Group Statements – Volume 1
Seventeenth edition
Group St
Sta
atte
em
ment
me
nts
s – Vo
Vollume 1
Se
Seve
enttee
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e itio
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Editor: Ma
andyy Jonck
nical Editor: Liz Biss
scho
off
Techn
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.
Group Statements focuses on providing detailed explanatory application examples of
the following IFRSs:
• IAS 27 Separate Financial Statements;
• IFRS 3 Business Combinations;
• IFRS 10 Consolidated Financial Statements;
• IAS 28 Investments in Associates and Joint Ventures; and
• IFRS 12 Disclosure of Interests in Other Entities (by providing limited disclosure
examples of some core aspects).
The text includes numerous illustrative and practical examples which expand on the
principles and conceptual issues of the standards above and related aspects of other
IFRSs. The approach of the book 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
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.
LexisNexis Passplus is still included for Volume 1 of this work. 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 instantly. 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
v
Preface
through each chapter in the textbook and then complete the accompanying questions to
test their progress.
During the latter part of 2017, the SAICA finalised its “syllabus overload” review and
some aspects were excluded or moved to an “awareness level” for the sake of SAICA’s
professional assessment (the Initial Test of Competence (ITC)). The major aspects thus
affected relating to Group Statements are as follows:
• investment entities;
• some aspects relating to the identification of a business combination and the
acquirer;
• pre-existing relationships and reacquired rights in a business combination;
• some aspects relating to determining control (such as delegated power, principal/
agent consideration; control of specified assets);
• vertical groups (less detailed emphasis);
• subsidiaries classified as held for sale and subsidiaries acquired with a view to
resale;
• share buy-backs and rights issues of subsidiaries leading to loss of control or step
acquisition;
• joint operation accounting;
• parent recognising its investment in investees at fair value/under the equity method
in its separate financial statements (the update of this work focused on the parent
carrying the investment at cost);
• group reorganisations;
• changes in interests in associate (but still an associate); and
• associates held for sale.
This work was updated to still include a brief discussion of some of these aspects
(where relevant), but without very detailed explanatory examples thereof. Volume 2 was
mostly affected by these changes.
We trust that users of this publication will find it beneficial.
THE AUTHORS
November 2017
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
37
83
131
203
327
439
479
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 ........
4
4
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
12
14
15
15
16
16
17
17
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
22
24
1
Chapter 1
Accounting and disclosure in the separate financial statements of
the parent
1.15
2
Accounting of subsidiaