CONSOLIDATED STATEMENT OF PROFIT OR LOSS
AND OTHER COMPREHENSIVE INCOME
FOR THE YEAR ENDED 31 DECEMBER 20.18
PROFIT FOR THE YEAR (1)
Other comprehensive income for the year
TOTAL COMPREHENSIVE INCOME FOR THE YEAR
Total comprehensive income attributable to:
Owners of the parent
Non-controlling interests
265 000
–
R265 000
235 000
30 000
R265 000
(1) 115 000(P) + 100 000(S) + 150 000(S) – 100 000(J2) = 265 000
336
Adjustments and sundry aspects of group statements
P LTD GROUP
CONSOLIDATED STATEMENT OF CHANGES IN EQUITY
FOR THE YEAR ENDED 31 DECEMBER 20.18
Balance at 1 January 20.18
Changes in equity for 20.18
Total comprehensive income for
the year:
Profit for the year
Balance at 31 December 20.18
Share
capital
Retained
earnings
90 000
*434 000
Total
Noncontrolling
interests
Total
equity
524 000
100 000
624 000
–
235 000 235 000
30 000 265 000
R90 000 ^R669 000 R759 000 R130 000 R889 000
* 342 000(P) + 92 000(S) = 434 000
^ 342 000(P) + 115 000(P) + 212 000(S) = 669 000
Calculations
C1 Analysis of owners’ equity of S Ltd
Total
i At acquisition (1/1/20.16)
Share capital
Revaluation surplus (350 000 – 250 000)
P Ltd 80%
At
Since
NCI
110 000
88 000
22 000
Retained earnings
100 000
175 000
80 000
140 000
20 000
35 000
Equity represented by goodwill – Parent
385 000
52 000
308 000
52 000
77 000
–
Consideration (1) and NCI
437 000 R360 000
77 000
(Deferred tax ignored)
ii Since acquisition
• To beginning of current year:
Retained earnings (290 000 – 175 000)
• Current year:
Profit for the year
115 000
92 000
23 000
100 000
150 000
120 000
30 000
(100 000 + (150 000 – 100 000))
R702 000
R212 000 R130 000
(1) 380 000 – 20 000 = 360 000
C2 Proof of calculation of goodwill of S 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)
360 000
77 000
437 000
Net of the identifiable assets acquired and liabilities assumed
at acquisition date: IFRS 3.32(b)
(385 000)
Goodwill
R52 000
337
Chapter 6
C3 Pro forma consolidation journal entries
31 December 20.18
Dr
R
J1
Mark-to-market reserve (P)(OCI)
Investment in S Ltd (P)(SFP)
Reversal of fair value adjustment
20 000
J2
Gain on sale of land and buildings (S)(P/L)
Revaluation surplus (S)(OCI)
Adjustment of pro forma revaluation of land
and buildings of S Ltd
100 000
Cr
R
20 000
100 000
The journal entry above could also be replaced with the following journal entries:
Dr
R
J2.1 Land and buildings (S)(SFP)
Revaluation surplus (S)(OCI)
Pro forma revaluation of subsidiary’s land and
buildings at acquisition date (350 000 – 250 000)
100 000
J2.2 Gain on sale of land and buildings (S)(P/L)
Land and buildings (S)(SFP)
Sale of land and buildings revalued at acquisition
date
100 000
Cr
R
100 000
100 000
31 December 20.19 and all the future years
Dr
R
J3
Retained earnings – Since acquisition (S)(SCE)
Revaluation surplus (S)(OCI)
Offsetting of the pro forma revaluation of S Ltd’s
land and buildings. The land and buildings were
sold during the period since the acquisition date
to the beginning of the current year
100 000
Cr
R
100 000
The journal entry above could also be replaced with the following journal entries:
Dr
R
J3.1 Land and buildings (S)(SFP)
Revaluation surplus (S)(OCI)
Pro forma revaluation of subsidiary’s land and
buildings at acquisition date
100 000
J3.2 Retained earnings – Since acquisition (S)(SCE)
Land and buildings (S)(SFP)
Sale of land and buildings revalued at date of
acquisition. The land and buildings were sold in the
period since the acquisition date to the beginning
of the current year
100 000
338
Cr
R
100 000
100 000
Adjustments and sundry aspects of group statements
C4 Proof of the gain on sale of land and buildings for the group
P Ltd
Selling price
Carrying amount
Gain per
records
of S Ltd
Pro forma
consolidation
journal
Gain for
purposes
of the
group
400 000
(250 000)
Gain on sale of land and
buildings per trial balance
R–
R150 000
(R100 000)(J2) R50 000(1)
(1) 400 000(selling price) – 350 000(carrying amount for the group) = 50 000
6.4 Revaluation at acquisition date of depreciable property, plant
and equipment
The measurement of income and expenses of the subsidiary is based on the amounts
of assets and liabilities recognised in the consolidated financial statements at the
acquisition date (IFRS 10.B88). When property, plant and equipment that is subject to
depreciation is revalued, then the depreciation expense recognised in the consolidated
statement of profit or loss and other comprehensive income after the acquisition date is
calculated on the revalued amount of the related depreciable asset that was recognised
in the consolidated financial statements at the acquisition date (IFRS 10.B88).
Example 6.5
Revaluation of plant and detailed journal entries
On 1 July 20.14, P Ltd acquired 80% of the issued ordinary shares of S Ltd.
At that date, the plant of S Ltd, with a cost price of R200 000 and a carrying amount of
R120 000, was revalued at R150 000. At that stage, P Ltd also confirmed the original
estimated useful life of the plant as five years.
S Ltd depreciates the plant at 20% per year on cost price. S Ltd’s depreciation per year
is R200 000 × 20% = R40 000
The expired useful life at 1 July 20.14 is calculated as follows:
Cost of plant
200 000
Carrying amount of plant
(120 000)
Accumulated depreciation
R80 000
∴ Expired useful life = R80 000 ÷ R40 000 = 2 years
Since the original estimated useful life was confirmed as five years and the number of
years that has expired is two years (as above), the remaining useful life of the plant is
three years.
The revaluation was not recorded in the books of S Ltd.
As at the revaluation date the carrying amount of the plant was equal to the tax base
thereof. The company tax rate is 28%.
339
Chapter 6
The plant of the subsidiary was pro forma revalued upwards on 1 July 20.14 by
R30 000(150 000 – 120 000) to R150 000. In the consolidated financial statements, the
increased carrying amount must be written off as depreciation on a straight-line basis
over the remaining useful life of the plant of three years. It follows that the depreciation
on consolidation is increased annually as from 1 July 20.14 by R10 000 (30 000 ÷
3 years) per year.
Assume that P Ltd had no plant and that the plant as above is the only plant that S Ltd
had.
Solution 6.5
The necessary pro forma consolidation journal entries for the year ended 30 June 20.15
are as follows:
Dr
R
J1
Plant (S)(SFP) (150 000 – 120 000)
Deferred tax (S)(SFP) (30 000 × 28%)
Revaluation surplus (S)(SCE)
Pro forma revaluation of plant of S Ltd
at acquisition date
30 000
J2
Depreciation (S)(P/L)
Accumulated depreciation (S)(SFP)
Additional depreciation for the current year (30 000/3)
10 000
J3
Deferred tax (S)(SFP)
Income tax expense (S)(P/L) (10 000 × 28%)
Tax implication of additional depreciation
for the current year
2 800
Cr
R
8 400
21 600
10 000
2 800
C1 Explanation of deprecation for the group
Revaluation amount
Carrying amount
150 000
(120 000)
Revaluation surplus
Additional depreciation per year as a result
of the revaluation (30 000/3 years)
R30 000
Cost of plant
Depreciation per year in records of S Ltd
R200 000
(200 000/5 years)
340
Total
depreciation
for the
plant
for 20.15
R10 000
R50 000
R40 000
Adjustments and sundry aspects of group statements
Per trial
balance of
P Ltd
Depreciation – Plant
R–
Per trial
balance of
S Ltd
Pro forma
consolidation
journal
Depreciation
for purposes
of the group
R40 000(dr)
R10 000(dr)(J2)
R50 000
Deferred
tax @28%
C2 Explanation of deferred tax
For S Ltd
Carrying amount at 1 July 20.14
Depreciation/ Tax allowance
– 20.15 (200 000/5)
Carrying
amount
Tax base
Temporary
differences
120 000
120 000
–
–
(40 000)
(40 000)
–
–
R80 000
R80 000
–
–
Carrying
amount
Tax base
Temporary
differences
120 000
30 000
120 000
–
–
–
150 000
120 000
30 000
(50 000)
(40 000)
(10 000) (2 800)(dr)(J3)
R100 000
R80 000
R20 000 R5 600(cr)
For the group
Carrying amount at 1 July 20.14
Revaluation (150 000 – 120 000)
Depreciation/ Tax allowance
– 20.15 (150 000/3);(200 000/5)
Deferred
tax @28%
–
–
8 400(cr)(J1)
The necessary pro forma consolidation journal entries for the year ended
30 June 20.16 (the next year) are as follows:
Dr
R
J1
Plant (S)(SFP)(150 000 – 120 000)
Deferred tax (S)(SFP) (30 000 × 28%)
Revaluation surplus (S)(SCE)
Pro forma revaluation of plant of S Ltd at date
of acquisition
J2
Retained earnings – Since acquisition (S)(SCE)
(10 000 – 2 800)
Deferred tax (S)(SFP) (10 000 × 28%)
Accumulated depreciation (S)(SFP)
Additional depreciation since acquisition to
beginning of current year (30 000/3)
30 000
7 200
2 800
Cr
R
8 400
21 600
10 000
continued
341
Chapter 6
Dr
R
J3
Depreciation (S)(P/L)
Accumulated depreciation (S)(SFP)
Additional depreciation for the current year
J4
Deferred tax (S)(SFP)
Income tax expense (S)(P/L) (10 000 × 28%)
Tax implications of additional deprecation
for the current year
10 000
Cr
R
10 000
(30 000/3)
2 800
2 800
The necessary pro forma consolidation journal entries for the year ended
30 June 20.17 (the following year) are as follows:
Dr
R
J1
Plant (S)(SFP) (150 000 – 120 000)
Deferred tax (S)(SFP) (30 000 × 28%)
Revaluation surplus (S)(SCE)
Pro forma revaluation of plant of S Ltd at date
of acquisition
J2
Retained earnings – Since acquisition (S)(SCE)
(10 000 – 2 800 + 10 000 – 2 800)
Deferred tax (S)(SFP) (20 000 × 28%)
Accumulated depreciation (S)(SFP)
Additional depreciation since acquisition to
beginning of current year (30 000/3 × 2)
J3
Depreciation (S)(P/L)
Accumulated depreciation (S)(SFP)
Additional depreciation for the current year
30 000
14 400
5 600
10 000
Cr
R
8 400
21 600
20 000
10 000
(30 000/3)
J4
Deferred tax (S)(SFP)
Income tax expense (S)(P/L)(10 000 × 28%)
Tax implications of additional deprecation
for the current year
2 800
2 800
The necessary pro forma consolidation journal entries for the year ended
30 June 20.18 and all future years are as follows:
Dr
R
J1
Plant (S)(SFP)(150 000 – 120 000)
Deferred tax (S)(SFP) (30 000 × 28%)
Revaluation surplus (S)(SCE)
Pro forma revaluation of plant of S Ltd at date
of acquisition
30 000
J2
Retained earnings – Since acquisition (S)(SCE)
Deferred tax (S)(SFP) (30 000 × 28%)
Accumulated depreciation (S)(SFP) (30 000/3 × 3)
Additional depreciation since acquisition to
beginning of current year
21 600
8 400
342
Cr
R
8 400
21 600
30 000
Adjustments and sundry aspects of group statements
However, the above two journals may also be replaced by the following journal:
Dr
R
J1
Retained earnings – Since acquisition (S)(SCE)
Revaluation surplus (S)(SCE) (30 000 × (100% – 28%))
Pro forma revaluation of plant of S Ltd at date
of acquisition, now fully depreciated
Example 6.6
21 600
Cr
R
21 600
Revaluation of plant and detailed journal entries for
subsequent periods
Assume the same information as example 6.5 (the previous example) but add the
following information:
S Ltd sells this plant on 31 December 20.15 for R30 000.
Solution 6.6
The necessary pro forma consolidation journal entries for the year ended 30 June 20.16
are as follows:
Dr
R
J1
Plant (S)(SFP) (150 000 – 120 000)
Deferred tax (S)(SFP) (30 000 × 28%)
Revaluation surplus (S)(SCE)
Pro forma revaluation of plant of S Ltd at date
of acquisition
30 000
J2
Retained earnings – Since acquisition (S)(SCE)
Deferred tax (S)(SFP) (10 000 × 28%)
Accumulated depreciation (S)(SFP)
Additional depreciation since acquisition to
beginning of current year (30 000/3)
7 200
2 800
Depreciation (S)(P/L)
Accumulated depreciation (S)(SFP)
Additional depreciation for the current year
5 000
J3
Cr
R
8 400
21 600
10 000
5 000
(30 000/3 × 6/12)
J4
Deferred tax (S)(SFP)
Income tax expense (S)(P/L)(5 000 × 28%)
Tax implications of additional depreciation
for the current year
1 400
1 400
continued
343
Chapter 6
Dr
R
J5
Deferred tax (S)(SFP) (8 400 – 2 800 – 1 400)
Accumulated depreciation (S)(SFP)(10 000 + 5 000)
Loss on sale of plant (S)(P/L)(45 000 – 30 000)
Income tax expense (S)(P/L)(15 000 × 28%)
Plant (S)(SFP)
Adjustment to consolidated loss upon sale of plant
Cr
R
4 200
15 000
15 000
4 200
30 000
C1 Calculation of loss on sale of plant in the books of S Ltd and for group
purposes
Carrying
amount
Revalued
amount
1 July 20.14
Depreciation (200 000/5)
120 000 1 July 20.14
(40 000) Depreciation (150 000/3)
150 000
(50 000)
30 June 20.15
Depreciation (40 000 × 6/12)
80 000 30 June 20.15
(20 000) Depreciation (50 000 × 6/12)
100 000
(25 000)
31 December 20.15
Selling price at
31 December 20.15
60 000 31 December 20.15
Selling price at
(30 000)
31 December 20.15
75 000
(30 000)
Loss in records of subsidiary
R30 000 Loss for group purposes
R45 000
C2 Proof of loss on sale of plant for the group
Loss per
records
of S Ltd
P Ltd
Selling price
Carrying amount
Loss on sale of plant per trial
balance
Pro forma
consolidation
journal
Loss for
purposes
of the
group
30 000
(60 000)
R–
(R30 000) (R15 000)(J5)
(R45 000)
6.5 Revaluation of inventory at acquisition date
In this section, the revaluation of two types of inventory is dealt with, namely:
l ordinary trading inventory, which is routinely purchased and sold by the subsidiary;
and
l revaluation of property constituting inventory in the hands of the subsidiary, for
example, stands held as inventory.
Inventory held by a subsidiary must, in accordance with IAS 2.9 Inventories, be valued
at the lower of cost and net realisable value. If the FIFO or average cost formula is
applied by the subsidiary, the carrying amount of the inventory and the value placed on
such inventory by the parent to determine the purchase price of the shares will
generally not differ materially.
The parent can, however, place a fair value on the inventory of the subsidiary other
than the inventory’s carrying amount in the subsidiary’s records.
344
Adjustments and sundry aspects of group statements
Example 6.7
Revaluation of inventory and detailed journal entries
On 1 January 20.18, P Ltd purchased 80% of the issued ordinary shares of S Ltd. At
that date, P Ltd placed a value of R5 000 less than its carrying amount on the inventory
of S Ltd. This revaluation was not recorded in the books of S Ltd. The company tax rate
is 28%.
Solution 6.7
The necessary pro forma consolidation journal entries for the year ended 31 December
20.18 are as follows:
Dr
R
J1
J2
Cr
R
Retained earnings – At acquisition (S)(SCE)
Deferred tax (S)(SFP) (5 000 × 28%)
Cost of sales (S)(P/L)
Pro forma revaluation of S Ltd’s inventory at
acquisition date
3 600
1 400
Income tax expense (S)(P/L)
Deferred tax (S)(SFP)
Tax implication of the profit realisation during the
current year
1 400
5 000
1 400
Comment
J1 can be explained as follows, as it is a combination of the following two pro forma
journals:
At acquisition date the following pro forma journal is performed:
Dr
R
J1(1)
Retained earnings – Beginning of year (S)(SCE)
Deferred tax (S)(SFP) (5 000 × 28%)
Inventories (S)(SFP)
Revaluation of inventory of subsidiary at
acquisition date
Cr
R
3 600
1 400
5 000
Once the inventories are sold by S Ltd the following pro forma journal would be
recorded on the date of sale, to account for the realisation of the profit:
Dr
R
J1(2)
Inventories (S)(SFP)
Cost of sales (P)(P/L)
Recognition of profit realisation
5 000
Income tax expense (S)(P/L)
Deferred tax (S)(SFP) (5 000 × 28%)
Tax implication of the realisation of the profit
during the current year
1 400
Cr
R
5 000
1 400
By the end of the reporting period the pro-forma journal (as shown above (J1)) is
processed instead.
345
Chapter 6
The net effect of the pro forma consolidation journal entries is that retained earnings at
acquisition date is reduced by R3 600 and the subsidiary’s post-acquisition profit is
increased by R3 600 to formalise the view of the parent, namely that the subsidiary in
its own records will incur an after-tax loss of R3 600 after 1 January 20.18 in respect of
which the subsidiary should already have made provision, in the year ending on
31 December 20.17.
The necessary pro forma consolidation journal entry in respect of the year ending
31 December 20.19 and all future years is as follows:
Dr
R
J1
Retained earnings – At acquisition (S)
Retained earnings – Since acquisition (S)
Pro forma revaluation of S Ltd’s inventory
on acquisition date
Example 6.8
Cr
R
3 600
3 600
Revaluation of current asset (property) at acquisition date
The following is the abridged statement of financial position of S Ltd as at
31 December 20.17:
S LTD
STATEMENT OF FINANCIAL POSITION AS AT 31 DECEMBER 20.17
ASSETS
Inventory – Property
R50 000
EQUITY AND LIABILITIES
Share capital (50 000 shares)
R50 000
On 1 January 20.18, P Ltd acquired all the issued shares of S Ltd for R450 000. For the
purpose of determining the purchase price, S Ltd’s inventory was valued at R600 000.
The company tax rate is 28%.
On 31 December 20.18, the abridged financial statements of P Ltd and S Ltd were as
follows:
STATEMENTS OF FINANCIAL POSITION AS AT 31 DECEMBER 20.18
ASSETS
Property, plant and equipment
Inventory
Loan to P Ltd
Trade receivables
Investment in S Ltd: 50 000 shares at fair value
Total assets
EQUITY AND LIABILITIES
Share capital (60 000/50 000 shares)
Retained earnings
Loan from S Ltd
Total equity and liabilities
346
P Ltd
S Ltd
150 000
30 000
–
19 600
450 000
260 300
20 000
15 000
13 900
–
R649 600
R309 200
60 000
574 600
15 000
50 000
259 200
–
R649 600
R309 200
Adjustments and sundry aspects of group statements
STATEMENTS OF PROFIT OR LOSS AND OTHER COMPREHENSIVE INCOME
FOR THE YEAR ENDED 31 DECEMBER 20.18
P Ltd
S Ltd
Revenue
Cost of sales
80 000
(40 000)
480 000
(30 000)
Gross profit
Other expenses
40 000
(10 000)
450 000
(90 000)
Profit before tax
Income tax expense
30 000
(8 400)
360 000
(100 800)
PROFIT FOR THE YEAR
21 600
259 200
–
–
R21 600
R259 200
Other comprehensive income for the year
TOTAL COMPREHENSIVE INCOME FOR THE YEAR
EXTRACT FROM THE STATEMENTS OF CHANGES IN EQUITY
FOR THE YEAR ENDED 31 DECEMBER 20.18
Retained earnings
P Ltd
Balance at 1 January 20.18
Changes in equity for 20.18
Total comprehensive income for the year:
Profit for the year
Balance at 31 December 20.18
S Ltd
553 000
–
21 600
259 200
R574 600
R259 200
During 20.18, S Ltd made no inventory purchases and sold 60% of the inventory that
was on hand at 1 January 20.18.
P Ltd elected to measure the non-controlling interests in the acquiree at their
proportionate share of the acquiree’s identifiable net assets at the acquisition date.
347
Chapter 6
Solution 6.8
The consolidated financial statements for the P Ltd Group for the year ended
31 December 20.14 will be drawn up as follows:
P LTD GROUP
CONSOLIDATED STATEMENT OF FINANCIAL POSITION
AS AT 31 DECEMBER 20.18
ASSETS
Non-current assets
Property, plant and equipment (150 000(P) + 260 300(S))
Goodwill
410 300
4 000
414 300
Current assets
Inventory (30 000(P) + 20 000(S) + 550 000(J1) – 330 000(J2))
Trade and other receivables (19 600(P) + 13 900(S))
270 000
33 500
303 500
Total assets
EQUITY AND LIABILITIES
Share capital (P)
Retained earnings
Total equity
Non-current liabilities
Deferred tax (154 000(J1) – 92 400(J3))
Total equity and liabilities
R717 800
60 000
596 200
656 200
61 600
R717 800
P LTD GROUP
CONSOLIDATED STATEMENT OF PROFIT OR LOSS
AND OTHER COMPREHENSIVE INCOME
FOR THE YEAR ENDED 31 DECEMBER 20.18
Revenue (80 000(P) + 480 000(S))
Cost of sales (40 000(P) + 30 000(S) + 330 000(J2))
560 000
(400 000)
Gross profit
Other expenses (10 000(P) + 90 000(S))
160 000
(100 000)
Profit before tax
Income tax expense (8 400(P) + 100 800(S) – 92 400(J3))
60 000
(16 800)
PROFIT FOR THE YEAR
43 200
Other comprehensive income for the year
TOTAL COMPREHENSIVE INCOME FOR THE YEAR
348
–
R43 200
Adjustments and sundry aspects of group statements
P LTD GROUP
CONSOLIDATED STATEMENT OF CHANGES IN EQUITY
FOR THE YEAR ENDED 31 DECEMBER 20.18
Balance at 1 January 20.18
Changes in equity for 20.18
Total comprehensive income for the year:
Share
capital
Retained
earnings
Total
60 000
553 000
613 000
–
43 200
43 200
Profit for the year
Balance at 31 December 20.18
R60 000
R596 200 R656 200
Calculations
C1 Analysis of owners’ equity of S Ltd
Total
P Ltd 100%
At
i At acquisition (1/1/20.18)
Share capital
Retained earnings ((600 000 – 50 000) × 72%)
50 000
396 000
50 000
396 000
Equity represented by goodwill – Parent
446 000
4 000
446 000
4 000
Consideration and NCI
450 000
R450 000
ii Since acquisition
• Current year:
Profit for the year (259 200 – 330 000(J2) + 92 400(J3))
21 600
21 600
R471 600
R21 600
C2 Proof of calculation of goodwill of S 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)
Net of the identifiable assets acquired and liabilities assumed
at acquisition date: IFRS 3.32(b)
Goodwill
Since
450 000
–
450 000
(446 000)
R4 000
349
Chapter 6
C3 Pro forma consolidation journal entries
Dr
R
J1
Inventory (S)(SFP) (600 000 – 50 000)
Retained earnings – At acquisition (S)(SCE)
Deferred tax (SFP) (550 000 × 28%)
Pro forma revaluation of S Ltd’s inventory
at acquisition date
550 000
J2
Cost of sales (S)(P/L)
Inventory (S)(SFP)
Sale of 60% of inventory as revalued at acquisition
date (550 000 × 60%)
330 000
J3
Deferred tax (S)(SFP)
Income tax expense (S)(P/L)
Reversal of appropriate part of deferred tax created
at acquisition (330 000 × 28%)
92 400
Cr
R
396 000
154 000
330 000
92 400
Comment
S Ltd's closing inventory as per the separate financial statements is R20 000. However,
for the group the inventory value is based on the fair value as at the acquisition date of the
business combination.
As there were no purchases during the current reporting period the inventory on hand at
the end of the financial year is the balance of the inventory that is unsold at the end of the
reporting period.
Therefore the fair value of the inventory at reporting date should be:
R240 000 (R600 000 × 40%(unsold portion)).
This is achieved by processing the above-mentioned pro forma consolidation journal
entries as follows:
R20 000(S) + 550 000(J1) – 330 000(J2) = R240 000
Impairment of goodwill
6.6 Significance of goodwill
Goodwill is defined in IFRS 3 Appendix A as “an asset representing the future
economic benefits arising from other assets acquired in a business combination that
are not individually identified and separately recognised”. This implies that the acquirer
made a payment in the anticipation of earning future economic benefits from assets that
are not individually identified at the time of the acquisition. IAS 38 Intangible Assets
prescribes the accounting treatment for identifiable intangible assets acquired in a
business combination. An intangible asset is defined as an identifiable non-monetary
asset without physical substance (IFRS 3 Appendix A). Goodwill acquired in a business
combination is carried at the amount that was recognised at the acquisition date of the
acquiree less any accumulated impairment losses and is disclosed under “Non-current
assets" in the consolidated statement of financial position.
350
Adjustments and sundry aspects of group statements
6.7 Impairment losses
After initial recognition, goodwill acquired in a business combination is tested annually
for impairment, or more frequently if events or changes in circumstances indicate that
the asset might be impaired, in accordance with the requirements of IAS 36
Impairment of Assets.
IAS 36 prescribes the accounting treatment for impairment losses. An impairment loss
is the amount by which the carrying amount of an asset or cash generating unit (CGU)
exceeds its recoverable amount (IAS 36.6). A CGU represents the smallest identifiable
group of assets that generates cash inflows that are largely independent of the cash
inflows from other assets or groups of assets (i.e. the subsidiary can be considered to
be the CGU). The recoverable amount of an asset or CGU is the higher of its fair value
less costs of disposal and its value in use. In terms of IAS 36.6 the value in use is the
present value of the future cash flows expected to be derived from an asset or CGU
and the fair value less costs of disposal is the price that would be received to sell an
asset or paid to transfer a liability in an orderly transaction between market participants
at the measurement date, less the costs of disposal.
When establishing whether a CGU is impaired or not, the basis of calculating the
carrying amount of the CGU must be the same as the basis for calculating the
recoverable amount (i.e. the same items must be included). If, after determining the
recoverable amount of the subsidiary (CGU), it is found to be lower than the carrying
amount of the subsidiary, an impairment loss is recognised. The impairment loss
reduces the carrying amount of the assets of the CGU but is first allocated to reduce
the carrying amount of any goodwill of the CGU (IAS 36.104(a)).
Goodwill will be reflected at cost less accumulated impairment losses in the
consolidated statement of financial position.
The impairment losses recognised in respect of impaired goodwill are never reinstated
(i.e. reversed). This is to avoid recognising internally generated goodwill which is
prohibited by IAS 38.
6.8 Losses from the changes in the fair value of the equity investments
of the parent
Where a parent has investments in equity instruments, then these are measured at fair
value and any gains or losses on remeasurement are recognised in profit or loss
(FVTPL1) with one exception. For an investment in an equity instrument that is not held
for trading, an entity can choose on an instrument for instrument basis, on initial
recognition, to irrevocably elect to present all fair value changes from the investment in
other comprehensive income (FVTOCI2) (IFRS 9.5.7.5). Amounts presented in other
comprehensive income shall not be subsequently transferred to profit or loss
(IFRS 9.B5.7.1). Dividends on such investments are recognised in profit or loss unless
the dividend clearly represents a recovery of part of the cost of the investment
(IFRS 9.B5.7.1).
________________________
1
2
Fair value through profit or loss.
Fair value through other comprehensive income.
351
Chapter 6
If there has been a decrease in the fair value of the equity investment of the parent and
the parent accounts for equity investments as at FVTPL, then the following journal
would have been processed in the accounting records of the parent:
Dr
R
J1
Fair value adjustment (P/L)
Investment in S Ltd (SFP)
Decrease in fair value of S Ltd at year end
Cr
R
xxx
xxx
If there has been a decrease in the fair value of the equity investment of the parent and
the parent accounts for equity investments as at FVTOCI, then the following journal
would have been processed in the accounting records of the parent:
Dr
R
J1
Mark-to-market reserve (OCI)
Investment in S Ltd (SFP)
Decrease in fair value of S Ltd at year end
Cr
R
xxx
xxx
In both cases these journal entries would need to be reversed during the preparation of
the consolidated financial statements. On consolidation, any fair value adjustments that
were recognised in the parent's individual accounting records since acquisition must be
reversed to determine the at acquisition date fair value of the consideration (equity
investment).
6.9 Impairment losses and non-controlling interests
In terms of IFRS 3.32 there are two measurement options for determining the noncontrolling interests at acquisition of an acquiree. When the goodwill amount
attributable to a business combination is determined at acquisition it will vary depending
on the measurement option applied at acquisition. Consider the following two
scenarios:
l When P Ltd has elected to measure the non-controlling interests at their
proportionate share of the acquiree’s identifiable net assets at the acquisition date,
the total goodwill that is attributed to a subsidiary will only comprise that attributable
to the parent (amount contributed by the non-controlling interests is Rnil as it is not
measured at fair value).
l When P Ltd has elected to measure the non-controlling interests at its fair value at
the acquisition date, the total goodwill is attributable to the subsidiary and will
comprise the portion attributable to the parent as well as the portion attributable to
the non-controlling interests.
The annual goodwill impairment test involves comparing the entire recoverable amount
of the CGU (Subsidiary) with the entire carrying amount of the CGU (Subsidiary). This
is not a problem when goodwill is measured at fair value but when the goodwill is
measured at the non-controlling interests' proportionate share of the acquiree’s
identifiable net assets, the recoverable amount of the subsidiary will include goodwill
attributable to both the parent and the non-controlling interests. In contrast the goodwill
recognised in the consolidated statement of financial position includes only the portion
352
Adjustments and sundry aspects of group statements
of goodwill allocated to the parent. This implies that the carrying amount of the
subsidiary would need to be restated to include the unrecognised non-controlling
interests' portion of goodwill. Please refer to the following illustrative example:
Example 6.9
Impairment of goodwill – Difference between non-controlling
interests measured at proportionate share of identifiable net
assets and non-controlling interests measured at fair value
The following information is available:
P Ltd acquires an 80% interest in subsidiary S Ltd.
Acquisition date of subsidiary
Consideration paid
Fair value of total identifiable net assets
Fair value of non-controlling interests on 1/1/20.18
Recoverable amount for S Ltd on 31/1/20.18
1/1/20.18
R140 000
R150 000
R40 000
R162 500
Solution 6.9
(a) Non-controlling interests measured at their proportionate share of
identifiable net assets
P Ltd 80%
Total
i At acquisition (1/1/20.18)
Identifiable net assets
Equity represented by goodwill – Parent
Consideration and NCI
Goodwill impairment
At
150 000
20 000
120 000
20 000
170 000
(10 000)
140 000
R160 000
Goodwill impairment
Since
NCI
30 000
–
(10 000)
30 000
–
R10 000
R30 000
(10 000)
R10 000
The impairment loss is calculated as follows:
Carrying amount
Identifiable net assets
Goodwill (Attributable to parent)
Notional goodwill attributable to non-controlling interests
[25 000(20 000/80%) – 20 000]
Recoverable amount
175 000
150 000
20 000
5 000
(162 500)
R12 500
353
Chapter 6
The impairment loss will be allocated between the parent and the non-controlling
interests in the profit-sharing ratio.
i.e. 12 500 × 80% = R10 000
If the impairment loss attributable to the non-controlling interests relates to goodwill that
is not recognised in the consolidated financial statements, then such impairment is not
recognised as an impairment loss. In such cases, only the impairment loss relating to
the goodwill that is allocated to the parent is recognised as a goodwill impairment loss
(IAS 36 Appendix C8).
Since the non-controlling interests is measured at the proportionate share of identifiable
net assets at acquisition date, then R2 500 (12 500 × 20%) of the impairment loss will
not be recognised in the consolidated financial statements.
Therefore goodwill will be disclosed in the consolidated statement of financial position
as: 20 000 – 10 000 = R10 000
Dr
R
J1
J2
Equity at acquisition (S)(SCE)
Goodwill (SFP)
Investment in S Ltd (P)(SFP)
Non-controlling interests (SFP)
Elimination of owners’ equity at acquisition of S Ltd
Impairment loss (P)(P/L)(12 500 × 80%)
Accumulated impairment losses for goodwill (P)(SFP)
Impairment of goodwill as at year end
Cr
R
150 000
20 000
140 000
30 000
10 000
10 000
(b) Non-controlling interests measured at fair value
Total
i At acquisition (1/1/20.18)
Net identifiable assets
Equity represented by goodwill
– Parent and NCI
Consideration and NCI
Goodwill impairment
P Ltd 80%
At
NCI
150 000
120 000
30 000
30 000
20 000
10 000
180 000
(17 500)
140 000
R162 500
Goodwill impairment
Since
(14 000)
40 000
(3 500)
(R14 000)
R36 500
(14 000)
R6 000
The impairment loss is calculated as follows:
Carrying amount
180 000
Net identifiable assets
Goodwill (Attributable to parent and NCI)
150 000
30 000
Recoverable amount
(162 500)
R17 500
354
Adjustments and sundry aspects of group statements
Therefore the impairment loss that will be accounted for in the consolidated financial
statements is R17 500.
Goodwill will be disclosed in the consolidated statement of financial position as:
30 000 – 17 500 = R12 500
The impairment loss will be allocated between the parent and the non-controlling
interests in the profit-sharing ratio.
Parent: 17 500 × 80% = R14 000
Non-controlling interests: 17 500 × 20% = R3 500
Dr
R
J1
Equity at acquisition (S)(SCE)
Goodwill (SFP)
Investment in S Ltd (P)(SFP)
Non-controlling interests (SFP)
Elimination of owners’ equity at acquisition of S Ltd
150 000
30 000
J2
Impairment loss (P)(P/L)
Accumulated impairment losses for goodwill (P)(SFP)
Impairment of goodwill as at year end
17 500
J3
Non-controlling interests (SFP) (17 500 × 20%)
Non-controlling interests (SCI)
Recording of non-controlling interests
in impairment loss at year end
3 500
Example 6.10
Cr
R
140 000
40 000
17 500
3 500
Impairment of goodwill – Non-controlling interests measured
at proportionate share of identifiable net assets
The abridged statements of financial position of the two companies on 30 June 20.18
were as follows:
STATEMENTS OF FINANCIAL POSITION AS AT 30 JUNE 20.18
ASSETS
Property, plant and equipment
Investment in S Ltd at fair value
Trade receivables
Total assets
EQUITY AND LIABILITIES
Share capital (200 000/100 000 shares)
Mark-to-market reserve
Retained earnings
Deferred tax
Trade payables
Total equity and liabilities
P Ltd
S Ltd
850 000
184 000
48 000
240 000
–
57 000
R1 082 000
R297 000
200 000
19 525
826 000
4 475
32 000
100 000
–
184 800
–
12 200
R1 082 000
R297 000
355
Chapter 6
STATEMENTS OF PROFIT OR LOSS AND OTHER COMPREHENSIVE INCOME
FOR THE YEAR ENDED 30 JUNE 20.18
P Ltd
S Ltd
Revenue
Cost of sales
800 000
(400 000)
480 000
(300 000)
Gross profit
Other expenses
400 000
(100 000)
180 000
(90 000)
Profit before tax
Income tax expense
300 000
(84 000)
90 000
(25 200)
PROFIT FOR THE YEAR
216 000
64 800
Other comprehensive income for the year
Items that will not be reclassified to profit or loss
Mark-to-market reserve (fair value adjustment on investment)
Income tax relating to mark-to-market reserve
(8 000)
1 492
–
–
Other comprehensive income for the year, net of tax
(6 508)
–
TOTAL COMPREHENSIVE INCOME FOR THE YEAR
R209 492
R64 800
EXTRACT FROM THE STATEMENTS OF CHANGES IN EQUITY
FOR THE YEAR ENDED 30 JUNE 20.18
Mark-tomarket
reserve
Balance at 1 July 20.17
Changes in equity for 20.18
Total comprehensive income for the year:
Profit for the year
Other comprehensive income for the year
Balance at 30 June 20.18
Retained earnings
P Ltd
P Ltd
S Ltd
26 033
610 000
120 000
–
(6 508)
216 000
–
64 800
–
R19 525
R826 000
R184 800
Additional information
1 P Ltd acquired 80 000 shares in S Ltd on 1 July 20.16 for R160 000 when the equity
of S Ltd consisted of the following:
Share capital (100 000 shares)
100 000
Retained earnings
85 000
R185 000
2
P Ltd classified the equity investment in S Ltd under IFRS 9 in its separate financial
statements and recognised fair value adjustments in a mark-to-market reserve
(other comprehensive income).
356
Adjustments and sundry aspects of group statements
3
4
5
P Ltd elected to measure the non-controlling interests in the acquiree at their
proportionate share of the acquiree’s identifiable net assets at the acquisition date.
The carrying amount of the subsidiary at 30 June 20.18 exceeded the recoverable
amount of the subsidiary by R10 100.
The company tax rate is 28% and capital gains tax (CGT) is calculated at 66,6%
thereof.
Comment
The parent's investment in equity instruments is measured at fair value and any gains or
losses on remeasurement are recognised in other comprehensive income (FVTOCI)
and therefore the impairment referred to in point 4 has already been taken into account
in the financial records of the parent by recognising the decline in fair value of the
investment in S Ltd (refer to the “mark-to-market reserve (fair value adjustment on
investment)” in the OCI).
On consolidation the reversal of the fair value adjustments (refer to J1–J3) results in the
effect of the impairment also being reversed.
Solution 6.10
The consolidated financial statements of the P Ltd Group for the year ended
30 June 20.18 will be drawn up as follows:
P LTD GROUP
CONSOLIDATED STATEMENT OF FINANCIAL POSITION
AS AT 30 JUNE 20.18
ASSETS
Non-current assets
Property, plant and equipment (850 000(P) + 240 000(S))
Goodwill (12 000 – 8 080)
1 090 000
3 920
1 093 920
Current assets
Trade receivables (48 000(P) + 57 000(S))
Total assets
EQUITY AND LIABILITIES
Equity attributable to owners of the parent
Share capital (P)
Retained earnings
Non-controlling interests
Total equity
Current liabilities
Trade payables (32 000(P) + 12 200(S))
Total equity and liabilities
105 000
R1 198 920
200 000
897 760
1 097 760
56 960
1 154 720
44 200
R1 198 920
357
Chapter 6
P LTD GROUP
CONSOLIDATED STATEMENT OF PROFIT OR LOSS AND OTHER COMPREHENSIVE
INCOME FOR THE YEAR ENDED 30 JUNE 20.18
Revenue (800 000(P) + 480 000(S))
Cost of sales (400 000(P) + 300 000(S))
1 280 000
(700 000)
Gross profit
Other expenses (100 000(P) + 90 000(S) + 8 080)
580 000
(198 080)
Profit before tax
Income tax expense (84 000(P) + 25 200(S))
381 920
(109 200)
PROFIT FOR THE YEAR
272 720
Other comprehensive income for the year
–
TOTAL COMPREHENSIVE INCOME FOR THE YEAR
Total comprehensive income attributable to:
Owners of the parent
Non-controlling interests
R272 720
259 760
12 960
R272 720
P LTD GROUP
CONSOLIDATED STATEMENT OF CHANGES IN EQUITY
FOR THE YEAR ENDED 30 JUNE 20.18
Share
capital
Balance at 1 July 20.17
Changes in equity for 20.18
Total comprehensive
income for the year:
Profit for the year
Balance at 30 June 20.18
λ
200 000 λ638 000
–
259 760
Total
Noncontrolling
interests
Total
equity
838 000
44 000
882 000
259 760
12 960
272 720
R200 000 R897 760 R1 097 760
610 000(P) + 28 000(S) = 638 000
358
Retained
earnings
R56 960 R1 154 720
Adjustments and sundry aspects of group statements
Calculations
C1 Analysis of owners’ equity of S Ltd
Total
i At acquisition (1/7/20.16)
Share capital
Retained earnings
Equity represented by goodwill
– Parent
Consideration and NCI
P Ltd 80%
At
Since
NCI
100 000
85 000
80 000
68 000
20 000
17 000
185 000
148 000
37 000
12 000
12 000
–
197 000
R160 000
37 000
ii Since acquisition
• To beginning of current year:
Retained earnings (120 000 – 85 000)
35 000
28 000
• Current year:
Profit for the year
Goodwill impairment (1)
7 000
44 000
64 800
(8 080)
51 840
(8 080)
12 960
–
R288 720
R71 760
R56 960
(1) Refer to Comment below after journal C3
C2 Proof of calculation of goodwill of S 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)
160 000
37 000
197 000
Net of the identifiable assets acquired and liabilities assumed
at acquisition date: IFRS 3.32(b)
(185 000)
Goodwill
R12 000
359
Chapter 6
C3 Pro forma consolidation journal entries
Dr
R
J1
Mark-to-market reserve – Opening balance (P)(SCE)
((24 000 + 8 000) × 81,352%)
Deferred tax (P)(SFP) ((24 000 + 8 000) × 18,648%)
Investment in S Ltd (P)(SFP)
Reversal of fair value adjustment on investment
in S Ltd at beginning of year at group level
26 033
5 967
J2
Investment in S Ltd (P)(SFP)
Mark-to-market reserve (P)(OCI)
Reversal of fair value adjustment on investment
in S Ltd for current year at group level
8 000
J3
Income tax relating to OCI (P)(OCI) (8 000 × 18,648%)
Deferred tax (P)(SFP)
Tax effect of reversal of fair value adjustment on
investment in S Ltd for current year
1 492
J4
Share capital (S)(SCE)
Retained earnings (S)(SCE)
Goodwill (SFP)
Investment in S Ltd (P)(SFP)
Non-controlling interests (SFP)
Main elimination journal entry at acquisition date
of S Ltd
100 000
85 000
12 000
J5
Retained earnings – Beginning of year
Non-controlling interests
Recognition of non-controlling interests in retained
earnings at beginning of year
7 000
J6
Non-controlling interests (SCI)
Non-controlling interests (SFP)
Recognition of non-controlling interests in current
year’s profit
12 960
J7
Impairment loss (P/L)(10 100 × 80%) (refer to Comment)
Accumulated impairment losses for goodwill (SFP)
Impairment of goodwill as at 30 June 20.18
8 080
360
Cr
R
32 000
8 000
1 492
160 000
37 000
7 000
12 960
8 080
Adjustments and sundry aspects of group statements
Comment
If the subsidiary is regarded as a cash generating unit and goodwill arose as a result of
the business combination, then the cash generating unit, i.e. the subsidiary, should be
tested for impairment at least annually.
In order to test whether any impairment has taken place, the recoverable amount of the
subsidiary must be compared to the carrying amount of the subsidiary and if the carrying
amount exceeds the recoverable amount, then there is an impairment loss. The carrying
amount will include the identifiable net assets of the subsidiary and the unidentified
assets that are not recognised separately (i.e. goodwill).
If the parent has elected to measure the non-controlling interests (in the case of a
partially owned subsidiary) at their proportionate share of the acquiree’s identifiable net
assets at the acquisition date, then the goodwill recognised in the consolidated financial
statements will be attributable to the parent and the goodwill attributable to the noncontrolling interest will not have been recognised.
For there to be a fair comparison between the recoverable amount and the carrying
amount, the carrying amount of the subsidiary should also include the goodwill
attributable to the non-controlling interests. To achieve this the goodwill attributable to
the parent is grossed up to calculate the total goodwill for the subsidiary and this figure
together with the carrying amount of the subsidiary’s net assets will be equal to the
notionally adjusted carrying amount of the subsidiary which can be compared to the
recoverable amount in order to determine the impairment loss.
The goodwill impairment in J7 was calculated as follows:
Impairment loss given (to be allocated to goodwill)
(difference between carrying amount and recoverable amount)
R10 100
As S Ltd is a cash generating unit the loss should be allocated in the
profit-sharing ratio between the parent and the non-controlling interests
and only the portion attributable to the parent is recognised. The
impairment loss that relates to the non-controlling interest is not
recognised as the goodwill relating to the non-controlling interests was
not recognised in the consolidated financial statements (10 100 × 80%).
R8 080
If the total impairment loss exceeds the notionally adjusted carrying amount of goodwill,
then the excess will be allocated to the other assets in the cash generating unit
(subsidiary) on a pro rata basis (based on the carrying amounts of the assets).
361
Chapter 6
Example 6.11
Impairment of goodwill – Non-controlling interests measured at
fair value
The abridged statements of financial position of P Ltd and S Ltd on 30 June 20.18 are
as follows:
STATEMENTS OF FINANCIAL POSITION AS AT 30 JUNE 20.18
ASSETS
Property, plant and equipment
Investment in S Ltd at fair value
Trade receivables
Total assets
EQUITY AND LIABILITIES
Share capital (100 000/200 000 shares)
Mark-to-market reserve
Retained earnings
Deferred tax
Trade payables
Total equity and liabilities
P Ltd
S Ltd
520 000
445 000
12 000
400 000
–
105 000
R977 000
R505 000
100 000
19 525
758 800
4 475
94 200
200 000
–
291 400
–
13 600
R977 000
R505 000
EXTRACT FROM THE STATEMENTS OF PROFIT OR LOSS
AND OTHER COMPREHENSIVE INCOME
FOR THE YEAR ENDED 30 JUNE 20.18
P Ltd
S Ltd
Gross profit
Other income
Other expenses
480 000
20 000
(65 000)
315 000
–
(70 000)
Profit before tax
Income tax expense
435 000
(116 200)
245 000
(68 600)
PROFIT FOR THE YEAR
318 800
176 400
Other comprehensive income for the year
Items that will not be reclassified to profit or loss
Mark-to-market reserve (fair value adjustment on investment)
Income tax relating to mark-to-market reserve
(8 000)
1 492
–
–
Other comprehensive income for the year, net of tax
(6 508)
–
TOTAL COMPREHENSIVE INCOME FOR THE YEAR
R312 292
R176 400
362
Adjustments and sundry aspects of group statements
EXTRACT FROM THE STATEMENTS OF CHANGES IN EQUITY
FOR THE YEAR ENDED 30 JUNE 20.18
Mark-tomarket
reserve
Balance at 1 July 20.17
Changes in equity for 20.18
Total comprehensive income for the year:
Profit for the year
Other comprehensive income for the year
Dividends paid
Balance at 30 June 20.18
Retained earnings
P Ltd
P Ltd
S Ltd
26 033
490 000
140 000
–
(6 508)
–
318 800
–
(50 000)
176 400
–
(25 000)
R19 525
R758 800
R291 400
Additional information
1 P Ltd acquired 160 000 shares in S Ltd on 1 July 20.16 for R421 000 when the
equity of S Ltd consisted of the following:
Share capital (200 000 shares)
200 000
Retained earnings
102 000
R302 000
2
3
4
5
On the acquisition date, P Ltd valued land of S Ltd, with a carrying amount of
R250 000, at R500 000. This revaluation was not recognised in the records of S Ltd.
P Ltd classified the equity investment in S Ltd under IFRS 9 in its separate financial
statements and recognised fair value adjustments in a mark-to-market reserve
(other comprehensive income).
P Ltd elected to measure the non-controlling interests in the acquiree at their fair
value of R108 000 at the acquisition date.
The carrying amount of the subsidiary at 30 June 20.18 exceeded the recoverable
amount of the subsidiary by R10 100.
The company tax rate is 28% and capital gains tax (CGT) is calculated at 66,6%
thereof.
363
Chapter 6
Solution 6.11
The consolidated financial statements of the P Ltd Group at 30 June 20.18 will be
drawn up as follows:
P LTD GROUP
CONSOLIDATED STATEMENT OF FINANCIAL POSITION AS AT 30 JUNE 20.18
ASSETS
Non-current assets
Property, plant and equipment (520 000(P) + 400 000(S) + 250 000(J3))
Goodwill (23 620 – 10 100)
1 170 000
13 520
1 183 520
Current assets
Trade receivables (12 000(P) + 105 000(S))
Total assets
EQUITY AND LIABILITIES
Equity attributable to owners of the parent
Share capital (P)
Retained earnings
Non-controlling interests
Total equity
Non-current liabilities
Deferred tax (J3)
Current liabilities
Trade payables (94 200(P) + 13 600(S))
Total liabilities
117 000
R1 300 520
100 000
902 240
1 002 240
143 860
1 146 100
46 620
107 800
154 420
Total equity and liabilities
R1 300 520
P LTD GROUP
CONSOLIDATED STATEMENT OF PROFIT OR LOSS
AND OTHER COMPREHENSIVE INCOME
FOR THE YEAR ENDED 30 JUNE 20.18
Gross profit (480 000(P) + 315 000(S))
Other expenses (65 000(P) + 70 000(S) + 10 100(J6))
795 000
(145 100)
Profit before tax
Income tax expense (116 200(P) + 68 600(S))
649 900
(184 800)
PROFIT FOR THE YEAR
465 100
Other comprehensive income for the year
TOTAL COMPREHENSIVE INCOME FOR THE YEAR
Total comprehensive income attributable to:
Owners of the parent
Non-controlling interests (35 280(J6) – 2 020(J9))
–
R465 100
431 840
33 260
R465 100
364
Adjustments and sundry aspects of group statements
P LTD GROUP
CONSOLIDATED STATEMENT OF CHANGES IN EQUITY
FOR THE YEAR ENDED 30 JUNE 20.18
Share
capital
Balance at 1 July 20.17
Changes in equity
for 20.18
Total comprehensive
income for the year:
Profit for the year
Dividends paid
Balance at 30 June 20.18
λ
Retained
earnings
100 000 λ520 400
–
431 840
(50 000)
Total
Noncontrolling
interests
Total
equity
620 400
115 600
736 000
431 840
(50 000)
33 260
(5 000)
465 100
(55 000)
R100 000 R902 240 R1 002 240
R143 860 R1 146 100
490 000(P) + 30 400(S) = 520 400
Calculations
C1 Analysis of owners’ equity of S Ltd
Total
i At acquisition (1/7/20.16)
Share capital
Revaluation surplus (1)
Retained earnings
Equity represented by goodwill
– Parent and NCI
Consideration (2) and NCI
ii Since acquisition
• To beginning of current year:
Retained earnings (140 000 – 102 000)
• Current year:
Profit for the year
Dividends paid
Impairment of goodwill
P Ltd 80%
At
Since
NCI
200 000
203 380
102 000
160 000
162 704
81 600
40 000
40 676
20 400
505 380
404 304
101 076
23 620
16 696
6 924
529 000 R421 000
108 000
38 000
30 400
7 600
115 600
176 400
(25 000)
(10 100)
141 120
(20 000)
(8 080)
35 280
(5 000)
(2 020)
R708 300
R143 440
R143 860
(1) (500 000 – 250 000) × 81,352% = 203 380
(2) 445 000 – 32 000(J1) + 8 000(J2) = 421 000
365
Chapter 6
C2 Proof of calculation of goodwill of S 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)
421 000
108 000
529 000
Net of the identifiable assets acquired and liabilities assumed
at acquisition date: IFRS 3.32(b)
(505 380)
Goodwill
R23 620
C3 Pro forma consolidation journal entries
Dr
R
J1
Mark-to-market reserve (P)(SCE)
Deferred tax (P)(SFP) (32 000 × 66,6% × 28%)
Investment in S Ltd (P)(SFP) (26 033/81,352%)
Reversal of fair value adjustment on investment
in S Ltd at beginning of year at group level
26 033
5 967
J2
Investment in S Ltd (P)(SFP)
Mark-to-market reserve (P)(SCE) (8 000 – 1 492)
Deferred tax (P)(SFP) (8 000 × 66,6% × 28%)
Reversal of fair value adjustment on investment
in S Ltd in current year at group level
8 000
J3
Land (S)(SFP) (500 000 – 250 000)
Deferred tax (S)(SFP) (250 000 × 66,6% × 28%)
Revaluation surplus (S)(SCE)
Revaluation of land of subsidiary at acquisition
date
250 000
J4
Share capital (S)(SCE)
Revaluation surplus (S)(SCE)
Retained earnings (S)(SCE)
Goodwill (SFP)
Investment in S Ltd (P)(SFP)
Non-controlling interests (SFP)
Elimination of owners’ equity at acquisition
of S Ltd
200 000
203 380
102 000
23 620
J5
Retained earnings – Beginning of year (S)(SCE)
Non-controlling interests (SFP)
Recording of non-controlling interests in retained
earnings at beginning of year
7 600
J6
Non-controlling interests (SCI)
Non-controlling interests (SFP)
Recording of non-controlling interests in current
year’s profit for the year
35 280
J7
Dividends received (P)(P/L) (25 000 × 80%)
Non-controlling interests (SFP)
Dividend paid (S)(SCE)
Elimination of intragroup dividend at year end
20 000
5 000
Cr
R
32 000
6 508
1 492
46 620
203 380
421 000
108 000
7 600
35 280
25 000
continued
366
Adjustments and sundry aspects of group statements
Dr
R
J8
Impairment loss (P/L)
Accumulated impairment losses for goodwill (SFP)
Impairment of goodwill as at 30 June 20.18
10 100
J9
Non-controlling interests (SFP)
Non-controlling interests (P/L)
Recording of non-controlling interests in
impairment of goodwill as at 30 June 20.18
2 020
Cr
R
10 100
2 020
Losses of a subsidiary
6.10 Accumulated losses of subsidiary at acquisition date
An accumulated loss at the acquisition date of the controlling interest in a subsidiary
forms a negative element in the owners’ interest of the subsidiary at this date. If a
subsidiary has an accumulated loss, it does not necessarily mean that the subsidiary is
insolvent (refer to section 6.13) as the share capital and other components of equity
can exceed the accumulated loss. The existence of such an unfavourable balance
would certainly have influenced the price paid for the shares, and the goodwill or gain
on bargain purchase which would have been determined by taking into account such an
unfavourable balance, would thus be realistic.
Example 6.12
Accumulated losses of a subsidiary at acquisition date
The following are the condensed statements of changes in equity of P Ltd and its
subsidiary, S Ltd, for the year ended 31 December 20.18:
EXTRACT FROM THE STATEMENTS OF CHANGES IN EQUITY
FOR THE YEAR ENDED 31 DECEMBER 20.18
Retained earnings
Balance at 1 January 20.18
Changes in equity for 20.18
Total comprehensive income for the year:
Profit for the year
Balance at 31 December 20.18
P Ltd
S Ltd
200 000
(50 000)
100 000
80 000
R300 000 R30 000
P Ltd purchased 80% of the issued shares of S Ltd on 2 January 20.14, for R80 000.
The fair value at 31 December 20.18 has not changed. At 2 January 20.14 the owners’
interest of S Ltd was as follows:
Share capital (300 000 shares)
R300 000
Accumulated loss
(R200 000)
At that date the owners’ interest of P Ltd was as follows:
Share capital (100 000 shares)
R100 000
Retained earnings
R50 000
367
Chapter 6
P Ltd classified the equity investment in S Ltd under IFRS 9 in its separate financial
statements and recognised fair value adjustments in a mark-to-market reserve (other
comprehensive income).
P Ltd elected to measure the non-controlling interests in the acquiree at their
proportionate share of the acquiree’s identifiable net assets at the acquisition date.
Solution 6.12
The consolidated statement of profit or loss and other comprehensive income and the
consolidated statement of changes in equity of the P Ltd Group will be prepared as
follows:
P LTD GROUP
CONSOLIDATED STATEMENT OF PROFIT OR LOSS
AND OTHER COMPREHENSIVE INCOME
FOR THE YEAR ENDED 31 DECEMBER 20.18
PROFIT FOR THE YEAR (100 000(P) + 80 000(S))
180 000
Other comprehensive income for the year
–
TOTAL COMPREHENSIVE INCOME FOR THE YEAR
R180 000
Total comprehensive income attributable to:
Owners of the parent (180 000 – 16 000)
Non-controlling interests
164 000
16 000
R180 000
P LTD GROUP
CONSOLIDATED STATEMENT OF CHANGES IN EQUITY
FOR THE YEAR ENDED 31 DECEMBER 20.18
Share
capital
Balance at 1 January 20.18
Changes in equity for 20.18
Total comprehensive income
for the year:
Profit for the year
Balance at 31 December 20.18
#
200 000(P) + 120 000(S) = 320 000
368
Retained
earnings
100 000 # 320 000
–
164 000
Total
420 000
164 000
R100 000 R484 000 R584 000
Noncontrolling
interests
Total
equity
50 000
470 000
16 000
180 000
R66 000 R650 000
Adjustments and sundry aspects of group statements
Calculations
C1 Analysis of owners’ equity of S Ltd
Total
i At acquisition (2/1/20.14)
Share capital
Accumulated loss
P Ltd 80%
At
Since
NCI
300 000 240 000
(200 000) (160 000)
60 000
(40 000)
Purchase difference
100 000
–
80 000
–
20 000
–
Consideration and NCI
100 000
R80 000
20 000
ii Since acquisition
• To beginning of current year:
Retained earnings (–50 000 – (–200 000))
• Current year:
Profit for the year
150 000
120 000
30 000
50 000
80 000
R330 000
64 000
16 000
R184 000 R66 000
C2 Proof of calculation of purchase difference of S Ltd in terms of IFRS 3.32
Consideration transferred at acquisition date: IFRS 3.32(a)(i)
80 000
Amount of non-controlling interests: IFRS 3.32(a)(ii)
20 000
Net of the identifiable assets acquired and liabilities assumed
at acquisition date: IFRS 3.32(b)
Purchase difference
100 000
(100 000)
R–
6.11 Post-acquisition losses of subsidiaries
If a subsidiary incurs losses subsequent to the parent’s acquisition of the subsidiary, the
loss will be allocated to the parent and to the non-controlling interests in their
proportionate shareholdings. The consolidation process is not affected by the
subsidiary incurring losses. The parent’s proportionate share in the subsidiary’s
accumulated loss will decrease the retained earnings of the group and the noncontrolling interests’ proportionate share will decrease the non-controlling interests’
balance in the statement of changes in equity (a debit to the non-controlling interests).
Fair value is defined by IFRS 13 Fair Value Measurement as the price that would be
received to sell an asset or paid to transfer a liability in an orderly transaction between
market participants at the measurement date.
The fair value at the reporting date would be determined as the best price that could be
obtained by the seller (Parent) in a hypothetical sale. The fair value measurement
assumes that the transaction to sell the asset takes place in the principal market for the
asset or in the absence of a principal market in the most advantageous market for the
asset (IFRS 13.16).
369
Chapter 6
A change in the fair value of P Ltd's investment in S Ltd, resulting from post-acquisition
losses incurred by a subsidiary, should be recognised in P Ltd’s separate financial
statements if at the reporting date the decrease in fair value is a reversal of:
(a) a fair value gain previously recognised in profit for the year (FVTPL); or
(b) previously recognised credit to a mark-to-market reserve (FVTOCI).
If there is a remaining net fair value gain after adjusting for the fair value loss, then the
fair value gain should be reversed for the purpose of preparing the consolidated
financial statements of the P Ltd Group.
IAS 36 determines that an entity should assess whether or not there is any indication
that an asset could be impaired at each reporting date. If any such indication exists, the
entity should estimate the recoverable amount of the asset (IAS 36.9). The investment
in the subsidiary is an asset in the parent’s separate financial statements and therefore
the principles of IAS 36.9 also apply to such an investment in the subsidiary.
The parent should therefore assess if there is any indication that the asset (investment
in subsidiary) could be impaired at each reporting date. These indications are fully
explained in IAS 36.10, but IAS 36.11 points out that the list is not exhaustive. An entity
can also identify other signs that the asset could be impaired, and this would also
require the determination of the recoverable amount. The authors are of the opinion that
post-acquisition losses of the subsidiary (as identified in the analysis of the owners’
interest of the subsidiary) could be such a sign. Thus, if the subsidiary has postacquisition losses, the recoverable amount of the subsidiary should be determined
according to the requirements of IAS 36.
An impairment loss should be recognised in P Ltd’s separate financial statements if the
carrying amount of the investment in the subsidiary exceeds the recoverable amount of
the investment in the subsidiary.
The impairment loss should, however, be reversed for the purpose of preparing the
consolidated financial statements of the group.
Example 6.13
Accumulated losses of a subsidiary since acquisition date
The following is the condensed statement of changes in equity of S Ltd for the year ended
31 December 20.17:
EXTRACT FROM THE STATEMENT OF CHANGES IN EQUITY
FOR THE YEAR ENDED 31 DECEMBER 20.17
Retained
earnings
150 000
Balance at 1 January 20.17
Changes in equity for 20.17
Total comprehensive income for the year:
Loss for 20.17
(200 000)
Balance at 31 December 20.17
(R50 000)
P Ltd purchased 90% of the issued shares of S Ltd for R396 000 on 2 January 20.16.
At that date, S Ltd’s owners’ equity was as follows:
Share capital (300 000 shares)
R300 000
Retained earnings
R140 000
370
Adjustments and sundry aspects of group statements
The investment is reflected in the separate financial statements of P Ltd as follows:
Statement of financial position
Non-current assets
Investment in S Ltd at fair value less impairment losses
R20 000
The impairment loss was recognised in the current year.
P Ltd classified the equity investment in S Ltd under IFRS 9 in its separate financial
statements and recognised fair value adjustments in a mark-to-market reserve (other
comprehensive income).
P Ltd elected to measure the non-controlling interests at their proportionate share of the
acquiree’s identifiable net assets at the acquisition date.
Solution 6.13
The analysis of owners’ equity of S Ltd and pro forma consolidation journal entries will
be prepared as follows:
Calculations
C1 Analysis of the owners’ equity of S Ltd
Total
i At acquisition (2/1/20.16)
Share capital
Retained earnings
P Ltd 90%
At
Since
NCI
300 000
140 000
270 000
126 000
30 000
14 000
Purchase difference
440 000
–
396 000
–
44 000
–
Consideration and NCI
440 000 R396 000
44 000
ii Since acquisition
• To beginning of current year:
Retained earnings (150 000 – 140 000)
• Current year:
Loss for the year
10 000
9 000
1 000
45 000
(200 000)
R250 000
(180 000)
(20 000)
(R171 000) R25 000
C2 Proof of calculation of purchase difference of S 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)
Net of the identifiable assets acquired and liabilities assumed
at acquisition date: IFRS 3.32(b)
Purchase difference
396 000
44 000
440 000
(440 000)
R–
371
Chapter 6
C3 Pro forma consolidation journal entries
Dr
R
J1
Investment in S Ltd (P)(SFP) (396 000 – 20 000)
Impairment loss in respect of subsidiary (P)(P/L)
Reversal of impairment loss on investment in
S Ltd for current year
376 000
J2
Share capital (S)(SCE)
Retained earnings (S)(SCE)
Investment in S Ltd (P)(SFP)
Non-controlling interests (SFP)
Elimination of owners’ equity at acquisition of S Ltd
300 000
140 000
J3
Retained earnings – Beginning of year (SCE)
Non-controlling interests (SFP)
Allocation of non-controlling interests in retained
earnings at beginning of year of S Ltd
1 000
J4
Non-controlling interests (SFP)
Non-controlling interests (P/L)
Allocation of non-controlling interests in the losses
for the year of S Ltd
20 000
Cr
R
376 000
396 000
44 000
1 000
20 000
Comment
a An impairment loss shall be recognised immediately in profit or loss (IAS 36.60), unless
the asset is carried at a revalued amount in accordance with another standard (e.g., in
accordance with the fair value model of IFRS 9 whereby the carrying amount of the
investment in the subsidiary has been adjusted for any increases in fair value). Any
impairment loss of a revalued asset shall be treated as a decrease in fair value (fair
value adjustment) in accordance with IFRS 9.
b If the carrying amount of the investment in S Ltd is, as in this case, R20 000 and the
original consideration paid for the investment was R396 000, then the amount that has
been written off (recognised in profit or loss) as an impairment loss, is R376 000.
6.12 Assessed loss of a subsidiary at acquisition date
When a parent acquires a controlling interest in a subsidiary that is incurring losses, it
must obviously have a very good reason for taking such a step. The possibility exists
that the interest in the subsidiary incurring losses has been acquired with the income
tax position as the main consideration.
A deferred tax asset arising from the potential benefit of an income tax loss carry
forward (assessed loss) shall be recognised at the acquisition date of the business
combination to the extent that it is probable that the temporary difference will reverse in
the foreseeable future and that future taxable profit will be available against which the
unused tax losses can be utilised (IAS 12.44).
The parent will accordingly be prepared to pay more for the shares than the net asset
values based on the carrying amounts.
The potential benefit of the acquiree’s income tax loss carry forwards may not have
satisfied the recognition criteria at the acquisition date of the business combination but
the benefit may be subsequently realised (IAS 12.68). Deferred tax benefits that realise
372
Adjustments and sundry aspects of group statements
after the acquisition date of the business combination, but within the measurement
period, that resulted from new information about facts and circumstances that existed at
the acquisition date, will be accounted for as follows:
l A debit to the deferred tax asset and a credit to the carrying amount of any goodwill
related to that acquisition; or
l If the carrying amount of goodwill is zero, any remaining deferred tax benefits shall
be recognised in profit or loss (IAS 12.68(a)).
Comment
S 103(2) of the Income Tax Act 58 of 1962 places a limit on the utilisation of such
assessed losses.
Example 6.14
Income tax loss (assessed loss) of a subsidiary at acquisition
date
The following are the condensed trial balances of P Ltd and its subsidiary S Ltd for the
year ended 31 December 20.18:
Debits
Property, plant and equipment
Investment in S Ltd
Current assets
Income tax expense
Credits
Share capital (100 000 and 80 000 shares)
Retained earnings – 1 January 20.18
Profit before tax
Current liabilities
P Ltd
R
S Ltd
R
352 000
10 000
44 000
40 600
446 600
120 000
–
23 600
8 400
152 000
100 000
160 000
145 000
41 600
446 600
80 000
38 000
30 000
4 000
152 000
P Ltd purchased 75% of the issued shares of S Ltd for R10 000 on 1 January 20.16. At
that date, S Ltd’s owners’ equity was as follows:
Share capital (80 000 shares)
R80 000
Accumulated loss
R220 000
At the acquisition date of S Ltd the identified assets, liabilities and contingent liabilities
were fairly valued except for a deferred tax asset that was not recognised for the carry
forward of unused tax losses. It is probable that future taxable profit will be available
against which the unused tax losses can be utilised.
P Ltd classified the equity investment in S Ltd under IFRS 9 in its separate financial
statements and recognised fair value adjustments in a mark-to-market reserve (other
comprehensive income).
373
Chapter 6
P Ltd elected to measure the non-controlling interests in the acquiree at their
proportionate share of the acquiree’s identifiable net assets at the acquisition date.
The company tax rate is 28% and capital gains tax (CGT) is calculated at 66,6%
thereof.
Solution 6.14
The consolidated financial statements of the P Ltd Group will be prepared as follows:
P LTD GROUP
CONSOLIDATED STATEMENT OF FINANCIAL POSITION
AS AT 31 DECEMBER 20.18
ASSETS
Non-current assets
Property, plant and equipment (352 000(P) + 120 000(S))
Goodwill
472 000
68 800
Current assets (44 000(P) + 23 600(S))
540 800
67 600
Total assets
R608 400
EQUITY AND LIABILITIES
Equity attributable to owners of the parent
Share capital (P)
Retained earnings
100 000
427 900
Non-controlling interests
527 900
34 900
Total equity
562 800
Current liabilities (41 600(P) + 4 000(S))
45 600
Total equity and liabilities
R608 400
P LTD GROUP
CONSOLIDATED STATEMENT OF PROFIT OR LOSS
AND OTHER COMPREHENSIVE INCOME
FOR THE YEAR ENDED 31 DECEMBER 20.18
Profit before tax (145 000(P) + 30 000(S))
Income tax expense (40 600(P) + 8 400(S))
175 000
(49 000)
PROFIT FOR THE YEAR
126 000
Other comprehensive income for the year
TOTAL COMPREHENSIVE INCOME FOR THE YEAR
Total comprehensive income attributable to:
Owners of the parent (126 000 – 5 400)
Non-controlling interests
–
R126 000
120 600
5 400
R126 000
374
Adjustments and sundry aspects of group statements
P LTD GROUP
CONSOLIDATED STATEMENT OF CHANGES IN EQUITY
FOR THE YEAR ENDED 31 DECEMBER 20.18
Share
capital
Balance at 1 January 20.18
Changes in equity for 20.18
Total comprehensive income
for the year:
Profit for the year
Retained
earnings
100 000 # 307 300
–
Balance at 31 December 20.18 R100 000
#
120 600
Total
Noncontrolling
interests
Total
equity
407 300
29 500
436 800
120 600
5 400
126 000
R427 900 R527 900
R34 900 R562 800
160 000(P) + 147 300(S) = 307 300
Calculations
C1 Analysis of owners’ equity of S Ltd
Total
i At acquisition (1/1/20.16)
Share capital
Accumulated loss (–220 000 × 72%)
P Ltd 75%
At
Since
NCI
80 000
60 000
(158 400) (118 800)
20 000
(39 600)
Equity represented by goodwill – Parent
(78 400)
68 800
(58 800)
68 800
(19 600)
–
Consideration and NCI
(9 600) R10 000
(19 600)
ii Since acquisition
• To beginning of current year:
Retained earnings (38 000 – (–158 400))
• Current year:
Profit for the year (30 000 – 8 400)
196 400
147 300
29 500
21 600
R208 400
16 200
5 400
R163 500 R34 900
C2 Proof of calculation of goodwill of S 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)
Net of the identifiable assets acquired and liabilities assumed at acquisition
date: IFRS 3.32(b) (–(–78 400))
Goodwill
49 100
10 000
(19 600)
(9 600)
78 400
R68 800
375
Chapter 6
C3 Pro forma consolidation journal entries
Dr
R
J1
Deferred tax asset (S)(SFP) (220 000 × 28%)
Accumulated loss at acquisition
(Deferred tax expense) (S)(SCE)
Recognition of deferred tax asset at acquisition
date
61 600
J2
Share capital (S)(SCE)
Accumulated loss (S)(SCE) (220 000 – 61 600(J1))
Investment in S Ltd (P)(SFP)
Goodwill (SFP)
Non-controlling interests (SFP)
Elimination of owners’ equity of S Ltd at acquisition
date
80 000
68 800
19 600
J3
Retained earnings – Beginning of year (S)(SCE)
Non-controlling interests (SFP)
Recording of non-controlling interests in retained
earnings at beginning of year
49 100
J4
Non-controlling interests (P/L)
Non-controlling interests (SFP)
Recording of non-controlling interests in current
year’s profit for the year
5 400
Cr
R
61 600
158 400
10 000
49 100
5 400
Insolvent subsidiaries
6.13 The legal liability of the shareholders of an insolvent subsidiary
In terms of Section 4(1) of the Companies Act 71 of 2008 a company will be considered
to be solvent and liquid if at a particular time, considering all reasonably foreseeable
financial circumstances of the company at that time:
l the assets of the company, as fairly valued, equal or exceed the liabilities of the
company as fairly valued; and
l it appears that the company will be able to pay its debts as they become due in the
ordinary course of business for a period of 12 months after the date on which the
liquidity test is performed.
A subsidiary is insolvent when the accumulated deficit (unfavourable balance on the
retained earnings in the statement of changes in equity) exceeds the total equity
interest; under these circumstances, such equity will normally consist of only the total
issued share capital. In other words the total liabilities of the subsidiary exceed the total
assets.
376
Adjustments and sundry aspects of group statements
A company is technically insolvent when its liabilities exceed its assets (i.e. the entity
has a negative net asset value). Technical insolvency may be an indicator of serious
problems that may lead to actual insolvency, or it may be perfectly acceptable as it is
possible to be technically insolvent, while still being able to repay debt. It is also
possible that the entity may be technically solvent but unable to repay its debt. The
reason for this is because technical insolvency is based only on the statement of
financial position and ignores the impact of cash flows. In addition the carrying amounts
of the entity’s assets as reflected in the statement of financial position may be less than
the fair values thereof.
Commercial insolvency means the inability of the entity to pay debts as and when they
become due in the ordinary course of business.
A company with a share capital is a legal persona as a result of its incorporation in
terms of the Companies Act 71 of 2008 (effective date 1 May 2011). As a result, the
shareholders are not legally liable for the debts of the company. From this follows, in
principle, that no shareholder or group of shareholders should lose more than the cost
price of the shares they hold in a specific company should that company become
insolvent. The unsecured creditors will thus have to bear any losses over and above the
total shareholders’ interest.
Under certain circumstances it is, however, possible that some or all of the
shareholders of an insolvent subsidiary will be held responsible for a part of the deficit,
over and above the total shareholders’ interest. These circumstances are as follows:
l where a shareholder (usually the parent) has guaranteed the liabilities or a certain
liability of the insolvent subsidiary; or
l where a shareholder (usually the parent) that is also a creditor subordinates its
claim as creditor until such time that the subsidiary becomes solvent again.
6.14 Accounting for an insolvent subsidiary
Where a parent has an insolvent subsidiary, various situations can be discerned, each
of which has to be treated differently in the annual financial statements:
(a) The parent may decide to abandon the subsidiary.
(b) The parent as well as the non-controlling interests guarantees the obligations to
third parties of the subsidiary in relation to their respective shareholding.
(c) The parent alone guarantees the liabilities of the insolvent subsidiary.
(d) The parent subordinates its claim until such time as the subsidiary regains its
solvency.
(e) Loans to subsidiaries (usually by the parent) are converted to share capital.
377
Chapter 6
Each of the above situations will be accounted for as follows in the appropriate annual
financial statements:
Situation
Financial statements
of parent
Consolidated financial
statements
Financial statements
of subsidiary
(a)
The investment in the
subsidiary is written off.
Provision is made for any
further losses which may
arise from loans granted
or guarantees issued.
The subsidiary is consolidated
with disclosure in terms of
IFRS 5 Non-current Assets
Held for Sale and
Discontinued Operations.
Financial statements of
the subsidiary are
prepared on a liquidation
basis.
(b)
The investment in the
subsidiary is written off.
Provision is made for any
further losses which may
arise from loans granted
or guarantees issued.
The subsidiary is consolidated.
Total liabilities and assets of
the subsidiary are taken up in
the consolidated financial
statements on a going-concern
basis. Non-controlling interests
are shown as a deficit balance.
The subsidiary is now
technically solvent.
Financial statements are
prepared on a goingconcern basis with
explicit reference to the
guarantees provided.
(c)
The investment in the
subsidiary is written off.
Provision is made for any
further losses which may
arise from loans granted
or guarantees issued
The subsidiary is consolidated.
Total liabilities and assets of
subsidiary are taken up in the
consolidated financial
statements on a going-concern
basis. Non-controlling interests
are allocated its share of the
losses and shown as a deficit
balance.
The subsidiary is now
technically solvent.
Financial statements are
prepared on a goingconcern basis with
explicit reference to the
guarantees provided by
the parent.
(d)
The investment in the
subsidiary is written off.
Provision is made for
any further losses which
may arise from loans
granted. Additional
disclosure is required
with respect to the
subordination agreement.
The subsidiary is consolidated.
Total liabilities and assets of
subsidiary are taken up in the
consolidated financial
statements on a goingconcern basis. Non-controlling
interests are allocated its
share of the losses and shown
as a deficit balance.
The subsidiary is now
technically solvent.
Financial statements are
drawn up on a goingconcern basis with
explicit reference
to the subordination
agreement.
(e)
The loan to the
subsidiary is converted to
shares in the subsidiary.
The increased
investment is then written
off. The amount thus
written off will correspond
with the total amount the
parent will have to write
off under (d) above.
The subsidiary is consolidated.
Remaining liabilities and
assets of the subsidiary are
taken into the consolidated
financial statements on a
going-concern basis. The
proportional shareholding of
the non-controlling interests is
reduced (diluted).
The subsidiary is now
solvent. Financial
statements are prepared
on a going-concern
basis.
378
Adjustments and sundry aspects of group statements
A closer look at situations (b) to (e) reveals that the specific steps taken in each case
were only to help prevent liquidation of the subsidiary by creditors and the noncontrolling shareholders. The adverse effect that the existence of the insolvent
subsidiary has on the financial statements of the parent, as well as on the consolidated
financial statements, can only be eliminated by:
l managing the subsidiary to profitability;
l obtaining further capital, especially from the non-controlling shareholders.
Acquisition of an insolvent subsidiary
6.15 Basic consolidation procedures
When a parent acquires shares (especially a controlling interest) in an already insolvent
company, it must obviously have a very good reason for taking such a step. It may be
that the parent is of the opinion that the unfavourable affairs of the subsidiary are only
temporary and that the subsidiary, with the co-operation of the group, can be converted
into a profitable entity. A further possibility is that the interest in an insolvent subsidiary,
which has at its disposal an assessed loss, is acquired with the income tax advantage
as a consideration.
In such circumstances, it is logical to accept that the parent will have to provide the
unsecured creditors with some or other form of security in order to prevent them from
applying for the liquidation of the company. Non-controlling shareholders will normally
not provide such guarantees. Although this may be the case, in terms of IFRS 10.B94
Consolidated Financial Statements however, as the accumulated losses of a
subsidiary are attributed to the owners of the parent and to the non-controlling interests,
even if this results in the non-controlling interests having a deficit balance. The
reasoning behind this treatment is that, even though the non-controlling interests are
not compelled to cover the deficit (unless they have otherwise specifically agreed to do
so), the fact is that the non-controlling interests meet the Framework’s definition of
equity.
Paragraph 49(c) of the Framework states that equity is the residual interest in the
assets of an entity after deducting all of its liabilities.
Since the non-controlling interests in a subsidiary meet the definition of equity and thus
participates proportionately in the risks and rewards of the investment in the subsidiary,
any negative total comprehensive income will be attributed to them even if it results in a
deficit balance (IFRS 10.B94).
Where interests are acquired in an already-insolvent subsidiary, the difference between
the consideration paid for the interest and the underlying net asset value must be
examined in order to determine whether the difference can be attributed to a specific
asset (which is possibly undervalued in the records of the subsidiary). This is the same
treatment as in the case of a solvent subsidiary. If not, the difference (as with a solvent
subsidiary) will be allocated to goodwill or a gain on bargain purchase. A gain on
bargain purchase is taken to profit or loss if there is no uncertainty about the fair values
of the subsidiary’s assets, liabilities and contingent liabilities acquired by the parent. It
has already been stated that the parent possibly acquired the interest in an already
insolvent subsidiary with the income tax advantage of an assessed loss.
379
Chapter 6
All post-acquisition profits of an insolvent subsidiary will usually be treated as
distributable profits in the consolidated statement of comprehensive income. These
profits are legally distributable.
If the parent has already provided in its own records for its share of the losses of the
subsidiary, care must be taken that these same losses are not included again on
consolidation. The correct procedure would be to reverse the actual entries already
made by the parent by means of a pro forma consolidation journal entry before the
actual losses of the subsidiary are included in the consolidated financial statements.
The following example illustrates the consolidation of the financial statements of a
simple group in the case where the parent acquired shares in an already insolvent
subsidiary.
Example 6.15
Consolidation where shares are acquired in an insolvent
subsidiary
The following are the condensed financial statements of P Ltd and its subsidiary S Ltd
for the financial year ended 31 December 20.18:
STATEMENTS OF FINANCIAL POSITION AS AT 31 DECEMBER 20.18
ASSETS
Property, plant and equipment
Investment in S Ltd – 16 000 shares at cost less
impairment losses (Cost – R10 000)
Trade receivables
Total assets
EQUITY AND LIABILITIES
Share capital (50 000/20 000 shares)
Retained earnings
Accumulated loss
Long-term liabilities
Trade and other payables
Total equity and liabilities
P Ltd
S Ltd
300 000
112 000
–
94 000
–
9 000
R394 000
R121 000
50 000
257 000
–
55 000
32 000
20 000
–
(25 000)
92 000
34 000
R394 000
R121 000
EXTRACT FROM THE STATEMENTS OF PROFIT OR LOSS
AND OTHER COMPREHENSIVE INCOME
FOR THE YEAR ENDED 31 DECEMBER 20.18
P Ltd
PROFIT FOR THE YEAR
Other comprehensive income for the year
TOTAL COMPREHENSIVE INCOME FOR THE YEAR
380
S Ltd
6 000
2 000
–
–
R6 000
R2 000
Adjustments and sundry aspects of group statements
EXTRACT FROM THE STATEMENTS OF CHANGES IN EQUITY
FOR THE YEAR ENDED 31 DECEMBER 20.18
Retained earnings
Balance at 1 January 20.18
Changes in equity for 20.18
Total comprehensive income for the year:
Profit for the year
Dividend paid
Balance at 31 December 20.18
P Ltd
S Ltd
254 000
(27 000)
6 000
(3 000)
R257 000
2 000
–
(R25 000)
P Ltd acquired an 80% interest in S Ltd on 1 January 20.17, on which date the
accumulated loss of the latter amounted to R28 000.
P Ltd elected to measure the non-controlling interests of the acquiree at their
proportionate share of the acquiree’s identifiable net assets at the acquisition date.
At the acquisition date, the assets and liabilities of the subsidiary were considered to be
fairly valued and there were no unaccounted for contingent liabilities.
Goodwill was considered to be totally impaired at the end of the reporting period in
which the subsidiary was acquired.
Solution 6.15
The consolidated financial statements of the P Ltd Group for the year ended
31 December 20.18 will be drawn up as follows:
P LTD GROUP
CONSOLIDATED STATEMENT OF FINANCIAL POSITION
AS AT 31 DECEMBER 20.18
ASSETS
Non-current assets
Property, plant and equipment (300 000(P) + 112 000(S))
Current assets
Trade receivables (94 000(P) + 9 000(S))
Total assets
EQUITY AND LIABILITIES
Equity attributable to owners of the parent
Share capital (P)
Retained earnings
412 000
103 000
R515 000
50 000
253 000
Non-controlling interests
303 000
(1 000)
Total equity
302 000
Non-current liabilities
Long-term liabilities (55 000(P) + 92 000(S))
Current liabilities
Trade and other payables (32 000(P) + 34 000(S))
Total liabilities
Total equity and liabilities
147 000
66 000
213 000
R515 000
381
Chapter 6
P LTD GROUP
EXTRACT FROM THE CONSOLIDATED STATEMENT OF PROFIT OR LOSS
AND OTHER COMPREHENSIVE INCOME
FOR THE YEAR ENDED 31 DECEMBER 20.18
PROFIT FOR THE YEAR (6 000(P) + 2 000(S))
8 000
Other comprehensive income for the year
–
TOTAL COMPREHENSIVE INCOME FOR THE YEAR
R8 000
Total comprehensive income attributable to:
Owners of the parent (8 000 – 400)
Non-controlling interests
7 600
400
R8 000
P LTD GROUP
CONSOLIDATED STATEMENT OF CHANGES IN EQUITY
FOR THE YEAR ENDED 31 DECEMBER 20.18
Balance at 1 January 20.18
Changes in equity for 20.18
Total comprehensive income
for the year:
Profit for the year
Dividend paid
Total
equity
298 400
(1 400)
297 000
7 600
(3 000)
400
–
8 000
(3 000)
Retained
earnings
Total
50 000
#248 400
–
–
7 600
(3 000)
Balance at 31 December 20.18 R50 000
#
Noncontrolling
interests
Share
capital
R253 000 R303 000
(R1 000) R302 000
254 000(P) + 800(S) + 10 000(write back of impairment loss) – 16 400(goodwill) = 248 400
382
Adjustments and sundry aspects of group statements
Calculations
C1 Analysis of owners’ equity of S Ltd
Total
i At acquisition (1/1/20.17)
Share capital
Accumulated loss
P Ltd 80%
At
Since
NCI
20 000
(28 000)
16 000
(22 400)
4 000
(5 600)
Equity represented by goodwill – Parent
(8 000)
16 400
(6 400)
16 400
(1 600)
–
Consideration and NCI
8 400
R10 000
(1 600)
ii Since acquisition
• To beginning of current year:
Retained earnings (–27 000 – (–28 000))
1 000
800
200
(1 400)
• Current year:
Profit for the year
Impairment of goodwill:
• To beginning of current year
2 000
1 600
400
R11 400
2 400
(R1 000)
(16 400)
(16 400)
R–
(R14 000)
C2 Proof of calculation of goodwill of S 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)
Net of the identifiable assets acquired and liabilities assumed
at acquisition date: IFRS 3.32(b) (Refer to comment)
Goodwill
10 000
(1 600)
8 400
8 000
R16 400
Comment
The identifiable liabilities assumed at acquisition are greater than the assets acquired,
which results in a negative net asset situation. The implications of the above calculation
are that the net liabilities are added to the sum of the consideration transferred and the
amount of non-controlling interests (e.g. –(–8 000)).
383
Chapter 6
C3 Pro forma consolidation journal entries
Dr
R
Cr
R
J1
Investment in S Ltd (P)(SFP)
Impairment loss reversed at acquisition date (P)
Reversal of impairment loss
10 000
J2
Share capital (S)(SCE)
Accumulated loss (S)(SCE)
Investment in S Ltd (P)(SFP)
Goodwill (SFP)
Non-controlling interests (SFP)
Elimination of owners’ equity of S Ltd at acquisition
date
20 000
16 400
1 600
J3
Retained earnings – Beginning of year (S)(SCE)
Non-controlling interests (SFP)
Recording of non-controlling interests in retained
earnings at beginning of year
200
J4
Non-controlling interests (P/L)
Non-controlling interests (SFP)
Recording of non-controlling interests in current
year’s profit for the year
400
J5
Impairment of goodwill (P/L)
Goodwill (SFP)
Recording of goodwill impairment
16 400
10 000
28 000
10 000
200
400
16 400
Insolvency of a subsidiary after acquisition
6.16 Basic consolidation procedures
In the event that a subsidiary becomes insolvent after the acquisition date of the
controlling interest by a parent, the treatment of the insolvent subsidiary on
consolidation of the financial statements of the group would be dictated by the actual
circumstances applicable in each case.
The parent may decide to abandon the insolvent subsidiary in the sense that it does not
provide any active financial support, either by way of guarantee of the debts of such
subsidiary or otherwise, in order to prevent the possible liquidation of the subsidiary. In
such a case, the financial statements of S Ltd will be prepared on a liquidation basis.
The fair value of the assets and liabilities will reflect their liquidation values. Disclosure
is done in terms of IFRS 5 Non-current Assets Held for Sale and Discontinued
Operations. The subsidiary will, however, still be consolidated, probably in terms of the
limited-line-item consolidation as determined by IFRS 5. The basic calculations remain
similar to those applied in example 6.16.
384
Adjustments and sundry aspects of group statements
However, should the parent be of the opinion that the reversal in the affairs of the
subsidiary is only temporary, or decide on any other grounds to provide such support as
may be necessary in order to prevent the liquidation of the subsidiary, the use of
liquidation values in the preparation of financial statements is not justifiable. As a result,
the going-concern approach must be applied in the preparation of the subsidiary’s
financial statements, as well as the consolidated financial statements.
The following example illustrates the consolidation of the financial statements of a
simple group, where the subsidiary became insolvent after the acquisition date of the
controlling interest by the parent.
Example 6.16
Consolidation of a subsidiary that becomes insolvent after
acquisition date
The following are the condensed financial statements of P Ltd and its subsidiary S Ltd:
STATEMENTS OF FINANCIAL POSITION AS AT 31 DECEMBER 20.18
ASSETS
Property, plant and equipment
Investment in S Ltd: 16 000 shares at cost less impairment
losses
Loan to S Ltd
Trade receivables
Total assets
EQUITY AND LIABILITIES
Share capital (50 000/20 000 shares)
Retained earnings/(Accumulated loss)
Long-term liabilities
Trade and other payables
Loan from P Ltd
Total equity and liabilities
P Ltd
S Ltd
609 200
184 000
–
132 000
63 300
–
–
55 000
R804 500
R239 000
50 000
492 500
230 000
32 000
–
20 000
(133 000)
92 000
128 000
132 000
R804 500
R239 000
EXTRACT FROM THE STATEMENTS OF PROFIT OR LOSS
AND OTHER COMPREHENSIVE INCOME
FOR THE YEAR ENDED 31 DECEMBER 20.18
P Ltd
PROFIT FOR THE YEAR
Other comprehensive income for the year
TOTAL COMPREHENSIVE INCOME FOR THE YEAR
S Ltd
326 000
15 000
–
–
R326 000
R15 000
385
Chapter 6
EXTRACT FROM THE STATEMENTS OF CHANGES IN EQUITY
FOR THE YEAR ENDED 31 DECEMBER 20.18
Retained earnings
Balance at 1 January 20.18
Changes in equity for 20.18
Total comprehensive income for the year:
Profit for the year
Dividend paid
Balance at 31 December 20.18
P Ltd
S Ltd
241 500
(148 000)
326 000
(75 000)
15 000
–
R492 500
(R133 000)
P Ltd acquired an 80% interest in S Ltd on 1 January 20.17 for R64 000, when the
retained earnings of the latter amounted to R45 000. In terms of an agreement, P Ltd
subordinated the loan to S Ltd to rank below the claims of the other creditors.
At the acquisition date, the assets and liabilities of the subsidiary were considered to be
fairly valued and there were no unaccounted for contingent liabilities.
P Ltd elected to measure the non-controlling interests in the acquiree at their fair value
of R17 000 on 1 January 20.17, the acquisition date.
386
Adjustments and sundry aspects of group statements
Solution 6.16
The condensed financial statements of the P Ltd Group for the year ended
31 December 20.18 will be drawn up as follows:
P LTD GROUP
CONSOLIDATED STATEMENT OF FINANCIAL POSITION
AS AT 31 DECEMBER 20.18
ASSETS
Non-current assets
Property, plant and equipment (609 200(P) + 184 000(S))
Goodwill
793 200
16 000
809 200
Current assets
Trade receivables (63 300(P) + 55 000(S))
Total assets
118 300
R927 500
EQUITY AND LIABILITIES
Equity attributable to owners of the parent
Share capital (P)
Retained earnings
50 000
414 100
Non-controlling interests
464 100
(18 600)
Total equity
445 500
Non-current liabilities
Long-term liabilities (230 000(P) + 92 000(S))
322 000
Current liabilities
Trade and other payables (32 000(P) + 128 000(S))
160 000
Total liabilities
482 000
Total equity and liabilities
R927 500
P LTD GROUP
EXTRACT FROM THE CONSOLIDATED STATEMENT OF PROFIT OR LOSS
AND OTHER COMPREHENSIVE INCOME
FOR THE YEAR ENDED 31 DECEMBER 20.18
PROFIT FOR THE YEAR (326 000(P) + 15 000(S))
Other comprehensive income for the year
TOTAL COMPREHENSIVE INCOME FOR THE YEAR
Total comprehensive income attributable to:
Owners of the parent
Non-controlling interests
341 000
–
R341 000
338 000
3 000
R341 000
387
Chapter 6
P LTD GROUP
CONSOLIDATED STATEMENT OF CHANGES IN EQUITY
FOR THE YEAR ENDED 31 DECEMBER 20.18
Balance at 1 January 20.18
Changes in equity for 20.18
Total comprehensive income
for the year:
Profit for the year
Dividend paid
Balance at 31 December 20.18
#
Share
capital
Retained
earnings
Total
Noncontrolling
interests
Total
equity
50 000
#151 100
201 100
(21 600)
179 500
338 000
(75 000)
338 000
(75 000)
3 000
–
341 000
(75 000)
R50 000 R414 100 R464 100
(R18 600) R445 500
241 500(P) – 154 400(S) + 64 000(write back of impairment loss) = 151 100
Calculations
C1 Analysis of owners’ equity of S Ltd
Total
i At acquisition (1/1/20.17)
Share capital
Retained earnings
P Ltd 80%
At
Since
NCI
20 000
45 000
16 000
36 000
4 000
9 000
Equity represented by goodwill
– Parent and NCI
65 000
52 000
13 000
16 000
12 000
4 000
Consideration and NCI
81 000 R64 000
17 000
ii Since acquisition
• To beginning of current year:
Retained earnings (–148 000 – (+45 000)
(193 000)
(154 400)
(38 600)
(21 600)
• Current year:
Profit for the year
15 000
(R97 000)
12 000
3 000
(R142 400) (R18 600)
C2 Proof of calculation of goodwill of S 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)
64 000
17 000
81 000
Net of the identifiable assets acquired and liabilities assumed
at acquisition date: IFRS 3.32(b)
(65 000)
Goodwill
R16 000
388
Adjustments and sundry aspects of group statements
C3 Pro forma consolidation journal entries
Dr
R
J1
Investment in S Ltd (P)(SFP)
Impairment loss reversed at acquisition (P)
Reversal of impairment loss
64 000
J2
Share capital (S)(SCE)
Retained earnings (S)(SCE)
Goodwill (SFP)
Investment in S Ltd (P)(SFP)
Non-controlling interests (SFP)
Elimination of owners’ equity of S Ltd at acquisition
date
20 000
45 000
16 000
J3
Non-controlling interests (SFP)
Accumulated loss – Beginning of year (S)(SCE)
Recording of non-controlling interests in
accumulated loss at beginning of year
38 600
J4
Non-controlling interests (P/L)
Non-controlling interests (SFP)
Recording of non-controlling interests in current
year’s profit for the year
3 000
Cr
R
64 000
64 000
17 000
38 600
3 000
Preference shares
6.17 Characteristics
Preference shares can only exist when another class of shares, generally ordinary
shares, exists, in comparison to which the preference shares enjoy certain preferential
rights. These preferential rights can be summarised as follows:
(a) Preferential rights in respect of dividends
For the purposes of the following discussion, this is probably the most important
right attached to preference shares. This right is normally expressed as a
percentage of the value of the share, for example 9% preference shares with an
issued value of R400 000 would receive a dividend of R36 000 (9% × R400 000).
Where a subsidiary has issued preference shares, these shares have a preferential
claim to the profit of the company, whilst the balance is attributable to the ordinary
owners (shareholders). As in the case of ordinary shares, preference owners
cannot legally lay claim to their share of the profit before a preference dividend has
been declared. If the preference shares are cumulative (see (c) below), ordinary
owners may not receive a dividend in the current reporting period unless a
preference dividend is declared. The preference shares can in essence, for the
purposes of allocation of profit, be regarded as a debt that bears “interest”, of
which the obligation to pay accrues on a time basis.
If this approach is followed, no problems should be experienced with the treatment
of preference dividends on consolidation.
389
Chapter 6
(b) Preferential rights in respect of repayment of capital
Unless an express provision exists in the articles of the company to the effect that
preference shares also enjoy preference to repayment of capital on liquidation,
they share pro rata in such repayment with the ordinary shares.
(c) Classification with regard to dividends
Preference shares can be classified as follows with regard to dividends:
l Non-cumulative
These shareholders are not entitled to the payment of arrear dividends.
l Cumulative
If no dividend is declared in a specific reporting period(s), a cumulative
preferential right exists that on the first dividend declaration in a subsequent
year the arrear and current preference dividends must first be declared before a
dividend may be declared to any other class of shares. Even if no formal
dividend is declared to the preference shareholders, a dividend will accrue and
become payable based on the terms of the preference shares.
Cumulative preferential rights to dividends are normally expressly prescribed and
expressed in the designation of the shares, for example 8% cumulative preference
shares. Where it is not expressly stipulated, it is assumed that preference shares
are cumulative. For the sake of brevity, reference is made in this publication only to
preference shares, which by implication refers to cumulative preference shares.
(d) Participating and non-participating
The participation of preference shares in the sharing of profit is normally restricted
to the fixed percentage dividend to which they are entitled. Participating preference
shareholders are, however, entitled to such fixed percentage dividend, as well as a
share of the remaining portion of the distributable profits, if available.
(e) Voting rights
A final characteristic of preference shares to which we wish to draw attention in this
text is that they normally do not carry a vote, except while the preference dividend
or a redemption instalment (see below) is in arrears and remains unpaid, and
where any resolution is proposed at a shareholders’ meeting which directly affects
the rights attached to the preference shares or the interests of the preference
shareholders (also refer example 1.8 of chapter 1).
Different types of preference shares also exist, such as convertible preference shares
(i.e. shares which give the holder the right, subject to certain stated conditions, to
convert the shares into other shares of the company – usually ordinary shares) and
redeemable preference shares (i.e. preference shares which may be redeemed out of
profits or out of the proceeds of a new issue of shares). The fact that preference shares
may be redeemable raises the question of whether such preference shares may be
regarded as owner’s equity.
390
Adjustments and sundry aspects of group statements
6.18 Liability versus equity
Per IAS 32.15 an issuer of a financial instrument should, on initial recognition, classify
the instrument as a financial liability or an equity instrument in accordance with the
substance of the contractual arrangement and the definitions of a financial liability and
an equity instrument.
Although the classification of preference shares could become very complicated in
practice, a brief discussion, starting with the definitions of relevant concepts in IAS 32.11,
is essential before the related consolidation procedures can be discussed,
A financial instrument is any contract that gives rise to a financial asset of one entity
and a financial liability or equity instrument of another entity.
A financial liability is any liability that is a contractual obligation:
l to deliver cash or another financial asset to another entity; or
l to exchange financial assets or financial liabilities with another entity under
conditions that are potentially unfavourable to the entity; or
l a contract that will be settled in the entity’s own equity instruments and is:
• a non-derivative, for which the entity is or may be obliged to deliver a variable
number of the entity’s own equity instruments; or
• a derivative that will or may be settled other than by the exchange of a fixed
amount of cash or another financial asset for a fixed amount of the entity’s own
equity instruments. For this purpose, the entity’s own equity instruments do not
include instruments that are themselves contracts for the future receipt or
delivery of the entity’s own equity instruments.
An equity instrument is any contract that evidences a residual interest in the assets of
an entity after deducting the liabilities.
When the definition of a financial liability is analysed, it becomes clear that the essence
of the classification depends on whether the issuer of the instrument has a contractual
obligation:
l to deliver cash or another financial instrument to the holder of the instrument; or
l to exchange financial assets and liabilities with other entities under conditions that
would be potentially unfavourable to the issuer.
Furthermore, it is important to determine whether the issuer has an unconditional right
to avoid delivering cash or another financial asset to settle an obligation, i.e.:
l if an entity does not have an unconditional right to avoid delivering cash or another
financial asset to settle a contractual obligation, the obligation meets the definition
of a financial liability (IAS 32.19); therefore
l if an entity does have an unconditional right to avoid delivering cash or another
financial asset to settle a contractual obligation, the obligation meets the definition
of an equity instrument.
391
Chapter 6
Various permutations of preference shares may be found in practice, depending on
their “redeemability”, i.e. redeemable, non-redeemable and redeemable at the option of
either the issuer or the holder. The same applies to the payment of dividends, which
could be discretionary or compulsory. The purpose of this discussion is not to classify
financial instruments. Therefore, in order to simplify the classification of preference
shares for the purpose of this work, it is assumed that preference shares that provide
for the mandatory redemption by the issuer for a fixed (or determinable) amount at a
fixed (or determinable) future date, and that the payment of dividends is compulsory
(thus cumulative) are not classified as preference shares. A financial instrument that
falls into this category is classified as a financial liability and is accounted for in terms of
IAS 39 Financial Instruments: Presentation. Such investments in preferences shares
are not consolidated. Furthermore, if the preference share is classified as a financial
liability, the related dividends are regarded as interest and thus classified as an
expense in profit or loss. Such dividends therefore also have no effect on the
consolidation process.
In all other instances preference shares are assumed to be non-redeemable and are
therefore regarded as equity instruments for the purposes of this work. Furthermore,
such an investment in the preference shares of a subsidiary is regarded as being part
of the net investment in the subsidiary as a whole, because of the equity nature of the
preference shares. Investments in preference shares are consolidated in terms of IFRS 10
in the same manner as ordinary shares.
Comment
This view is substantiated by the definition of non-controlling interests in IFRS 10, which
determines that “non-controlling interests is the equity in a subsidiary not attributable,
directly or indirectly, to a parent” (IFRS 10 Appendix A).
Consolidation procedures where the capital of the subsidiary
includes preference shares
6.19 The treatment of preference shares and their profit-sharing
preferential right when preparing consolidated financial
statements
When drawing up consolidated financial statements, particular attention must be given
to the rights attached to preference shares. If the share capital of a subsidiary consists
of more than one class of shares, the total owner’s equity must be allocated between
the different classes of capital in accordance with the particular rights attached to each.
The purpose of such allocation is to:
l identify the equity of the subsidiary attributable to the total investment of the parent;
and
l determine the total interest of the non-controlling interests (where applicable).
At acquisition date the acquirer shall measure the non-controlling interests in the
acquiree (that are present ownership interests and entitle their holders to a
proportionate share of the entity’s net assets in the event of liquidation) at the
proportionate share of the entity’s identifiable net assets or at fair value (IFRS 3.19).
392
Adjustments and sundry aspects of group statements
If the non-controlling interests in the acquiree are not entitled on liquidation of the
acquiree to a proportionate share of the acquiree’s net assets then the non-controlling
interests shall be measured at their acquisition-date fair values (IFRS 3.19).
If the non-controlling interests include preference shares then the measurement of the
preference share capital will be determined as follows:
l the acquiree has issued preference shares and the preference shares give their
holders a right to a preferential dividend in priority to the payment of any dividend
to the holders of ordinary shares and the preference shareholders are only entitled
to receive a repayment of the nominal value of the preference share upon
liquidation of the acquiree.
In this situation the acquirer measures the preference shares at their acquisitiondate fair value,
l the acquiree has issued preference shares and the preference shares give their
holders a right to a preferential dividend in priority to the payment of any dividend
to the holders of ordinary shares and the preference shareholders are entitled to
receive a proportionate share of the net assets available for distribution upon
liquidation of the acquiree.
In this situation the acquirer measures the preference shares at their acquisition-date
fair value or at their proportionate share in the acquiree’s recognised identifiable net
assets. This will be in accordance with the method elected by the parent for the
measuring of the non-controlling interests at acquisition date.
In the analysis of the owners’ equity of the subsidiary, the portion attributable to the
preference owners must be allocated first. The remaining balance is then attributable to
the ordinary owners.
Example 6.17
Issued preference shares of acquiree with limited preference on
liquidation of the acquiree
The issued share capital of S Ltd is as follows:
500 000 Ordinary shares
R500 000
20 000 Preference shares (classified as equity)
R30 000
The preference shareholders have the following preferential rights:
l their dividend payment has priority over that of the ordinary shareholders; and
l will receive the return of their investment upon liquidation of the acquiree.
P Ltd acquired all the ordinary shares of S Ltd on 1 January 20.18. The acquisition
gives P Ltd control of S Ltd.
P Ltd did not acquire any of the preference shares. The acquisition-date fair value of
the preference shares is R40 000.
393
Chapter 6
Solution 6.17
The non-controlling interests that relate to S Ltd’s preference shares do not qualify for
the measurement choice in IFRS 3.19 because their holders are not entitled to a
proportionate share of the entity’s net assets in the event of liquidation.
Therefore the preference share capital has to be measured at the acquisition-date fair
value of R40 000.
Analysis of preference owners’ equity of S Ltd at acquisition date
Total
i At acquisition (1/1/20.18)
Share capital
Equity represented by goodwill – NCI
Consideration and NCI
Example 6.18
P Ltd 0%
At
Since
NCI
30 000
10 000
–
–
30 000
10 000
R40 000
R–
R40 000
Issued preference shares of acquiree with preference on
liquidation of the acquiree
The issued share capital of S Ltd is as follows:
500 000 Ordinary shares
R500 000
20 000 Preference shares (classified as equity)
R30 000
The preference shareholders have the following preferential rights:
l their dividend payment has priority over that of the ordinary shareholders; and
l will receive a proportionate share of the net assets available for distribution upon
liquidation of the acquiree.
P Ltd acquired all the ordinary shares of S Ltd on 1 January 20.18. The acquisition
gives P Ltd control of S Ltd.
P Ltd did not acquire any of the preference shares. The acquisition-date fair value of
the preference shares is R40 000.
Solution 6.18
The non-controlling interests that relate to S Ltd’s preference shares qualify for the
measurement choice in IFRS 3.19 because they entitle their holders to a proportionate
share of the entity’s net assets in the event of liquidation.
Therefore P Ltd can choose to measure the preference shares at their acquisition-date
fair value of R40 000 or at their proportionate share in the acquiree’s recognised
amounts of the identifiable net assets of R50 000.
In this solution assume that P Ltd has elected to measure non-controlling interests at
their proportionate share of the acquiree’s identifiable net assets at the acquisition date.
394
Adjustments and sundry aspects of group statements
Analysis of preference owners’ equity of S Ltd at acquisition date
Total
i At acquisition (1/1/20.18)
Share capital
Equity represented by goodwill
Consideration and NCI
P Ltd 0%
At
Since
NCI
30 000
–
–
–
30 000
–
R30 000
R–
R30 000
A study of the previous section of this work will have highlighted the following points
which deserve attention when consolidating the preference share capital:
l Is the preference share capital classified as equity or as a liability?
l Does the parent hold all the preference shares or is there a non-controlling interest
component?
l What are the rights attached to the preference shares?
l Are any of the dividends payable to the preference shareholders in arrears?
l What is the elected method for measuring the non-controlling interests at
acquisition date?
After taking into consideration the abovementioned pointers apply the relevant
consolidation procedures.
Example 6.19
All preference shares are held by non-controlling interests and
preference shares have limited rights on liquidation
The following information relates to the ordinary and preference share capital of S Ltd:
STATEMENTS OF PROFIT OR LOSS AND OTHER COMPREHENSIVE INCOME
FOR THE YEAR ENDED 28 FEBRUARY 20.18
P Ltd
S Ltd
Gross profit
Other income (including dividend received)
200 100
72 900
140 000
20 000
Profit before tax
Income tax expense
273 000
(71 960)
160 000
(44 800)
PROFIT FOR THE YEAR
Other comprehensive income for the year
Items that will not be reclassified to profit or loss
Mark-to-market reserve (fair value adjustment on investment)
Income tax relating to mark-to-market reserve
201 040
115 200
4 600
(858)
–
–
Other comprehensive income for the year, net of tax
3 742
–
TOTAL COMPREHENSIVE INCOME FOR THE YEAR
R204 782
R115 200
395
Chapter 6
Additional information
1 P Ltd acquired 32 000 ordinary shares in S Ltd on 1 March 20.15 for R102 000
when the equity of S Ltd consisted of the following:
Share capital: Ordinary (40 000 shares)
40 000
Share capital: 10% Preference (10 000 shares)
10 000
Retained earnings
80 000
R130 000
2
3
4
5
At the acquisition date, the assets and liabilities were considered to be fairly valued
and there were no unaccounted for contingent liabilities.
The preference shareholders have a prior right to their dividend payment and will
receive the return of their investment upon liquidation of the acquiree. All preference
dividends have been paid up to and including 28 February 20.18. The fair value of
the preference shares at acquisition date is R12 000.
P Ltd classified the equity investments in S Ltd under IFRS 9 in its separate
financial statements and recognised fair value adjustments in a mark-to-market
reserve (other comprehensive income).
P Ltd elected to measure the non-controlling interests in the acquiree at their
proportionate share of the acquiree’s identifiable net assets at the acquisition date.
The company tax rate is 28% and capital gains tax (CGT) is calculated at 66,6%
thereof.
Solution 6.19
The goodwill or gain from a bargain purchase at acquisition will be calculated as
follows:
Calculations
C1 Analysis of the owners’ equity of S Ltd
P Ltd 80%
Ordinary shares
Total
i At acquisition (1/3/20.15)
Share capital
Retained earnings
40 000
80 000
32 000
64 000
8 000
16 000
120 000
6 000
96 000
6 000
24 000
–
R126 000 R102 000
R24 000
Equity represented by goodwill – Parent
Consideration and NCI
At
Since
C2 Proof of calculation of goodwill of S 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)
NCI
102 000
24 000
126 000
Net of the identifiable assets acquired and liabilities assumed
at acquisition date: IFRS 3.32(b)
Goodwill
396
(120 000)
R6 000
Adjustments and sundry aspects of group statements
Comment
a The analysis of the owners’ equity of S Ltd is expanded to include the analysis of
the preference owners’ equity.
b Since the non-controlling interests that relate to S Ltd’s preference shares do not
qualify for the measurement choice in IFRS 3.19 because they do not entitle their
holders to a proportionate share of the entity’s net assets in the event of liquidation
the preference share capital must be measured at the acquisition-date fair value.
C3 Analysis of preference owners’ equity of S Ltd
Preference shares
Share capital
Equity attributable to goodwill – NCI
Consideration and NCI
Total
P Ltd 0%
At
Since
NCI
10 000
2 000
10 000
2 000
R12 000
R12 000
C4 Proof of calculation of goodwill of preference shares of S 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)
12 000
12 000
Net of the identifiable assets acquired and liabilities assumed
at acquisition date: IFRS 3.32(b)
(10 000)
Goodwill
R2 000
Comment
a As the investment was remeasured (fair value adjustment), the remeasurement
should be reversed on consolidation in order to facilitate the basic elimination journal
entry of the investment. The “Investment in S Ltd” should be eliminated at cost to
ensure the correct calculation of goodwill or gain on bargain purchase at the
acquisition date.
b The consolidated amounts can be obtained either by setting off the pro forma
consolidation journal entries against the combined amounts of the parent and the
subsidiary (in a worksheet), or by merely adding certain amounts in respect of the
subsidiary to that of the parent.
6.20 The calculation of non-controlling interests in the profit of the
current reporting period of a subsidiary with preference share
capital
Where a subsidiary has issued preference shares, these preference shares have a
preferential claim to the profit of the subsidiary for that reporting period. This right is,
however, limited to a predetermined amount per year, namely the amount of the fixed
preference dividend. The interest of the ordinary owners in the profit of the subsidiary
for the current reporting period is thus after the profit attributable to the preference
397
Chapter 6
shareholders (i.e. preference dividend) has been taken into account, assuming the
preference shares are cumulative (as discussed in 6.17(c)). An important aspect which
must consequently be kept in mind is that when the non-controlling interests hold both
preference and ordinary shares, the non-controlling interests in the profit for the year
includes the following:
l the pro rata portion of the preference dividend for the current reporting period
attributable to the preference shareholding of the non-controlling interests,
irrespective of whether such preference dividend is paid or declared, or even
where no provision has been made for a preference dividend in the financial
statements of the subsidiary; and
l the pro rata share attributable to the ordinary shareholding of the non-controlling
interests in the current profit for the reporting period which remains after the full
preference dividend for the reporting period has been taken into account.
Example 6.20
All preference shares are held by non-controlling interests and
there are no accrued or outstanding dividends
The following represents the abridged financial statements of P Ltd and its subsidiary
S Ltd on 28 February 20.18:
STATEMENTS OF FINANCIAL POSITION AS AT 28 FEBRUARY 20.18
ASSETS
Property, plant and equipment
Investment in S Ltd: 32 000 ordinary shares at fair value
Trade receivables
Total assets
EQUITY AND LIABILITIES
Share capital: Ordinary shares (100 000/40 000 shares)
Share capital: 10% preference shares (20 000/10 000 shares)
Mark-to-market reserve (20 000 – 3 730(deferred tax))
Retained earnings
Deferred tax (20 000 × 66,6% × 28%)
Trade and other payables
Total equity and liabilities
398
P Ltd
S Ltd
350 000
122 000
17 040
266 200
–
35 000
R489 040
R301 200
100 000
20 000
16 270
340 040
3 730
9 000
40 000
10 000
–
219 200
–
32 000
R489 040
R301 200
Adjustments and sundry aspects of group statements
STATEMENTS OF PROFIT OR LOSS AND OTHER COMPREHENSIVE INCOME
FOR THE YEAR ENDED 28 FEBRUARY 20.18
P Ltd
S Ltd
Gross profit
Other income (including dividend received)
200 100
72 900
140 000
20 000
Profit before tax
Income tax expense
273 000
(71 960)
160 000
(44 800)
PROFIT FOR THE YEAR
Other comprehensive income for the year
Items that will not be reclassified to profit or loss
Mark-to-market reserve (fair value adjustment on investment)
Income tax relating to mark-to-market reserve
201 040
115 200
4 600
(858)
–
–
Other comprehensive income for the year, net of tax
3 742
–
TOTAL COMPREHENSIVE INCOME FOR THE YEAR
R204 782
R115 200
EXTRACTS FROM THE STATEMENTS OF CHANGES IN EQUITY
FOR THE YEAR ENDED 28 FEBRUARY 20.18
Mark-tomarket
reserve
P Ltd
Balance at 1 March 20.17
Changes in equity for 20.18
Total comprehensive income for the year:
Profit for the year
Other comprehensive income for the year
Dividend paid: Ordinary (31 January 20.18)
Dividend paid: Preference (31 January 20.18)
Balance at 28 February 20.18
Retained earnings
P Ltd
S Ltd
12 528
164 000
125 000
–
3 742
–
–
201 040
–
(25 000)
–
115 200
–
(20 000)
(1 000)
R16 270
R340 040
R219 200
Additional information
1 P Ltd acquired 32 000 ordinary shares in S Ltd on 1 March 20.15 for R102 000
when the equity of S Ltd consisted of the following:
Share capital: Ordinary (40 000 shares)
40 000
Share capital: 10% preference (10 000 shares)
10 000
Retained earnings
80 000
R130 000
At the acquisition date, the assets and liabilities were considered to be fairly valued
and there were no unaccounted for contingent liabilities.
399
Chapter 6
2
3
4
5
The preference shareholders have a prior right to their dividend payment and will
receive the return of their investment upon liquidation of the acquiree. All preference
dividends have been paid up to and including 28 February 20.18. The fair value of
the preference shares at acquisition date is R12 000.
P Ltd classified the equity investments in S Ltd under IFRS 9 in its separate
financial statements and recognised fair value adjustments in a mark-to-market
reserve (other comprehensive income).
P Ltd elected to measure the non-controlling interests in the acquiree at their
proportionate share of the acquiree’s identifiable net assets at the acquisition date.
The company tax rate is 28% and capital gains tax (CGT) is calculated at 66,6%
thereof.
Solution 6.20
The consolidated financial statements of the P Ltd Group are prepared as follows:
P LTD GROUP
CONSOLIDATED STATEMENT OF FINANCIAL POSITION
AS AT 28 FEBRUARY 20.18
ASSETS
Non-current assets
Property, plant and equipment (350 000(P) + 266 200(S))
Goodwill (6 000(ordinary) + 2 000(preference))
616 200
8 000
624 200
Current assets
Trade receivables (17 040(P) + 35 000(S))
Total assets
EQUITY AND LIABILITIES
Equity attributable to owners of the parent
Share capital (Ordinary)
Share capital (Preference)
Retained earnings
52 040
R676 240
100 000
20 000
451 400
Non-controlling interests (51 840(ordinary) + 12 000(preference))
571 400
63 840
Total equity
635 240
Current liabilities
Trade and other payables (9 000(P) + 32 000(S))
Total equity and liabilities
400
41 000
R676 240
Adjustments and sundry aspects of group statements
P LTD GROUP
CONSOLIDATED STATEMENT OF PROFIT OR LOSS
AND OTHER COMPREHENSIVE INCOME
FOR THE YEAR ENDED 28 FEBRUARY 20.18
Gross profit (200 100(P) + 140 000(S))
Other income (72 900(P) + 20 000(S) – 16 000(dividend received))
340 100
76 900
Profit before tax
Income tax expense (71 960(P) + 44 800(S))
417 000
(116 760)
PROFIT FOR THE YEAR
300 240
Other comprehensive income for the year
–
TOTAL COMPREHENSIVE INCOME FOR THE YEAR
Total comprehensive income attributable to:
Owners of the parent (300 240 – 23 840)
Non-controlling interests (23 040(C1) + 1 000(C2) – 200(C1))
R300 240
276 400
23 840
R300 240
P LTD GROUP
CONSOLIDATED STATEMENT OF CHANGES IN EQUITY
FOR THE YEAR ENDED 28 FEBRUARY 20.18
Share
capital –
Ordinary
Balance at
1 March 20.17
Changes in equity
for 20.18
Total
comprehensive
income for the
year:
Profit for the year
Dividend paid
Balance at
28 February 20.18
100 000
–
–
R100 000
Share
capital –
Preference
Retained
earnings
20 000 * 200 000
–
–
276 400
(25 000)
Total
Noncontrolling
interests
Total
equity
320 000
@45 000
365 000
276 400
(25 000)
23 840
& (5 000)
300 240
(30 000)
R20 000 R451 400 R571 400 #R63 840 R635 240
* 164 000(P) + 36 000(S) = 200 000
@ 33 000(C1) + 12 000(C2) = 45 000
# 51 840(C1) + 12 000(C2) = 63 840
& 4 000(C1) + 1 000(C2) = 5 000
401
Chapter 6
Calculations
C1 Analysis of the owners’ equity of S Ltd
P Ltd 80%
Ordinary shares
Total
i At acquisition (1/3/20.15)
Share capital
Retained earnings
40 000
80 000
32 000
64 000
8 000
16 000
120 000
96 000
24 000
6 000
6 000
–
126 000
R102 000
24 000
Equity represented by goodwill
– Parent
Consideration and NCI
ii Since acquisition
• To beginning of current year :
Retained earnings (125 000 – 80 000)
• Current year:
Profit for the year
Income attributable to preference
shareholders
Dividends paid
At
Since
NCI
45 000
36 000
9 000
115 200
92 160
33 000
23 040
(1 000)
(20 000)
(800)
(16 000)
(200)
(4 000)
R265 200
R111 360
R51 840
C2 Proof of calculation of goodwill of S 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)
102 000
24 000
126 000
Net of the identifiable assets acquired and liabilities assumed
at acquisition date: IFRS 3.32(b)
(120 000)
Goodwill
R6 000
C2 Analysis of preference owners’ equity of S Ltd
P Ltd 0%
Preference shares
Total
Share capital
Equity attributable to goodwill
– NCI
10 000
10 000
2 000
2 000
Consideration and NCI
Income attributable to preference
shareholders
Dividends paid
12 000
12 000
1 000
(1 000)
1 000
(1 000)
R12 000
R12 000
402
At
Since
NCI
Adjustments and sundry aspects of group statements
C3 Pro forma consolidation journal entries
Dr
R
J1
Cr
R
Mark-to-market reserve (P)(SCE)
Deferred tax (P)(SFP) (15 400 × 66,6% × 28%)
Investment in S Ltd (P)(SFP) (12 528/81,352%)
Reversal of fair value adjustment on investment
in S Ltd at beginning of year at group level
12 528
2 872
J2
Mark-to-market reserve (P)(SCE)
Investment in S Ltd (P)(SFP)
Reversal of fair value adjustment on investment
in S Ltd for current year at group level
4 600
J3
Deferred tax (P)(SFP) (4 600 × 66,6% × 28%)
Income tax relating to OCI (OCI)
Tax effect on reversal of fair value adjustment on
investment in S Ltd for current year at group level
858
J4
Share capital (Ordinary) (S)(SCE)
Retained earnings (S)(SCE)
Goodwill (SFP)
Investment in S Ltd (P)(SFP)
Non-controlling interests (SFP)
Elimination of ordinary owners’ equity of S Ltd
at acquisition date
40 000
80 000
6 000
Share capital (Preference) (P)(SCE)
Goodwill (SFP)
Non-controlling interests (SFP)
Elimination of preference owners’ equity of S Ltd
at acquisition date
10 000
2 000
J6
Non-controlling interests (SVE)
Non-controlling interests (SFP)
Recognition of non-controlling interests in since
acquisition retained earnings
9 000
J7
Non-controlling interests (P/L) (23 040 – 200 + 1 000)
Non-controlling interests (SFP)
Recognition of non-controlling interests in current
year’s profit for the year
23 840
J8
Dividend received (P)(P/L)
Non-controlling interests (SFP)
Ordinary dividend paid (S)(SCE)
Elimination of intragroup ordinary dividend and
recording of non-controlling interests in dividend
16 000
4 000
Non-controlling interests (SFP)
Preference dividend paid (S)(SCE)
Recording of non-controlling interests in preference
dividend
1 000
J5
J9
15 400
4 600
858
102 000
24 000
12 000
9 000
23 840
20 000
1 000
403
Chapter 6
Example 6.21
Calculation of the non-controlling interests in the profit of the
current reporting period of a subsidiary with issued preference
shares
The following are the condensed financial statements of S Ltd, a subsidiary of P Ltd, for
the reporting period ended 31 December 20.18:
S LTD
STATEMENT OF FINANCIAL POSITION AS AT 31 DECEMBER 20.18
ASSETS
Non-current assets
Property, plant and equipment
Total assets
EQUITY AND LIABILITIES
Equity attributable to owners of the parent
Share capital: Ordinary (100 000 shares)
Share capital: 8% Preference (50 000 shares)
Retained earnings
Total equity
210 000
R210 000
100 000
50 000
60 000
210 000
Total equity and liabilities
R210 000
S LTD
EXTRACT FROM THE STATEMENT OF PROFIT OR LOSS
AND OTHER COMPREHENSIVE INCOME
FOR THE YEAR ENDED 31 DECEMBER 20.18
Profit before tax
Income tax expense
50 000
(21 000)
PROFIT FOR THE YEAR
29 000
Other comprehensive income for the year
TOTAL COMPREHENSIVE INCOME FOR THE YEAR
–
R29 000
S LTD
EXTRACT FROM THE STATEMENT OF CHANGES IN EQUITY
FOR THE YEAR ENDED 31 DECEMBER 20.18
Retained
earnings
Balance at 1 January 20.18
Changes in equity for 20.18
Total comprehensive income for the year:
Profit for the year
Preference dividend paid
Ordinary dividend paid
29 000
(4 000)
(10 000)
Balance at 31 December 20.18
R60 000
404
45 000
Adjustments and sundry aspects of group statements
On 1 January 20.18, P Ltd acquired 80% of the ordinary shares of S Ltd for R120 000,
and 50% of the preference shares of S Ltd for R25 000. There were no arrear
preference dividends at that date. The fair value of P Ltd’s investment in the shares of
S Ltd is equal to the consideration paid therefore, at the end of the reporting period.
The preference shareholders have a preferential right to their dividend payment and will
receive a proportionate share of the net assets available for distribution upon liquidation
of the acquiree. The fair value of the preference shares at acquisition date is R26 000.
At the acquisition date, the assets and liabilities were considered to be fairly valued and
there were no unaccounted for contingent liabilities.
P Ltd elected to measure the non-controlling interests in the acquiree at their
proportionate share of the acquiree’s identifiable net assets at the acquisition date.
Solution 6.21
The non-controlling interests in the profit of S Ltd for the reporting period ended
31 December 20.18 will be calculated as follows:
A pro rata portion of the preference dividend for the current reporting period is
attributable to the preference shareholding of the non-controlling interests (irrespective
of whether the preference dividend has been paid, or declared, or even where no
provision has been made for the preference dividend in the financial statements of the
subsidiary):
Pro rata share of preference dividend: 50% × 4 000
2 000
Pro rata share of profit attributable to ordinary shareholders
attributable to the non-controlling interests: 20% × 25 000
5 000
Non-controlling interests
R7 000
Comment
If P Ltd, in the example above, held no preference shares in S Ltd, the non-controlling
interests in profit would have amounted to R9 000 (4 000(preference dividend) +
5 000(C1)).
In the interest of clarity, the treatment of the preference share capital and preference
dividend in the analysis of the owners’ equity of S Ltd is dealt with next. The pro forma
consolidation journal entries are also given.
405
Chapter 6
Calculations
C1 Analysis of owners’ equity of S Ltd
P Ltd 80%
Ordinary shares
Total
i At acquisition (1/1/20.18)
Share capital
Retained earnings
100 000
45 000
80 000
36 000
20 000
9 000
145 000
116 000
29 000
Equity represented by goodwill
– Parent
Consideration and NCI
ii Since acquisition
• Current year :
Profit for the year attributable
to ordinary shareholders
(29 000 – 4 000(1))
Ordinary dividend
At
Since
NCI
4 000
4 000
–
149 000
R120 000
29 000
25 000
(10 000)
R164 000
20 000
(8 000)
R12 000
5 000
(2 000)
R32 000
(1) 50 000 × 8% = 4 000
C2 Proof of calculation of goodwill of S 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)
120 000
29 000
149 000
Net of the identifiable assets acquired and liabilities assumed
at acquisition date: IFRS 3.32(b)
(145 000)
Goodwill
R4 000
C3 Analysis of preference owners’ equity of S Ltd
P Ltd 50%
Preference shares
Total
i At acquisition (1/1/20.18)
Share capital
Purchase difference
50 000
–
25 000
–
25 000
–
50 000
R25 000
25 000
Consideration and NCI
ii Since acquisition
• Current year:
Profit attributable to preference
shareholders
Preference dividend
406
At
NCI
Since
4 000
(4 000)
2 000
(2 000)
2 000
(2 000)
R50 000
–
R25 000
Adjustments and sundry aspects of group statements
C4 Proof of calculation of purchase difference of S Ltd in terms of IFRS 3.32:
Consideration transferred at acquisition date: IFRS 3.32(a)(i)
25 000
Amount of non-controlling interests: IFRS 3.32(a)(ii)
25 000
50 000
Net of the identifiable assets acquired and liabilities assumed
at acquisition date: IFRS 3.32(b)
(50 000)
Purchase difference
R–
C5 Pro forma consolidation journal entries
Dr
R
J1
J2
J3
J4
Share capital (Ordinary) (S)(SCE)
Share capital (Preference) (S)(SCE)
Retained earnings (S)(SCE)
Goodwill (SFP)
Investment in S Ltd (Ordinary)(P)(SFP)
Investment in S Ltd (Preference)(P)(SFP)
Non-controlling interests (SFP) (29 000 + 25 000)
Elimination of owners’ equity in S Ltd at acquisition
date
Since acquisition journals
Non-controlling interests (P/L) (5 000 + 2 000)
Non-controlling interests (SFP)
Recognition of non-controlling interests
in the profit for the year
100 000
50 000
45 000
4 000
7 000
Dividend received (P)(P/L)
Non-controlling interests (SFP)
Ordinary dividend paid (S)(SCE)
Elimination of intragroup ordinary dividend and
recording of non-controlling interests in dividend
8 000
2 000
Dividend received (P)(P/L)
Non-controlling interests (SFP)
Preference dividend paid (S)(SCE)
Elimination of intragroup preference dividend and
recording of non-controlling interests in dividend
2 000
2 000
Cr
R
120 000
25 000
54 000
7 000
10 000
4 000
407
Chapter 6
Example 6.22
Consolidation procedure: Preference shares of the subsidiary
held by both the parent and non-controlling interests
P Ltd purchased 80% of the issued ordinary shares of S Ltd for R47 000 and 60% of
the preference shares for R20 000 on 1 January 20.16. There were no preference
dividends in arrears on that date and the owners’ equity of S Ltd then consisted of the
following:
Share capital: Ordinary (50 000 shares)
R50 000
Share capital: 7% Preference (30 000 shares)
R30 000
Retained earnings
R11 000
The preference shareholders have a preferential right to their dividend payment and will
receive a proportionate share of the net assets available for distribution upon liquidation
of the acquiree. The fair value of the preference shares at acquisition date is R13 000.
P Ltd classified the equity investment in S Ltd under IFRS 9 in its separate financial
statements and recognised fair value adjustments in a mark-to-market reserve (other
comprehensive income). The fair values of P Ltd’s investment in S Ltd at 31 December
20.18 were as follows:
Investment in ordinary shares
R52 000
Investment in preference shares
R23 000
P Ltd elected to measure the non-controlling interests in the acquiree at their fair value at
the acquisition date. The fair value of the ordinary non-controlling interests at acquisition
is R12 000.
The company tax rate is 28% and capital gains tax (CGT) is calculated at 66,6%
thereof.
At the acquisition date, the assets and liabilities of S Ltd were considered to be fairly
valued. There were no unaccounted for contingent liabilities.
The condensed financial statements of the two companies for the reporting period
ended 31 December 20.19 are as follows:
STATEMENTS OF FINANCIAL POSITION AS AT 31 DECEMBER 20.19
P Ltd
ASSETS
Property, plant and equipment
Investment in S Ltd at fair value:
40 000 ordinary shares
18 000 7% preference shares
Trade receivables
Total assets
EQUITY AND LIABILITIES
Share capital: Ordinary (150 000/50 000 shares)
Share capital: 7% Preference (30 000 shares)
Mark-to-market reserve (12 000 – (12 000 × 66,6% × 28%))
Retained earnings
Deferred tax (12 000 × 66,6% × 28%)
Total equity and liabilities
408
S Ltd
78 900
65 000
55 000
24 000
34 000
–
–
32 000
R191 900
R97 000
150 000
–
9 762
29 900
2 238
50 000
30 000
–
17 000
–
R191 900
R97 000
Adjustments and sundry aspects of group statements
EXTRACT FROM THE STATEMENTS OF PROFIT OR LOSS
AND OTHER COMPREHENSIVE INCOME
FOR THE YEAR ENDED 31 DECEMBER 20.19
P Ltd
S Ltd
Profit before dividends received
Dividend received from S Ltd:
Ordinary
Preference
23 240
15 400
3 600
1 260
–
–
Profit before tax
Income tax expense
28 100
(6 500)
15 400
(4 300)
PROFIT FOR THE YEAR
Other comprehensive income for the year
Items that will not be reclassified to profit or loss
Mark-to-market reserve (fair value adjustment on investment)
Income tax relating to mark-to-market reserve
21 600
11 100
4 000
(746)
–
–
Other comprehensive income for the year, net of tax
3 254
–
TOTAL COMPREHENSIVE INCOME FOR THE YEAR
R24 854
R11 100
EXTRACT FROM THE STATEMENTS OF CHANGES IN EQUITY
FOR THE YEAR ENDED 31 DECEMBER 20.19
Mark-tomarket
reserve
P Ltd
Balance at 1 January 20.19
Changes in equity for 20.19
Total comprehensive income for the year:
Profit for the year
Other comprehensive income for the year
Preference dividend paid
Ordinary dividend paid
Balance at 31 December 20.19
Retained earnings
P Ltd
S Ltd
6 508
21 800
12 500
–
3 254
–
–
21 600
–
–
(13 500)
11 100
–
(2 100)
(4 500)
R9 762
R29 900
R17 000
409
Chapter 6
Solution 6.22
The consolidated financial statements of the P Ltd Group for the reporting period ended
31 December 20.19 are as follows:
P LTD GROUP
CONSOLIDATED STATEMENT OF FINANCIAL POSITION
AS AT 31 DECEMBER 20.19
ASSETS
Non-current assets
Property, plant and equipment (78 900(P) + 65 000(S))
Goodwill
143 900
3 000
146 900
Current assets
Trade receivables (34 000(P) + 32 000(S))
Total assets
66 000
R212 900
EQUITY AND LIABILITIES
Equity attributable to owners of the parent
Share capital (P)
Retained earnings
150 000
36 700
Non-controlling interests
186 700
26 200
Total equity
212 900
Total equity and liabilities
R212 900
P LTD GROUP
EXTRACT FROM THE CONSOLIDATED STATEMENT OF PROFIT OR LOSS
AND OTHER COMPREHENSIVE INCOME
FOR THE YEAR ENDED 31 DECEMBER 20.19
Profit before tax (23 240 + 15 400)
Income tax expense (6 500 + 4 300)
38 640
(10 800)
PROFIT FOR THE YEAR
27 840
Other comprehensive income for the year
TOTAL COMPREHENSIVE INCOME FOR THE YEAR
Total comprehensive income attributable to:
Owners of the parent (27 840 – 2 640)
Non-controlling interests (1 800(C1) + 840(C2))
–
R27 840
25 200
2 640
R27 840
410
Adjustments and sundry aspects of group statements
P LTD GROUP
CONSOLIDATED STATEMENT OF CHANGES IN EQUITY
FOR THE YEAR ENDED 31 DECEMBER 20.19
Balance at 1 January 20.19
Changes in equity for 20.19
Total comprehensive income
for the year:
Profit for the year
Dividend paid
Share
capital
Retained
earnings
Total
Noncontrolling
interests
Total
equity
150 000
* 25 000
175 000
@ 25 300
200 300
–
–
25 200
(13 500)
25 200
(13 500)
2 640
# (1 740)
27 840
(15 240)
Balance at 31 December 20.19 R150 000
R36 700 R186 700 & R26 200 R212 900
*
21 800(P) + 1 200(S) + 2 000(gain from bargain purchase) = 25 000
#
900(ordinary) + 840(preference) = 1 740
13 200(ordinary) + 13 000(preference) = 26 200
@ 12 300(ordinary) + 13 000(preference) = 25 300
&
Calculations
C1 Analysis of owners’ equity of S Ltd
P Ltd 80%
Ordinary shares
Total
i At acquisition (1/1/20.16)
Share capital
Retained earnings
50 000
11 000
40 000
8 800
10 000
2 200
61 000
48 800
12 200
(2 000)
(1 800)
(200)
59 000
R47 000
12 000
Gain from a bargain purchase
– Parent and NCI
Consideration (55 000 – 8 000) and NCI
ii Since acquisition
• To beginning of current year:
Retained earnings (12 500 – 11 000)
• Current year:
Profit attributable to ordinary
shareholders (11 100 – 2 100(1))
Ordinary dividend
1 500
At
Since
1 200
NCI
300
12 300
9 000
(4 500)
7 200
(3 600)
1 800
(900)
R65 000
R4 800
R13 200
(1) 30 000 × 7% = 2 100
411
Chapter 6
C2 Proof of calculation of gain from bargain purchase on ordinary shares of
S Ltd in terms of IFRS 3.32:
Consideration transferred at acquisition date: IFRS 3.32(a)(i)
47 000
Amount of non-controlling interests: IFRS 3.32(a)(ii)
12 000
59 000
Net of the identifiable assets acquired and liabilities assumed
at acquisition date: IFRS 3.32(b)
(61 000)
Gain from a bargain purchase
(R2 000)
C3 Analysis of preference owners’ equity of S Ltd
Preference shares
i At acquisition (1/1/20.16)
Share capital
Equity represented by goodwill
– Parent and NCI
Consideration (24 000 – 4 000) and NCI
ii Since acquisition
• Current year:
Profit attributable to preference
shareholders
Preference dividend
Total
P Ltd 60%
At
Since
NCI
30 000
18 000
12 000
3 000
2 000
1 000
33 000
R20 000
13 000
2 100
(2 100)
1 260
(1 260)
840
(840)
R33 000
R–
R13 000
C4 Proof of calculation of goodwill of preference shares of S Ltd in terms of IFRS
3.32:
Consideration transferred at acquisition date: IFRS 3.32(a)(i)
20 000
Amount of non-controlling interests: IFRS 3.32(a)(ii)
13 000
33 000
Net of the identifiable assets acquired and liabilities assumed
at acquisition date: IFRS 3.32(b)
(30 000)
Goodwill
R3 000
Comment
a If the parent, as well as the non-controlling interests, holds preference shares of the
subsidiary, the analysis is still done in the usual way. The elimination of common
items, intragroup balances and the determination of the non-controlling interests are
also done in the usual way.
b If the purchase price paid by the parent for such preference shares differs from the
net asset value of the shares, goodwill or a gain from a bargain purchase is created,
as in the case with the acquisition of ordinary shares.
c If the parent has elected to measure the non-controlling interests at their fair value at
the acquisition date and the fair value of the preference shares is higher than the net
asset value of the shares then goodwill will be created.
412
Adjustments and sundry aspects of group statements
C5 Pro forma consolidation journal entries
Dr
R
J1
Mark-to-market reserve – Opening balance (P)(SCE)
((52 000 – 47 000) × 81,352%) + ((23 000 – 20 000)
× 81,352%)
Deferred tax (P)(SFP) (8 000 × 66,6% × 28%)
Investment in S Ltd: Ordinary shares (P)(SFP)
Investment in S Ltd: Preference shares (P)(SFP)
Reversal of fair value adjustment on investment
in S Ltd at beginning of year at group level
J2
Cr
R
Mark-to-market reserve (P)(OCI)
Investment in S Ltd: Ordinary shares (P)(SFP)
6 508
1 492
5 000
3 000
4 000
3 000
(55 000 – 52 000)
Investment in S Ltd: Preference shares (P)(SFP)
1 000
(24 000 – 23 000)
Reversal of fair value adjustment on investment
in S Ltd for current year at group level
J3
Deferred tax (P)(SFP) (4 000 × 66,6% × 28%)
Mark-to-market reserve – Income tax of OCI (P)(OCI)
Tax effect on reversal of fair value adjustment on
investment in S Ltd for current year at group level
746
J4
Share capital: Ordinary (S)(SCE)
Share capital: Preference (S)(SCE)
Retained earnings (S)(SCE)
Goodwill (SFP)
Gain from bargain purchase
Investment in S Ltd (P)(SFP)
Investment in S Ltd (P)(SFP)
Non-controlling interests (SFP) (12 000 + 13 000)
Elimination of owners’ equity of S Ltd at date
of acquisition
50 000
30 000
11 000
3 000
J5
Retained earnings (S)(SCE)
Non-controlling interests (SFP)
Recording non-controlling interests in since
acquisition retained earnings of the subsidiary
300
J6
Non-controlling interests (P/L) (1 800 + 840)
Non-controlling interests (SFP)
Recording non-controlling interests in profit for the
year
2 640
J7
Dividend received (P)(P/L) (3 600 + 1 260)
Non-controlling interests (SFP)
Dividend paid (S)(SCE) (4 500 + 2 100)
Elimination of intragroup dividends and recording
of non-controlling interests’ portion of the dividend
4 860
1 740
746
2 000
47 000
20 000
25 000
300
2 640
6 600
continued
413
Chapter 6
Dr
R
J8
Gain from a bargain purchase
Retained earnings – Beginning of year (S)(SCE)
Recognition of gain from bargain purchase
2 000
Cr
R
2 000
The consolidated amounts can be obtained by either setting off the pro forma
consolidation journal entries against the combined amounts of the parent and the
subsidiary (in a worksheet), or by merely adding certain amounts in respect of the
subsidiary to that of the parent.
Treatment of preference dividends of subsidiaries
6.21 Situations to be considered
IAS 27.12 determines that an entity shall recognise a dividend from a subsidiary in
profit or loss in the entity’s separate financial statements when the entity’s right to
receive the dividend is established. When such a dividend is recognised in terms of
IAS 27 and evidence is available that the carrying amount of the investment in the
separate financial statements exceeds the carrying amount in the consolidated financial
statements of the investee’s net assets, including associated goodwill, or the dividend
exceeds the total comprehensive income of the subsidiary in the period in which the
dividend is declared, an impairment test needs to be done in terms of IAS 36.12(h) and
.9 Impairment of Assets. This impairment test is done for the first dividend received
after acquisition. It may also be necessary to perform an impairment test in any year in
which the dividends received from the subsidiary for that year exceed the parents'
share of the total comprehensive income for that year.
In the treatment of the preference dividends of subsidiaries, the following circumstances
will be considered:
l preference dividends outstanding at the end of the reporting period;
l accrued preference dividends on acquisition of a subsidiary; and
l preference dividends in arrears.
6.22 Preference dividends outstanding at the end of the reporting period
As has already been stated, the preference dividend of a subsidiary must, for
consolidation purposes, be treated as if it is an expense (similar to interest on a loan)
which accrues on a time-proportion basis. When regarded in this way, this dividend
represents a charge against income, and must be brought into account before the profit
attributable to the owners of both the non-controlling interests as well as the parent is
determined.
414
Adjustments and sundry aspects of group statements
Example 6.23
Treatment of preference dividends outstanding at the end
of the reporting period
The following are the condensed statements of financial position and statements of
changes in equity of P Ltd and its subsidiary S Ltd for the reporting period ended
28 February 20.19:
STATEMENTS OF FINANCIAL POSITION AS AT 28 FEBRUARY 20.19
ASSETS
Property, plant and equipment
Investment in S Ltd at fair value:
105 000 ordinary shares
32 000 preference shares
Trade receivables
Total assets
EQUITY AND LIABILITIES
Share capital: Ordinary (200 000/140 000 shares)
Share capital: 10% Preference (80 000 shares)
Mark-to-market reserve
Retained earnings
Deferred tax
Trade payables
Total equity and liabilities
P Ltd
S Ltd
436 100
456 000
145 000
66 000
44 000
–
–
14 000
R691 100
R470 000
200 000
–
20 338
452 000
4 662
14 100
110 000
80 000
–
261 000
–
19 000
R691 100
R470 000
EXTRACT FROM THE STATEMENTS OF CHANGES IN EQUITY
FOR THE YEAR ENDED 28 FEBRUARY 20.19
Mark-tomarket
reserve
P Ltd
Balance at 1 March 20.18
Changes in equity for 20.19
Total comprehensive income for the year:
Profit for the year
Other comprehensive income for the year
Balance at 28 February 20.19
Retained earnings
P Ltd
S Ltd
16 433
212 000
145 000
–
3 905
R20 338
240 000
–
R452 000
116 000
–
R261 000
P Ltd acquired ownership of both the ordinary shares and the preference shares in
S Ltd on 28 February 20.15, when the retained earnings of S Ltd amounted to R40 000.
P Ltd paid R127 500 for the investment in ordinary shares and R58 500 for the
investment in preference shares. At that date, the preference dividends had been
declared and paid, up to 28 February 20.15.
Provision still has to be made for the preference dividend for the reporting period ended
28 February 20.19 that was declared on 28 February 20.19.
415
Chapter 6
P Ltd classified the equity investments in S Ltd under IFRS 9 in its separate financial
statements and recognised fair value adjustments in a mark-to-market reserve (other
comprehensive income).
At the acquisition date, the assets and liabilities were considered to be fairly valued and
there were no unaccounted for contingent liabilities.
P Ltd elected to measure the non-controlling interests in the acquiree at their
proportionate share of the acquiree’s identifiable net assets at the acquisition date. The
fair values of P Ltd’s investments in S Ltd at 28 February 20.18 were as follows:
Investment in ordinary shares
R141 640
Investment in preference shares
R64 560
Assume a tax rate of 28% and capital gains tax (CGT) is calculated at 66,6% thereof.
Solution 6.23
The consolidated financial statements of the P Ltd Group for the year ended
28 February 20.19 will be drawn up as follows:
P LTD GROUP
CONSOLIDATED STATEMENT OF FINANCIAL POSITION
AS AT 28 FEBRUARY 20.19
ASSETS
Non-current assets
Property, plant and equipment (436 100(P) + 456 000(S))
Goodwill (15 000 + 26 500)
892 100
41 500
933 600
Current assets
Trade receivables (44 000(P) + 14 000(S))
Total assets
EQUITY AND LIABILITIES
Equity attributable to owners of the parent
Share capital
Retained earnings
Non-controlling interests (90 750(ordinary) + 48 000(preference))
Total equity
Current liabilities
Trade payables (14 100(P) + 19 000(S))
Preference dividend payable (J7)
58 000
R991 600
200 000
614 950
814 950
138 750
953 700
33 100
4 800
37 900
Total equity and liabilities
416
R991 600
Adjustments and sundry aspects of group statements
P LTD GROUP
CONSOLIDATED STATEMENT OF PROFIT OR LOSS
AND OTHER COMPREHENSIVE INCOME
FOR THE YEAR ENDED 28 FEBRUARY 20.19
PROFIT FOR THE YEAR (240 000(P) + 116 000(S))
356 000
Other comprehensive income for the year
–
TOTAL COMPREHENSIVE INCOME FOR THE YEAR
Total comprehensive income attributable to:
Owners of the parent
Non-controlling interests (27 000(ordinary) + 4 800(preference))
R356 000
324 200
31 800
R356 000
P LTD GROUP
CONSOLIDATED STATEMENT OF CHANGES IN EQUITY
FOR THE YEAR ENDED 28 FEBRUARY 20.19
Share
capital
Balance at 1 March 20.18
Changes in equity for 20.19
Total comprehensive income
for the year:
Profit for the year
Dividend payable
Retained
earnings
200 000 * 290 750
–
–
324 200
–
Total
Noncontrolling
interests
Total
equity
490 750
@ 111 750
602 500
324 200
–
# 31 800
(4 800)
356 000
(4 800)
Balance at 28 February 20.19 R200 000 R614 950 R814 950 & R138 750 R953 700
@ 63 750(ordinary) + 48 000(preference) = 111 750
*
#
&
212 000(P) + 78 750(S) = 290 750
27 000(ordinary) + 4 800(preference) = 31 800
90 750 + 48 000 = 138 750
417
Chapter 6
Calculations
C1 Analysis of owners’ equity of S Ltd
P Ltd 75%
Ordinary shares
Total
i At acquisition (28/2/20.15)
Share capital
Retained earnings
110 000
40 000
82 500
30 000
27 500
10 000
150 000
112 500
37 500
15 000
15 000
–
165 000 R127 500
37 500
Equity represented by goodwill
– Parent
Consideration and NCI
ii Since acquisition
• To beginning of current year :
Retained earnings (145 000 – 40 000)
At
105 000
Since
78 750
26 250
63 750
• Current year :
Profit attributable to ordinary
shareholders (1)
NCI
108 000
81 000
27 000
R378 000
R159 750
R90 750
(1) 116 000 – 8 000(80 000 × 10%)(preference dividend) = 108 000
C2 Proof of calculation of goodwill of ordinary shares of S Ltd in terms
of IFRS 3.32:
Consideration transferred at acquisition date: IFRS 3.32(a)(i)
127 500
Amount of non-controlling interests: IFRS 3.32(a)(ii)
37 500
165 000
Net of the identifiable assets acquired and liabilities assumed
at acquisition date: IFRS 3.32(b)
(150 000)
Goodwill
R15 000
418
Adjustments and sundry aspects of group statements
C3 Analysis of preference owners’ equity of S Ltd
P Ltd 40%
Preference shares
Total
i At acquisition (28/2/20.15)
Share capital
Equity represented by goodwill
80 000
26 500
32 000
26 500
48 000
–
106 500
R58 500
48 000
Consideration and NCI
ii Since acquisition
• Current year
Profit attributable to preference
shareholders
Preference dividend payable
At
NCI
Since
8 000
(8 000)
3 200
(3 200)
4 800
(4 800)
R106 500
–
R48 000
C4 Proof of calculation of goodwill on preference shares of S 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)
Net of the identifiable assets acquired and liabilities assumed
at acquisition date: IFRS 3.32(b)
Goodwill
58 500
48 000
106 500
(80 000)
R26 500
Comment
• Where a subsidiary has issued preference share capital which is wholly or partially
held by the non-controlling interests, the profit of the subsidiary must, as indicated, be
allocated to the ordinary and preference shareholders of the subsidiary. This
allocation must be made even when the subsidiary has made no provision for the
preference dividend in its separate financial statements.
• Since S Ltd has not yet made provision for the preference dividend and P Ltd has
consequently not yet reacted thereto, it is, on consolidation, merely necessary to
transfer the portion of the preference dividend which is due to the non-controlling
interests from non-controlling interests (SCE) to current liabilities (SFP).
419
Chapter 6
C5 Pro forma consolidation journal entries
Dr
R
J1
Mark-to-market reserve (P)(SCE)
Deferred tax (P)(SFP) ((14 140 + 6 060) × 66,6% × 28%)
Investment in S Ltd (Ordinary)(P)(SFP)
Cr
R
16 433
3 767
14 140
(141 640 – 127 500)
Investment in S Ltd (Preference) (P)(SFP)
6 060
(64 560 – 58 500)
Reversal of fair value adjustment on investment
in S Ltd at beginning of year at group level
J2
Mark-to-market reserve (P)(SCE)
Investment in S Ltd (Ordinary) (P)(SFP)
4 800
(145 000 – 141 640)
3 360
(66 000 – 64 560)
1 440
Investment in S Ltd (Preference) (P)(SFP)
Reversal of fair value adjustment on investment
in S Ltd for current year at group level
J3
Deferred tax (P)(SFP) (4 800 × 66,6% × 28%)
Mark-to-market reserve – Income tax of OCI (OCI)
Tax on reversal of fair value adjustment on
investment in S Ltd for current year at group level
J4
Share capital (Ordinary) (S)(SCE)
Share capital (Preference) (S)(SCE)
Retained earnings (S)(SCE)
Goodwill (15 000 + 26 500)
Investment in S Ltd (P)(SFP) (127 500 + 58 500)
Non-controlling interests (SFP) (37 500 + 48 000)
Elimination of owners’ equity in S Ltd at acquisition
date
110 000
80 000
40 000
41 500
J5
Retained earnings (S)(SCE)
Non-controlling interests (SFP)
Recognition of non-controlling interests in since
acquisition retained earnings of the subsidiary to the
beginning of the current reporting period
26 250
J6
Non-controlling interests (P/L) (27 000(C1) + 4 800(C2))
Non-controlling interests (SFP)
Recognition of non-controlling interests in profit for
the year
31 800
J7
Non-controlling interests (SFP)
Preference dividend payable (S)(SFP)
Transfer of portion of preference dividend owing
to non-controlling interests
4 800
420
895
895
186 000
85 500
26 250
31 800
4 800
Adjustments and sundry aspects of group statements
6.23 Accrued preference dividends on acquisition of preference shares
in a subsidiary
In the normal course of events, there are at least two reasons why there may be a
difference between the carrying amount of the preference shares acquired and the
actual price paid for them, namely:
l If the dividend rate on the preference shares is appreciably higher than the
dividend yield available on similar investments in the open market, the purchase
price of the shares will probably be higher than the carrying amount thereof. In
these circumstances, the excess purchase price should be regarded as goodwill
and treated in terms of IFRS 3; and
l Should the preference shares be acquired during the course of the reporting period
at a time before the dividend on preference shares has been declared, provision
must be made for this. If the dividend is, for example, declared annually and the
shares in the subsidiary are purchased eight months after the date on which the
previous dividend had been declared, it can be reasonably assumed that the
parent would have made provision in the determination of the purchase price for
the fact that the full preference dividend would be paid within four months
(acquisition date fair value).
As previously discussed, as per IAS 27.38A, a dividend from a subsidiary must be
recognised in profit or loss in the separate financial statements when the right to receive
the dividend is established. IAS 18.30(c) also requires such dividends to be recognised
as income. However IFRS 9.B5.7.1 states that dividends received from investments
which are recorded at fair value through other comprehensive income (as elected by the
entity) are recognised in profit or loss in accordance with IAS 18, unless the dividend
clearly represents a recovery of part of the cost of the investment.
Should the preference shares initially be classified as a liability in terms of IAS 39, then the
correct treatment would be to credit the investment in a subsidiary with any received
dividend which was payable from pre-acquisition profits. Furthermore such an investment
would not be consolidated.
Assume, for example, that P Ltd acquired all the preference shares (100 000 6%
shares) of S Ltd, whose reporting period ends on 31 December, on 31 August 20.14 for
R104 000.
The total purchase price of the shares is debited to an investment account (investment
in preference shares of S Ltd). When the dividend of R6 000 (6% × R100 000) for the
reporting period to 31 December 20.14 is received, the dividend recognised in profit or
loss will be R2 000 (100 000 × 6% × 4/12) as R4 000 (100 000 × 6% × 8/12) represents a
recovery of part of the cost of the investment (IFRS 9.B5.7.1). The parent will make the
following entries in its records:
Investment in preference shares of S Ltd (SFP)
Bank (SFP)
Recording of investment in preference shares
Bank (SFP) (100 000 × 6%)
Investment in preference shares (SFP) ) (100 000 × 6% × 8/12)
Dividend from subsidiary (P/L) (100 000 × 6% × 4/12)
Recognition of dividend received from subsidiary
Dr
R
104 000
6 000
Cr
R
104 000
4 000
2 000
421
Chapter 6
Self-assessment questions
Question 6.1
The following represents the trial balances of P Ltd and its subsidiary for the year
ended 31 December 20.17:
Share capital (200 000/100 000 shares)
Retained earnings – 1 January 20.17
Equity investments:
Investment in S Ltd at fair value
Investment in Z Ltd at fair value (Cost – R27 000)
Loan granted – P Ltd
Mark-to-market reserve – 1 January 20.17
Deferred tax (on mark-to-market reserve: 4 662 + 932)
Tax on fair value adjustment gain on equity investment (OCI)
Revenue
Dividends received
Interest received
Gain on sale of land (capital gains tax paid)
Fair value adjustment gain on equity investment (OCI)
Cost of sales
Other expenses
Interest paid
Income tax expense
Dividends paid – 31 December 20.17
Property, plant and equipment
Accumulated depreciation
Trade receivables
Inventories
Cash and cash equivalents
Long-term loan – ABC Ltd
Long-term loan – S Ltd
P Ltd
Dr/(Cr)
(200 000)
(539 200)
S Ltd
Dr/(Cr)
(100 000)
(483 700)
440 000
–
–
(20 338)
(5 594)
932
(800 000)
(32 000)
–
–
(5 000)
400 000
156 000
33 800
58 856
22 000
688 000
(44 000)
41 000
99 544
86 000
(80 000)
(300 000)
–
27 000
300 000
–
–
–
422
(700 000)
(2 000)
(30 000)
(70 000)
–
350 000
150 000
–
74 200
40 000
270 000
(30 000)
87 500
65 000
52 000
–
–
Adjustments and sundry aspects of group statements
P Ltd paid R410 000 for an 80% interest in S Ltd on 1 January 20.16, when the retained
earnings of S Ltd amounted to R300 000. On 1 January 20.16, the assets and liabilities
of S Ltd were considered to be fairly valued except for the assets detailed below:
Fair
Carrying
value
amount
Land
R210 060 R150 000
Plant
R48 000
R40 000
There were no unaccounted for contingent liabilities.
S Ltd sold the above-mentioned land during the current reporting period.
P Ltd and S Ltd classified their investments under IFRS 9 as equity investments in the
separate financial statements and recognised any fair value adjustments in the mark-tomarket reserve (other comprehensive income).
P Ltd elected to measure the non-controlling interests in the acquiree at their
proportionate share of the acquiree’s identifiable net assets at the acquisition date.
Goodwill was not considered to be impaired from the time that the investments were
acquired to the end of the current reporting period.
The plant of S Ltd is depreciated at 20% per annum on a straight-line basis. The
remaining useful life of the plant at acquisition date of S Ltd remained unchanged at
four years.
P Ltd purchases inventory from S Ltd at a profit mark-up of 25% on the cost of the
goods. Included in the inventory of P Ltd at 31 December 20.17 is inventory of R50 000
purchased from S Ltd. The total sales from S Ltd to P Ltd during the current reporting
period amounted to R110 000.
The interest received by S Ltd is in respect of the intragroup loan.
The company tax rate is 28% and capital gains tax (CGT) is calculated at 66,6%
thereof.
423
Chapter 6
Suggested solution 6.1
The consolidated financial statements of the P Ltd Group for the year ended
31 December 20.17 will be drawn up as follows:
P LTD GROUP
CONSOLIDATED STATEMENT OF FINANCIAL POSITION
AS AT 31 DECEMBER 20.17
ASSETS
Non-current assets
Property, plant and equipment ˜
Goodwill
Equity investments (S)
Deferred tax Ȝ
888 000
46 304
27 000
1 680
962 984
Current assets
Cash and cash equivalents (86 000(P) + 52 000(S))
Trade receivables (41 000(P) + 87 500(S))
Inventories (99 544(P) + 65 000(S) – 10 000(J10))
138 000
128 500
154 544
421 044
Total assets
EQUITY AND LIABILITIES
Equity attributable to owners of the parent
Share capital (P)
Retained earnings
R1 384 028
200 000
948 992
Non-controlling interest
1 150 592
153 436
Total equity
1 304 028
Non-current liabilities
Long-term loan (300 000(P) + 80 000(P) – 300 000(S(J13))
Total equity and liabilities
˜
Ȝ
80 000
R1 384 028
688 000(P) + 270 000(S) + 60 060(J4) + 8 000(J4) – 44 000(P) – 30 000(S) – 60 060(J7) –
2 000(J8) – 2 000(J9) = 888 000
(5 594)(P) + 4 662(J1) + 932(J3) – 13 440(J4) + 11 200(J7) + 560(J8) + 560(J9) + 2 800(J10)
= 1 680
424
Adjustments and sundry aspects of group statements
P LTD GROUP
CONSOLIDATED STATEMENT OF PROFIT OR LOSS
AND OTHER COMPREHENSIVE INCOME
FOR THE YEAR ENDED 31 DECEMBER 20.17
Revenue (800 000(P) + 700 000(S) – 110 000(J11)(intragroup sales))
Cost of sales (400 000(P) + 350 000(S) – 110 000(J11) + 10 000(J10))
1 390 000
(650 000)
Gross profit
Other income ȍ
Other expenses (156 000(P) + 150 000(S) + 2 000(J9))
Finance costs (33 800(P) – 30 000(J12))
740 000
11 940
(308 000)
(3 800)
Profit before tax
Income tax expense &
440 140
(118 496)
PROFIT FOR THE YEAR
321 644
Other comprehensive income for the year
–
TOTAL COMPREHENSIVE INCOME FOR THE YEAR
R321 644
Total comprehensive income attributable to:
Owners of the parent (321 644 – 34 060(J14))
Non-controlling interests d
287 584
34 060
R321 644
ȍ 32 000(P) + 2 000(S) + 30 000(S) + 70 000(S) – 60 060(J7) – 30 000(J12) – 32 000(J15) = 11 940
& 58 856(P) + 74 200(S) – 11 200(J7) – 560(J8) – 2 800(J10) = 118 496
P LTD GROUP
CONSOLIDATED STATEMENT OF CHANGES IN EQUITY
FOR THE YEAR ENDED 31 DECEMBER 20.17
Share
capital
Retained
earnings
Total
Noncontrolling
interests
Total
equity
200 000 ȍ 685 008
885 008
127 376c
1 012 384
Changes in equity for 20.17
Total comprehensive
income for the year:
Profit for the year
Dividend paid
287 584
(22 000)
287 584
(22 000)
34 060d
(8 000)e
321 644
(30 000)
Balance at 31 December 20.17
R200 000 R950 592 R1 150 592
Balance at 1 January 20.17
R153 436 R1 304 028
ȍ 539 200(P) + 145 808a = 685 008
425
Chapter 6
Calculations
C1 Analysis of owners’ equity of S Ltd
Total
i At acquisition 1/1/20.16
Share capital
Revaluation surplus
Retained earnings
Equity represented by goodwill
– Parent
Consideration (1) and NCI
ii Since acquisition
• To beginning of current year:
Retained earnings
(483 700 – 300 000 – 1 440(J8))
• Current year:
Profit for the year (2)
Dividends paid
P Ltd 80%
At
Since
NCI
100 000
54 620
300 000
80 000
43 696
240 000
20 000
10 924
60 000
454 620
363 696
90 924
46 304
46 304
–
500 924
R410 000
90 924
182 260
145 808 a
36 452
127 376 c
170 300
(40 000)
136 240
(32 000)b
R813 484
R250 048
34 060 d
(8 000)e
R153 436 f
(1) 440 000 – 20 338 (mark-to-market reserve)(J1) – 4 662 (deferred tax on mark-to-market
reserve)(J1) – 5 000 (fair value adjustment gain (OCI)(J2) = 410 000
(2) Calculation of profit for the year of S Ltd
Revenue
700 000
Cost of sales
(350 000)
Gross profit
Gain on sale of land
Other income (interest received)
Other income (dividend received)
Other expenses
350 000
70 000
30 000
2 000
(150 000)
Income tax expense
302 000
(74 200)
Reversal of at acquisition revaluation surplus of land (J7)
Deferred tax on reversed revaluation surplus (J7)
Depreciation on revaluation at acquisition (J9)
Tax on depreciation on revaluation at acquisition (J9)
Unrealised profit in inventory (J10)
Tax on unrealised profit in inventory (J10)
C2 Proof of calculation of goodwill of S Ltd in terms of IFRS 3.32
Consideration transferred at acquisition date: IFRS 3.32(a)(i)
Amount of non-controlling interest: IFRS 3.32(a)(ii)
Net of the identifiable assets acquired and liabilities assumed
at acquisition date: IFRS 3.32(b)
Goodwill
426
227 800
(60 060)
11 200
(2 000)
560
(10 000)
2 800
R170 300
410 000
90 924
500 924
(454 620)
R46 304
Adjustments and sundry aspects of group statements
C3 Pro forma consolidation journal entries
Dr
R
J1
Cr
R
Mark-to-market reserve (P)(SCE)
Deferred tax (P)(SFP) (25 000 × 66,6% × 28%)
Investment in S Ltd (P)(SFP) (20 338/81,352%)
Reversal of fair value adjustment on investment
in S Ltd at beginning of year at group level
20 338
4 662
J2
Mark-to-market reserve (P)(SCE)
Investment in S Ltd (P)(SFP)
Reversal of fair value adjustment on investment
in S Ltd for current year at group level
5 000
J3
Deferred tax (P)(SFP) (5 000 × 66,6% × 28%)
Income tax expense of mark-to-market reserve (OCI)
Tax effect on reversal of fair value adjustment on
investment in S Ltd for current year at group level
J4
Land (S)(SFP) (210 060 – 150 000)
Plant (S)(SFP) (48 000 – 40 000)
Revaluation surplus (S)(SCE)
Deferred tax (S)(SFP)
932
60 060
8 000
J6
J7
5 000
932
54 620
13 440
((60 060 × 66,6% × 28%) + (8 000 × 28%))
Revaluation of assets at acquisition of investment
in S Ltd
J5
25 000
Share capital (S)(SCE)
Retained earnings (S)(SCE)
Goodwill (SFP)
Revaluation surplus of assets (S)(SCE)
Investment in S Ltd (P)(SFP)
Non-controlling interests (SFP)
Elimination of owners' equity at acquisition
of S Ltd
100 000
300 000
46 304
54 620
Retained earnings – Beginning of year (S)(SCE)
Non-controlling interests (SFP)
Recognition of non-controlling interests in retained
earnings since acquisition of S Ltd
36 452
Gain on sale of land (S)(P/L) (J4)
Deferred tax (S)(SFP)
Land (S)(SFP)
Income tax expense (S)(P/L) (60 060 × 66,6% × 28%)
Sale in current reporting period of land revalued
at acquisition date
60 060
11 200
410 000
90 924
36 452
60 060
11 200
continued
427
Chapter 6
Dr
R
J8
Retained earnings – Since acquisition (S)(SCE)
Deferred tax (S)(SFP) (2 000 × 28%)
Accumulated depreciation (S)(SFP) (8 000/4)
Additional depreciation since acquisition to
beginning of year
1 440
560
Depreciation (S)(P/L) (8 000/4)
Deferred tax (S)(SFP) (2 000 × 28%)
Accumulated depreciation (S)(SFP)
Income tax expense (S)(P/L)
Additional depreciation for current year
2 000
560
J10 Cost of sales (P)(P/L) (50 000 × 25/125)
Deferred tax (P)(SFP)
Inventory (P)(SFP)
Income tax expense (P)(P/L) (10 000 × 28%)
Elimination of unrealised profit included
in inventory
10 000
2 800
J11 Revenue (S)(P/L)
Cost of sales (P)(P/L)
Elimination of intragroup sales
110 000
J12 Interest received (S)(P/L)
Interest paid (P) (P/L)
Elimination of intragroup interest paid on intragroup
loan
30 000
J13 Long-term loan (P)(SFP)
Loan granted (S)(SFP)
Elimination of intragroup loans
300 000
J14 Non-controlling interests (P/L)
Non-controlling interests (SFP)
Recognition of non-controlling interests in current
year's profit for the year of S Ltd
34 060
J15 Dividends received (P)(P/L)
Non-controlling interests (SFP)
Dividend paid (S)(SCE)
Elimination of intragroup dividend and recording
of non-controlling interests therein
32 000
8 000
J9
428
Cr
R
2 000
2 000
560
10 000
2 800
110 000
30 000
300 000
34 060
40 000
Adjustments and sundry aspects of group statements
Question 6.2
The following are the financial statements of P Ltd and its subsidiary S Ltd for the year
ended 31 December 20.17:
STATEMENTS OF FINANCIAL POSITION AS AT 31 DECEMBER 20.17
P Ltd
S Ltd
117 500
211 500
146 000
240 000
Cost
Accumulated depreciation
352 500
(141 000)
300 000
(60 000)
Investment in S Ltd at fair value
164 175
–
45 000 Ordinary shares
39 000 8% Preference shares
119 000
45 175
–
–
79 000
96 100
R572 175
R482 100
100 000
–
2 270
9 905
460 000
60 000
130 000
–
–
292 100
R572 175
R482 100
ASSETS
Land
Machinery
Trade receivables
Total assets
EQUITY AND LIABILITIES
Share capital: Ordinary (100 000/60 000 shares)
Share capital: 8% Preference (130 000 shares)
Deferred tax
Mark-to-market reserve
Retained earnings
Total equity and liabilities
429
Chapter 6
STATEMENTS OF PROFIT OR LOSS AND OTHER COMPREHENSIVE INCOME
FOR THE YEAR ENDED 31 DECEMBER 20.17
P Ltd
S Ltd
Revenue
Cost of sales
687 124
(291 120)
520 500
(250 500)
Gross profit
Other expenses
Depreciation
Gain on sale of machinery
Dividends received from S Ltd
396 004
(125 000)
(80 000)
50 000
48 120
270 000
(53 750)
(60 000)
–
–
Profit before tax
Income tax expense
289 124
(74 124)
156 250
(43 750)
PROFIT FOR THE YEAR
Other comprehensive income for the year
Items that will not be reclassified to profit or loss
Fair value adjustments on equity investments:
215 000
112 500
4 130
–
Investment in ordinary shares
Investment in preference shares
3 000
1 130
–
–
Income tax relating to mark-to-market reserve
(770)
–
Investment in ordinary shares
Investment in preference shares
(559)
(211)
–
–
Other comprehensive income for the year, net of tax
3 360
–
TOTAL COMPREHENSIVE INCOME FOR THE YEAR
R218 360
R112 500
430
Adjustments and sundry aspects of group statements
EXTRACT FROM THE STATEMENTS OF CHANGES IN EQUITY
FOR THE YEAR ENDED 31 DECEMBER 20.17
Mark-tomarket
reserve
P Ltd
Balance at 1 January 20.17
Changes in equity for 20.17
Total comprehensive income for the year:
Profit for the year
Other comprehensive income for the year
Ordinary dividend paid
Preference dividend paid
Balance at 31 December 20.17
Retained earnings
P Ltd
S Ltd
6 545
300 000
250 000
–
3 360
–
–
215 000
–
(55 000)
–
112 500
–
(60 000)
(10 400)
R9 905
R460 000
R292 100
Additional information
1 P Ltd purchased the shares on 1 January 20.13, when the retained earnings of
S Ltd was R66 000. P Ltd paid R110 000 for the investment in ordinary shares and
R42 000 for the investment in preference shares.
2 S Ltd purchased all its machinery on 1 January 20.17 from P Ltd. S Ltd depreciates
the machinery over the remaining useful life of the asset of five years.
3 P Ltd sold the machinery at cost price plus 20%, and the machinery was not part of
inventories in the records of P Ltd.
4 P Ltd classified the equity investment in S Ltd under IFRS 9 in the separate financial
statements and recognised any fair value adjustments in the mark-to-market
reserve (other comprehensive income).
5 P Ltd elected to measure the non-controlling interests in the acquiree at their
proportionate share of the acquiree’s identifiable net assets at the acquisition date.
6 The company tax rate is 28% and capital gains tax (CGT) is calculated at 66,6%
thereof.
Required
Prepare the consolidated financial statements of the P Ltd Group for the reporting
period ended 31 December 20.17.
431
Chapter 6
Suggested solution 6.2
The consolidated financial statements of the P Ltd Group for the year ended
31 December 20.17 will be prepared as follows:
P LTD GROUP
CONSOLIDATED STATEMENT OF FINANCIAL POSITION AS AT 31 DECEMBER
20.17
ASSETS
Non-current assets
Property, plant and equipment (117 500(P) + 146 000(S) + 352 500(P)
+ 300 000(S) – 141 000(P) – 60 000(S) – 50 000(J5) + 10 000(J6))
Deferred tax (–2 270(P) + 1 500(J1) + 770(J3) + 14 000(J5) – 2 800(J6))
Goodwill (15 500 + 3 000)
675 000
11 200
18 500
704 700
Current assets
Trade receivables (79 000(P) + 96 100(S))
Total assets
175 100
R879 800
EQUITY AND LIABILITIES
Equity attributable to owners of the parent
Share capital (P)
Retained earnings
100 000
600 775
Non-controlling interests (88 025(C1) + 91 000(C3))
700 775
179 025
Total equity
879 800
Total equity and liabilities
R879 800
P LTD GROUP
CONSOLIDATED STATEMENT OF PROFIT OR LOSS
AND OTHER COMPREHENSIVE INCOME
FOR THE YEAR ENDED 31 DECEMBER 20.17
Revenue (687 124(P) + 520 500(S))
Cost of sales (291 120(P) + 250 500(S))
1 207 624
(541 620)
Gross profit
Other expenses (125 000(P) + 53 750(S) + 80 000(P) + 60 000(S) – 10 000(J6))
666 004
(308 750)
Profit before tax
Income tax expense (74 124(P) + 43 750(S) – 14 000(J5) + 2 800(J6))
357 254
(106 674)
PROFIT FOR THE YEAR
Other comprehensive income for the year
250 580
–
TOTAL COMPREHENSIVE INCOME FOR THE YEAR
Total comprehensive income attributable to:
Owners of the parent
Non-controlling interests (25 525(C1) + 7 280(C3))
R250 580
217 775
32 805
R250 580
432
Adjustments and sundry aspects of group statements
P LTD GROUP
CONSOLIDATED STATEMENT OF CHANGES IN EQUITY
FOR THE YEAR ENDED 31 DECEMBER 20.17
Share
capital
Balance at 1 January 20.17
Changes in equity
for 20.17
Total comprehensive
income for the year:
Profit for the year
Dividend paid
Balance
at 31 December 20.17
&
Retained
earnings
Total
Noncontrolling
interest
Total
equity
100 000
&438 000
538 000
@168 500
706 500
–
–
217 775
(55 000)
217 775
(55 000)
32 805
§(22 280)
250 580
(77 280)
R100 000
#R600 775 R700 775
R179 025 R879 800
300 000(P) + 138 000(C1) = 438 000
@ 77 500(ordinary) + 91 000(preference) = 168 500
#
§
460 000(P) + 169 575(S) – 50 000(J5) + 14 000(J5) + 10 000(J6) – 2 800(J6) = 600 775
15 000(S)(ordinary) + 7 280(S)(preference) = 22 280
Comment
In this example P Ltd sold machinery to S Ltd. The profit on the transaction has been
recognised in the accounting records of P Ltd. The pro forma consolidation journal entry
J5 eliminates the unrealised profit on the machinery. The non-controlling interests are not
affected by J5.
The intragroup profit is in the meanwhile recognised by the group (realised) by reducing
the depreciation charge (use of the machine). The profit can also be realised by the sale
of the machine to a third party. The reduction of the depreciation charge as per J6 also
does not affect the non-controlling interests as P Ltd originally made the profit and
therefore the realisation of the profit must also be allocated to P Ltd.
433
Chapter 6
Calculations
C1 Analysis of owners’ equity of S Ltd
P Ltd 75%
Ordinary shares
Total
i At acquisition (1/1/20.13)
Share capital
Retained earnings
60 000
66 000
45 000
49 500
15 000
16 500
126 000
94 500
31 500
15 500
15 500
–
141 500
R110 000
31 500
Equity represented by goodwill
(Parent)
Consideration and NCI
ii Since acquisition
• To beginning of current year:
Retained earnings (1)
184 000
At
Since
138 000
46 000
77 500
• Current year:
Profit for the year after preference
dividend (2)
Ordinary dividend
NCI
102 100
(60 000)
76 575
(45 000)
25 525
(15 000)
R367 600
R169 575
R88 025
(1) 250 000 – 66 000 = 184 000
(2) 112 500 – 10 400 = 102 100
C2 Proof of calculation of goodwill of ordinary shares of S Ltd in terms
of IFRS 3.32:
Consideration transferred at acquisition date: IFRS 3.32(a)(i)
110 000
Amount of non-controlling interests: IFRS 3.32(a)(ii)
31 500
141 500
Net amounts of the identifiable assets acquired and liabilities assumed
at acquisition date: IFRS 3.32(b)
(126 000)
Goodwill
R15 500
434
Adjustments and sundry aspects of group statements
C3 Analysis of preference owners’ equity of S Ltd
Preference shares
i At acquisition (1/1/20.13)
Share capital
Equity represented by goodwill
Consideration and NCI
ii Since acquisition
• Current year:
Attributable profit
Dividend paid
Total
P Ltd 30%
At
Since
NCI
130 000
3 000
39 000
3 000
91 000
–
133 000
R42 000
91 000
10 400
(10 400)
3 120
(3 120)
7 280
(7 280)
R133 000
R–
R91 000
C4 Proof of calculation of goodwill of preference shares of S Ltd in terms
of IFRS 3.32:
Consideration transferred at acquisition date: IFRS 3.32(a)(i)
42 000
Amount of non-controlling interests: IFRS 3.32(a)(ii)
91 000
Net amounts of the identifiable assets acquired and liabilities assumed
at acquisition date: IFRS 3.32(b)
Goodwill
133 000
(130 000)
R3 000
C5 Pro forma consolidation journal entries
Dr
R
J1
Mark-to-market reserve (P)(SCE)
Deferred tax (P)(SFP)
(6 545/81,352 = 8 045): (8 045 × 66,6% × 28%)
Investment in ordinary shares – S Ltd (P)(SFP)
6 545
1 500
6 000
(119 000 – 110 000 – 3 000)
Investment in preference shares – S Ltd (P)(SFP)
2 045
(45 175 – 42 000 – 1 130)
Reversal of fair value adjustment on investment
in S Ltd at beginning of year at group level
J2
Mark-to-market reserve (P)(SCE)
Investment in ordinary shares – S Ltd (P)(SFP)
Investment in preference shares – S Ltd (P)(SFP)
Reversal of fair value adjustment on investment
in S Ltd for current year at group level
Cr
R
4 130
3 000
1 130
continued
435
Chapter 6
Dr
R
Cr
R
J3
Deferred tax (P)(SFP)
Income tax expense of mark-to-market reserve (OCI)
Tax effect on reversal of fair value adjustment on
investment in S Ltd for current year at group level
770
J4
Ordinary share capital (S)(SCE)
Preference share capital (S)(SCE)
Retained earnings (S)(SCE)
Goodwill (SFP) (15 500 + 3 000)
Non-controlling interests (SFP) (91 000 + 31 500)
Investment in S Ltd – Ordinary (P)(SFP)
Investment in S Ltd – Preference (P)(SFP)
Elimination of owners’ equity in S Ltd at acquisition
date
60 000
130 000
66 000
18 500
Gain on sale of machinery (P)(P/L) (300 000 × 20/120)
Deferred tax (S)(SFP) (50 000 × 28%)
Property, plant and equipment (S)(SFP)
Income tax expense (P)(P/L)
Elimination of unrealised profit on machinery
50 000
14 000
Accumulated depreciation (S)(SFP)
Income tax expense (P)(P/L)
Depreciation (P)(P/L) (50 000/5)
Deferred tax (S)(SFP) (10 000 × 28%)
Depreciation on unrealised profit in machinery
10 000
2 800
J7
Retained earnings (S)(SCE)
Non-controlling interests (SFP)
Recognition of non-controlling interests in since
acquisition retained earnings of subsidiary to
beginning of current year
46 000
J8
Non-controlling interests – Preference (P/L)
Non-controlling interests – Ordinary (P/L)
Non-controlling interests (SFP)
Recognition of non-controlling interests in profit
for the year
7 280
25 525
J5
J6
J9
Dividends received (P)(P/L) (45 000(ordinary)
+ 3 120(preference))
Non-controlling interests (SFP) (15 000 + 7 280)
Preference dividend paid (S)(SCE)
Ordinary dividend paid (S)(SCE)
Elimination of intragroup preference and ordinary
dividend and recording of non-controlling interests
in dividends
436
48 120
22 280
770
122 500
110 000
42 000
50 000
14 000
10 000
2 800
46 000
32 805
10 400
60 000
Adjustments and sundry aspects of group statements
Question 6.3
The following are the financial statements of P Ltd and its subsidiary S Ltd for the year
ended 31 December 20.17:
STATEMENTS OF FINANCIAL POSITION AS AT 31 DECEMBER 20.17
P Ltd
S Ltd
110 000
155 000
50 000
40 000
20 000
130 000
15 000
10 000
Investment in S Ltd at fair value
148 000
–
80 000 Ordinary shares
25 000 10% Preference shares
Current account
110 000
30 000
8 000
–
–
–
25 000
15 000
30 000
30 000
R298 000
R215 000
200 000
–
13 000
45 000
–
40 000
100 000
50 000
–
50 000
5 000
10 000
R298 000
R215 000
ASSETS
Property, plant and equipment at carrying amount
Land and buildings
Machinery
Vehicles
Inventories
Trade receivables
Total assets
EQUITY AND LIABILITIES
Share capital: Ordinary (200 000/100 000 shares)
Share capital: 10% Preference (50 000 shares)
Mark-to-market reserve
Retained earnings
Current account – P Ltd
Trade and other payables
Total equity and liabilities
437
Chapter 6
STATEMENTS OF PROFIT AND LOSS AND OTHER COMPREHENSIVE INCOME
FOR THE YEAR ENDED 31 DECEMBER 20.17
P Ltd
S Ltd
90 500
(40 000)
50 500
(5 000)
45 500
74 000
(30 000)
44 000
(4 000)
40 000
4 000
2 500
500
4 000
56 500
(25 000)
–
–
–
–
40 000
(20 000)
PROFIT FOR THE YEAR
Other comprehensive income for the year
Items that will not be reclassified to profit or loss
Fair value adjustment on equity investments
31 500
20 000
3 000
–
TOTAL COMPREHENSIVE INCOME FOR THE YEAR
R34 500
R20 000
Revenue
Cost of sales
Gross profit
Other expenses
Other income received from S Ltd:
Ordinary dividend
Preference dividend
Interest received
Management fees
Profit before tax
Income tax expense
EXTRACT FROM THE STATEMENTS OF CHANGES IN EQUITY
FOR THE YEAR ENDED 31 DECEMBER 20.17
Mark-tomarket
reserve
P Ltd
Balance at 1 January 20.17
Changes in equity for 20.17
Total comprehensive income for the year:
Profit for the year
Other comprehensive income for the year
Ordinary dividend paid
Preference dividend paid
Balance at 31 December 20.17
Retained
earnings
P Ltd
S Ltd
10 000
23 500
40 000
–
3 000
–
–
31 500
–
(10 000)
–
20 000
–
(5 000)
(5 000)
R13 000
R45 000
R50 000
Additional information
1 P Ltd acquired the share investments in S Ltd on 1 June 20.15, when the retained
earnings of S Ltd was R39 000. At the acquisition date, the assets and liabilities
were considered to be fairly valued and there were no unaccounted for contingent
liabilities. P Ltd paid R100 000 for the investment in ordinary shares and R27 000
for the investment in preference shares.
2 P Ltd classified the equity investment in S Ltd under IFRS 9 in the separate financial
statements and recognised any fair value adjustments in the mark-to-market
438
Adjustments and sundry aspects of group statements
reserve (other comprehensive income). The fair values of the investments at
31 December 20.16 were as follows:
Investment in ordinary shares
R108 000
Investment in preference shares
R29 000
3
4
5
Since March 20.17, S Ltd has purchased certain inventories from P Ltd. The selling
price of the inventories is cost price plus 33,3%. Included in the inventories of S Ltd
on 31 December 20.17 are inventories purchased at an invoice price of R1 000 from
P Ltd. Inventories invoiced at R3 000 were in transit to S Ltd on 31 December
20.17. Total purchases from P Ltd in S Ltd’s records amounted to R15 000 before
the inventories in transit had been accounted for.
P Ltd elected to measure the non-controlling interests at their proportionate share of
the acquiree’s identifiable net assets at the acquisition date.
Ignore all tax implications.
Required
Prepare the consolidated financial statements of the P Ltd Group for the reporting
period ended 31 December 20.17.
Suggested solution 6.3
The consolidated financial statements will be drawn up as follows:
P LTD GROUP
CONSOLIDATED STATEMENT OF FINANCIAL POSITION
AS AT 31 DECEMBER 20.17
ASSETS
Non-current assets
Property (50 000(P) + 130 000(S))
Plant (40 000(P) + 15 000(S))
Vehicles (20 000(P) + 10 000(S))
Goodwill
180 000
55 000
30 000
2 000
267 000
Current assets
Inventories (25 000(P) + 30 000(S) + 3 000(J5) – 1 000(J6))
Trade receivables (15 000(P) + 30 000(S))
57 000
45 000
102 000
Total assets
R369 000
EQUITY AND LIABILITIES
Equity attributable to owners of the parent
Share capital (P)
Retained earnings
200 000
64 000
Non-controlling interests (30 000(C2) + 25 000(C3))
264 000
55 000
Total equity
319 000
Current liabilities
Trade and other payables (40 000(P) + 10 000(S))
50 000
Total equity and liabilities
R369 000
439
Chapter 6
P LTD GROUP
CONSOLIDATED STATEMENT OF PROFIT OR LOSS
AND OTHER COMPREHENSIVE INCOME
FOR THE YEAR ENDED 31 DECEMBER 20.17
Revenue (90 500(P) + 74 000(S) – 18 000(J7))
Cost of sales (40 000(P) + 30 000(S) – 18 000(J7) + 1 000(J6))
146 500
(53 000)
Gross profit
Other expenses (5 000(P) + 4 000(S) – 500(S) – 4 000(S))
93 500
(4 500)
Profit before tax
Income tax expense (25 000(P) + 20 000(S))
89 000
(45 000)
PROFIT FOR THE YEAR
44 000
Other comprehensive income for the year
–
TOTAL COMPREHENSIVE INCOME FOR THE YEAR
Total comprehensive income attributable to:
Owners of the parent (44 000 – 5 500)
Non-controlling interests (3 000(C1) + 2 500(C3))
R44 000
38 500
5 500
R44 000
P LTD GROUP
CONSOLIDATED STATEMENT OF CHANGES IN EQUITY
FOR THE YEAR ENDED 31 DECEMBER 20.17
Share
capital
Balance at 1 January 20.17
Changes in equity for 20.17
Total comprehensive income
for the year:
Profit for the year
Dividend paid
Retained
earnings
200 000 ∇ 35 500
–
–
38 500
(10 000)
Total
Noncontrolling
interests
Total
equity
235 500
ȍ 53 000
288 500
38 500
(10 000)
5 500
&(3 500)
44 000
(13 500)
Balance at 31 December 20.17 R200 000 λR64 000 R264 000
∇ 23 500(P) + 800(C1) + 11 200(J4) = 35 500
ȍ 28 000 + 25 000 = 53 000
λ 45 000(P) – 1 000(J6) + 8 800(C2) + 11 200(J4) = 64 000
& 1 000(C1) + 2 500(C3) = 3 500
440
R55 000 R319 000
Adjustments and sundry aspects of group statements
Calculations
C1 Analysis of owners’ equity of S Ltd
P Ltd 80%
Ordinary shares
Total
i At acquisition (1/6/20.15)
Share capital
Retained earnings
100 000
39 000
80 000
31 200
20 000
7 800
139 000
(11 200)
111 200
(11 200)
27 800
–
127 800
R100 000
27 800
Gain from a bargain purchase –
Parent
Consideration (1) and NCI
ii Since acquisition
• To beginning of current year:
Retained earnings (2)
At
1 000
Since
800
200
28 000
• Current year:
Profit for the year after preference
dividend (3)
Ordinary dividend
NCI
15 000
(5 000)
12 000
(4 000)
3 000
(1 000)
R138 800
R8 800
R30 000
(1) 110 000 – 10 000 = 100 000
(2) 40 000 – 39 000 = 1 000
(3) 20 000 – 5 000 = 15 000
C2 Proof of gain from bargain purchase of ordinary shares in terms of IFRS 3.32:
Consideration transferred at acquisition date: IFRS 3.32(a)(i)
100 000
Amount of non-controlling interests: IFRS 3.32(a)(ii)
27 800
127 800
Net of the identifiable assets acquired and liabilities assumed
at acquisition date: IFRS 3.32(b)
(139 000)
Gain from a bargain purchase
R11 200
441
Chapter 6
C3 Analysis of preference shareholders’ equity of S Ltd
P Ltd 50%
Preference shares
Total
i At acquisition (1/6/20.15)
Share capital
Equity represented by goodwill – Parent
50 000
2 000
25 000
2 000
25 000
–
52 000
R27 000
25 000
Consideration (1) and NCI
ii Since acquisition
• Current year:
Attributable profit
Dividend paid
At
Since
NCI
5 000
(5 000)
2 500
(2 500)
2 500
(2 500)
R52 000
R–
R25 000
(1) 30 000 – 3 000 = 27 000
C4 Proof of calculation of goodwill on preference shares of S Ltd in terms
of IFRS 3.32:
Consideration transferred at acquisition date: IFRS 3.32(a)(i)
27 000
Amount of non-controlling interests: IFRS 3.32(a)(ii)
25 000
52 000
Net of the identifiable assets acquired and liabilities assumed
at acquisition date: IFRS 3.32(b)
(50 000)
Goodwill
R2 000
C5 Pro forma consolidation journal entries
Dr
R
J1
Mark-to-market reserve – Opening balance (P)(SCE)
Investment in ordinary shares – S Ltd (P)(SFP)
10 000
8 000
(108 000 – 100 000)
Investment in preference shares – S Ltd (P)(SFP)
2 000
(29 000 – 27 000)
Reversal of fair value adjustment on investment
in S Ltd at beginning of year at group level
J2
Mark-to-market reserve (P)(SCE)
Investment in ordinary shares – S Ltd (P)(SFP)
(110 000 – 108 000)
Investment in preference shares – S Ltd (P)(SFP)
(30 000 – 29 000)
Reversal of fair value adjustment on investment
in S Ltd for current year at group level
Cr
R
3 000
2 000
1 000
continued
442
Adjustments and sundry aspects of group statements
Dr
R
J3
Cr
R
Share capital – Ordinary (S)(SCE)
Share capital – Preference (S)(SCE)
Retained earnings (S)(SCE)
Goodwill (SFP)
Investment in S Ltd (P)(SFP) (100 000 + 27 000)
Non-controlling interests (SFP) (27 800 + 25 000)
Gain from bargain purchase (SCE)
Elimination of owners’ equity in S Ltd at acquisition
date
100 000
50 000
39 000
2 000
J4
Gain from bargain purchase (SCE)
Retained earnings – Beginning of year (S)(SCE)
Recognition of gain from bargain purchase
in retained earnings
11 200
J5
Inventories (S)(SFP)
Current account – P Ltd (S)(SFP)
Recognition of inventories in transit in S Ltd’s
records
3 000
J6
Cost of sales (P)(P/L)
Inventories (S)(SFP)
Elimination of unrealised profit in closing
inventories [(1 000 + 3 000) × (33,3/133,3)]
1 000
J7
Revenue (P)(P/L) (15 000 + 3 000(J5))
Cost of sales (S)(P/L)
Elimination of intragroup sales
18 000
J8
Interest received (P)(P/L)
Other expenses (S)(P/L)
Elimination of intragroup interest
500
J9
Management fees (received) (P)(P/L)
Other expenses (S)(P/L)
Elimination of intragroup management fees
J10
Retained earnings (S)(SCE)
Non-controlling interests (SFP)
Recognition of non-controlling interests in since
acquisition retained earnings of subsidiary to
beginning of current reporting period
200
J11
Non-controlling interests (P/L) (3 000 + 2 500)
Non-controlling interests (SFP)
Recognition of non-controlling interests in profit
for the year
5 500
J12
Dividends received (P)(P/L) (4 000 + 2 500)
Non-controlling interests (SFP) (1 000 + 2 500)
Preference dividend paid (S)(SCE)
Ordinary dividend paid (S)(SCE)
Elimination of intragroup ordinary and preference
dividends and recording of non-controlling interests
in dividends
6 500
3 500
4 000
127 000
52 800
11 200
11 200
3 000
1 000
18 000
500
4 000
200
5 500
5 000
5 000
443
7
Consolidation of complex groups
Composition of a group of companies
7.1
7.2
7.3
7.4
Introduction ..............................................................................................
Horizontal groups .....................................................................................
Vertical groups .........................................................................................
Mixed groups ...........................................................................................
447
447
447
448
Consolidation of a horizontal group
7.5
Basic consolidation procedures ...............................................................
Example 7.1: Horizontal group ................................................................
448
448
Consolidation of a vertical group
7.6
7.7
Introduction ..............................................................................................
Basic consolidation procedures ...............................................................
Example 7.2: Vertical group – P Ltd acquired an interest in S Ltd after
S Ltd acquired an interest in SS Ltd. The abridged
consolidated financial statements of the S Ltd Group are
used to prepare the consolidated financial statements of
the P Ltd Group .................................................................
Example 7.3: Vertical group – P Ltd acquired the interest in S Ltd
after S Ltd acquired an interest in SS Ltd. The separate
financial statements of the parent P Ltd and the
subsidiaries S Ltd and SS Ltd are used to prepare the
consolidated financial statements of the P Ltd Group. ......
Example 7.4: Vertical group – P Ltd acquired the interest in S Ltd
before S Ltd acquired the interest in SS Ltd......................
Example 7.5: Vertical group – S Ltd acquired an interest in SS Ltd
before P Ltd acquired the interest in S Ltd ........................
454
455
456
461
468
475
Intragroup transactions in complex groups
7.8
7.9
Unrealised profit ......................................................................................
Elimination of intragroup debts ................................................................
Example 7.6: Complex groups – Intragroup transactions ......................
483
483
484
445
Chapter 7
Consolidation of a mixed group
7.10
Basic consolidation procedures ..............................................................
Example 7.7: Consolidation of the financial statements of a
mixed group....................................................................
492
492
Self-assessment questions
Question 7.1 ........................................................................................................
Question 7.2 ........................................................................................................
446
498
508
Consolidation of complex groups
Composition of a group of companies
7.1 Introduction
A “group” consists of a parent which is not itself a full subsidiary, and all such
companies which are its subsidiaries. A parent (P Ltd) can have more than one
subsidiary, whilst a subsidiary (S Ltd) could also be the parent of another entity
(SS Ltd). SS Ltd is known as the sub-subsidiary of the ultimate parent (P Ltd).
A parent, together with its subsidiaries and sub-subsidiaries (if any), forms a group of
entities. Note that a sub-subsidiary is legally considered to be a subsidiary of the
ultimate parent. This arises from the definition of a subsidiary as stated in chapter 1.
A simple group is a group consisting of a parent and a single subsidiary, whilst there is
more than one subsidiary in a complex group. Complex groups can, according to the
structure of the controlling equity shareholding, be divided into horizontal, vertical and
mixed groups.
7.2 Horizontal groups
In the case of horizontal groups, also known as single level structures, the shares
forming the equity interest in two or more subsidiaries in the group are owned by the
parent itself. There is thus direct ownership by the parent. This group is illustrated
diagrammatically in Figure 1.
P Ltd
90%
70%
S1 Ltd
S2 Ltd
Figure 1
7.3 Vertical groups
In the case of vertical groups, also known as multiple level structures, the parent owns
the controlling equity shareholding in a subsidiary, which in its turn owns the controlling
interest in a sub-subsidiary. The sub-subsidiary may in turn own the controlling interest
in another entity. Thus the vertical line of shareholding can extend even further
downwards. The dominant entity can therefore control other entities by means of
indirect as well as direct ownership of shares.
Figures 2 and 3 diagrammatically illustrates two possible combinations of this type of group.
P Ltd
P Ltd
75%
S1 Ltd
80%
90%
S1 Ltd
80%
SS1 Ltd
Figure 2
S2 Ltd
60%
75%
SS1 Ltd
SS2 Ltd
Figure 3
447
Chapter 7
7.4 Mixed groups
The essence of a mixed group is that the parent itself owns the controlling equity
shareholding in at least one subsidiary, and that the parent and such subsidiary together
own the controlling interest in another company. Figures 4 and 5 are diagrammatic
representations of two possible combinations to be found in the case of mixed groups.
P Ltd
80%
P Ltd
40%
75%
30%
S1 Ltd
S2 Ltd
40%
S1 Ltd
20%
SS1 Ltd
Figure 4
Figure 5
Consolidation of a horizontal group
7.5 Basic consolidation procedures
In a horizontal group, the parent itself is the only entity in the group holding shares in two
or more subsidiaries. (Note that in Figure 1, control is exercised in only one direction.)
In the case of a horizontal group, the consolidation process is thus similar to the
process applied in the case of a simple group, where the parent owns the controlling
interest in only a single subsidiary. The interests of the subsidiaries in a horizontal
group must be separately analysed. It does not matter which subsidiary is analysed first.
Example 7.1
Horizontal group
The following are the abridged financial statements of P Ltd and its subsidiaries at
31 December 20.18:
STATEMENTS OF FINANCIAL POSITION AS AT 31 DECEMBER 20.18
ASSETS
Property, plant and equipment
Trade receivables
Investment in S1 Ltd at fair value:
70 000 shares
Investment in S2 Ltd at fair value:
80 000 shares
Total assets
EQUITY AND LIABILITIES
Share capital
(250 000/100 000/100 000 shares)
Mark-to-market reserve
Retained earnings
Deferred tax
Trade payables
Total equity and liabilities
448
P Ltd
S1 Ltd
S2 Ltd
322 600
161 200
115 000
233 000
365 000
145 000
102 000
–
–
120 000
–
–
R705 800 R348 000 R510 000
250 000 100 000 100 000
11 390
–
–
373 880 238 800 387 000
2 610
–
–
67 920
9 200
23 000
R705 800 R348 000 R510 000
Consolidation of complex groups
EXTRACT FROM THE STATEMENTS OF PROFIT OR LOSS
AND OTHER COMPREHENSIVE INCOME
FOR THE YEAR ENDED 31 DECEMBER 20.18
P Ltd
S1 Ltd
S2 Ltd
Profit before dividend received
Dividend received
244 000
17 200
140 000
–
275 000
–
Profit before tax
Income tax expense
261 200
(68 320)
140 000
(39 200)
275 000
(77 000)
PROFIT FOR THE YEAR
Other comprehensive income for the year
Items that will not be reclassified to profit or loss
Mark-to-market reserve – Fair value adjustment on
equity investment
Income tax relating to mark-to-market reserve
192 880
100 800
198 000
3 000
–
–
(559)
–
–
2 441
–
–
TOTAL COMPREHENSIVE INCOME FOR THE YEAR R195 321 R100 800
R198 000
Other comprehensive income for the year, net of tax
EXTRACT FROM THE STATEMENTS OF CHANGES IN EQUITY
FOR THE YEAR ENDED 31 DECEMBER 20.18
Mark-tomarket
reserve
Retained earnings
P Ltd
P Ltd
S1 Ltd
S2 Ltd
Balance at 1 January 20.18
Changes in equity for 20.18
Total comprehensive income for the year:
Profit for the year
Other comprehensive income for the year
Dividend paid
˜ 8 949
206 000
150 000
200 000
–
2 441
–
192 880
–
(25 000)
100 800
–
(12 000)
198 000
–
(11 000)
Balance at 31 December 20.18
R11 390 R373 880 R238 800
R387 000
˜
((8 000(S1) × 81,352%) + (3 000(S2) × 81,352%)) = 8 949
P Ltd purchased 70 000 shares in S1 Ltd for R92 000 on 1 January 20.14. At this date,
the retained earnings of S1 Ltd amounted to R28 000. The fair value of the noncontrolling interests of S1 Ltd on 1 January 20.14 was determined to be R39 000.
P Ltd paid R116 000 for its interest in S2 Ltd on 1 January 20.17. At this date, the
retained earnings of S2 Ltd amounted to R40 000.The fair value of the non-controlling
interests of S2 Ltd on 1 January 20.17 was determined to be R29 000.
At the dates of acquisition, the assets and liabilities of both subsidiaries were
considered to be fairly valued and there were no unaccounted for contingent liabilities.
P Ltd classified the equity investments in subsidiaries under IFRS 9 in its separate
financial statements and recognised fair value adjustments in a mark-to-market reserve
(other comprehensive income).
449
Chapter 7
P Ltd elected to measure the non-controlling interests of the acquiree at their fair value
at the acquisition date.
Goodwill was not considered to be impaired from the time that the investments were
acquired till the end of the current reporting period.
The company tax rate is 28% and CGT is calculated at 66,6% thereof.
Solution 7.1
The abridged consolidated financial statements of the P Ltd Group for the year ended
31 December 20.18 will be drawn up as follows:
P LTD GROUP
CONSOLIDATED STATEMENT OF FINANCIAL POSITION
AS AT 31 DECEMBER 20.18
ASSETS
Non-current assets
Property, plant and equipment (322 600(P) + 115 000(S1) + 365 000(S2))
Goodwill (5 000g + 3 000a )
802 600
8 000
810 600
Current assets
Trade receivables (161 200(P) + 233 000(S1) + 145 000(S2))
Total assets
EQUITY AND LIABILITIES
Equity attributable to owners of the parent
Share capital
Retained earnings
Non-controlling interests (102 240(S1) + 98 400(S2))
Total equity
Current liabilities
Trade payables (67 920(P) + 9 200(S1) + 23 000(S2))
Total equity and liabilities
539 200
R1 349 800
250 000
799 040
1 049 040
200 640
1 249 680
100 120
R1 349 800
P LTD GROUP
CONSOLIDATED STATEMENT OF PROFIT OR LOSS
AND OTHER COMPREHENSIVE INCOME
FOR THE YEAR ENDED 31 DECEMBER 20.18
Profit before tax (244 000(P) + 140 000(S1) + 275 000(S2))
Income tax expense (68 320(P) + 39 200(S1) + 77 000(S2))
659 000
(184 520)
PROFIT FOR THE YEAR
474 480
Other comprehensive income for the year
TOTAL COMPREHENSIVE INCOME FOR THE YEAR
Total comprehensive income attributable to:
Owners of the parent (474 480 – 69 840)
Non-controlling interests (30 240e + 39 600k)
–
R474 480
404 640
69 840
R474 480
450
Consolidation of complex groups
P LTD GROUP
CONSOLIDATED STATEMENT OF CHANGES IN EQUITY
FOR THE YEAR ENDED 31 DECEMBER 20.18
Balance at
1 January 20.18
Changes in equity
for 20.18
Total comprehensive
income for the year:
Profit for the year
Dividend paid
Balance at
31 December 20.18
#
&
ȍ
˜
Noncontrolling
interests
Total
equity
Share
capital
Retained
earnings
Total
250 000
# 419 400
669 400 & 136 600
806 000
–
–
404 640
(25 000)
404 640
(25 000)
474 480
(30 800)
69 840
ȍ (5 800)
R250 000 ˜ R799 040 R1 049 040 R200 640 R1 249 680
206 000(P) + 85 400b + 128 000h = 419 400
j
75 600d + 61 000 = 136 600
f
l
3 600 + 2 200 = 5 800
373 880(P) + 147 560c + 277 600i = 799 040
Calculations
C1 Analysis of owners’ equity of S1 Ltd
P Ltd 70%
Total
i At acquisition (1/1/20.14)
Share capital
Retained earnings
Equity represented by goodwill
– Parent and NCI
Consideration (1) and NCI
ii Since acquisition
• To beginning of current year:
Retained earnings (150 000 – 28 000)
• Current year:
Profit for the year
Dividend
At
Since
NCI
100 000
28 000
70 000
19 600
30 000
8 400
128 000
89 600
38 400
3 000
a
131 000
122 000
2 400
600
R92 000
39 000
85 400b
36 600
75 600 d
100 800
(12 000)
70 560
(8 400)
30 240 e
(3 600)f
R341 800
R147 560c
R102 240
(1) 102 000 – 8 000(J1) – 2 000(J2) = 92 000
451
Chapter 7
C2 Proof of calculation of goodwill of S1 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)
92 000
39 000
131 000
Net of the identifiable assets acquired and liabilities assumed
at acquisition date: IFRS 3.32(b)
(128 000)
Goodwill
R3 000
C3 Analysis of owners’ equity of S2 Ltd
P Ltd 80%
Total
i At acquisition (1/1/20.17)
Share capital
Retained earnings
Equity represented by goodwill
– Parent and NCI
Consideration (1) and NCI
At
NCI
Since
100 000
40 000
80 000
32 000
20 000
8 000
140 000
112 000
28 000
g
4 000
1 000
R116 000
29 000
5 000
145 000
ii Since acquisition
• To beginning of current year:
Retained earnings (200 000 – 40 000)
160 000
128 000
h
32 000
j
61 000
• Current year:
Profit for the year
Dividend
198 000
(11 000)
158 400
(8 800)
39 600
l
(2 200)
R492 000
R277 600
i
k
R98 400
(1) 120 000 – 3 000(J1) – 1 000(J2) = 116 000
C4 Proof of calculation of goodwill of S2 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)
Net of the identifiable assets acquired and liabilities assumed
at acquisition date: IFRS 3.32(b)
Goodwill
116 000
29 000
145 000
(140 000)
R5 000
Comment
The calculation C4 above is provided as proof of the calculation of goodwill or the gain
on bargain purchase and is only provided for completeness purposes. Either the
analysis approach or the above calculation can be used to calculate the goodwill or the
gain on bargain purchase on acquisition of a subsidiary.
Another point to remember is that pro forma journals are prepared for consolidation
purposes only and are not recognised in the individual records of either the parent or
the subsidiary. The pro forma journals eliminate common balances.
452
Consolidation of complex groups
C5 Pro forma consolidation journal entries
Dr
R
J1
Mark-to-market reserve – Opening balance (P)(OCI)
(11 000 × 81,352%)
Deferred tax (P)(SFP) ((8 000 + 3 000) – 8 949)
Investment in S1 Ltd (P)(SFP)
Investment in S2 Ltd (P)(SFP)
Reversal of fair value adjustment on equity
investments in S1 Ltd and S2 Ltd at beginning
of year at group level
J2
Mark-to-market reserve (P)(OCI)
Investment in S1 Ltd (P)(SFP)
Investment in S2 Ltd (P)(SFP)
Reversal of fair value adjustment on equity
investments in S1 Ltd and S2 Ltd for current year at
group level S1: 102 000 – 92 000 – 8 000 = 2 000
Cr
R
8 949
2 051
3 000
8 000
3 000
2 000
1 000
S2: 120 000 – 116 000 – 3 000 = 1 000
OR 3 000 – 2 000 = 1 000
J3
J4
J5
J6
Deferred tax (P)(SFP) (3 000 × 66,6% × 28%)
Income tax expense of mark-to-market reserve (OCI)
Tax effect of reversal of fair value adjustment on
investments in S1 Ltd and S2 Ltd for current year
at group level
559
559
Share capital (S1)(SCE)
Retained earnings (S1)(SCE)
Goodwill (SFP)
Non-controlling interests (SFP)
Investment in S1 Ltd (P)(SFP)
Elimination of equity of S1 Ltd at acquisition date
100 000
28 000
3 000
Share capital (S2)(SCE)
Retained earnings (S2)(SCE)
Goodwill (SFP)
Non-controlling interests (SFP)
Investment in S2 Ltd (P)(SFP)
Elimination of equity of S2 Ltd at acquisition date
100 000
40 000
5 000
Retained earnings (SCE)
Non-controlling interests (SFP)
Recognition of the non-controlling interests in the
since acquisition retained earnings of S2 Ltd until the
beginning of the current year
32 000
39 000
92 000
29 000
116 000
32 000
continued
453
Chapter 7
Dr
R
J7
Retained earnings (SCE)
Non-controlling interests (SFP)
Recognition of the non-controlling interests in the
since acquisition retained earnings of S1 Ltd until
the beginning of the current year
36 600
J8
Non-controlling interests (P/L)
Non-controlling interests (SFP)
Recognition of the non-controlling interests in the
profit for the year of S1 Ltd
30 240
J9
Non-controlling interests (P/L)
Non-controlling interests (SFP)
Recognition of the non-controlling interests in the
profit for the year of S2 Ltd
39 600
J10
Dividend received (P)(P/L)
Non-controlling interests (SFP)
Dividend paid (S1)(SCE)
Elimination of intragroup dividends from S1 Ltd and
recording of non-controlling interests in the dividend
8 400
3 600
Dividend received (P)(P/L)
Non-controlling interests (SFP)
Dividend paid (S2)(SCE)
Elimination of intragroup dividends from S2 Ltd and
recording of non-controlling interests in the dividend
8 800
2 200
J11
Cr
R
36 600
30 240
39 600
12 000
11 000
Comment
a The consolidated financial statements can be prepared by using one of the following
two procedures:
l Pro forma consolidation journal entries can be prepared from the above analysis
and then set off against the combined financial statements of P Ltd, S1 Ltd and
S2 Ltd (in a worksheet), resulting in the consolidated amounts.
l The consolidated financial statements are prepared directly from the analysis by
adding the applicable amounts for the subsidiaries to those of the parent.
b The direct preparation of consolidated financial statements (directly from the
individual financial statements of the entities in the group and the analysis of owners’
equity of the subsidiaries) can be formally represented in a worksheet format. When
answering more complex questions, the preparation of consolidated financial
statements in a worksheet format is the most suitable as an examination technique.
c The latter procedure (preparing of the consolidated statements directly) is generally
used in the remainder of this textbook.
Consolidation of a vertical group
7.6 Introduction
A subsidiary partially owned by a parent, can, in turn, have subsidiaries of its own. In
such cases two sets of consolidated financial statements must be prepared – one set
454
Consolidation of complex groups
for the partially-owned subsidiary and the sub-subsidiaries, and a further set for the
group as a whole. In the latter instance there will be at least two groups of noncontrolling shareholders: those of the sub-subsidiary(ies) and those of the partiallyowned subsidiary who will indirectly share in the profit or loss and the net assets of the
sub-subsidiaries.
The effective interest of the parent in the sub-subsidiaries can be less than 50%. If, for
example, the partially-owned subsidiary S Ltd is 60% owned by the parent and if S Ltd,
in turn, holds a 75% interest in the equity share capital of a sub-subsidiary, SS Ltd, the
effective interest of the parent in the sub-subsidiary is only 45% (60% × 75%). Hence,
the non-controlling interests can be a material amount.
7.7 Basic consolidation procedures
A vertical group in its simplest form consists of a parent with a controlling interest in a
partially-owned subsidiary, which, in turn, has a controlling interest in a sub-subsidiary.
The basic approach to consolidating the financial statements of a vertical group is to
first consolidate the financial statements of the subsidiary and the sub-subsidiary, after
which the financial statements of the parent and subsidiaries (subsidiary and
sub-subsidiary) are consolidated.
Where a vertical group consists of a parent, P Ltd, a partially-owned subsidiary, S Ltd,
and a sub-subsidiary, SS Ltd, two sets of consolidated financial statements must be
prepared: one set for S Ltd and its subsidiary SS Ltd and a further set for P Ltd and the
two subsidiaries S Ltd and SS Ltd. In practice, the consolidated financial statements of
the S Ltd Group and the financial statements of P Ltd will be used to prepare the
consolidated financial statements of the P Ltd Group. It is therefore necessary to
analyse the consolidated owners’ equity of the S Ltd Group (refer to example 7.2).
When a question requires the consolidated financial statements of the P Ltd Group to
be prepared, only the financial statements of the individual entities in the group are
usually given. In such cases, it is unnecessary to first prepare the consolidated financial
statements of S Ltd Group (S Ltd and its subsidiary SS Ltd). All that has to be done is
to analyse S Ltd’s interest in SS Ltd and then to use certain details from that analysis to
analyse P Ltd’s interest in S Ltd’s consolidated owners’ equity (refer to example 7.3).
On consolidation of a vertical group, the dates on which the parent acquired the
controlling interest in the subsidiaries are of primary importance. Should P Ltd own 90%
of the shares of S Ltd and S Ltd in turn own 80% of the shares in SS Ltd, the timing of
the acquisitions may be illustrated as follows:
l P Ltd acquired the interest in S Ltd on 1 January 20.17, while S Ltd acquired an
interest in SS Ltd on 1 January 20.19. (S Ltd has been a subsidiary of P Ltd since
1 January 20.17, while SS Ltd has been a subsidiary of P Ltd since
1 January 20.19.)
l P Ltd acquired the interest in S Ltd on 1 January 20.19, while S Ltd acquired an
interest in SS Ltd on 1 January 20.17 (S Ltd and SS Ltd have thus been
subsidiaries of P Ltd since 1 January 20.19).
The alternative possibilities whereby a vertical group can be formed must be kept in
mind when analysing the owners’ equity in the subsidiaries.
455
Chapter 7
Example 7.2
Vertical group – P Ltd acquired an interest in S Ltd after S Ltd
acquired an interest in SS Ltd. The abridged consolidated
financial statements of the S Ltd Group are used to prepare
the consolidated financial statements of the P Ltd Group
The abridged financial statements of P Ltd and the abridged consolidated financial
statements of the S Ltd Group as at 31 December 20.18 were as follows:
STATEMENTS OF FINANCIAL POSITION AS AT 31 DECEMBER 20.16
ASSETS
Property, plant and equipment
Goodwill
Bank and trade receivables
Investment in S Ltd at fair value: 270 000 shares
Total assets
EQUITY AND LIABILITIES
Share capital (500 000/300 000 shares)
Mark-to-market reserve
Retained earnings
Non-controlling interests
Deferred tax
Trade and other payables
Total equity and liabilities
P Ltd
S Ltd
Group
403 000
–
200 000
500 000
1 273 000
2 600
150 000
–
R1 103 000 R1 425 600
500 000
26 847
431 000
–
6 153
139 000
300 000
–
812 000
141 600
–
172 000
R1 103 000 R1 425 600
EXTRACT FROM THE STATEMENTS OF PROFIT OR LOSS AND OTHER
COMPREHENSIVE INCOME FOR THE YEAR ENDED 31 DECEMBER 20.18
P Ltd
S Ltd
Group
PROFIT FOR THE YEAR
Other comprehensive income for the year
Items that will not be reclassified to profit or loss
Mark-to-market reserve – Fair value adjustment on equity
investment
Income tax relating to mark-to-market reserve
136 000
429 000
3 000
(559)
–
–
Other comprehensive income for the year, net of tax
2 441
–
TOTAL COMPREHENSIVE INCOME FOR THE YEAR
R138 441
R429 000
138 441
–
362 000
67 000
R138 441
R429 000
Total comprehensive income attributable to:
Owners of the parent
Non-controlling interests
456
Consolidation of complex groups
EXTRACT FROM THE STATEMENTS OF CHANGES IN EQUITY
FOR THE YEAR ENDED 31 DECEMBER 20.18
Mark-tomarket
reserve
Retained earnings
P Ltd
P Ltd
S Ltd
Group
Noncontrolling
interests
S Ltd
Group
Balance at 1 January 20.18
Changes in equity for 20.18
Total comprehensive income for
the year:
Profit for the year
Other comprehensive income
for the year
Dividend paid
24 406
325 000
470 000
83 600
–
136 000
362 000
67 000
2 441
–
–
(30 000)
–
(20 000)
–
(9 000)
Balance at 31 December 20.18
R26 847
R431 000
R812 000
R141 600
P Ltd acquired a 90% interest in S Ltd on 1 January 20.16 for R467 000. At this date,
the retained earnings of S Ltd amounted to R200 000. P Ltd had control over S Ltd as
per the definition of control in terms of IFRS 10 from the acquisition date.
S Ltd paid R217 000 for an 80% interest in SS Ltd on 1 January 20.15. At this date the
retained earnings of SS Ltd amounted to R148 000. S Ltd had control over SS Ltd as
per the definition of control in terms of IFRS 10 from the acquisition date.
At the acquisition dates, the assets and liabilities of both subsidiaries were considered
to be fairly valued and there were no unaccounted for contingent liabilities.
A dividend of R18 000 received from S Ltd is included in the profit for the year of P Ltd.
The equity investments in S Ltd and SS Ltd are classified under IFRS 9 in the separate
financial statements and the fair value adjustments are recognised in a mark-to-market
reserve (other comprehensive income).
P Ltd elected to measure the non-controlling interests of the acquiree at their
proportionate share of the acquiree’s identifiable net assets at the acquisition date.
Goodwill was not considered to be impaired from the time that the investments were
acquired to the end of the current reporting period.
The company tax rate is 28% and CGT is calculated at 66,6% thereof.
457
Chapter 7
Solution 7.2
The consolidated financial statements for the P Ltd Group for the year ended
31 December 20.15 will be prepared as follows.
P LTD GROUP
CONSOLIDATED STATEMENT OF FINANCIAL POSITION
AS AT 31 DECEMBER 20.18
ASSETS
Non-current assets
Property, plant and equipment (403 000(P) + 1 273 000(S))
Goodwill
1 676 000
19 340
1 695 340
Current assets
Trade receivables (200 000(P) + 150 000(S))
Total assets
EQUITY AND LIABILITIES
Equity attributable to owners of the parent
Share capital
Retained earnings
Non-controlling interests
Total equity
Current liabilities
Trade and other payables (139 000(P) + 172 000(S))
Total equity and liabilities
350 000
R2 045 340
500 000
981 800
1 481 800
252 540
1 734 340
311 000
R2 045 340
P LTD GROUP
EXTRACT FROM THE CONSOLIDATED STATEMENT OF PROFIT OR LOSS
AND OTHER COMPREHENSIVE INCOME
FOR THE YEAR ENDED 31 DECEMBER 20.18
PROFIT FOR THE YEAR (136 000(P) – 18 000(dividend received) + 429 000 (S))
Other comprehensive income for the year
TOTAL COMPREHENSIVE INCOME FOR THE YEAR
Total comprehensive income attributable to:
Owners of the parent
Non-controlling interests (67 000(NCI of SS) + 36 200(analysis))
547 000
–
R547 000
443 800
103 200
R547 000
458
Consolidation of complex groups
P LTD GROUP
CONSOLIDATED STATEMENT OF CHANGES IN EQUITY
FOR THE YEAR ENDED 31 DECEMBER 20.18
Share
capital
Balance at 1 January 20.18
Changes in equity
for 20.18
Total comprehensive income
for the year:
Profit for the year
Dividend paid
Balance at
31 December 20.18
˜
#
&
Ȝ
ɛ
Total
Noncontrolling
interests
Total
equity
1 068 000
&160 340
1 228 340
443 800
(30 000)
# (11 000)
103 200
547 000
(41 000)
Retained
earnings
500 000 ˜ 568 000
–
–
443 800
(30 000)
R500 000 ɛR981 800 R1 481 800 Ȝ R252 540 R1 734 340
325 000(P) + 243 000(S) = 568 000
9 000 +2 000(C1) = 11 000
83 600(S Ltd Group) + 76 740(NCI of SS) = 160 340
141 600(S Ltd Group) + 110 940 (analysis of S Ltd Group) = 252 540
431 000(P) + 550 800 (analysis of S Ltd Group) = 981 800
Calculations
C1 Analysis of consolidated owners’ equity of S Ltd Group
Total
i At acquisition (1/1/20.16)
Share capital
Retained earnings
Goodwill of S Ltd Group absorbed into
equity at acquisition
P Ltd 90%
At
Since
NCI
300 000
200 000
270 000
180 000
30 000
20 000
(2 600)
(2 340)
(260)
497 400
447 660
49 740
Equity represented by goodwill
– Parent
19 340
19 340
–
Consideration (1) and NCI
516 740 R467 000
49 740
ii Since acquisition
To beginning of current year:
Consolidated retained earnings (2)
• Current year:
Consolidated profit for the year
Dividend
270 000
243 000
27 000
76 740
362 000
(20 000)
R1 128 740
325 800
(18 000)
36 200
(2 000)
R550 800 R110 940
(1) 500 000 – 30 000(J1) – 3 000(J2) = 467 000
(2) 470 000 – 200 000 = 270 000
459
Chapter 7
C2 Proof of calculation of goodwill of S Ltd Group in terms of IFRS 3.32
Consideration transferred at acquisition date: IFRS 3.32(a)(i)
467 000
Amount of non-controlling interests: IFRS 3.32(a)(ii)
49 740
516 740
Net of the identifiable assets acquired and liabilities assumed
at acquisition date: IFRS 3.32(b)
(497 400)
Goodwill
R19 340
Comment
P Ltd elected to measure its investment in S Ltd in terms of IFRS 9 i.e. at fair value
through other comprehensive income. Therefore at initial recognition P Ltd measures
the investment in S Ltd at its fair value of R467 000 (generally being the consideration
given). P Ltd subsequently measures the investment in S Ltd at fair value. Any fair value
adjustments are recognised in OCI and accumulated in equity through the mark-tomarket reserve. Deferred tax is provided for on the mark-to-market reserve at the capital
gains tax %. In the above example the deferred tax for the current year on the mark-tomarket reserve was calculated as R3 000 × 66,6% × 28% = R559.
On consolidation, any fair value adjustments recognised in the separate financial
statements of the parent (P Ltd) on its investment in the subsidiary (S Ltd) since
acquisition must be reversed to start at cost. The pro forma journals will be as follows:
Pro forma journals
Dr
R
J1
J2
460
Mark-to-market reserve (S)(OCI)
Deferred tax (S)(SFP)
Investment in SS Ltd (S)(SFP)
Income tax expense on mark-to-market reserve
(P)(OCI)
Reversal of fair value adjustments on equity
investment in S Ltd for current year at group level
3 000
559
Mark-to-market reserve (P)(SCE) (26 847 – 2 441)
Deferred tax (6 153 – 559)
Investment in S Ltd (P)(SFP) (24 406 + 5 594)
Reversal of fair value adjustments on equity
investment in S Ltd at beginning of year at group
level
24 406
5 594
Cr
R
3 000
559
30 000
Consolidation of complex groups
Example 7.3
Vertical group – P Ltd acquired the interest in S Ltd after S Ltd
acquired an interest in SS Ltd. The separate financial statements
of the parent P Ltd and the subsidiaries S Ltd and SS Ltd are
used to prepare the consolidated financial statements of the
P Ltd Group.
P Ltd paid R467 000 for a 90% interest in the issued equity share capital of S Ltd on
1 January 20.16. At this date, the retained earnings of S Ltd amounted to R200 000. On
1 January 20.15, S Ltd acquired an 80% interest in the issued equity share capital of
SS Ltd when the retained earnings amounted to R148 000 and paid R217 000 for the
investment. At the acquisition date, the assets and liabilities of both subsidiaries were
considered to be fairly valued and there were no unaccounted for contingent liabilities.
The equity investments in the subsidiaries are classified under IFRS 9 in the separate
financial statements and the fair value adjustments recognised in a mark-to-market
reserve (other comprehensive income).
P Ltd elected to measure the non-controlling interests of the acquiree at their
proportionate share of the acquiree’s identifiable net assets at the acquisition date.
Goodwill was not considered to be impaired from the time that the investments were
acquired to the end of the current reporting period.
The dividends received from the respective investments in the subsidiaries are included
in the profit for the year of P Ltd and S Ltd.
The company tax rate is 28% and CGT is calculated at 66,6% thereof.
The abridged financial statements of the group of companies at 31 December 20.18
were as follows:
STATEMENTS OF FINANCIAL POSITION AS AT 31 DECEMBER 20.18
ASSETS
Property, plant and equipment
Trade receivables
Investment in S Ltd at fair value:
270 000 shares
Investment in SS Ltd at fair value:
96 000 shares
Total assets
EQUITY AND LIABILITIES
Share capital
(500 000/300 000/120 000 shares)
Mark-to-market reserve
Retained earnings
Deferred tax
Trade and other payables
Total equity and liabilities
P Ltd
S Ltd
SS Ltd
403 000
200 000
571 000
90 000
702 000
60 000
500 000
–
–
–
225 000
–
R1 103 000
R886 000
R762 000
500 000
26 847
431 000
6 153
139 000
300 000
6 508
460 000
1 492
118 000
120 000
–
588 000
–
54 000
R1 103 000
R886 000
R762 000
461
Chapter 7
EXTRACT FROM THE STATEMENTS OF PROFIT OR LOSS
AND OTHER COMPREHENSIVE INCOME
FOR THE YEAR ENDED 31 DECEMBER 20.18
P Ltd
S Ltd
SS Ltd
136 000
130 000
335 000
Other comprehensive income for the year
Items that will not be reclassified to profit or loss
Mark-to-market reserve – Fair value adjustment
on equity investment
Income tax relating to mark-to-market reserve
3 000
(559)
–
–
–
–
Other comprehensive income for the year, net of tax
2 441
–
–
PROFIT FOR THE YEAR
TOTAL COMPREHENSIVE INCOME FOR THE YEAR
R138 441 R130 000 R335 000
EXTRACT FROM THE STATEMENTS OF CHANGES IN EQUITY
FOR THE YEAR ENDED 31 DECEMBER 20.18
Mark-to- Mark-tomarket
market
reserve reserve
P Ltd
Balance at 1 January 20.18
Changes in equity for 20.18
Total comprehensive income for
the year:
Profit for the year
Other comprehensive income for
the year
Dividend paid
Balance at 31 December 20.18
P Ltd
S Ltd
SS Ltd
24 406
6 508
325 000
350 000
298 000
–
2 441
–
–
136 000
–
130 000
–
335 000
–
–
R26 847
S Ltd
Retained earnings
–
(30 000) (20 000) (45 000)
R6 508 R431 000 R460 000 R580 000
The consolidated financial statements for the year ended 31 December 20.18 must be
prepared for the P Ltd Group.
Example 7.3 deals with exactly the same group as example 7.2, as well as for the same
accounting period. However, in example 7.3, the individual abridged financial
statements of the entities in the group are given.
462
Consolidation of complex groups
Solution 7.3
The interest of S Ltd in SS Ltd is analysed first, after which certain information from the
analysis is used to analyse P Ltd’s interest in S Ltd’s consolidated owners’ equity.
The consolidated financial statements of the P Ltd Group for the year ended
31 December 20.18 will be prepared as follows:
P LTD GROUP
CONSOLIDATED STATEMENT OF FINANCIAL POSITION
AS AT 31 DECEMBER 20.18
ASSETS
Non-current assets
Property, plant and equipment (403 000(P) + 571 000(S) + 702 000(SS))
Goodwill
Current assets
Trade receivables (200 000(P) + 90 000(S) + 60 000(SS))
Total assets
EQUITY AND LIABILITIES
Equity attributable to owners of the parent
Share capital (P)
Retained earnings
g
b
Non-controlling interests (110 940 + 141 600 )
Total equity
Current liabilities
Trade and other payables (139 000(P) + 118 000(S) + 54 000(SS))
Total equity and liabilities
1 676 000
19 340
1 695 340
350 000
R2 045 340
500 000
981 800
1 481 800
252 540
1 734 340
311 000
R2 045 340
P LTD GROUP
EXTRACT FROM THE CONSOLIDATED STATEMENT OF PROFIT OR LOSS
AND OTHER COMPREHENSIVE INCOME
FOR THE YEAR ENDED 31 DECEMBER 20.18
PROFIT FOR THE YEAR (1)
Other comprehensive income for the year
547 000
–
TOTAL COMPREHENSIVE INCOME FOR THE YEAR
R547 000
Total comprehensive income attributable to:
Owners of the parent (547 000 – 103 200)
Non-controlling interests (67 000a + 13 000e + 23 200f )
443 800
103 200
R547 000
(136 000(P) – 36 000j(dividend received) + 130 000(S) + 335 000(SS)) = 547 000
463
Chapter 7
P LTD GROUP
EXTRACT FROM THE CONSOLIDATED STATEMENT OF CHANGES IN EQUITY
FOR THE YEAR ENDED 31 DECEMBER 20.18
Share
capital
Retained
earnings
Total
Noncontrolling
interests
Total
equity
Balance at 1 January 20.18 500 000 ȍ 568 000
887 800 ˜ 160 340 1 228 340
Changes in equity
for 20.18
Total comprehensive
income for the year
Profit for the year
–
443 800
443 800
103 200
547 000
Dividend paid
–
(30 000)
(30 000)
(11 000)
(41 000)
Balance at
31 December 20.18
R500 000 ’R981 800 R1 481 800 &R252 540 R1 734 340
ȍ
˜
’
&
c
325 000(P) + 243 000(S) = 568 000
h
i
83 600(SS) + 76 740(S) = 160 340
431 000(P) + 550 800(S)k = 981 800
b
g
141 600(SS) + 110 940(S) = 252 540
Calculations
C1 Analysis of owners’ equity of SS Ltd
Total
i At acquisition (1/1/20.15)
Share capital
Retained earnings
Equity represented by goodwill
– Parent
Consideration (1) and NCI
ii Since acquisition
• To beginning of current year:
Retained earnings (2)
• Current year:
Profit for the year
Dividends paid
(1) 225 000 – 8 000(J2) = 217 000
(2) 298 000 – 148 000 = 150 000
464
S Ltd 80%
At
Since
NCI
120 000
148 000
96 000
118 400
24 000
29 600
268 000
214 400
53 600
2 600
270 600
2 600
R217 000
–
53 600
150 000
120 000
30 000
83 600h
335 000
(45 000)
268 000
(36 000)j
67 000a
(9 000)
R710 600
R352 000
R141 600b
Consolidation of complex groups
C2 Proof of calculation of purchase difference of SS Ltd in terms of IFRS 3.32
Consideration transferred at acquisition date: IFRS 3.32(a)(i)
217 000
Amount of non-controlling interests: IFRS 3.32(a)(ii)
53 600
270 600
Net of the identifiable assets acquired and liabilities assumed
at acquisition date: IFRS 3.32(b)
(268 000)
Goodwill
R2 600
Comment
By using the above analysis, the consolidated financial statements of the S Ltd Group
can be prepared. As the question only requires the consolidated financial statements of
the P Ltd Group, certain information from the above analysis of equity is used to
analyse S Ltd’s consolidated owners’ equity.
C3 Analysis of consolidated owners’ equity of S Ltd
Total
i At acquisition (1/1/20.16)
Share capital
Retained earnings
Goodwill
P Ltd 90%
At
NCI
Since
300 000
200 000
(2 600)
497 400
270 000
180 000
(2 340)
447 660
30 000
20 000
(260)
49 740
19 340
19 340
–
Consideration (1) and NCI
516 740
R467 000
49 740
ii Since acquisition
• To beginning of current year:
270 000
243 000
c
27 000
Retained earnings – SS Ltd
Retained earnings – S Ltd (2)
120 000
150 000
108 000
135 000
12 000
15 000
Equity represented by goodwill
– Parent
i
• Current year:
Profit for the year:
76 740
362 000
325 800
36 200
S Ltd
SS Ltd
130 000
232 000
117 000
208 800
13 000e
23 200f
Dividend paid
(20 000)
(18 000)d
R1 128 740
R550 800
k
(2 000)
R110 940g
(1) 500 000 – 30 000(J1) – 3 000(J3) = 467 000
(2) 350 000 – 200 000 = 150 000
465
Chapter 7
C4 Proof of calculation of goodwill of S 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)
467 000
49 740
516 740
Net of the identifiable assets acquired and liabilities assumed
at acquisition date: IFRS 3.32(b)
(497 400)
Goodwill
R19 340
Comment
The above analyses result in exactly the same figures as those in example 7.2, where
the consolidated owners’ equity in S Ltd was given and analysed.
C5 Pro forma consolidation journal entries
Dr
R
J1
J2
J3
Mark-to-market reserve – Opening balance (P)(SCE)
Deferred tax (6 153 – 559)
Investment in S Ltd (P)(SFP) (26 847 + 6 153 – 3 000)
Reversal of fair value adjustments on equity
investment in S Ltd at beginning of year at group level
24 406
5 594
Mark-to-market reserve – Opening balance (P)(SCE)
Deferred tax (6 153 – 559)
Investment in S Ltd (P)(SFP) (6 508 + 1 492)
Reversal of fair value adjustments on equity
investment in S Ltd at beginning of year at group level
6 508
1 492
Mark-to-market reserve (S)(OCI)
Deferred tax (P)(SFP)
Investment in S Ltd (P)(SFP)
3 000
559
3 000
559
Reversal of fair value adjustments on equity
investment in S Ltd for current year at group level
Share capital (SS)(OCI)
Retained earnings (SS)(SCE)
Goodwill
Non-controlling interests (SFP)
Investment in SS Ltd (S)(SFP)
Elimination of owners’ interest of SS Ltd at date
of acquisition
30 000
8 000
Income tax expense on mark-to-market reserve
(P)(OCI)
J4
Cr
R
120 000
148 000
2 600
53 600
217 000
continued
466
Consolidation of complex groups
Dr
R
J5
Share capital (S)(SCE)
Retained earnings (S)(SCE)
Goodwill (SFP)
Goodwill – SS Ltd
Non-controlling interests (SFP)
Investment in S Ltd (P)(SFP)
Elimination of owners’ interest of S Ltd at date
of acquisition
300 000
200 000
19 340
J6
Retained earnings (SS)(SCE)
Non-controlling interests (SFP)
Recognition of the non-controlling interests in the
since-acquisition retained earnings of SS Ltd until
beginning of current year
30 000
J7
Retained earnings (S)(SCE)
Retained earnings (SS)(SCE)
Non-controlling interests (SFP)
Recognition of the non-controlling interests in the
since-acquisition retained earnings of S Ltd until
beginning of current year
12 000
15 000
Non-controlling interests (P/L)
Non-controlling interests (SFP)
Recognition of the non-controlling interests in the
profit for the year of SS Ltd
Non-controlling interests (S)(P/L)
Non-controlling interests (SS)(P/L)
Non-controlling interests (SFP)
Recognition of the non-controlling interests in the
profit for the year of S Ltd
67 000
Dividend received (P)(P/L)
Non-controlling interests (SFP)
Dividend paid (S)( SCE)
Elimination of intragroup dividends from S Ltd and
recording of non-controlling interests in the dividend
18 000
2 000
Dividend received (S)( P/L)
Non-controlling interests (SFP)
Dividend paid (SS)(SCE)
Elimination of intragroup dividends from SS Ltd and
recording of non-controlling interests in the dividend
36 000
9 000
J8
J9
J10
J11
13 000
23 200
Cr
R
2 600
49 740
467 000
30 000
27 000
67 000
36 200
20 000
45 000
467
Chapter 7
Example 7.4
Vertical group – P Ltd acquired the interest in S Ltd before
S Ltd acquired the interest in SS Ltd
The abridged financial statements of P Ltd, S Ltd and SS Ltd were as follows on
31 December 20.18:
STATEMENTS OF FINANCIAL POSITION AS AT 31 DECEMBER 20.18
ASSETS
Property, plant and equipment
Investments in subsidiaries at fair value:
24 000 shares in S Ltd
16 000 shares in SS Ltd
Trade receivables
P Ltd
S Ltd
SS Ltd
426 400
237 800
674 000
139 600
–
109 000
–
290 200
50 000
–
–
40 000
Total assets
EQUITY AND LIABILITIES
Share capital (50 000/30 000/20 000 shares)
Mark-to-market reserve
Retained earnings
Trade and other payables
R675 000 R578 000 R714 000
Total equity and liabilities
R675 000 R578 000 R714 000
100 000
10 000
540 000
25 000
110 000
5 000
433 000
30 000
140 000
–
539 000
35 000
EXTRACT FROM THE STATEMENTS OF PROFIT OR LOSS
AND OTHER COMPREHENSIVE INCOME
FOR THE YEAR ENDED 31 DECEMBER 20.18
PROFIT FOR THE YEAR
Other comprehensive income for the year
Items that will not be reclassified to profit or loss
Mark-to-market reserve – Fair value adjustment
on equity investment
TOTAL COMPREHENSIVE INCOME FOR THE YEAR
468
P Ltd
S Ltd
SS Ltd
210 000
188 000
115 000
5 000
3 000
–
R215 000 R191 000 R115 000
Consolidation of complex groups
EXTRACT FROM THE STATEMENTS OF CHANGES IN EQUITY
FOR THE YEAR ENDED 31 DECEMBER 20.18
Mark-to-market
reserve
P Ltd
Balance at 1 January 20.18
Changes in equity for 20.18
Total comprehensive income
for the year:
Profit for the year
Other comprehensive income
for the year
Dividend paid
Balance at 31 December 20.18
Retained earnings
S Ltd
P Ltd
S Ltd
SS Ltd
5 000
2 000
380 000
270 000
440 000
–
–
210 000
188 000
115 000
5 000
3 000
–
(50 000)
–
(25 000)
–
(16 000)
R10 000
R5 000 R540 000 R433 000 R539 000
P Ltd paid R129 600 for an interest in S Ltd on 2 January 20.15, when the retained
earnings of S Ltd amounted to R62 000. S Ltd paid R285 200 for an interest in SS Ltd
on 2 January 20.17, when the retained earnings of SS Ltd amounted to R210 000. At
the dates of acquisition, the assets and liabilities of both subsidiaries were considered
to be fairly valued and there were no unaccounted for contingent liabilities.
The investments in S Ltd and SS Ltd are classified as equity investments under IFRS 9
in their separate financial statements and all fair value adjustments are recognised in a
mark-to-market reserve (other comprehensive income).
P Ltd elected to measure the non-controlling interests of the acquiree at their
proportionate share of the acquiree’s identifiable net assets at the acquisition date.
Goodwill was not considered to be impaired from the time that the investments were
acquired to the end of the current reporting period.
Ignore deferred tax implications.
469
Chapter 7
Solution 7.4
The abridged consolidated financial statements of the P Ltd Group for the year ended
31 December 20.18 will be drawn up as follows:
P LTD GROUP
CONSOLIDATED STATEMENT OF FINANCIAL POSITION
AS AT 31 DECEMBER 20.18
ASSETS
Non-current assets
Property, plant and equipment (426 400(P) + 237 800(S) + 674 000(SS))
Goodwillh (5 200(J3) – 1 040(J7))
1 338 200
4 160
1 342 360
Current assets
Trade receivables (109 000(P) + 50 000(S) + 40 000(SS))
Total assets
199 000
R1 541 360
EQUITY AND LIABILITIES
Equity attributable to owners of the parent
Share capital
Retained earnings
100 000
1 055 360
Non-controlling interests (135 800i + 160 200j )
1 155 360
296 000
Total equity
Current liabilities
Trade and other payables (25 000(P) + 30 000(S) + 35 000(SS))
Total equity and liabilities
1 451 360
90 000
R1 541 360
P LTD GROUP
EXTRACT FROM THE CONSOLIDATED STATEMENT OF PROFIT OR LOSS
AND OTHER COMPREHENSIVE INCOME
FOR THE YEAR ENDED 31 DECEMBER 20.18
PROFIT FOR THE YEAR (1)
Other comprehensive income for the year
TOTAL COMPREHENSIVE INCOME FOR THE YEAR
Total comprehensive income attributable to:
Owners of the parent (480 200 – 76 440)
Non-controlling interests (23 000e + 53 440f )
480 200
–
R480 200
403 760
76 440
R480 200
(1) (210 000(P) + 188 000(S) + 115 000(SS) – 20 000(dividend)(S) – 12 800(dividend)(SS)) =
480 200
470
Consolidation of complex groups
P LTD GROUP
CONSOLIDATED STATEMENT OF CHANGES IN EQUITY
FOR THE YEAR ENDED 31 DECEMBER 20.18
Balance at
1 January 20.18
Changes in equity
for 20.18
Total comprehensive
income for the year:
Profit for the year
Dividend paid
Balance at
31 December 20.18
Noncontrolling
interests
Share
capital
Retained
earnings
Total
100 000
˜ 701 600
801 600 # 227 760
–
403 760
(50 000)
403 760
(50 000)
76 440
(8 200)
Total
equity
1 029 360
480 200
(58 200)
R100 000 ȍR1 055 360 R1 155 360 R296 000 R1 451 360
˜ 380 000(P) + 313 600g + 8 000(gain from bargain purchase) = 701 600
# 111 760(S) + 116 000(SS) = 227 760
ȍ 540 000(P) + 507 360(S) + 8 000(J12) = 1 055 360
Calculations
C1 Analysis of owners’ equity of SS Ltd
Total
i At acquisition (2/1/20.17)
Share capital
Retained earnings
Equity represented by goodwill
– Parent
Consideration (1) and NCI
ii Since acquisition
• To beginning of current year:
Retained earnings (440 000 – 210 000)
• Current year:
Profit for the year
Dividend paid
S Ltd 80%
At
Since
NCI
140 000
210 000
112 000
168 000
28 000
42 000
350 000
280 000
70 000
5 200
5 200a
–
355 200 R285 200
70 000
230 000
184 000c
46 000
116 000
115 000
(16 000)
R684 200
92 000d
(12 800)
23 000e
(3 200)
R263 200b R135 800i
(1) 290 200 – 2 000(j1) – 3 000(j2) = 285 200
471
Chapter 7
C2 Proof of calculation of goodwill of SS 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)
285 200
70 000
355 200
Net of the identifiable assets acquired and liabilities assumed
at acquisition date: IFRS 3.32(b)
(350 000)
Goodwill
R5 200
Comment
In the consolidated statements of S Ltd and subsidiary SS Ltd, there is goodwill of
R5 200. This amount represents, in essence, a correction of the equity of S Ltd, as
S Ltd paid R285 200 for an investment of which the underlying net asset value
amounted to only R280 000.
The consolidated owners’ equity of S Ltd can now be determined and analysed by
adding the amounts in the above “Since” column (184 000c and 92 000d) to the
reserves of S Ltd for the corresponding periods. There is, however, a further amount
appearing in the above analysis which must be taken into account in the calculation and
analysis of S Ltd’s consolidated owners’ equity, i.e. the goodwill of R5 200. The
goodwill, on consolidation, represents a downward revaluation of the investment in
SS Ltd to the underlying value of the net assets attributable to S Ltd’s interest in SS Ltd
at the acquisition date.
C3 Analysis of consolidated owners’ equity of S Ltd
Total
i At acquisition (2/1/20.15)
Share capital
Retained earnings
P Ltd 80%
At
Since
NCI
110 000
62 000
88 000
49 600
22 000
12 400
172 000
137 600
34 400
(8 000)
(8 000)
–
Consideration (1) and NCI
164 000
R129 600
34 400
ii Since acquisition
• To beginning of current year:
Retained earnings:
392 000
S Ltd (270 000 – 62 000)
SS Ltd
208 000
184 000c
Gain from a bargain purchase –
Parent
Goodwill – SS Ltd
• Current year:
Profit for the year:
S Ltd (188 000 – 12 800)
SS Ltd
Dividend paid
(5 200)a
(4 160)h
78 400
(1 040)
117 760
267 200
213 760
53 440f
175 200
92 000d
(25 000)
R793 000
(20 000)
R507 360
(5 000)
R160 200j
(1) 139 600 – 5 000(j1) – 5 000(J2) = 129 600
472
313 600g
(R4 160)
Consolidation of complex groups
C4 Proof of calculation of gain from bargain purchase of S Ltd in terms
of IFRS 3.32
Consideration transferred at acquisition date: IFRS 3.32(a)(i)
129 600
Amount of non-controlling interests: IFRS 3.32(a)(ii)
34 400
164 000
Net of the identifiable assets acquired and liabilities assumed
at acquisition date: IFRS 3.32(b)
(172 000)
Gain from bargain purchase
(R8 000)
C5 Pro forma consolidation journal entries
Dr
R
J1
J2
J3
J4
J5
Mark-to-market reserve (S)(SCE)
Investment in SS Ltd (S)(SFP)
Mark-to-market reserve (P)(SCE)
Investment in S Ltd (P)(SFP)
Reversal of fair value adjustments on equity
investment in S Ltd and SS Ltd at beginning of year at
group level
2 000
Mark-to-market reserve (S)(OCI)
Investment in SS Ltd (S)(SFP)
Mark-to-market reserve (P)(OCI)
Investment in S Ltd (P)(SFP)
Reversal of fair value adjustments on equity
investment in S Ltd and SS Ltd for current year at
group level
3 000
3 000
Cr
R
2 000
3 000
5 000
Share capital (SS)(SCE)
Retained earnings (SS)(SCE)
Goodwill (SFP)
Non-controlling interests (SFP)
Investment in SS Ltd (S)(SFP) (290 200 – 5 000)
Elimination of owners’ interest of SS Ltd at date
of acquisition
140 000
210 000
5 200
Share capital (S)(SCE)
Retained earnings (S)(SCE)
Retained earnings (SCE) (Gain from a bargain purchase)
Non-controlling interests (SFP)
Investment in S Ltd (P)(SFP) (139 600 – 10 000)
Elimination of owners’ interest of S Ltd at date of
acquisition
110 000
62 000
Retained earnings (SS)(SCE)
Non-controlling interests (SFP)
Recognition of the non-controlling interests in the
since acquisition retained earnings of SS Ltd until
beginning of current year
46 000
3 000
5 000
70 000
285 200
8 000
34 400
129 600
46 000
continued
473
Chapter 7
Dr
R
J6
Retained earnings (S)(SCE)
Non-controlling interests (SFP)
Recognition of the non-controlling interests in the
since acquisition retained earnings of S Ltd until
beginning of current year
78 400
J7
Non-controlling interests (SFP)
Goodwill (SFP)
Recognition of downward valuation of S Ltd’s net
asset value arising from goodwill in investment of
S Ltd in SS Ltd
Non-controlling interests (P/L)
Non-controlling interests (SFP)
Recognition of the non-controlling interests in the
profit for the year of SS Ltd
Non-controlling interests (P/L)
Non-controlling interests (SFP)
Recognition of the non-controlling interests in the
profit for the year of S Ltd
1 040
J8
J9
J10
J11
J12
23 000
53 440
Dividend received (P)(P/L)
Non-controlling interests (SFP)
Dividend paid (S)( SCE)
Elimination of intragroup dividend of S Ltd
20 000
5 000
Dividend received (S)( P/L)
Non-controlling interests (SFP)
Dividend paid (SS)(SCE)
Elimination of intragroup dividend of SS Ltd
12 800
3 200
Gain from bargain purchase (SCE)
Retained earnings – Beginning of year (S)(SCE)
Recognition of gain from bargain purchase in retained
earnings
8 000
Cr
R
78 400
1 040
23 000
53 440
25 000
16 000
8 000
Comment
In the consolidated financial statements of P Ltd Group there will be goodwill resulting
from the acquisition of subsidiary S Ltd of sub-subsidiary SS Ltd. In S Ltd’s consolidation
this goodwill amounted to R5 200. In the consolidation of P Ltd Group it is necessary to
compare the fair value of the investment of the ultimate parent (in the case of a vertical
group the intermediate subsidiary has made the investment) with the fair value of the subsubsidiary’s net assets. To incorporate the effect of the investment being made by the
intermediate subsidiary and that P Ltd’s effective investment in SS Ltd is 80% of S Ltd’s
80% investment in SS Ltd, the goodwill amount must be adjusted to reflect it from the
point of view of the parent. Goodwill will therefore be shown at R5 200 × 80% = R4 160 in
the consolidated statement of financial position (or R5 200 – R1 040(J7) = R4 160).
474
Consolidation of complex groups
Example 7.5
Vertical group – S Ltd acquired an interest in SS Ltd before
P Ltd acquired the interest in S Ltd
The abridged financial statements of P Ltd, S Ltd and SS Ltd at 31 December 20.18 are
as follows:
STATEMENTS OF FINANCIAL POSITION AS AT 31 DECEMBER 20.18
ASSETS
Property, plant and equipment
Investments in subsidiaries at fair value:
24 000 shares in S Ltd
16 000 shares in SS Ltd
Trade receivables
P Ltd
S Ltd
SS Ltd
400 400
337 000
674 000
229 600
–
85 000
–
190 000
51 000
–
–
40 000
Total assets
EQUITY AND LIABILITIES
Share capital (50 000/30 000/20 000 shares)
Mark-to-market reserve
Retained earnings
Trade and other payables
R715 000 R578 000 R714 000
Total equity and liabilities
R715 000 R578 000 R714 000
100 000
10 000
530 000
75 000
110 000
5 000
433 000
30 000
140 000
–
539 000
35 000
EXTRACT FROM THE STATEMENTS OF PROFIT OR LOSS
AND OTHER COMPREHENSIVE INCOME
FOR THE YEAR ENDED 31 DECEMBER 20.18
PROFIT FOR THE YEAR
Other comprehensive income for the year
Items that will not be reclassified to profit or loss
Mark-to-market reserve – Fair value adjustment
on equity investment
TOTAL COMPREHENSIVE INCOME FOR THE YEAR
P Ltd
S Ltd
SS Ltd
200 000
188 000
115 000
2 000
3 000
–
R202 000 R191 000 R115 000
475
Chapter 7
EXTRACT FROM THE STATEMENTS OF CHANGES IN EQUITY
FOR THE YEAR ENDED 31 DECEMBER 20.18
Mark-to-market
reserve
P Ltd
S Ltd
Balance at 1 January 20.18
Changes in equity for 20.18
Total comprehensive income
for the year:
Profit for the year
Other comprehensive income for
the year
Dividend paid
Balance at 31 December 20.18
Retained earnings
P Ltd
S Ltd
SS Ltd
8 000
2 000
380 000
270 000
440 000
–
–
200 000
188 000
115 000
2 000
–
R10 000
3 000
–
–
–
–
(50 000) (25 000) (16 000)
R5 000 R530 000 R433 000 R539 000
P Ltd paid R219 600 for an interest in S Ltd on 2 January 20.17, when the retained
earnings of S Ltd were R62 000 and those of SS Ltd were R210 000. S Ltd paid
R185 000 for an interest in SS Ltd on 2 January 20.15, when the retained earnings of
SS Ltd were R80 000. At the acquisition date, the assets and liabilities of both
subsidiaries were considered to be fairly valued and there were no unaccounted for
contingent liabilities.
The equity investments in S Ltd and SS Ltd are classified under IFRS 9 in the separate
financial statements and all fair value adjustments are recognised in a mark-to-market
reserve (other comprehensive income).
P Ltd elected to measure the non-controlling interests of the acquiree at their
proportionate share of the acquiree’s identifiable net assets at the acquisition date.
Goodwill was not considered to be impaired from the time that the investments were
acquired to the end of the current reporting period.
Ignore tax implications.
Solution 7.5
If only the consolidated financial statements of the S Ltd Group are to be prepared, the
owners’ equity of SS Ltd will be analysed with the acquisition date being
2 January 20.15. However, SS Ltd only became a subsidiary of P Ltd on 2 January
20.17, i.e. the date when P Ltd acquired the controlling interest in S Ltd. Hence, the
consolidated financial statements of the S Ltd Group cannot be used to prepare the
consolidated financial statements of the P Ltd Group. In the consolidated financial
statements of the S Ltd Group, the increase in the reserves of SS Ltd during the period
2 January 20.15 to 2 January 20.17, represent a since-acquisition increase. However,
from P Ltd’s viewpoint, these reserves form part of at-acquisition reserves. Since the
consolidated financial statements of the P Ltd Group are to be prepared, the owners’
equity of SS Ltd is analysed with 2 January 20.17 as the acquisition date.
476
Consolidation of complex groups
The consolidated financial statements of the P Ltd Group for the year ended
31 December 20.18 will be prepared as follows:
P LTD GROUP
CONSOLIDATED STATEMENT OF FINANCIAL POSITION
AS AT 31 DECEMBER 20.18
ASSETS
Non-current assets
Property, plant and equipment (400 400(P) + 337 000(S) + 674 000(SS))
Goodwill
1 411 400
6 000
1 417 400
Current assets
Trade receivables (85 000(P) + 51 000(S) + 40 000(SS))
Total assets
EQUITY AND LIABILITIES
Equity attributable to owners of the parent
Share capital
Retained earnings
Non-controlling interests (135 800c + 180 240d)
Total equity
Current liabilities
Trade and other payables (75 000(P) + 30 000(S) + 35 000(SS))
Total equity and liabilities
176 000
R1 593 400
100 000
1 037 360
1 137 360
316 040
1 453 400
140 000
R1 593 400
P LTD GROUP
EXTRACT FROM THE CONSOLIDATED STATEMENT OF PROFIT OR LOSS
AND OTHER COMPREHENSIVE INCOME
FOR THE YEAR ENDED 31 DECEMBER 20.18
PROFIT FOR THE YEAR (1)
Other comprehensive income for the year
TOTAL COMPREHENSIVE INCOME FOR THE YEAR
Total comprehensive income attributable to:
Owners of the parent (470 200 – 76 440)
Non-controlling interests (23 000a + 53 440b )
470 200
–
R470 200
393 760
76 440
R470 200
(1) (200 000(P) + 188 000(S) + 115 000(SS) – 20 000(dividend)(S) – 12 800(dividend)(SS)) = 470 200
477
Chapter 7
P LTD GROUP
CONSOLIDATED STATEMENT OF CHANGES IN EQUITY
FOR THE YEAR ENDED 31 DECEMBER 20.18
Balance at
1 January 20.18
Changes in equity
for 20.18
Total comprehensive
income for the year:
Profit for the year
Dividend paid
Balance at
31 December 20.18
Share
capital
Retained
earnings
Total
Noncontrolling
interests
Total
equity
100 000
˜ 693 600
793 600
# 247 800
1 041 400
–
393 760
(50 000)
393 760
(50 000)
& 76 440
@ (8 200)
470 200
(58 200)
R100 000 ȍ R1 037 360 R1 137 360 ɛ R316 040 R1 453 400
380 000(P) + 313 600e = 693 600
116 000(SS) + 131 800(S) = 247 800
23 000a + 53 440b = 76 440
135 800c + 180 240d = 316 040
530 000(P) + 507 360f = 1 037 360
@ 3 200(C1) + 5 000(C2) = 8 200
˜
#
&
ɛ
ȍ
Calculations
C1 Analysis of owners’ equity of SS Ltd
Total
i At acquisition (2/1/20.17)
Share capital
Retained earnings
S Ltd 80%
At
Since
NCI
140 000
210 000
112 000
168 000
28 000
42 000
Gain from a bargain purchase – Parent
350 000
(95 000)
280 000
(95 000)
70 000
–
Consideration (1) and NCI
255 000 R185 000
70 000
ii Since acquisition
• To beginning of current year:
Retained earnings (440 000 – 210 000)
• Current year:
Profit for the year
Dividend paid
230 000
46 000
116 000
115 000
(16 000)
92 000
(12 800)
23 000a
(3 200)
R584 000
R263 200
R135 800c
(1) 190 000 – 2 000(J1)* – 3 000(J2)* = 185 000; *(mark-to-market reserve)
478
184 000
Consolidation of complex groups
C2 Proof of calculation of gain on bargain purchase of SS 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)
185 000
70 000
255 000
Net of the identifiable assets acquired and liabilities assumed
at acquisition date: IFRS 3.32(b)
(350 000)
Gain from a bargain purchase
(R95 000)
C3 Analysis of consolidated owners’ equity of S Ltd
Total
i At acquisition (2/1/20.17)
Share capital
Retained earnings
Gain from a bargain purchase
– SS Ltd
P Ltd 80%
At
Since
NCI
110 000
62 000
88 000
49 600
22 000
12 400
95 000
76 000
19 000
267 000
213 600
53 400
6 000
6 000
–
Consideration (1) and NCI
273 000
R219 600
53 400
ii Since acquisition
• To beginning of current year:
Retained earnings
392 000
S Ltd (270 000 – 62 000)
SS Ltd
208 000
184 000
Equity represented by goodwill
– Parent
• Current year:
Profit for the year
313 600e
78 400
131 800
267 200
213 760
53 440b
S Ltd (188 000 – 12 800)
SS Ltd
175 200
92 000
Dividend paid
(25 000)
(20 000)
(5 000)
R907 200
R507 360
R180 240e
(1) 229 600 – 8 000(J1) – 2 000(J2) = 219 600
C4 Proof of calculation of goodwill of S 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)
219 600
53 400
273 000
Net of the identifiable assets acquired and liabilities assumed
at acquisition date: IFRS 3.32(b)
(267 000)
Goodwill
R6 000
479
Chapter 7
C5 Pro forma consolidation journal entries
Dr
R
J1
J2
J3
Mark-to-market reserve – Opening balance (P)(SCE)
Investment in S Ltd (P)(SFP)
Mark-to-market reserve – Opening balance (S)(SCE)
Investment in SS Ltd (S)(SFP)
Reversal of fair value adjustment on investment in
S Ltd and SS Ltd at beginning of year at group level
8 000
Mark-to-market reserve (P)(OCI)
Investment in S Ltd (P)(SFP)
Mark-to-market reserve (S)(OCI)
Investment in SS Ltd (S)(SFP)
Reversal of fair value adjustment on investment
in S Ltd and SS Ltd for current year at group level
2 000
2 000
3 000
Share capital (SS)(C)
Retained earnings (SS)(SCE)
Gain from bargain purchase (SFP)
Non-controlling interests (SFP)
Investment in SS Ltd (S)(SFP) (190 000 – 5 000)
Elimination of owners’ interest of SS Ltd
at acquisition date
140 000
210 000
95 000
Share capital (S)(SCE)
Retained earnings (S)(SCE)
Retained earnings – Beginning of year (SCI)
Non-controlling interests (SFP)
Goodwill (SFP)
Investment in S Ltd (P)(SFP) (229 600 – 10 000)
Elimination of owners’ interest of S Ltd at date
of acquisition
110 000
62 000
J5
Retained earnings (SS)(SCE)
Non-controlling interests (SFP)
Recognition of the non-controlling interests in the
since acquisition retained earnings of SS Ltd
until the beginning of the current year
46 000
J6
Retained earnings (SS)(SCE)
Non-controlling interests (SFP)
Recognition of the non-controlling interests in the
since acquisition retained earnings of S Ltd until
the beginning of the current year
78 400
J4
Cr
R
8 000
2 000
2 000
3 000
70 000
185 000
95 000
53 400
6 000
219 600
46 000
78 400
continued
480
Consolidation of complex groups
Dr
R
J7
Non-controlling interests (P/L)
Non-controlling interests (SFP)
Recognition of the non-controlling interests
in the profit for the year of SS Ltd
23 000
J8
Non-controlling interests (P/L)
Non-controlling interests (SFP)
Recognition of the non-controlling interests
in the profit for the year of S Ltd
53 440
Cr
R
23 000
53 440
The following analysis reflects, by implication, the adjustments that have to be made, if,
in the case under consideration, the consolidated statements of the S Ltd Group were
given instead of the individual financial statements of S Ltd and SS Ltd.
Calculations
C1 Analysis of owners’ equity of SS Ltd
Total
i At acquisition (2/1/20.15)
Share capital
Retained earnings
Equity represented by goodwill
– Parent
Consideration (1) and NCI
ii Since acquisition
• To beginning of current year:
Retained earnings
To 2/1/20.17 (210 000 – 80 000)
To 31/12/20.17 (440 000 – 210 000)
• Current year:
Profit for the year
Dividend paid
S Ltd 80%
At
Since
NCI
140 000
80 000
112 000
64 000
28 000
16 000
220 000
176 000
44 000
9 000
9 000
–
229 000 R185 000
44 000
130 000
230 000
104 000
184 000
26 000
46 000
116 000
115 000
(16 000)
R688 000
92 000
(12 800)
23 000a
(3 200)
R367 200 R135 800
(1) 190 000 – 2 000(J1)* – 3 000(J2)* = 185 000 *(mark-to-market reserve)
C2 Proof of calculation of goodwill of SS 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)
185 000
44 000
229 000
Net of the identifiable assets acquired and liabilities assumed
at acquisition date: IFRS 3.32(b)
(220 000)
Goodwill
R9 000
481
Chapter 7
C3 Analysis of consolidated owners’ equity of S Ltd
Total
i At acquisition (2/1/20.17)
Share capital
Retained earnings
S Ltd
SS Ltd
110 000
166 000
P Ltd 80%
At
Since
NCI
88 000
132 800
22 000
33 200
62 000
104 000
Goodwill in SS Ltd
(9 000)
(7 200)
(1 800)
Goodwill – Parent
267 000
6 000
213 600
6 000
53 400
–
273 000
R219 600
53 400
Consideration (1) and NCI
ii Since acquisition
• To beginning of current year:
Retained earnings
392 000
S Ltd (270 000 – 62 000)
SS Ltd
208 000
184 000
313 600
78 400
131 800
• Current year:
Profit for the year
S Ltd (188 000 – 12 800)
SS Ltd
Dividend paid
213 760
53 440b
(25 000)
(20 000)
(5 000)
R907 200
507 360
R180 240e
267 200
175 200
92 000
(1) 229 600 – 8 000(J1)* – 2 000(J2)* = 219 600 *(mark-to-market reserve)
C4 Proof of calculation of goodwill of S 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)
219 600
53 400
273 000
Net of the identifiable assets acquired and liabilities assumed
at acquisition date: IFRS 3.32(b)
(267 000)
Goodwill
R6 000
482
Consolidation of complex groups
Intragroup transactions in complex groups
7.8 Unrealised profit
If unrealised intragroup profit is included in an asset of any entity in the group, the basic
adjusting consolidation journal entry remains as follows:
l debit the total unrealised profit against the profit before tax of the selling entity
(revenue, cost of sales, other expenses, etc.); and
l credit the asset concerned.
This consolidation adjustment is made before the equity of S Ltd and SS Ltd are
analysed, because should either of the two have been the selling entity, it is
respectively the profit for the year of either S Ltd or SS Ltd which has to be debited.
That is, if S Ltd or SS Ltd is the selling entity, a portion of the unrealised intragroup
profit is allocated to the non-controlling interests via the analysis of the equity of the
subsidiaries.
Assume that the parent, P Ltd, owns 75% of the issued shares of its subsidiary S Ltd,
while S Ltd in turn owns 80% of the shares of the sub-subsidiary SS Ltd.
If one further assumes that the total unrealised profit on an intragroup inventory
transaction amounted to R6 000, the following three cases can be identified:
l P Ltd sold the inventory concerned to either S Ltd or SS Ltd. Because P Ltd is the
selling entity, the equity of neither of the other two companies is affected. As a
result, the total amount of the unrealised profit is eliminated against the
consolidated profit.
l S Ltd sold the inventory concerned to either P Ltd or SS Ltd. Because S Ltd is the
selling entity, the profit before tax of S Ltd is reduced by R6 000 and as a result,
part of the unrealised profit is allocated via the analysis of the equity of S Ltd to the
non-controlling interests in S Ltd.
l SS Ltd sold the inventory concerned to either P Ltd or S Ltd. Because SS Ltd is the
selling entity, the profit before tax of SS Ltd is reduced by R6 000 and as a result a
portion of the unrealised profit is allocated via the analysis of the equity of SS Ltd
to the non-controlling interests in SS Ltd, and a further portion is allocated to the
non-controlling interests of S Ltd via the analysis of the consolidated owners’ equity
of S Ltd.
7.9 Elimination of intragroup debts
Loan and current accounts between entities in the group are eliminated in the usual
way.
483
Chapter 7
Example 7.6
Complex groups – Intragroup transactions
STATEMENTS OF FINANCIAL POSITION AS AT 30 JUNE 20.18
ASSETS
Property, plant and equipment
Investment in S Ltd at fair value:
90 000 shares
Investment in SS Ltd at fair value:
72 000 shares
Current account:
SS Ltd
S Ltd
Inventory
Trade receivables
T Bank
Total assets
EQUITY AND LIABILITIES
Share capital (250 000/120 000/80 000 shares)
Mark-to-market reserve
Retained earnings
Deferred tax on mark-to-market reserve
Bank overdraft (T Bank guaranteed by P Ltd)
Current account:
P Ltd
S Ltd
Trade and other payables
Total equity and liabilities
484
P Ltd
S Ltd
SS Ltd
324 010
183 000
333 608
248 000
–
–
–
132 000
–
–
10 300
24 000
42 900
16 900
10 380
–
14 580
39 400
5 100
–
–
11 550
53 200
–
R666 110 R384 460 R398 358
250 000
17 003
321 810
3 897
–
120 000
10 576
218 360
2 424
–
180 000
–
171 808
–
10 000
–
–
73 400
10 300
–
22 800
–
7 960
28 590
R666 110 R384 460 R398 358
Consolidation of complex groups
STATEMENTS OF PROFIT OR LOSS AND OTHER COMPREHENSIVE INCOME
FOR THE YEAR ENDED 30 JUNE 20.18
P Ltd
S Ltd
SS Ltd
Revenue
Cost of sales
300 000 250 000 202 400
(197 000) (166 000) (112 000)
Gross profit
Other expenses
Dividend received
103 000
(55 000)
14 250
84 000
(51 000)
12 600
90 400
(49 000)
–
Profit before tax
Income tax expense
62 250
(13 440)
45 600
(9 240)
41 400
(11 592)
PROFIT FOR THE YEAR
48 810
36 360
29 808
Other comprehensive income for the year
Items that will not be reclassified to profit or loss
Mark-to-market reserve – Fair value adjustment
on equity investment
Income tax relating to mark-to-market reserve
7 000
(1 305)
5 000
(932)
–
–
Other comprehensive income for the year, net of tax
5 695
4 068
TOTAL COMPREHENSIVE INCOME FOR THE YEAR
R54 505
R40 428
R29 808
EXTRACT FROM THE STATEMENTS OF CHANGES IN EQUITY
FOR THE YEAR ENDED 30 JUNE 20.18
Mark-to-market
reserve
P Ltd
Balance at 1 July 20.17
Changes in equity for 20.18
Total comprehensive income
for the year:
Profit for the year
Other comprehensive income
for the year
Dividend paid
Balance at 30 June 20.18
Retained earnings
S Ltd
P Ltd
S Ltd
SS Ltd
11 308
6 508
305 000
201 000
156 000
–
–
48 810
36 360
29 808
5 695
–
4 068
–
–
(32 000)
–
(19 000)
–
(14 000)
R17 003 R10 576 R321 810 R218 360
R171 808
P Ltd paid R227 100 for an interest in S Ltd on 1 July 20.15, when the equity of the
latter was as follows:
Share capital
R120 000
Retained earnings
R160 000
On 1 July 20.16, when S Ltd paid R119 000 for an interest in SS Ltd, the latter had an
accumulated loss of R52 000.
485
Chapter 7
As from 1 July 20.17, SS Ltd acquired its entire inventory from S Ltd. The latter makes
a profit of 10% on the cost price of such inventory. On 30 June 20.18, goods invoiced at
R2 420 were in transit between S Ltd and SS Ltd. Total sales from S Ltd to SS Ltd
amounted to R30 000 for the current year.
The equity investments in S Ltd and SS Ltd are classified under IFRS 9 in the separate
financial statements and fair value adjustments are recognised in a mark-to-market
reserve (other comprehensive income).
At the acquisition date, the assets and liabilities of both subsidiaries were considered to
be fairly valued and there were no unaccounted for contingent liabilities.
P Ltd elected to measure the non-controlling interests of the acquiree at their
proportionate share of the acquiree’s identifiable net assets at the acquisition date.
Goodwill was not considered to be impaired from the time that the investments were
acquired to the end of the current reporting period.
The company tax rate is 28% and CGT is calculated at 66,6% thereof.
Solution 7.6
The consolidated financial statements of the P Ltd Group for the year ended 30 June
20.18 will be drawn up as follows:
P LTD GROUP
CONSOLIDATED STATEMENT OF FINANCIAL POSITION AS AT 30 JUNE 20.18
ASSETS
Non-current assets
Property, plant and equipment (324 010(P) + 183 000(S) + 333 608(SS))
Goodwill (17 100(J4) + 3 800(J5) – 950(J15))
Deferred tax
840 618
19 950
356
860 924
Current assets
Inventory (24 000(P) + 14 580(S) + 11 550(SS) + 2 420 – 1 270)
Trade receivables (42 900(P) + 39 400(S) + 53 200(SS))
Bank (16 900(P) + 5 100(S) – 10 000(SS))
51 280
135 500
12 000
198 780
Total assets
R1 059 704
EQUITY AND LIABILITIES
Equity attributable to owners of the parent
Share capital (P)
Retained earnings
250 000
515 965
Non-controlling interests (35 181b + 133 768d)
765 965
168 949
Total equity
Current liabilities
Trade and other payables (73 400(P) + 22 800(S) + 28 590(SS))
Total equity and liabilities
486
934 914
124 790
R1 059 704
Consolidation of complex groups
P LTD GROUP
CONSOLIDATED STATEMENT OF PROFIT OR LOSS
AND OTHER COMPREHENSIVE INCOME
FOR THE YEAR ENDED 30 JUNE 20.18
Revenue (300 000(P) + 250 000(S) + 202 400(SS) – 30 000)
Cost of sales
722 400
(197 000(P) + 166 000(S) + 112 000(SS) – 30 000 + 1 270(13 970 × 10/110))
(446 270)
Gross profit
Other expenses (55 000(P) + 51 000(S) + 49 000(SS))
276 130
(155 000)
Profit before tax
Income tax expense (13 440(P) + 9 240(S) + 11 592(SS) – 356(1 270 × 28%))
121 130
(33 916)
PROFIT FOR THE YEAR
87 214
Other comprehensive income for the year
–
TOTAL COMPREHENSIVE INCOME FOR THE YEAR
R87 214
Total comprehensive income attributable to:
Owners of the parent
Non-controlling interests (2 981a + 12 418c)
71 815
15 399
R87 214
P LTD GROUP
CONSOLIDATED STATEMENT OF CHANGES IN EQUITY
FOR THE YEAR ENDED 30 JUNE 20.18
Share
capital
Retained
earnings
Total
Noncontrolling
interests
Total
equity
250 000
˜ 476 150
726 150
& 159 700
885 850
–
–
71 815
(32 000)
71 815
(32 000)
15 399
ȍ (6 150)
87 214
(38 150)
Balance at 30 June 20.18 R250 000 # R515 965 R765 965 $ R168 949
R934 914
Balance at 1 July 20.17
Changes in equity
for 20.18
Total comprehensive
income for the year:
Profit for the year
Dividend paid
˜
#
&
ȍ
$
305 000(P) + 171 150 (S) = 476 150
321 810(P) + 194 155(S) = 515 965
126 100(S) + 33 600(SS) = 159 700
4 750(S) + 1 400(SS) = 6 150
133 769(S) + 35 181(SS) = 168 949
487
Chapter 7
Calculations
C1 Analysis of owners’ equity of SS Ltd
Total
i At acquisition (1/7/20.16)
Share capital
Accumulated loss
S Ltd 90%
At
Since
NCI
180 000
(52 000)
162 000
(46 800)
18 000
(5 200)
Equity represented by goodwill – Parent
128 000
3 800
115 200
3 800
12 800
–
Consideration (1) and NCI
131 800
119 000
12 800
ii Since acquisition
• To beginning of current year:
Retained earnings (2)
208 000
• Current year:
Profit for the year
Dividend paid
187 200
339 800
20 800
33 600
29 808
(14 000)
26 827
(12 600)
2 981a
(1 400)
R355 608
R201 427
R35 181b
(1) 132 000 – 8 000(J1) – 5 000(J2) = 119 000
(2) 156 000 + 52 000 = 208 000
C2 Proof of calculation of goodwill of SS 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)
119 000
12 800
131 800
Net of the identifiable assets acquired and liabilities assumed
at acquisition date: IFRS 3.32(b)
(128 000)
Goodwill
R3 800
488
Consolidation of complex groups
C3 Analysis of consolidated owners’ equity of S Ltd
Total
i At acquisition (1/7/20.15)
Share capital
Retained earnings
P Ltd 75%
At
Since
NCI
120 000
160 000
90 000
120 000
30 000
40 000
280 000
210 000
70 000
17 100
17 100
–
Consideration (1) and NCI
297 100
R227 100
70 000
ii Since acquisition
• To beginning of current year:
Retained earnings
228 200
S Ltd (201 000 – 160 000)
SS Ltd
41 000
187 200
Equity represented by goodwill
– Parent
Goodwill – SS Ltd
(3 800)
171 150
(2 850)
57 050
(950)
126 100
• Current year:
Profit for the year
49 673
S Ltd (2)
SS Ltd
22 846
26 827
Dividend
(19 000)
R552 173
(R2 850)
37 255
12 418c
(14 250)
(4 750)
R194 155
R133 768d
(1) 248 000 – 13 900(J1) – 7 000(J2) = 227 100
(2) 36 360 – 12 600(dividend income from SS Ltd) – 1 270(J7) + 356(J8) = 22 846
C4 Proof of calculation of goodwill of S 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)
227 100
70 000
297 100
Net of the identifiable assets acquired and liabilities assumed
at acquisition date: IFRS 3.32(b)
(280 000)
Goodwill
R17 100
C5 Journal entries
(a) In the records of SS Ltd (entry to balance current accounts)
Dr
R
J1
Inventory
Current account: S Ltd
Recognition of inventory in transit
Cr
R
2 420
2 420
The current accounts between S Ltd and SS Ltd will now contra at R10 380.
489
Chapter 7
(b) Pro forma consolidation journal entries
Dr
R
J1
J2
J3
J4
J5
Mark-to-market reserve – Opening balance (P)(SCE)
Mark-to-market reserve – Opening balance (S)(SCE)
Deferred tax (P)(SFP) (13 900 – 11 308)
Deferred tax (S)(SFP) (8 000 – 6 508)
Investment in S Ltd (P)(SFP) (11 308/81,352%)
Investment in SS Ltd (S)(SFP) (6 508/81,352%)
Reversal of fair value adjustment on investments in
S Ltd and SS Ltd at beginning of year at group level
11 308
6 508
2 592
1 492
Mark-to-market reserve (P)(OCI)
Mark-to-market reserve (S)(OCI)
Investment in S Ltd (P)(SFP)
Investment in SS Ltd (S)(SFP)
Reversal of fair value adjustment on investments
in S Ltd and SS Ltd for current year at group level
7 000
5 000
Deferred tax (P)(SFP)
Deferred tax (S)(SFP)
Income tax relating to mark-to-market reserve (P)(OCI)
Income tax relating to mark-to-market reserve (S)(OCI)
Tax effect on reversal of fair value adjustment
on investment in S Ltd and SS Ltd for current year
at group level
1 305
932
Share capital (S)(SCE)
Retained earnings (S)(SCE)
Goodwill (SFP)
Investment in S Ltd (P)(SFP)
Non-controlling interests (SFP)
Elimination of equity of S Ltd at acquisition
120 000
160 000
17 100
Share capital (SS)(SCE)
Retained earnings (SS)(SCE)
Goodwill (SFP)
Investment in SS Ltd (S)(SFP)
Non-controlling interests (SFP)
Elimination of equity of SS Ltd at acquisition
180 000
3 800
Cr
R
13 900
8 000
7 000
5 000
1 305
932
227 100
70 000
52 000
119 000
12 800
continued
490
Consolidation of complex groups
Dr
R
Cr
R
J6
Revenue (S)(P/L)
Cost of sales (SS)(P/L)
Elimination of total intragroup sales
30 000
J7
Cost of sales (S)(P/L)
Inventory (SS)(SFP)
Elimination of unrealised profit included in the
closing inventory of SS Ltd ((11 550 + 2 420) × 10/110)
1 270
J8
Income tax expense (S)(P/L)
Deferred tax (SFP)
Tax on unrealised profit included in inventory
of SS Ltd (1 270 × 28%)
356
J9
Dividend received (P)(P/L)
Non-controlling interests (SFP)
Dividend paid (S)(SCE)
Elimination of intragroup dividend of S Ltd
14 250
4 750
Dividend received (S)(P/L)
Non-controlling interests (SFP)
Dividend paid (SS)(SCE)
Elimination of intragroup dividend of SS Ltd
12 600
1 400
J10
J11
Retained earnings – Beginning of year (S)(SCE)
(41 000 × 25%)
10 250
(187 200 × 25%)
46 800
Retained earnings – Beginning of year (SS)(SCE)
Non-controlling interests (SFP)
Recognition of non-controlling interests in retained
earnings beginning of the year of S Ltd
J12
Retained earnings – Beginning of year (SS)(SCE)
Non-controlling interests (SFP)
Recognition of non-controlling interests in retained
earnings beginning of the year of SS Ltd
20 800
J13
Non-controlling interests (P/L) (22 846 × 25%)
Non-controlling interests (P/L) (26 827 × 25%)
Non-controlling interests (SFP)
Recognition of non-controlling interests in profit
for the year of S Ltd
5 712
6 707
J14
Non-controlling interests (P/L)
Non-controlling interests (SFP)
Recognition of non-controlling interests in profit
for the year of SS Ltd
2 981
J15
Non-controlling interests (P/L)
Goodwill (SFP)
Recognition of downward valuation of S Ltd’s net
asset value arising from goodwill in investment of
S Ltd in SS Ltd
950
30 000
1 270
356
19 000
14 000
57 050
20 800
12 419
2 981
950
491
Chapter 7
Consolidation of a mixed group
7.10 Basic consolidation procedures
In its simplest form, a mixed group consists of a parent (P Ltd) that owns the controlling
interest in a subsidiary (S Ltd), whilst both P Ltd and S Ltd together own sufficient
shares in another company (SS Ltd) in order to give P Ltd the controlling interest in
SS Ltd as well.
The following example explains the basic consolidation procedures when dealing with a
simple mixed group:
Example 7.7
Consolidation of the financial statements of a mixed group
The statements of financial position of P Ltd, S Ltd and SS Ltd were as follows at
31 December 20.18:
STATEMENTS OF FINANCIAL POSITION AS AT 31 DECEMBER 20.18
ASSETS
Property, plant and equipment
Investments in subsidiaries at fair value:
120 000 shares in SS Ltd
60 000 shares in SS Ltd
60 000 shares in S Ltd
Trade receivables
Dividend paid
Total assets
EQUITY AND LIABILITIES
Share capital
(300 000/100 000/200 000 shares)
Retained earnings: 31 December 20.17
Total comprehensive income for the year
Total equity and liabilities
P Ltd
S Ltd
SS Ltd
324 000
195 000
305 000
–
85 500
135 000
160 500
20 000
180 000
–
–
35 000
15 000
–
–
–
145 000
10 000
R725 000 R425 000 R460 000
300 000
225 000
200 000
100 000
135 000
190 000
200 000
150 000
110 000
R725 000 R425 000 R460 000
P Ltd acquired an interest in SS Ltd on 1 January 20.17, when the retained earnings of
SS Ltd were R55 000. The fair value of the non-controlling interests of the acquiree on
this date was R35 000. S Ltd acquired 120 000 shares in SS Ltd on the same date.
P Ltd acquired a 60% interest in S Ltd on 1 January 20.16 when the retained earnings
of S Ltd were R65 000. The fair value of the non-controlling interests of the acquiree on
this date was R70 000.
The equity investments in subsidiaries are classified under IFRS 9 in the separate
financial statements and fair value adjustments are recognised in a mark-to-market
reserve (other comprehensive income).
P Ltd elected to measure the non-controlling interests of the acquiree at their fair value
at the acquisition date.
Goodwill was not considered to be impaired from the time that the investments were
acquired to the end of the current reporting period.
492
Consolidation of complex groups
Solution 7.7
The consolidated financial statements of the P Ltd Group will be drawn up as follows as
at 31 December 20.18:
P LTD GROUP
CONSOLIDATED STATEMENT OF FINANCIAL POSITION
AS AT 31 DECEMBER 20.18
ASSETS
Non-current assets
Property, plant and equipment (324 000(P) + 195 000(S) + 305 000(SS))
Goodwill (40 000 + 16 200 + 9 000 + 9 500) OR
824 000
74 700
(45 500(J1) + 40 000(J2) – 10 800(J3))
898 700
Current assets
Trade receivables (160 500(P) + 35 000(S) + 145 000(SS))
Total assets
EQUITY AND LIABILITIES
Equity attributable to owners of the parent
Share capital
Retained earnings
340 500
R1 239 200
300 000
680 700
980 700
258 500
Non-controlling interests (204 000d + 54 500c)
Total equity
Total equity and liabilities
1 239 200
R1 239 200
P LTD GROUP
EXTRACT FROM THE CONSOLIDATED STATEMENT OF PROFIT OR LOSS
AND OTHER COMPREHENSIVE INCOME
FOR THE YEAR ENDED 31 DECEMBER 20.18
PROFIT FOR THE YEAR (1)
482 000
Other comprehensive income for the year
TOTAL COMPREHENSIVE INCOME FOR THE YEAR
–
R482 000
Total comprehensive income attributable to:
Owners of the parent
Non-controlling interests (11 000a + 100 000b)
371 000
111 000
R482 000
(1) 200 000(P) + 190 000(S) + 110 000(SS) – 9 000(J9) – 6 000(J8) – 3 000(J8) = 482 000
493
Chapter 7
P LTD GROUP
CONSOLIDATED STATEMENT OF CHANGES IN EQUITY
FOR THE YEAR ENDED 31 DECEMBER 20.18
Share
capital
Retained
earnings
Total
Noncontrolling
interests
Total
equity
Balance at 1 January 20.18 300 000 ’ 329 700
629 700 # 154 500
784 200
Changes in equity for
20.18
Total comprehensive
income for the year:
Profit for the year
–
371 000
371 000
111 000
482 000
Dividend paid
–
(20 000)
(20 000)
ũ(7 000)
(27 000)
Balance at
31 December 20.18
R300 000 ˜ R680 700 R980 700 ȍ R258 500 R1 239 200
’
#
ȍ
˜
ũ
225 000(P) + 76 200e + 28 500m = 329 700
110 000g + 44 500h = 154 500
54 500c + 204 000d = 258 500
225 000(P) + 200 000(P) + 217 200(Sf) + 58 500(SSn) – 20 000(dividend)(P) = 680 700
1 000o + 6 000p = 7 000
Calculations
Comment
Take note of the group’s policy in terms of the measurement of non-controlling interests
(NCI). In this case, it is mentioned in the information that the NCI is measured at fair
value and it is given that the fair value of the NCI of SS Ltd was R35 000 when P Ltd
acquired its investment in SS Ltd and the fair value of the NCI of S Ltd was R70 000
when P Ltd acquired this investment. This information affects the preparation of the
analysis of owners’ equity.
494
Consolidation of complex groups
C1 Analysis of owners’ equity of SS Ltd
Total
P Ltd 30%
S Ltd 60%
At
At
Since
Since
10%
NCI
i At acquisition
(1/1/20.17)
Share capital
Retained earnings
Equity represented
by goodwill – Parent
and NCI
Consideration and NCI
ii Since acquisition
• To beginning of
current year:
Retained earnings (1)
• Current year:
Profit for the year
Dividend paid
200 000
55 000
60 000
16 500
120 000
33 000
20 000
5 500
255 000
76 500
153 000
25 500
45 500
9 000
27 000
9 500
300 500 R85 500
R180 000
35 000
95 000
28 500m
57 000k
9 500
44 500h
110 000
(10 000)
33 000
(3 000)
R495 500
R58 500n
66 000i
(6 000)j
11 000a
(1 000)o
R117 000 R54 500c
(1) 150 000 – 55 000 = 95 000
C2 Proof of calculation of goodwill of SS Ltd in terms of IFRS 3.32
Consideration transferred at acquisition date: IFRS 3.32(a)(i)
265 500
(85 500 + 180 000)
Amount of non-controlling interests: IFRS 3.32(a)(ii)
35 000
300 500
Net of the identifiable assets acquired and liabilities assumed
at acquisition date: IFRS 3.32(b)
(255 000)
Goodwill
R45 500
495
Chapter 7
C3 Analysis of consolidated owners’ equity of S Ltd
Total
i At acquisition (1/1/20.16)
Share capital
Retained earnings
P Ltd 60%
At
Since
NCI
100 000
65 000
60 000
39 000
40 000
26 000
165 000
99 000
66 000
40 000
36 000
4 000
205 000
R135 000
70 000
ii Since acquisition
• To beginning of current year:
Goodwill of S Ltd in SS Ltd
Retained earnings
(27 000)
127 000
(16 200)
S Ltd (135 000 – 65 000)
SS Ltdk
70 000
57 000
Equity represented by goodwill
– Parent and NCI
Consideration and NCI
• Current year:
Profit for the year
S Ltd (190 000 – 6 000j(J8))
SS Ltdi
Dividends paid
76 200e
(10 800)
50 800
110 000g
250 000
150 000
100 000b
(9 000)
(6 000)p
R217 200f
R204 000d
184 000
66 000
(15 000)
R540 000
GW(R16 200)
C4 Proof of calculation of goodwill of S 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)
135 000
70 000
205 000
Net of the identifiable assets acquired and liabilities assumed
at acquisition date: IFRS 3.32(b)
(165 000)
Goodwill
R40 000
496
Consolidation of complex groups
C5 Pro forma consolidation journal entries
Dr
R
J1
Share capital (SS)(SCE)
Retained earnings (SS)(SCE)
Goodwill (SFP)
Non-controlling interests (SFP)
Investment in SS Ltd (P and S)(SFP)
200 000
55 000
45 500
Cr
R
35 000
265 500
(85 500 + 180 000)
Elimination of owners’ interest of SS Ltd
at acquisition date
J2
Share capital (S)(SCE)
Retained earnings (S)(SCE)
Goodwill (SFP)
Non-controlling interests (SFP)
Investment in S Ltd (P)(SFP)
Elimination of owners’ interest of S Ltd
at acquisition date
100 000
65 000
40 000
J3
Non-controlling interests – Opening balance
Goodwill (SFP)
Recognition of non-controlling interests
in goodwill of SS Ltd
10 800
J4
Retained earnings (S)(SCE)
Non-controlling interests (SFP)
Recognition of the non-controlling interests in the
since acquisition retained earnings of S Ltd until
the beginning of the current year
50 800
J5
Retained earnings (SS)(SCE)
Non-controlling interests (SFP)
Recognition of the non-controlling interests in the
since acquisition retained earnings of SS Ltd until
the beginning of the current year
9 500
J6
Non-controlling interests (P/L)
Non-controlling interests (SFP)
Recognition of the non-controlling interests
in the profit for the year of S Ltd
100 000
J7
Non-controlling interests (P/L)
Non-controlling interests (SFP)
Recognition of the non-controlling interests
in the profit for the year of SS Ltd
11 000
J8
Dividend received (P)(P/L)
Dividend received (S)(P/L)
Non-controlling interests (SFP)
Dividend paid (SS)(SCE)
Elimination of intragroup dividend and recording
of dividend paid to non-controlling interests
3 000
6 000
1 000
70 000
135 000
10 800
50 800
9 500
100 000
11 000
10 000
continued
497
Chapter 7
Dr
R
J9
Dividend received (P)(P/L)
Non-controlling interests (SFP)
Dividend paid (S)(SCE)
Elimination of intragroup dividend and recording
of dividend paid to non-controlling
Cr
R
9 000
6 000
15 000
Self-assessment questions
Question 7.1
The following are the trial balances of the companies within the P Ltd Group for the
year ended 31 December 20.18:
Property, plant and equipment
Investment in S1 Ltd at fair value
Investment in S2 Ltd at fair value
Investment in S2 Ltd at fair value
Investment in S3 Ltd at fair value
Loan to P Ltd
Trade receivables
Inventories
Cash and cash equivalents
Share capital – Shares
– 200 000 and 100 000 shares
– 90 000 and 150 000 shares
Retained earnings – 1 January 20.18
Mark-to-market reserve
(Only investment in S1 Ltd)
Fair value gain on equity investment
Tax on fair value gain (OCI)
Gross profit
Other income
Other expenses
Income tax expense
Finance costs
Dividend paid
Deferred tax (on mark-to-market reserve:
5 594 + 932)
Long-term borrowings
Trade and other payables
498
P Ltd
Dr/(Cr)
R
S1 Ltd
Dr/(Cr)
R
S2 Ltd
Dr/(Cr)
R
S3 Ltd
Dr/(Cr)
R
534 200
190 000
–
–
212 000
–
165 000
142 500
102 500
390 900
–
60 000
–
–
–
24 000
40 000
(33 000)
253 100
–
–
–
–
–
9 000
15 000
13 000
268 400
–
–
100 000
–
200 000
85 500
65 300
52 800
(200 000)
–
(474 000)
(100 000)
–
(116 000)
–
(90 000)
(94 000)
–
(150 000)
(369 400)
(24 406)
(5 000)
932
(352 400)
(70 000)
44 500
98 000
15 300
25 000
–
–
–
–
–
–
(410 000) (148 000)
(7 500) (40 000)
148 000
24 000
73 000
45 900
–
–
15 000
30 000
–
–
–
(108 300)
(22 000)
15 500
26 000
8 700
–
(6 526)
(365 000)
(32 600)
–
–
(84 400)
–
–
(18 000)
–
(122 000)
(50 500)
R–
R–
R–
R–
Consolidation of complex groups
Additional information
1 P Ltd acquired 80 000 shares in S1 Ltd on 1 October 20.17 when the retained
earnings amounted to R68 000. Land that was reflected in the accounting records of
S1 Ltd at R120 000 was valued at R165 000 for purposes of the acquisition. The
remaining assets and liabilities were considered to be fairly valued and there were
no unaccounted for contingent liabilities.
2 P Ltd acquired a 55% interest in S3 Ltd on 1 March 20.15 when the retained
earnings of S3 Ltd amounted to R225 000.
3 S1 Ltd acquired 22 500 shares in S2 Ltd on 1 January 20.18.
4 S3 Ltd acquired 36 000 shares in S2 Ltd on 1 January 20.18.
5 For the acquisitions of both the interest in S2 Ltd and the interest in S3 Ltd there
were no unidentified assets, liabilities or contingent liabilities, and the assets and
liabilities were considered to be fairly valued.
6 P Ltd, S1 Ltd, and S3 Ltd classified their equity investments under IFRS 9 in the
separate financial statements and recognised any fair value adjustments in a markto-market reserve (other comprehensive income).
7 P Ltd elected to measure the non-controlling interests of the acquiree at their
proportionate share of the acquiree’s identifiable net assets at the acquisition date.
8 Goodwill was not considered to be impaired from the time that the investments were
acquired to the end of the current reporting period.
9 The following intragroup transactions took place within the group during the year
ended 31 December 20.18:
9.1 From 1 July 20.16 P Ltd purchased inventories from S3 Ltd at cost plus 25%.
Included in the closing inventories of P Ltd on 31 December 20.18 were
inventories of R40 000 (31 December 20.17: R70 000) that were purchased
from S3 Ltd.
9.2 S3 Ltd made a loan of R200 000 to P Ltd on 1 July 20.18. The loan is
repayable in five equal instalments from 1 July 20.19. S3 Ltd charges 10%
interest on the loan per annum. Included in finance costs of P Ltd is interest
paid of R10 000 to S3 Ltd for the period 1 July 20.18 to 31 December 20.18.
9.3 P Ltd charges its subsidiary, S1 Ltd, a management fee of R4 000 per month.
9.4 S2 Ltd sold machinery with a carrying amount of R150 000 to S1 Ltd on
1 April 20.18. The selling price was R190 000. The useful life of the machinery
of five years has remained unchanged. The companies within the group
depreciate machinery on the straight-line method over the useful life of the
asset. The machinery was originally purchased on 1 April 20.15.
9.5 P Ltd has guaranteed the bank overdraft of S1 Ltd.
10 The company tax rate is 28% and CGT is calculated at 66,6% thereof.
Required
Prepare the consolidated financial statements of the P Ltd Group for the year ended
31 December 20.18.
499
Chapter 7
Suggested solution 7.1
The consolidated financial statements of the P Ltd Group will be drawn up as follows as
at 31 December 20.18:
P LTD GROUP
CONSOLIDATED STATEMENT OF FINANCIAL POSITION
AS AT 31 DECEMBER 20.18
ASSETS
Non-current assets
Property, plant and equipment (1)
Goodwill (11 200(S1 analysis) + 14 520(S3 analysis) + 5 750(S1))
Deferred tax (2)
1 466 600
31 470
848
1 498 918
Current assets
Trade receivables (165 000(P) + 24 000(S1) + 9 000(S2) + 85 500(S3))
Inventories (3)
Cash and cash equivalents (102 500(P) – 33 000(S1) + 13 000(S2) + 52 800(S3))
283 500
254 800
135 300
673 600
Total assets
R2 172 518
EQUITY AND LIABILITIES
Equity attributable to owners of the parent
Share capital
Retained earnings
200 000
1 051 099
Non-controlling interests (87 527(S1) + 88 935(S2) + 267 921(S3))
1 251 099
444 383
Total equity
Long-term liabilities
Long-term borrowings (365 000(P) + 122 000(S3) – 200 000(J14))
Current liabilities
Trade and other payables (32 600(P) + 84 400(S1) + 18 000(S2) + 50 500(S3))
Total liabilities
Total equity and liabilities
1 695 482
287 000
185 500
472 500
R2 172 518
(1) 534 200(P) + 390 900(S1) + 253 100(S2) + 268 400(S3) + 45 000(J3) – 40 000(J7) + 15 000(J8) =
1 466 600
(2) –6 526(P) + 5 594(J1) + 932(J2) + 2 240(J11) + 11 200(J7) – 4 200(J8) – 8 392(J3) = 848
(3) 142 500(P) + 40 000(S1) + 15 000(S2) + 65 300(S3) – 8 000(J10) = 254 800
500
Consolidation of complex groups
P LTD GROUP
CONSOLIDATED STATEMENT OF PROFIT OR LOSS AND OTHER
COMPREHENSIVE INCOME FOR THE YEAR ENDED 31 DECEMBER 20.18
Gross profit (1)
Other income (2)
Other expenses (3)
Finance charges (15 300(P) + 8 700(S3) – 10 000(J15))
1 024 700
10 000
(169 000)
(14 000)
Profit before tax
Income tax expense (4)
851 700
(237 580)
PROFIT FOR THE YEAR
614 120
Other comprehensive income for the year
–
TOTAL COMPREHENSIVE INCOME FOR THE YEAR
R614 120
Total comprehensive income attributable to:
Owners of the parent
Non-controlling interests (5)
485 673
128 447
R614 120
(1) 352 400(P) + 148 000(S2) + 410 000(S1) + 108 300(S3) + 14 000(J9) – 8 000(J10) = 1 024 700
(2) 70 000(P) – 12 000(J13) – 48 000(J16) + 7 500(S2) – 7 500(J12) + 22 000(S3) – 10 000(J15) –
12 000(J12) + 40 000(S2) – 40 000(J7) = 10 000
(3) 44 500(P) + 148 000(S1) – 48 000(J16) – 15 000(J8) + 24 000(S2) + 15 500(S3) = 169 000
(4) 98 000(P) + 73 000(S1) + 45 900(S2) + 26 000(S3) – 11 200(J7) + 4 200(J8) + 3 920(J9) –
2 240(J11) = 237 580
(5) 42 805(J21) + 35 035(J23) + 50 607(J22) = 128 447
P LTD GROUP
CONSOLIDATED STATEMENT OF CHANGES IN EQUITY FOR THE YEAR ENDED
31 DECEMBER 20.18
Balance at
1 January 20.18
Changes in equity for
20.18
Total comprehensive
income for the year:
Profit for the year
Non-controlling interests
share of goodwill of S2 Ltd
Dividend paid
Balance at
31 December 20.18
Noncontrolling
interests
Total
equity
Share
capital
Retained
earnings
Total
200 000
’594 962
794 962 # 344 116
–
485 673
485 673
128 447
614 120
–
–
–
(25 000)
– ˜ (14 680)
(25 000) @(13 500)
(14 680)
(38 500)
1 139 078
R200 000 R1 055 635 R1 255 635 ũR444 383 R1 700 018
’ 474 000(P) + 38 400(S1) + 73 876(S3) + 8 686(gain from a bargain purchase) = 594 962
# 50 522(S1) + 64 400(S2) + 229 194(S3) = 344 116
ũ 87 527(S1) + 88 935(S2) + 267 921(S3) = 444 383
˜ 11 880(J21) + 2 800(J20) = 14 680
@ 10 500(S2) + 3 000(S1) = 13 500
501
Chapter 7
Calculations
C1 Schematic diagram of group structure
P Ltd
80%
55%
1 Oct 20.17
1 Mar 20.15
S1 Ltd
S3 Ltd
1 Jan 20.18
25%
1 Jan 20.18
40%
S2 Ltd
C2 Analysis of owners’ equity of S2 Ltd
Total
S1 Ltd 25%
S3 Ltd 40%
At
At
Since
Since
35%
NCI
i At acquisition
(1/1/20.18)
Share capital
Retained earnings
Equity represented
by goodwill – Parent
Consideration and NCI
ii Since acquisition
• Current year:
Profit for the year (1)
Dividend paid
90 000
94 000
22 500
23 500
36 000
37 600
31 500
32 900
184 000
46 000
73 600
64 400
40 400
14 000
26 400
–
224 400
R60 000
R100 000
64 400
100 100
(30 000)
25 025
(7 500)
40 040 35 035
(12 000) (10 500)
R294 500
R17 525
R28 040 R88 935
(1) 148 000 + 40 000 – 24 000 – 45 900 – 28 800(J7) + 10 800(J8) = 100 100
C3 Proof of calculation of goodwill of S2 Ltd in terms of IFRS 3.32
Consideration transferred at acquisition date: IFRS 3.32(a)(i)
(60 000(S1) + 100 000(S3))
Amount of non-controlling interests: IFRS 3.32(a)(ii)
160 000
64 400
224 400
Net of the identifiable assets acquired and liabilities assumed
at acquisition date: IFRS 3.32(b)
(184 000)
Goodwill
R40 400
502
Consolidation of complex groups
C4 Analysis of owners’ equity of S3 Ltd
i At acquisition (1/3/20.15)
Share capital
Retained earnings
Equity represented by goodwill
– Parent
Consideration and NCI
ii Since acquisition
• To beginning of current year:
Retained earnings (1)
• Current year
Goodwill – S2 Ltd
Profit for the year
Profit for the year – S3 Ltd (2)
Profit for the year – S2 Ltd
55%
100%
Total
At
150 000
225 000
82 500
123 750
67 500
101 250
375 000
206 250
168 750
Since
45%
NCI
5 750
5 750
–
380 750
R212 000
168 750
134 320
73 876
60 444
229 194
(26 400)
112 460
(14 520)
–
61 853
(11 880)
50 607
72 420
40 040
39 831
22 022
32 589
18 018
R601 130
(R14 520) R135 729 R267 921
(1) 369 400 – 225 000 – 10 080(J9)) = 134 320
(2) 108 300 – 15 500 – 8 700 – 26 000 + 22 000(other income) + 14 000(J9) – 3 920(J9) – 8 000(J10)
+ 2 240(J11) – 12 000(J12) = 72 420
C5 Proof of calculation of goodwill of S3 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)
212 000
168 750
380 750
Net of the identifiable assets acquired and liabilities assumed
at acquisition date: IFRS 3.32(b)
(375 000)
Goodwill
R5 750
503
Chapter 7
C6 Analysis of owners’ equity of S1 Ltd
i At acquisition (1/10/20.17)
Share capital
Revaluation surplus (1)
Retained earnings
Gain from a bargain purchase
– Parent
Consideration and NCI (3)
ii Since acquisition
• To beginning of current year:
Retained earnings (116 000 – 68 000)
• Current year
Goodwill – S2 Ltd
Profit for the year
Profit for the year – S1 Ltd (2)
Profit for the year – S2 Ltd
Dividends paid
80%
100%
Total
At
100 000
36 608
68 000
80 000
29 286
54 400
20 000
7 322
13 600
204 608
163 686
40 922
(8 686)
(8 686)
–
195 922
155 000
40 922
48 000
Since
38 400
20%
NCI
9 600
50 522
(14 000)
214 025
(11 200)
189 000
25 025
171 220
(2 800)
42 805
151 200
20 020
37 800
5 005
(15 000)
(12 000)
(3 000)
R428 947
(R11 200) R197 620
R87 527
(1) (165 000 – 120 000) × 81,352% = 36 608
(2) 410 000 – 148 000 – 73 000 + 7 500(other income) – 7 500(J12) = 189 000
(3) 190 000 – 24 406 – 5 594 – 5 000 = 155 000
C7 Proof of calculation of gain on bargain purchase of S1 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)
155 000
40 922
195 922
Net of the identifiable assets acquired and liabilities assumed
at acquisition date: IFRS 3.32(b)
(204 608)
Gain on bargain purchase
(R8 686)
504
Consolidation of complex groups
C8 Pro forma consolidation journal entries
Dr
R
J1
J2
J3
Mark-to-market reserve – opening balance (P)(SCE)
Deferred tax (P)(SFP) (30 000 – 24 406)
Investment in S1 Ltd (P)(SFP) (24 406/81,352%)
Reversal of fair value adjustment on investment
in S1 Ltd at beginning of year at group level
24 406
5 594
Mark-to-market reserve (P)(OCI)
Deferred tax (P)(SFP) (5 000 × 66,6% × 28%)
Income tax relating to mark-to-market reserve (P)(OCI)
Investment in S1 Ltd (P)(SFP)
Reversal of fair value adjustment on investment
in S1 for current year at group level
5 000
932
Property, plant and equipment (S1)(SFP)
(165 000 – 120 000)
Revaluation surplus (S1)(SCE)
Deferred tax (S1)(SFP) (45 000 × 66,6% × 28%)
Revaluation of land on acquisition of S1 Ltd
J4
J5
J6
45 000
36 608
Share capital (S2)(SCE)
Retained earnings (S2)(SCE)
Goodwill (SFP)
Non-controlling interests (SFP)
Investment in S2 Ltd (S1)(SFP)
Investment in S2 Ltd (S3)(SFP)
Elimination of owners’ interest of S2 Ltd at acquisition
date
90 000
94 000
40 400
Share capital (S3)(SCE)
Retained earnings (S3)(SCE)
Goodwill (SFP)
Non-controlling interests (SFP)
Investment in S3 Ltd (P)(SCE)
Elimination of owners’ interest of S3 Ltd at
acquisition date
150 000
225 000
5 750
Share capital (S1)(SCE)
Revaluation surplus (S1)(SCE)
Retained earnings (S1)(SCE)
Gain from a bargain purchase (P/L)
Non-controlling interests (SFP)
Investment in S1 Ltd (P)(SCE)
Elimination of owners’ interest of S1 Ltd at
acquisition date
100 000
36 608
68 000
Cr
R
30 000
932
5 000
8 392
64 400
60 000
100 000
168 750
212 000
8 686
40 922
155 000
continued
505
Chapter 7
Dr
R
J7
Gain on sale of machinery (Other income)(S2)(P/L)
(190 000 – 150 000)
Deferred tax (P)(SFP)
Property, plant and equipment (P)(SFP)
Income tax expense (S2)(P/L) (40 000 × 28%)
Reversal of intragroup sale of machinery in current
reporting period (S Ltd to P Ltd)
J8
40 000
11 200
Accumulated depreciation (S3)(SFP) ((40 000/2) × 9/12)
Income tax expense (S2)(P/L) (15 000 × 28%)
Depreciation (S2)(P/L)
Deferred tax (S3)(SFP)
Recognition of a portion of the unrealised
intragroup profit which realises through
depreciation and tax effect thereof for current year
15 000
4 200
Retained earnings – Beginning of year (S3)(SCE)
Income tax expense (S3)(P/L) (14 000 × 28%)
Cost of sales (S3)((P/L) (70 000 × 25/125)
Elimination of unrealised profit included in opening
inventory of P Ltd
10 080
3 920
J10
Cost of sales (S3)((P/L)
Inventory (P)(SFP)
Elimination of unrealised profit included
in the closing inventory of P Ltd (40 000 × 25/125)
8 000
J11
Deferred tax (P)(SFP)
Income tax expense (S3)(P/L)
Tax on unrealised profit included in closing
inventory of P Ltd (8 000 × 28%)
2 240
J12
Dividend received (S1)(P/L)
Dividend received (S3)(P/L)
Non-controlling interests (SFP)
Dividend paid (S2)(SCE)
Elimination of intragroup dividend and recording
of dividend paid to non-controlling interests
7 500
12 000
10 500
Dividend received (P)(P/L)
Non-controlling interests (SFP)
Dividend paid (S1)(SCE)
Elimination of intragroup dividend and recording
of dividend paid to non-controlling interests
12 000
3 000
Long-term borrowings (P)(SFP)
Loan to P Ltd (S3)(SFP)
Elimination of intragroup long-term loan accounts
200 000
J9
J13
J14
Cr
R
40 000
11 200
15 000
4 200
14 000
8 000
2 240
30 000
15 000
200 000
continued
506
Consolidation of complex groups
Dr
R
J15
Interest received (S3)(P/L)
Interest paid (P)(P/L)
Elimination of interest charged on intragroup
long-term loan accounts
10 000
J16
Management fees received (P)(P/L)
Management fees paid (S1)(P/L)
Elimination of intragroup management fees
48 000
J17
Retained earnings (S1)(SCE)
Non-controlling interests (SFP)
Recognition of the non-controlling interests
in the since-acquisition retained earnings of S1 Ltd
9 600
J18
Retained earnings (S3)(SCE)
Non-controlling interests (SFP)
Recognition of the non-controlling interests
in the since acquisition retained earnings of S3 Ltd
64 980
J19
Non-controlling interests (SFP)
Goodwill (SFP)
Recognition of non-controlling interests in goodwill
of S2 Ltd
2 800
J20
Non-controlling interests (SFP)
Goodwill (SFP)
Recognition of non-controlling interests in goodwill
of S2 Ltd
11 880
J21
Non-controlling interests (P/L)
Non-controlling interests (SFP)
Recognition of the non-controlling interests
in the profit for the year of S1 Ltd and S2 Ltd
42 805
J22
Non-controlling interests (P/L)
Non-controlling interests (SFP)
Recognition of the non-controlling interests
in the profit for the year of S3 Ltd and S2 Ltd
50 607
J23
Non-controlling interests (P/L)
Non-controlling interests (SFP)
Recognition of the non-controlling interests
in the profit for the year of S2 Ltd
35 035
Cr
R
10 000
48 000
9 600
64 980
2 800
11 880
42 805
50 607
35 035
507
Chapter 7
Question 7.2
The following are the trial balances of the companies within the P Ltd Group for the
year ended 31 December 20.18:
Credits
Share capital
Fair value adjustment OCI (S1 Ltd)
Retained earnings – 1 January 20.18
Gross profit
Dividends received
Interest received
Gain on sale of plant
Deferred tax
Long-term loan
Bank overdraft
Trade payables
Debits
Property plant and equipment
Equity investments:
Investment in S1 Ltd
Investment in S2 Ltd
Investment in S3 Ltd
Sundry investments
Loan granted to S2 Ltd
Inventory and trade receivables
Cash and cash equivalents
Other expenses
Finance costs
Income tax expense
Income tax expense (OCI) (S1 Ltd)
Dividends paid – 31 December 20.18
P Ltd
Dr/(Cr)
R
S1 Ltd
Dr/(Cr)
R
S2 Ltd
Dr/(Cr)
R
S3 Ltd
Dr/(Cr)
R
300 000
4 000
367 100
222 000
30 000
8 000
90 000
30 000
60 000
–
60 000
200 000
–
189 800
90 000
–
–
35 000
20 000
20 000
–
24 000
100 000
–
270 000
132 000
–
–
–
–
80 000
–
21 000
150 000
–
175 000
110 000
20 000
–
–
–
–
40 000
12 000
1 171 100
578 800
603 000
507 000
329 000
232 700
383 200
200 500
260 000
–
220 000
–
80 000
81 440
17 214
66 000
5 600
61 100
746
50 000
–
196 000
–
–
–
36 000
19 900
17 000
2 200
35 000
–
40 000
–
–
–
–
–
54 000
90 800
42 000
8 000
25 000
–
–
–
–
–
155 000
–
97 000
–
33 000
1 500
20 000
–
–
1 171 100
578 800
603 000
507 000
Additional information
1 Share capital
P Ltd (150 000 shares)
R300 000
S1 Ltd (200 000 shares)
R200 000
S2 Ltd (100 000 shares)
R100 000
S3 Ltd (150 000 shares)
R150 000
2 P Ltd
P Ltd sold machinery with a carrying amount of R150 000 to S3 Ltd on 1 April 20.18.
The selling price was R240 000. The useful life of the machinery of five years has
remained unchanged. The companies within the group depreciate machinery on the
straight-line method over the useful life of the asset. The machinery was originally
purchased on 1 January 20.18.
508
Consolidation of complex groups
P Ltd granted a loan to S2 Ltd on 1 January 2018. The loan is repayable from
1 January 20.19. P Ltd charged S2 Ltd interest of 10% per year on the outstanding
loan.
3 Investment in S1 Ltd
P Ltd acquired 150 000 shares in S1 Ltd for R256 000 on 1 January 20.17 when
S1 Ltd's retained earnings amounted to R90 000. At that date the inventory in
S1 Ltd was valued at R12 000 more than its carrying amount and its plant R45 444
more than carrying amount. The remaining useful life of the plant at that date was
five years. S1 Ltd sold the plant on 30 June 20.18.
4 Investment in S2 Ltd
On 1 July 20.15, S1 Ltd acquired 65% of the shares in S2 Ltd for R196 000. S2 Ltd
had retained earnings of R110 000 on the acquisition date of S2 Ltd and on
1 January 20.17 the retained earnings were R190 000.
For the acquisition of the interest in S2 Ltd there were no unidentified assets,
liabilities or contingent liabilities and the assets and liabilities were considered to be
fairly valued.
5 Investment in S3 Ltd
P Ltd acquired 90 000 shares in S3 Ltd for R220 000 on 1 April 20.18.
The income and expenses of S3 Ltd were earned evenly during the year ended
31 December 20.18 except for the dividends received from equity investments
which were earned as follows:
1 January 20.18 to 31 March 20.18
2 125
1 April 20.18 to 31 December 20.18
17 875
R20 000
6
7
8
For the acquisition of the interest in S3 Ltd there were no unidentified assets,
liabilities or contingent liabilities and the assets and liabilities were considered to be
fairly valued.
P Ltd elected to measure the non-controlling interests in the acquiree at their fair
value at the acquisition date. The fair value of the non-controlling interests was
R158 000 at acquisition date.
P Ltd and S Ltd classified their equity investments under IFRS 9 in the separate
financial statements and recognised any fair value adjustments in a mark-to-market
reserve (other comprehensive income).
For the investments other than its investment in S3 Ltd, P Ltd elected to measure
the non-controlling interests in the acquiree at their proportionate share of the
acquiree’s identifiable net assets at the acquisition date.
The company tax rate is 28% and CGT is calculated at 66,6% thereof.
Required
Prepare the consolidated financial statements of the P Ltd Group for the year ended
31 December 20.18.
509
Chapter 7
Suggested solution 7.2
The consolidated financial statements of the P Ltd Group will be drawn up as follows as
at 31 December 20.18:
P LTD GROUP
CONSOLIDATED STATEMENT OF FINANCIAL POSITION
AS AT 31 DECEMBER 20.18
ASSETS
Non-current assets
Property, plant and equipment (1)
Equity investments
Goodwill (13 105(S1 analysis) + 37 000(S3 analysis))
1 074 835
155 000
50 105
1 279 940
Current assets
Inventories and trade receivables
268 440
(81 440(P) + 36 000(S1) + 54 000(S2) + 97 000(S3))
Cash and cash equivalents (17 214(P) + 19 900(S1) + 90 800(S2))
127 914
396 354
Total assets
R1 676 294
EQUITY AND LIABILITIES
Equity attributable to owners of the parent
Share capital
Retained earnings
300 000
652 070
Non-controlling interests (126 478(S1) + 149 450(S2) + 181 800(S3))
952 070
457 728
Total equity
Non-current liabilities
Deferred tax (2)
Long-term borrowings (60 000(P) + 20 000(S1) + 80 000(S2) – 80 000(J14))
1 409 798
29 496
80 000
109 496
Current liabilities
Trade and other payables (60 000(P) + 24 000(S1) + 21 000(S2) + 12 000(S3))
Bank overdraft
117 000
40 000
157 000
Total liabilities
Total equity and liabilities
266 496
R1 676 294
(1) 329 000(P) + 232 700(S1) + 383 200(S2) + 200 500(S3) + 45 444(J2) – 90 000(J8) + 14 211(J9) –
8 044(J10) – 4 022(J11) – 40 220(J12) + 12 066(J12) = 1 069 611
(2) 30 000(P) + 20 000(S1) – 746(J1) + 12 724(J2) + 3 360(J3) – 25 200(J8) + 3 979(J9) – 2 252(J10)
– 1 126(J11) – 7 883(J12) – 3 360(J16) = 29 496
510
Consolidation of complex groups
P LTD GROUP
CONSOLIDATED STATEMENT OF PROFIT OR LOSS
AND OTHER COMPREHENSIVE INCOME
FOR THE YEAR ENDED 31 DECEMBER 20.18
Gross profit (1)
Other income (2)
Other expenses (3)
Finance costs (4)
526 500
24 721
(139 561)
(8 925)
Profit before tax
Income tax expense (5)
402 735
(105 870)
PROFIT FOR THE YEAR
Other comprehensive income for the year
296 865
–
TOTAL COMPREHENSIVE INCOME FOR THE YEAR
R296 865
Total comprehensive income attributable to:
Owners of the parent
Non-controlling interests (6)
231 944
64 921
R296 865
(1) 222 000(P) + 90 000(S2) + 132 000(S1) + 82 500(110 000 × 9/12)(S3) = 526 500
(2) 30 000(P) + 8 000(P) + 90 000(P) + 35 000(S1) + 17 875(S3)(or 20 000 – 2 125) – 30 000(J13) –
8 000(J15) – 90 000(J8) – 28 154 (J12) = 24 721
(3) 66 000(P) + 17 000(S1) + 42 000(S2) + 24 750(33 000 × 9/12)(S3) – 14 211(J9) – 4 022(J11) =
131 539
(4) 5 600(P) + 2 200(S1) + 8 000(S2) + 1 125(1 500 × 9/12)(S3) – 8 000(J15) = 8 925
(5) 61 100(P) + 35 000(S1) + 25 000(S2) + 15 000(20 000 × 9/12)(S3) – 25 200(J8) + 3 979(J9) –
7 883(J12) – 1 126(J11) = 105 870
(6) 21 171(J19) + 19 950(J20) + 23 800(J19) = 64 921
P LTD GROUP
CONSOLIDATED STATEMENT OF CHANGES IN EQUITY
FOR THE YEAR ENDED 31 DECEMBER 20.18
Share
capital
Balance at 1 January 20.18
Changes in equity for 20.18
Acquisition of subsidiary
Total comprehensive income
for the year:
Profit for the year
Dividend paid
Balance at 31 December 20.18
Retained
earnings
300 000 ’470 126
Total
Noncontrolling
interests
Total
equity
770 126
# 244 807
1 014 933
–
–
–
158 000
158 000
–
–
231 944
(50 000)
231 944
(50 000)
64 921
(10 000)
296 865
(60 000)
R300 000 R652 070 R952 070 ȍR457 728 R1 409 798
’ 367 100(P) + 103 026(64 026 + 39 000)(S1) = 470 126
# 115 307(S1) + 129 500(S2) = 244 807
ȍ 126 478(S1) + 149 450(S2) + 181 800(S3) = 457 728
511
Chapter 7
Calculations
C1 Schematic diagram of group structure
P Ltd
75%
60%
1 January 20.17
1 April 20.18
S1 Ltd
S3 Ltd
1 July 20.15
65%
S2 Ltd
C2 Analysis of owners’ equity of S2 Ltd
65%
100%
Total
At
100 000
190 000
65 000
123 500
35 000
66 500
Equity represented by goodwill – Parent
290 000
7 500
188 500
7 500
101 500
–
Consideration and NCI
297 500 R196 000
101 500
i At acquisition (1/1/20.17)
Share capital
Retained earnings
ii Since acquisition
• To beginning of current year:
Retained earnings (270 000 – 190 000)
• Current year
Profit for the year (1)
80 000
Since
52 000
35%
NCI
28 000
129 500
57 000
37 050
19 950
R434 500
R89 050
R149 450
(1) 132 000 – 8 000 – 42 000 – 25 000 = 57 000
C3 Proof of calculation of goodwill of S2 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)
196 000
101 500
297 500
Net of the identifiable assets acquired and liabilities assumed
at acquisition date: IFRS 3.32(b)
(290 000)
Goodwill
R7 500
512
Consolidation of complex groups
C4 Analysis of owners’ equity of S1 Ltd
75%
25%
NCI
100%
Total
At
200 000
32 720
98 640
(7 500)
150 000
24 540
73 980
(5 625)
50 000
8 180
24 660
(1 875)
323 860
242 895
80 965
13 105
13 105
–
Consideration (3) and NCI
336 965
R256 000
80 965
ii Since acquisition
• To beginning of current year:
Retained earnings (4)
Retained earnings – S2 Ltd
85 368
52 000
i At acquisition (1/1/20.17)
Share capital
Revaluation surplus (1)
Retained earnings (90 000 + 8 640(2))
Goodwill – S2 Ltd
Equity represented by goodwill
– Parent
• Current year
Profit for the year
(1)
(2)
(3)
(4)
(5)
Since
64 026
39 000
21 342
13 000
115 307
84 683
63 512
21 171
Profit for the year – S1 Ltd (5)
Profit for the year – S2 Ltd
47 633
37 050
35 725
27 787
11 908
9 263
Dividend paid
(40 000)
(30 000)
(10 000)
R519 016
R136 538
R126 478
45 444 × 72% = 32 720
12 000 × 72% = 8 640
260 000 – 4 000 = 256 000
189 800 – 90 000 – 5 792(J10) – 8 640(J16) = 85 368
90 000 + 35 000(other income) – 2 200 – 17 000 – 35 000 – 4 022(J11) + 1 126(J11) –
28 154(J12) + 7 883(J12) = 47 633
C5 Proof of calculation of goodwill of S1 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)
Net of the identifiable assets acquired and liabilities assumed
at acquisition date: IFRS 3.32(b)
Goodwill
256 000
80 965
336 965
(323 860)
13 105
513
Chapter 7
C6 Analysis of owners’ equity of S3 Ltd
i At acquisition (1/4/20.18)
Share capital
Retained earnings (1)
Equity represented by goodwill
– Parent and NCI
Consideration and NCI
ii Since acquisition
• Current year
Profit for the year (2)
60%
100%
Total
At
150 000
191 000
90 000
114 600
60 000
76 400
341 000
204 600
136 400
37 000
15 400
21 600
378 000
R220 000
158 000
59 500
R437 500
Since
35 700
40%
NCI
23 800
R35 700 R181 800
(1) 175 000 + 16 000(110 000 – 1 500 – 33 000 – 20 000 = 55 500 x 3/12 = 13 875 + 2 125) =
191 000
(2) 55 500 × 9/12 = 41 625 + 17 875 = 59 500
C7 Proof of calculation of goodwill of S3 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)
220 000
158 000
378 000
Net of the identifiable assets acquired and liabilities assumed
at acquisition date: IFRS 3.32(b)
(341 000)
Goodwill
R37 000
C8 Pro forma consolidation journal entries
Dr
R
J1
J2
Mark-to-market reserve (P)(OCI)
Deferred tax (P)(SFP) (4 000 × 66,6% × 28%)
Income tax relating to mark-to-market reserve (P)(OCI)
Investment in S1 Ltd (S)(SFP)
Reversal of fair value adjustment on investment
in S1 for current year at group level
4 000
746
Property, plant and equipment (S1)(SFP)
Revaluation surplus
Deferred tax (S1)(SFP) (45 444 × 28%)
Revaluation of plant at acquisition date of S1 Ltd
45 444
Cr
R
746
4 000
32 720
12 724
continued
514
Consolidation of complex groups
Dr
R
J3
Inventory (S1)(SFP)
Retained earnings (S1)(SCE)
Deferred tax (S1)(SFP) (12 000 × 28%)
Revaluation of inventory at acquisition date
of S1 Ltd
12 000
J4
Share capital (S2)(SCE)
Retained earnings (S2)(SCE)
Goodwill (SFP)
Non-controlling interests (SFP)
Investment in S2 Ltd (S1)(SFP)
Elimination of owners’ interest of S2 Ltd at acquisition
date
100 000
190 000
7 500
Gross income (S3)(P/L) (110 000 × 3/12)
Other income (S3)(P/L) (dividend received)
Other expenses (S3)(P/L) (33 000 × 3/12)
Finance costs (S3)(P/L) (1 500 × 3/12)
Income tax expense (S3)(SCE) (20 000 × 3/12)
Retained earnings – at acquisition
Allocation of current years’ profit or loss items
between at and since acquisition earnings. S3 Ltd
acquired on 1 April 20.14
27 500
2 125
Share capital (S3)(SCE)
Retained earnings (S3)(SCE) (175 000 + 16 000(J5)
Goodwill (SFP)
Non-controlling interests (SFP)
Investment in S3 Ltd (P)(SCE)
Elimination of owners’ interest of S3 Ltd
at acquisition date
150 000
191 000
37 000
Share capital (S1)(SCE)
Revaluation surplus (S1)(SCE)
Retained earnings (S1)(SCE) (90 000 + 8 640)
Goodwill S1 Ltd (SFP)
Goodwill (S2)(SFP)
Non-controlling interests (SFP)
Investment in S1 Ltd (P)(SCE)
Elimination of owners’ interest of S1 Ltd
at acquisition date
200 000
32 720
98 640
13 105
Gain on sale of machinery (Other income)(P)(P/L)
90 000
J5
J6
J7
J8
(240 000 – 150 000)
Deferred tax (S3)(SFP)
Property, plant and equipment (S3)(SFP)
Income tax expense (P)(P/L) (90 000 × 28%)
Reversal of intragroup sale of machinery in current
reporting period (P Ltd to S3 Ltd)
25 200
Cr
R
8 640
3 360
101 500
196 000
8 250
375
5 000
16 000
158 000
220 000
7 500
80 965
256 000
90 000
25 200
continued
515
Chapter 7
Dr
R
J9
J10
J11
J12
Accumulated depreciation (S3)(SFP)
Income tax expense (P)(P/L)
Depreciation (P)(P/L) ((90 000/57) × 9)
Deferred tax (S3)(SFP) (14 211 × 28%)
Recognition of a portion of the unrealised
intragroup profit which realises through
depreciation and tax effect thereof for current year
14 211
3 979
Retained earnings – Beginning of year (S1)(SCE)
Deferred tax (S1)(SFP) (8 044 × 28%)
Accumulated depreciation (S1)(SFP) (40 220/5)
Recognition of deprecation on plant revalued
at acquisition of S1 Ltd
5 792
2 252
Depreciation (S1)((P/L) (40 220/5 × 6/12)
Accumulated depreciation (S1)(SFP)
Deferred tax (S1)(SFP) (4 022 × 28%)
Income tax expense (S1)(P/L)
Recognition of deprecation on plant revalued
at acquisition of S1 Ltd for current year
4 022
Accumulated depreciation (S1)(SFP)
1 126
Cr
R
14 211
3 979
8 044
4 022
1 126
12 066
(8 044(J10) + 4 022(J11))
Plant (S1)(SFP)
Gain on sale of plant (S1)(P/L) (40 220 – 12 066)
Deferred tax (S1)(SFP) (28 154 × 28%)
Income tax expense (S1)(P/L)
Plant of S1 Ltd revalued at acquisition sold during
current year
J13
28 154
7 883
Dividend received (P)(P/L)
Non-controlling interests (SFP)
Dividend paid (S1)(SCE)
Elimination of intragroup dividend and recording
of dividend paid to non-controlling interests
30 000
10 000
J14
Long-term borrowings (S2)(SFP)
Loan to S2 Ltd (P)(SFP)
Elimination of intragroup long-term loan
80 000
J15
Interest received (P)(P/L)
Interest paid (S2)(P/L)
Elimination of interest charged on intragroup
long-term loan
8 000
J16
Retained earnings (S1)(SCE)
Deferred tax (S1)(SFP)
Inventory (S1)(SFP)
Inventory of S1 Ltd revalued at acquisition realised
after acquisition
8 640
3 360
40 220
7 883
40 000
80 000
8 000
12 000
continued
516
Consolidation of complex groups
Dr
R
J17
Retained earnings (S1)(SCE)
Retained earnings (S2)(SCE)
Non-controlling interests (SFP)
Recognition of the non-controlling interests in the
since acquisition retained earnings of S1 Ltd
21 350
13 000
J18
Retained earnings (S2)(SCE)
Non-controlling interests (SFP)
Recognition of the non-controlling interests in the
since acquisition retained earnings of S2 Ltd
28 000
J19
Non-controlling interests (P/L)
Non-controlling interests (SFP)
Recognition of the non-controlling interests
in the profit for the year of S1 Ltd and S2 Ltd
21 171
J20
Non-controlling interests (P/L)
Non-controlling interests (SFP)
Recognition of the non-controlling interests
in the profit for the year of S2 Ltd
19 950
J21
Non-controlling interests (P/L)
Non-controlling interests (SFP)
Recognition of the non-controlling interests
in the profit for the year of S3 Ltd
23 800
Cr
R
34 350
28 000
21 171
19 950
23 800
517
8
Interim acquisition of an interest
in a subsidiary
Introduction
8.1
Interim acquisition of an interest in a subsidiary compared to the
acquisition at reporting date of a subsidiary ...........................................
521
Allocation of statement of profit or loss and other
comprehensive income items and items in the statement
of changes in equity
8.2
8.3
8.4
8.5
General approach ...................................................................................
Allocation of income and expense items ................................................
Allocation of items in other comprehensive income .................................
Allocation of items in the statement of changes in equity ........................
521
521
522
522
Presentation of the consolidated statement of profit or loss
and other comprehensive income and consolidated
statement of changes in equity
8.6
8.7
Alternative methods ................................................................................
Consolidation process when there is an interim acquisition ....................
Example 8.1: Elimination of investment at acquisition date ..................
Example 8.2: Interim acquisition of control ...........................................
523
523
524
525
Disclosure requirements for a subsidiary acquired
in the current reporting period ................................................................
532
Disclosure requirements for subsidiaries
(IFRS 12 Disclosing Interests in Other Entities) ..............................
533
Self-assessment question
Question 8.1
.....................................................................................................
538
519
Interim acquisition of an interest in a subsidiary
Introduction
8.1 Interim acquisition of an interest in a subsidiary compared
to the acquisition at reporting date of a subsidiary
In the preceding chapters, the acquisition date of an interest in a subsidiary by the
parent was consistently taken to be the first day of the subsidiary’s relevant reporting
period. The purchase of an interest in a subsidiary at a date which is later than the first
day of the subsidiary’s current reporting period is known as an “interim acquisition of an
interest in a subsidiary”. In the event of an interim acquisition, the profit or loss for the
year of the specific reporting period during which the interest was acquired must be
allocated between pre-acquisition and post-acquisition profit and losses. If it is feasible,
financial statements must be drawn up at the acquisition date of the interest in the
subsidiary concerned. Should this be done, the consolidation process would not differ
materially from a case in which the interest is acquired at the beginning of the reporting
period.
Allocation of statement of profit or loss and other comprehensive
income items and items in the statement of changes in equity
8.2 General approach
If, however, financial statements have not been drawn up at the acquisition date of the
interest in the subsidiary concerned, it is necessary to allocate the profit or loss of the
subsidiary for the relevant period concerned with reference to the available information.
The profit or loss for any reporting period of the subsidiary will, if it is not practicable to
apportion it with reference to the facts, be treated as if it accrued from day to day during
the year and be apportioned accordingly.
8.3 Allocation of income and expense items
Income and expense must be examined individually in order to determine the basis on
which each item should be apportioned between the period before acquisition and the
period post acquisition.
Certain items, such as depreciation, assessment rates, etc., normally accumulate from
day to day. Other items, such as gains or losses on the sale of property, plant and
equipment or investments, may be realised at a definite time, while other items may
accrue during the respective periods at differing rates or tariffs. For example:
l Gross profit may accrue at an increasing rate as a result of an increase in sales or
in the profit margin.
l Directors’ remuneration may change as a result of new appointments.
l Salaries and wages are allocated on a time basis but this may change due to new
appointments or resignations.
l Fair value adjustments on investment properties are allocated to the period when
the investment property was adjusted to fair value. It may be at acquisition date or
at the end of the reporting period.
521
Chapter 8
l
l
l
Interest paid may change because new loans are raised or existing loans have
been paid off.
Income or expenses related to leases will be allocated on a time basis, taking into
account the starting date of a new lease agreement or the termination date of a
lease that has ended.
Normal tax of the subsidiary for the current year should be apportioned in the ratio
of the taxable income for the periods before and since acquisition.
8.4 Allocation of items in other comprehensive income
l Fair value adjustments – financial assets
Fair value adjustments on investment properties are allocated to the period when the
investment property was adjusted to fair value. It may be at the acquisition date or at
the end of the reporting period.
l Revaluation surplus
The revaluation surplus will be allocated to the specific period in which the revaluation
surplus arose. It may be at the acquisition date or at the end of the reporting period.
8.5 Allocation of items in the statement of changes in equity
Items in the statement of changes in equity can be divided into four groups for the
purpose of apportionment between the periods before and after acquisition, i.e.:
l Preference dividends
Preference dividends regarding issued preference shares of the subsidiary is a term
cost, and should therefore be accounted for on a time basis. The cumulative preference
dividend must be accounted for even if it has not been declared. The only condition for
accounting is that adequate profits must be available for distribution on the current
reporting date.
l Ordinary dividends
Ordinary dividends are taken into account when the dividend is declared.
l Year end items
By their very nature, year-end items fall into the post-acquisition period. Examples of
such items are dividends paid.
l Adjustments in respect of previous financial years
Items which represent adjustments in respect of previous financial years will be
included in the pre-acquisition period. This will include the correction of prior period
errors and the effect of a change in accounting policy on the retained earnings of the
subsidiary at the beginning of the year.
l Special items
Such items will be treated according to their own merits and allocated on a time basis to
the pre- or post-acquisition period, depending on when the transaction concerned took
place. Examples of such items are interim dividends.
522
Interim acquisition of an interest in a subsidiary
Presentation of the consolidated statement of profit or loss and
other comprehensive income and consolidated statement of
changes in equity
8.6 Alternative methods
After the profit of the subsidiary for the current year has been apportioned between the
pre- and post-acquisition periods, one of two methods can be used in drawing up the
consolidated statement of profit or loss and other comprehensive income:
l According to the first method, only the post-acquisition profit for the year is
included in the profit for the year of the group.
l According to the alternative method, both the pre- and post-acquisition profit of the
subsidiary is included in the profit for the year of companies in the group.
Thereafter, the profit for the year earned by the subsidiary before acquisition of the
controlling interest is then deducted in order to determine the profit for the year of
the group.
The alternative method has the advantage that it facilitates comparison with
subsequent years, which gives a better indication of the earning capacity of the group.
However, the first method is theoretically a more correct representation of the profit
over which the group had control (refer to example 8.2).
IFRS 10.B88 Consolidated Financial Statements also supports the first method
mentioned above, because IFRS 10 stipulates that the income and expenses of a
subsidiary must be included in the consolidated statement of profit or loss and other
comprehensive income from the date it gains control until the date when the entity
ceases to control the subsidiary. Income and expenses of the subsidiary must be based
on the amounts of the identifiable assets and liabilities recognised in the consolidated
financial statements at the acquisition date. For example, a depreciation expense
recognised in the consolidated statement of profit or loss and other comprehensive
income after the acquisition date must be based on the fair values of the related
depreciable assets recognised in the consolidated statement of financial position at the
acquisition date.
To ensure the comparability of the consolidated statements with the following and
previous periods, applicable information about the newly acquired subsidiaries must be
provided. If a subsidiary was acquired during the current reporting period or after the
end of the reporting period but before the financial statements are authorised for issue,
the acquirer must disclose information that enables users of its financial statements to
evaluate the nature and financial effect of the acquisition of the subsidiary
(IFRS 3.59(b) together with IFRS 3 paragraphs B64–B66) (these paragraphs detail the
disclosure requirements).
8.7 Consolidation process when there is an interim acquisition
If the acquisition of a subsidiary took place during the current reporting period, then the
equity at the date of acquisition will consist of the following:
l share capital;
l retained earnings at the beginning of the current reporting period; and
l current profit or loss items which have accumulated from the beginning of the
current year to the date of acquisition.
523
Chapter 8
This current profit or loss consists of revenue, cost of sales, other income, etc.
Therefore, in the main elimination journal entry at the acquisition date of S Ltd, the pro
forma consolidation journals would need to include entries to remove, from the
statement of profit or loss and other comprehensive income line items, the portion
attributable to the parent before the subsidiary was acquired. This principle is illustrated
in the following example.
Example 8.1
Elimination of investment at acquisition date
P Ltd acquired all the shares of S Ltd on 1 October 20.18 for R310 000. The group’s
reporting date is 31 December.
S Ltd entered into a loan with ABC Bank on 1 July 20.18 for R180 000 at 12%. After
P Ltd acquired the interest in S Ltd, P Ltd charged S Ltd a management fee of R7 500
per month.
On 1 October 20.18 S Ltd had the following reserves:
Share capital
R25 000
Retained earnings – Beginning of year
R175 000
Total
1/1/20.18–
31/12/20.18
9 months
1/1/20.18–
30/9/20.18
3 months
1/10/20.18–
31/12/20.18
520 000
390 000
130 000
(300 000 × 9/12); (300 000 × 3/12)
(300 000)
(225 000)
(75 000)
Gross profit
Interest paid (180 000 × 12% × 6/12);
220 000
165 000
55 000
(10 800)
(18 000)
(22 500)
(5 400)
(13 500)
–
(5 400)
(4 500)
(22 500)
168 700
146 100
22 600
Revenue (520 000 × 9/12); (520 000 × 3/12)
Cost of sales
(10 800 × 3/6)
Other expenses (18 000 × 9/12); (18 000 × 3/12)
Management fees (7 500 × 3)
Profit before tax
Income tax expense
(146 100/168 700 × 46 700);
(22 600/168 700 × 46 700)
Profit after tax
Retained earnings – Beginning of year
(46 700)
(40 444)
(6 256)
122 000
105 656
16 344
175 000
280 656
524
Interim acquisition of an interest in a subsidiary
Pro forma consolidation journal entries
Dr
R
J1
Share capital (S)(SFP)
Retained earnings (S)(SCE)
Revenue (S)(P/L)
Goodwill (SFP)
Cost of sales (S)(P/L)
Interest paid (S)(P/L)
Other expenses (S)(P/L)
Income tax expense (S)(P/L)
Investment in S Ltd (P)(SFP)
Elimination of investment at acquisition date
Example 8.2
Cr
R
25 000
175 000
390 000
4 344
225 000
5 400
13 500
40 444
310 000
Interim acquisition of control
The following are the trial balances of P Ltd and S Ltd at 30 June 20.18:
P Ltd
Dr
S Ltd
Cr
Dr
Cr
Share capital
100 000
350 150
28 640
–
(100 000/80 000 shares)
Retained earnings: 1/7/20.17
Trade and other payables
Long-term finance lease liability
Property, plant and equipment
at cost price
Accumulated depreciation: 30/6/20.18
Inventory on hand: 30/6/20.17
Trade receivables
Cash in bank
Investment in S Ltd at fair value:
60 000 shares
Sales
Dividend received
Purchases
Depreciation
Other expenses
Interest paid on lease agreement
Income tax expense
Dividend paid
338 000
80 000
145 000
39 296
266 680
572 500
112 000
45 000
76 600
28 400
46 000
13 700
55 300
6 536
218 000
–
825 000
11 250
454 000
30 000
153 000
–
54 040
30 000
R1 427 040 R1 427 040
390 000
–
163 900
41 700
48 000
13 800
36 540
15 000
R966 976
R966 976
525
Chapter 8
P Ltd acquired its interest in S Ltd on 1 March 20.18. The average monthly sales of
S Ltd have increased by 25% during the period since P Ltd acquired the controlling
interest. Other expenses have accrued uniformly during the year.
Included in property, plant and equipment of S Ltd is plant with a cost of R258 000 that
was acquired under a finance lease agreement. The lease was entered into on
1 January 20.18 and the plant has a useful life of 10 years.
The group provides for depreciation on plant on the straight-line basis over the useful
life of the asset.
Inventory on hand at 30 June 20.18:
P Ltd
R50 000
S Ltd
R21 600
The company tax rate is 28% and CGT is calculated at 66,6% thereof.
P Ltd classified the investment in S Ltd under IFRS 9 in its separate financial
statements and fair value adjustments are recognised in a mark-to-market reserve
(other comprehensive income).
P Ltd elected to measure the non-controlling interests of the acquiree at their fair value
of R72 000 at the acquisition date.
Goodwill was not considered to be impaired from the time that the investment was
acquired to the end of the reporting period.
526
Interim acquisition of an interest in a subsidiary
Solution 8.2
The consolidated financial statements of the P Ltd Group in respect of the year ended
30 June 20.18, will be drawn up as follows:
P LTD GROUP
CONSOLIDATED STATEMENT OF FINANCIAL POSITION AS AT 30 JUNE 20.18
ASSETS
Non-current assets
Property, plant and equipment
(338 000(P) + 572 500(S) – 112 000(P) – 46 000(S))
Goodwill
752 500
4 592
757 092
Current assets
Inventory (50 000(P) + 21 600(S))
Trade receivables (76 600(P) + 55 300(S))
Bank (28 400(P) + 6 536(S))
71 600
131 900
34 936
238 436
Total assets
EQUITY AND LIABILITIES
Equity attributable to owners of the parent
Share capital
Retained earnings (SCE)
Non-controlling interests (analysis or SCE)
R995 528
100 000
485 952
585 952
74 960
Total equity
Non-current liabilities
Long-term liability
266 680
Current liabilities
Trade and other payables (28 640(P) + 39 296(S))
67 936
Total liabilities
334 616
Total equity and liabilities
660 912
R995 528
527
Chapter 8
P LTD GROUP
CONSOLIDATED STATEMENT OF PROFIT OR LOSS
AND OTHER COMPREHENSIVE INCOME
FOR THE YEAR ENDED 30 JUNE 20.18
Revenue (825 000(P) + 150 000(S))
Cost of sales (45 000(P) + 454 000(P) – 50 000(P) + 60 000(S))
Gross profit
Other expenses (153 000(P) + 16 000(S) + 30 000(P) + 8 600(S) + 9 600(S))
Finance costs (S)
466 000
(217 200)
(9 200)
Profit before tax
Income tax expense (54 040(P) + 13 048(S))
239 600
(67 088)
PROFIT FOR THE YEAR
172 512
Other comprehensive income for the year
TOTAL COMPREHENSIVE INCOME FOR THE YEAR
Total comprehensive income attributable to:
Owners of the parent (172 512 – 6 710)
Non-controlling interests ((b)Ȝ)
975 000
(509 000)
–
R172 512
165 802
6 710
R172 512
Comment
The above method of presentation complies with International Financial Reporting
Standards (IFRS) in that the income of subsidiaries on consolidation is included only
from the effective acquisition date.
528
Interim acquisition of an interest in a subsidiary
Should the alternative method of presentation be used (refer to paragraph 8.6), the
statement of profit or loss and other comprehensive income would be as follows:
Alternative presentation of the statement of profit or loss and other
comprehensive income
P LTD GROUP
CONSOLIDATED STATEMENT OF PROFIT OR LOSS
AND OTHER COMPREHENSIVE INCOME
FOR THE YEAR ENDED 30 JUNE 20.18
Revenue (825 000(P) + 390 000(S))
Cost of sales (45 000(P) + 454 000(P) – 50 000(P) + 156 000(S))
Gross profit
Other expenses (153 000(P) + 48 000(S) + 30 000(P) + 41 700(S))
Finance costs (S)
Profit
Profit earned by subsidiary for eight months before acquisition
of controlling interest ((a)&)
Profit before tax
Income tax expense (54 040(P) + 13 048(S))
PROFIT FOR THE YEAR
Other comprehensive income for the year
TOTAL COMPREHENSIVE INCOME FOR THE YEAR
Total comprehensive income attributable to:
Owners of the parent (172 512 – 6 710)
Non-controlling interests ((b)Ȝ)
1 215 000
(605 000)
610 000
(272 700)
(13 800)
323 500
(83 900)
239 600
(67 088)
172 512
–
R172 512
165 802
6 710
R172 512
P LTD GROUP
CONSOLIDATED STATEMENT OF CHANGES IN EQUITY
FOR THE YEAR ENDED 30 JUNE 20.18
Balance at 1 July 20.17
Changes in equity for 20.18
Acquisition of subsidiary
Total comprehensive income
for the year
Profit for the year
Dividend
Balance at 30 June 20.18
Share
capital
Retained
earnings
Total
100 000
# 350 150
450 150
Noncontrolling
interests
Total
equity
–
450 150
˜ 72 000
72 000
165 802
(30 000)
Ȝ 6 710
ĭ (3 750)
172 512
(33 750)
R100 000 &R485 952 R585 952
R74 960
R660 912
165 802
(30 000)
#
350 150(P)
(350 150(P) + 825 000 – 449 000(C2) – 153 000(P) – 30 000(P) – 30 000(P) + 11 250(dividend
received from S Ltd) – 54 040(P) + 15 592(C3) = 485 952 (proof) (to SFP)
˜ J1 or (b)˜
Ȝ J2 or (b)Ȝ or SCI
ĭ J3 or (b)ĭ
&
529
Chapter 8
Calculations
C1 Allocation of statement of profit or loss and other comprehensive income
items
Total
1/7/20.17
to
28/2/20.18
8 months
1/3/20.18
to
30/6/20.18
4 months
Sales (see calculation below)
390 000
240 000
150 000
Inventory: 30/6/20.17
Purchases
13 700
163 900
Inventory: 30/6/20.18
177 600
(21 600)
Cost of sales (= 40% of sales)
(156 000)
(96 000)
(60 000)
Gross profit (= 60% of sales)
Finance costs (1)
Other expenses
234 000
(13 800)
(89 700)
144 000
(4 600)
(55 500)
90 000
(9 200)
(34 200)
Other expenses (2)
Depreciation – Finance lease (3)(4)
Depreciation (5)
(48 000)
(12 900)
(28 800)
(32 000)
(4 300)
(19 200)
(16 000)
(8 600)
(9 600)
Profit before tax
Income tax expense
130 500
(36 540)
83 900
(23 492)
46 600
(13 048)
Profit for the year
R93 960
R60 408
R33 552
(1)
(2)
(3)
(4)
(5)
13 800 × 2/6 = 4 600; 13 800 × 4/6 = 9 200
48 000 × 8/12 = 32 000; 48 000 × 4/12 = 16 000
258 000/10 × 6/12 = 12 900
12 900 × 2/6 = 4 300; 12 900 × 4/6 = 8 600
41 700 – 12 900 = 28 800 × 8/12 = 19 200; 28 800 × 4/12 = 9 600
Comment
Allocation of sales
Say S Ltd’s sales to 1 March 20.18 were Ry per month.
Then: 8y + (4 × 1,25y)
8y + 5y
13y
∴y
Sales 1/7/20.17 – 28/2/20.18 (8 × 30 000)
Sales 1/3/20.18 – 30/6/20.18 (4 × 1,25 × 30 000)
C2 Calculation of cost of sales of P Ltd
Inventory: 30/6/20.17
Purchases
45 000
454 000
Inventory: 30/6/20.18
499 000
(50 000)
Cost of sales
530
R449 000
=
=
=
=
390 000
390 000
390 000
30 000
R240 000
R150 000
Interim acquisition of an interest in a subsidiary
C3 Analysis of owners’ equity of S Ltd
Total
i At acquisition (1/3/20.18)
Share capital
Retained earnings 28/2/20.18
Retained earnings 1/7/20.17
Profit 1/7/20.17 í 28/2/20.18 ($)
Equity represented by goodwill
– Parent
Consideration and NCI
ii Since acquisition
• Current year:
Profit for the year
(1/3/20.18 – 30/6/20.18)
Dividend paid
*
80 000
205 408
P Ltd 75%
At
Since
NCI
60 000
154 056
20 000
51 352
285 408
214 056
71 352
4 592
3 944
648
290 000
R218 000
˜ 72 000
145 000
60 408
33 552
(15 000)
26 842
(11 250)
Ȝ 6 710
ĭ (3 750)
*R308 552
R15 592
R74 960
218 000 + 15 592 + 74 960 = 308 552
C4 Proof of calculation of goodwill of S Ltd in terms IFRS 3.32
Consideration transferred at acquisition date: IFRS 3.32(a)(i)
Amount of non-controlling interests: IFRS 3.32(a)(ii)
Net of the identifiable assets acquired and liabilities assumed
at acquisition date: IFRS 3.32(b)
Goodwill
218 000
72 000
290 000
(285 408)
R4 592
531
Chapter 8
C5 Pro forma consolidation journal entries
Dr
R
J1
Share capital (S)(SFP)
Retained earnings (S)(SCE)
Revenue (S)(P/L)
Goodwill (SFP)
Cost of sales (S)(P/L)
Other expenses (S)(P/L)
Finance charges (S)(P/L)
Income tax expense (S)(P/L)
Non-controlling interests (SFP)
Investment in S Ltd (P)(SFP)
Elimination of investment at acquisition date
80 000
145 000
240 000
4 592
J2
Non-controlling interests (P/L)
Non-controlling interests (SFP)
Recognition of non-controlling interests in profit
since acquisition
6 710
J3
Dividend received (P)(P/L)
Non-controlling interests (SFP)
Dividend paid (S)(SCE)
Elimination of intragroup dividend
11 250
3 750
Cr
R
96 000
55 500
4 600
23 492
72 000
218 000
6 710
15 000
The consolidated amounts can be obtained either by setting off the pro forma journal
entries against the combined amounts of the parent and the subsidiary (the worksheet
approach) or by merely setting off certain amounts in respect of the subsidiary against
those of the parent (the direct approach).
Disclosure requirements for a subsidiary acquired in the current
reporting period
The following information must be disclosed for each business combination that occurs
during the reporting period (IFRS 3.B64):
l The name and a description of the acquiree.
l The acquisition date.
l The percentage of voting equity interests acquired.
l The primary reasons for the business combination and a description of how the
acquirer obtained control of the acquiree.
l A qualitative description of the factors that contributed to the recognition of
goodwill, for example synergies expected from combining operations of the
acquiree and the acquirer, intangible assets that do not qualify for separate
recognition or other factors.
l The acquisition-date fair value of the consideration transferred and the fair value at
the acquisition date of each major class of consideration, i.e. cash,
tangible
or
intangible assets, liabilities incurred, for example a contingent consideration
liability, and equity interests of the acquirer, etc.
532
Interim acquisition of an interest in a subsidiary
l
l
l
l
l
l
l
l
l
Details of contingent consideration arrangements and indemnification assets,
including amounts, descriptions and estimated outcomes.
Details of receivables acquired, including the fair value, the gross amounts
receivable, and the best estimate of the uncollectible amounts. Each major class of
receivable, such as loans, direct finance leases and any other class of receivables
must be disclosed.
The amounts recognised at acquisition date for each major class of assets
acquired and liabilities assumed.
Disclosure of all contingent liabilities in terms of IAS 37. If a contingent liability is
not recognised because it could not be reliably measured, the reasons why it could
not be measured must be disclosed.
The total amount of goodwill that is expected to be deductible for tax purposes. In
South Africa this will always be Rnil and therefore it would not be necessary to
disclose this point.
Disclosure of any transactions that are recognised separately from the business
combination, i.e. acquisition-related costs including the amount, a description, how
they were accounted for and the line item in the financial statements in which each
amount is recognised.
If there is a bargain purchase, the amount of the gain recognised and the line item
in the statement of profit or loss and other comprehensive income in which the gain
is recognised and a description of the reasons why the transaction resulted in a
gain. If the acquirer holds less than 100% of the equity interest, the amount of the
non-controlling interests in the acquiree recognised at the acquisition date, the
measurement basis and if the non-controlling interests were measured at fair
value, the valuation techniques and key model inputs used to determine the fair
value.
Full details of the business combination achieved in stages including the
acquisition-date fair value of the previously held interest and the resulting gain or
loss arising from the aforementioned remeasurement disclosing the line item in the
statement of profit or loss and other comprehensive income which contains the
gain or loss.
The amounts of revenue and profit or loss of the acquiree since the acquisition
date included in the consolidated statement of profit or loss and other
comprehensive income for the reporting period, and the revenue and profit or loss
of the combined entity for the current reporting period as though the acquisition
date for all business combinations acquired during the year had been the
beginning of the year.
Disclosure requirements for subsidiaries (IFRS 12 Disclosing
Interests in Other Entities)
IFRS 12 requires extensive disclosures for interests in subsidiaries, structured entities
(both consolidated and not consolidated); joint arrangements and associates. The
intention of IFRS 12 is to improve the disclosure requirements for interests in other
entities to enable users to evaluate the nature of, and risks and financial effects
associated with these interests in the financial performance, financial position and cash
flows of the reporting entity. Entities should consider the level of detail that is needed in
order to satisfy this intention.
533
Chapter 8
IFRS 12 is effective for entities with annual periods beginning on or after 1 January
2013 (IFRAS 12.C1 & .C2).
IFRS
12.7
Disclosure requirements
Significant judgements and assumptions
The reporting entity must disclose information about significant judgements
and assumptions it has made in determining:
• that it has control over another entity; or
• that it has joint control of an arrangement or significant influence over
another entity.
12.8
Significant judgements and assumptions referred to in IFRS 12.7 would
include those made by the entity when coming to a conclusion whether it has
control, joint control or significant influence over another entity.
12.9
In particular to comply with IFRS 12.7 an entity shall disclose the significant
judgements and assumptions made in determining whether:
• it holds more than half of the voting rights of another entity where it does
not have control;
• it holds less than half of the voting rights of another entity where it has
control; or
• it is an agent or principal with respect to another entity
12.10
Interests in subsidiaries
IFRS 12 requires the reporting entity to disclose information that enables
users of the consolidated financial statements to understand or evaluate
.10(a)(i)
•
the composition of the group (i.e. the parent and its subsidiaries);
.10(a)(ii)
•
the interest that the NCI has in the group’s activities and cash flows;
.10(b)(i)
•
the nature and extent of significant restrictions on the parent’s ability to
access or use assets or settle liabilities of the subsidiaries in the group;
.10(b)(iii)
•
the consequences of changes in its ownership interest that do not result in
a loss of control (Volume 2 of Group Statements);
.10(b)(iv)
•
the consequences of losing control during the reporting period. (Volume 2
of Group Statements).
12.12
IFRS 12 requires reporting entities to disclose additional information for each
of an entity’s subsidiaries that have material non-controlling interests as
follows:
• the subsidiary’s name;
• its principal place of business (and country of incorporation, if different;
• the proportion of ownership interests held by non-controlling interests;
• the proportion of voting rights held by non-controlling interests, if different
from the proportion of ownership interests held;
.12(a)
.12(b)
.12(c)
.12(d)
continued
534
Interim acquisition of an interest in a subsidiary
IFRS
Disclosure requirements
.12(e)
•
.12(f)
.12(g)
the profit or loss allocated to non-controlling interests of the subsidiary
during the reporting period;
• the accumulated non-controlling interests of the subsidiary at the end of
the reporting period;
• summarised financial information about the subsidiary.
The summarised financial information referred to above helps users to
understand the interest that non-controlling interests have in the group’s
activities and cash flows. It includes the assets, liabilities, profit or loss and
cash flows of the subsidiary. It might include, but is not limited to, current/noncurrent assets, current/non-current liabilities, revenue, profit or loss, and total
comprehensive income. Dividends paid to non-controlling interests should
also be disclosed. The amounts disclosed should be given before intragroup
eliminations.
12.13
Nature and extent of significant restrictions
.13(a)
An entity must disclose, at a minimum, the nature and extent of any significant
restrictions on its ability to access or use the assets and settle the liabilities of
the group, such as
(i) those that restrict the ability of a parent or its subsidiaries to transfer cash
or other assets within the group; and
(ii) guarantees or other requirements that may restrict dividends or other
capital distributions being paid, or loans and advances being made or
repaid to other entities within the group.
12.11
Non-coterminous year-ends
When the financial statements of a subsidiary used in the preparation of
consolidated financial statements are as of a date or for a period that is
different from that of the consolidated financial statements, an entity shall
disclose:
• the date of the end of the reporting period of the financial statements of
that subsidiary; and
• the reason for using a different date or period.
This is additional to the preparation requirements of IAS 27.22 and .23 when
dealing with non-coterminous year-ends.
535
Chapter 8
The following are notes (illustrative) that are required as a result of having to comply
with IFRS 12 when preparing consolidated financial statements for P Ltd Group:
P LTD GROUP
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR
ENDED 31 DECEMBER 20.15 (extract)
10 Financial assets and financial liabilities (included under this note)
IFRS
1. Holding more than 50% of voting rights without control
12.7,.9(a)
IFRS 12 Disclosure of Interests in Other Entities requires
disclosure of the reasons why the ownership, directly or indirectly
through subsidiaries, of more than half of the voting or potential voting
power of an investee does not constitute control.
8. Interests in other entities
(a) Material subsidiaries
The groups principal subsidiaries as at 31 December 20.15 are set out
12.10(a)
below. Unless otherwise stated the share capital of the subsidiaries
consists of ordinary shares and these shares are held directly by members
of the group. The voting rights held by the group are representative of the
group’s ownership interests. The country of incorporation or registration is
12(a)–(d)
also their principal place of business.
Name of
entity
Place of
business/
incorporation
Ownership
interest held
by the group
Ownership
interest held by
non-controlling
interests
20.15
20.14
20.15
20.14
Principal
activities
S Ltd
RSA
100%
100%
0%
0%
Marketing and
selling of
marine
products
S1 Ltd
RSA
45%
45%
55%
55%
Marine craft
boatbuilding
S2 Ltd
Germany
70%
70%
30%
30%
Marine craft
engineering
SS Ltd
Landout
(Note (1) & (2)
100%
100%
0%
0%
Marine
Materials and
Leatherworks
536
12.10(a)(i)
12.10(a)(ii)
Interim acquisition of an interest in a subsidiary
(1) Significant judgement: Consolidation of entities with less than 12.7(a),.9(b)
50% ownership
The directors have concluded that the group controls S1 Ltd, even
though it holds less than half of the voting rights of this subsidiary.
The reason therefore being that the group is the largest shareholder
with a 45% equity interest while the remaining shares are held by ten
investors. The other shareholders and S1 Ltd signed an agreement
allowing S1 Ltd to appoint or remove the majority of the directors on
the board of S1 Ltd. The only way this agreement can be changed is
by means of a 75% majority vote and since P Ltd holds 45% of the
voting rights, this cannot be achieved.
(2) Significant restrictions
The group holds cash and short-term deposits in Landout which are 12.10(b)(i),
subject to local exchange control regulations. These regulations do
.13
not apply to dividends received from the subsidiary but are applicable
to all other capital. Included in the consolidated financial statements
are assets with a carrying amount of FC50 000 (2014: FC105 000) to
12.13(c)
which these restrictions are applicable.
(b) Non-controlling interests (NCI)
Set out below is summarised financial information for each subsidiary that
has non-controlling interests that are material to the group. The amounts
disclosed for each subsidiary are before intragroup eliminations.
Abridged statement of financial position
S2 Ltd
Current assets
Current liabilities
20.15
261 150
(119 070)
20.14
432 080
(155 000)
Current net assets
142 080
277 080
Non-current assets
Non-current liabilities
1 770 501
(487 716)
1 956 432
(234 432)
Non-current net assets
1 282 785
1 722 000
R1 424 865
R1 444 920
Accumulated non-controlling interests
R148 093
R167 656
Abridged statement of comprehensive income and
profit and loss
Revenue
Profit for the period
Other comprehensive income
1 500 000
273 365
–
1 200 000
304 532
–
Total comprehensive income
R273 365
R304 532
264 772
292 089
8 593
12 443
R273 365
R304 532
R2 500
R8 000
Net assets
Total comprehensive income attributable to:
Owners of the parent
Non-controlling interests
Dividends paid to non-controlling interests
12.12(g)
12.B11
12.10(a)(i)
12.10(a)(ii)
12.B10.(b)
12.12(f)
12.12(e)
12.B10(a)
537
Chapter 8
Comment
The above method of presentation complies with the requirements of IFRS 12. If the
financial statements of one of the subsidiaries used in the preparation of the
consolidated financial statements had been for a date for a different period to that of the
consolidated financial statements, this would have been needed to be mentioned in
terms of IFRS 12.11.
The IFRS 12 disclosures that have been discussed in this section are relevant to
Volume 1 of Group Statements. IFRS 12 also includes disclosure requirements
applicable to associates and joint ventures as well as the interest that non-controlling
interests have in the cash flows of the subsidiary. In addition there are specific
disclosure requirements for the risks associated with an entity’s interests in consolidated
structured entities and changes in a parent’s ownership. These aspects are not part of
the scope of this volume of Group Statements.
Self-assessment question
Question 8.1
The financial statements of P Ltd and its subsidiary, S Ltd, for the year ended
31 December 20.18 are given below. P Ltd paid R430 000 to acquire 75% of the issued
shares of S Ltd. It was agreed that the acquisition will become effective from 1 October
20.18.
S Ltd appointed management personnel in an attempt to improve the profitability of
S Ltd. The management fee for the period October to December amounted to a total of
R35 000. Profit of S Ltd for 20.18 accrued evenly throughout the year.
The following abridged financial statements must still be adjusted to provide for the
management fee:
STATEMENTS OF FINANCIAL POSITION AS AT 31 DECEMBER 20.18
P Ltd
S Ltd
902 000
430 000
188 000
30 000
10 400
59 500
540 000
–
–
–
50 250
141 000
Total assets
EQUITY AND LIABILITIES
Share capital (160 000/150 000 ordinary shares)
Share capital (100 000 8% preference shares)
Retained earnings
Long-term liabilities
Tax payable
R1 619 900
R731 250
160 000
100 000
989 900
370 000
–
150 000
–
357 380
130 000
93 870
Total equity and liabilities
R1 619 900
R731 250
ASSETS
Property, plant and equipment
Investment in S Ltd at fair value
Other investments
Loan to S Ltd
Inventory
Trade receivables
538
Interim acquisition of an interest in a subsidiary
STATEMENTS OF PROFIT OR LOSS AND OTHER COMPREHENSIVE INCOME
FOR THE YEAR ENDED 31 DECEMBER 20.18
P Ltd
S Ltd
Revenue
Cost of sales
1 295 000
(815 500)
820 000
(400 000)
Gross profit
Interest received from S Ltd (October to December)
Dividend received from S Ltd
Interest received on other investments
Other expenses
Interest paid
Costs incurred to acquire S Ltd – Consulting fees
479 500
750
7 500
9 500
(120 000)
(41 000)
(8 750)
420 000
–
–
–
(72 000)
(12 750)
–
Profit before tax
Income tax expense
327 500
(89 600)
335 250
(93 870)
PROFIT FOR THE YEAR
237 900
241 380
–
–
R237 900
R241 380
Other comprehensive income for the year
TOTAL COMPREHENSIVE INCOME FOR THE YEAR
EXTRACT FROM THE STATEMENTS OF CHANGES IN EQUITY
FOR THE YEAR ENDED 31 DECEMBER 20.18
Retained earnings
P Ltd
S Ltd
Balance at 1 January 20.18
Changes in equity for 20.18
Total comprehensive income for the year:
Profit for the year
Preference dividend paid
Ordinary dividend paid
Balance at 31 December 20.18
810 000
126 000
237 900
(8 000)
(50 000)
241 380
–
(10 000)
R989 900
R357 380
Additional information
1 S Ltd paid the dividend on 20 December 20.18 and P Ltd paid the preference
dividend and the ordinary dividend on 30 June 20.18.
2 The details of the property, plant and equipment of S Ltd on 1 October 20.18 were
as follows:
Carrying
Fair
amount
value
Land
R152 500 R247 500
Other property, plant and equipment
R240 000 R240 000
There were no other liabilities other than deferred tax which originated from the
revaluation of land at 1 October 20.18. The carrying amount of trade receivables
made up the difference of the net assets and liabilities acquired at acquisition.
539
Chapter 8
3
4
5
6
P Ltd elected to measure the non-controlling interests of the acquiree at its fair
value of R142 000 on the acquisition date.
P Ltd classified the investment in S Ltd under IFRS 9 in its separate financial
statements and fair value adjustments are recognised in a mark-to-market reserve
(other comprehensive income).
Goodwill has not been subject to any impairment.
The company tax rate is 28% and CGT is calculated at 66,6% thereof.
Required
(a) Prepare the consolidated statement of financial position, statement of profit or loss
and other comprehensive income and an extract from the consolidated statement
of changes in equity (retained earnings and non-controlling interests) of the P Ltd
Group for the year ended 31 December 20.18.
(b) Disclose the acquisition of the subsidiary in the notes to the annual financial
statements of the P Ltd Group for the reporting period ended 31 December 20.18.
540
Interim acquisition of an interest in a subsidiary
Suggested solution 8.1
The consolidated financial statements of the P Ltd Group in respect of the year ended
31 December 20.18, will be drawn up as follows:
P LTD GROUP
CONSOLIDATED STATEMENT OF FINANCIAL POSITION
AS AT 31 DECEMBER 20.18
ASSETS
Non-current assets
Property, plant and equipment (902 000(P) + 540 000(S) + 95 000(J1))
Goodwill (C3)
Other investments
1 537 000
45 501
188 000
1 770 501
Current assets
Inventory (10 400(P) + 50 250(S))
Trade receivables (59 500(P) + 141 000(S))
60 650
200 500
261 150
Total assets
R2 231 651
EQUITY AND LIABILITIES
Equity attributable to owners of the parent
Share capital – Ordinary shares
– Preference shares
Retained earnings
160 000
100 000
1 016 772
Non-controlling interests (C3)
1 276 772
148 093
Total equity
1 424 865
Non-current liabilities
Long-term liabilities (370 000(P) + 130 000(S) – 30 000 (J5))
Deferred tax (J1)
470 000
17 716
487 716
Current liabilities
Trade payables (J3)
Tax payable (93 870(S) – 9 800(J3))
35 000
84 070
119 070
Total liabilities
Total equity and liabilities
606 786
R2 231 651
541
Chapter 8
P LTD GROUP
CONSOLIDATED STATEMENT OF PROFIT OR LOSS
AND OTHER COMPREHENSIVE INCOME
FOR THE YEAR ENDED 31 DECEMBER 20.18
Revenue (1 295 000(P) + 205 000(C1))
Cost of sales (815 500(P) + 100 000(C1))
1 500 000
(915 500)
Gross profit
Other expenses (120 000(P) + 18 000(C1))
Administrative costs (8 750(P) + 35 000(J3))
Other income (P)
Finance costs (41 000(P) + 3 000(S))
584 500
(138 000)
(43 750)
9 500
(44 000)
Profit before tax
Income tax expense (89 600(P) + 15 085(S) – 9 800(J3))
368 250
(94 885)
PROFIT FOR THE YEAR
Other comprehensive income for the year
273 365
–
TOTAL COMPREHENSIVE INCOME FOR THE YEAR
Total comprehensive income attributable to:
Owners of the parent
Non-controlling interests
R273 365
264 772
8 593
R273 365
P LTD GROUP
EXTRACT FROM THE CONSOLIDATED STATEMENT OF CHANGES IN EQUITY
FOR THE YEAR ENDED 31 DECEMBER 20.18
Balance at 1 January 20.18 (P)
Changes in equity for 20.18
Acquisition of subsidiary
Total comprehensive income for the year:
Profit for the year
Preference dividend paid
Ordinary dividend paid
Balance at 31 December 20.18
Retained
earnings
Noncontrolling
Interest
810 000
–
−
142 000
264 772
(8 000)
(50 000)
8 593
–
(2 500)
R1 016 772
R148 093
P LTD GROUP
NOTES FOR THE YEAR ENDED 31 DECEMBER 20.18
2. Acquisition of subsidiary
On 1 October 20.18 P Ltd acquired 75% of the outstanding ordinary shares of S Ltd
and obtained control of S Ltd. S Ltd is operational in the telecommunications sector
and as a result of the acquisition the P Ltd Group will be a leading provider of these
services in the market.
542
Interim acquisition of an interest in a subsidiary
The goodwill of R45 501 arising from the acquisition results mainly from the
synergies expected from combining the operations of P Ltd and S Ltd.
The following table summarises the consideration paid for S Ltd and the amounts of
the assets acquired and liabilities assumed at the acquisition date, as well as the
fair value of the non-controlling interests in S Ltd.
Total consideration transferred – Cash
R430 000
Acquisition-related costs
Recognised amounts of the identifiable assets acquired
and liabilities assumed
Property, plant and equipment (240 000 + 247 500)
Trade receivables (balancing figure)
Deferred tax
8 750
487 500
56 715
(17 716)
Total identifiable net assets
Non-controlling interests in S Ltd
Goodwill
526 499
(142 000)
45 501
R430 000
The fair value of the non-controlling interests in S Ltd, an unlisted company, was
estimated by applying a market approach and an income approach . . . (detail of
measurement basis of the non-controlling interests as per requirements of
IFRS 3.B64(o)).
The revenue included in the consolidated statement of profit or loss and other
comprehensive income since 1 October 20.18 contributed by S Ltd was
R205 000(C1). S Ltd also contributed profit of R48 250(C1) over the same period.
Had S Ltd been consolidated from 1 January 20.18, the consolidated statement of
profit or loss and other comprehensive income would have included revenue of
R820 000(C1) and profit of R300 250(C1).
Calculations
C1 Allocation of S Ltd’s profit
Revenue
Cost of sales
Gross profit
Other expenses
Interest paid
P Ltd
Other
Management fee (arose only after acquisition)
Profit before tax
Income tax expense
Income tax expense (35 000 × 28%)
Profit for the year
#
&
Total
1/1–30/9
9 months
1/10–31/12
3 months
820 000
(400 000)
420 000
(72 000)
615 000
(300 000)
315 000
(54 000)
205 000
(100 000)
105 000
(18 000)
(750)
(12 000)
(35 000)
300 250
(93 870)
9 800
R216 180
–
(9 000)
–
252 000
(78 785)
–
R173 215
(750)
(3 000)
(35 000)
48 250
(15 085)
9 800
R42 965
252 000/300 250 × 93 870 = 78 785
48 250/300 250 × 93 870 = 15 085
543
Chapter 8
C2 Analysis of owners’ interest of S Ltd
Total
i At acquisition (1/10/20.18)
Share capital
Retained earnings (1)
Revaluation surplus (J1)
Equity represented by goodwill
– Parent and NCI
Consideration and NCI
ii Since acquisition
• Current year:
Profit after tax (C1)
Dividend
P Ltd 75%
At
Since
NCI
150 000
299 215
77 284
112 500
224 411
57 963
37 500
74 804
19 321
526 499
394 874
131 625
45 501
35 126
10 375
572 000
R430 000
142 000
42 965
(10 000)
R604 965
34 372
(7 500)
8 593
(2 500)
R26 872 R148 093
(1) 126 000 + 173 215(C1) = 299 215
C3 Proof of calculation of goodwill of S 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)
430 000
142 000
572 000
Net of the identifiable assets acquired and liabilities assumed
at acquisition date: IFRS 3.32(b)
(526 499)
Goodwill
R45 501
544
Interim acquisition of an interest in a subsidiary
C4 Pro forma consolidation journal entries
Dr
R
J1
Property, plant and equipment (S)(SFP)
(247 500 – 152 500)
Revaluation surplus (S)(SCE)
Deferred tax (S)(SFP) (95 000 × 66,6% × 28%)
Revaluation of land at acquisition date
J2
J3
Cr
R
95 000
Share capital (S)(SFP)
Retained earnings (S)(SCE)
Revaluation surplus (S)(SCE)
Goodwill (SFP)
Revenue (S)(P/L)
Cost of sales (S)(P/L)
Other expenses (S)(P/L)
Finance charges (S)(P/L)
Income tax expense (S)(P/L)
Non-controlling interests (SFP)
Investment in S Ltd (P)(SFP)
Elimination of investment at acquisition date
150 000
126 000
77 284
45 501
615 000
Management fees (S)(P/L)
Tax receivable (S)(SFP) (35 000 × 28%)
Trade payables (S)(SFP)
Income tax expense (S)(P/L)
Provision for the management fee for S Ltd
35 000
9 800
J4
Interest received (P)(P/L)
Interest paid (S)(P/L)
Elimination of intragroup interest
750
J5
Long-term loans (S)(SFP)
Loan to S Ltd (P)(SFP)
Elimination of intragroup loan
30 000
J6
Non-controlling interests (P/L)
Non-controlling interests (SFP)
Recognition of non-controlling interests in profit
since acquisition
8 593
J7
Dividend received (P)(P/L)
Non-controlling interests (SFP)
Dividend paid (S)(SCE)
Elimination of intragroup dividend
7 500
2 500
77 284
17 716
300 000
54 000
9 000
78 785
142 000
430 000
35 000
9 800
750
30 000
8 593
10 000
545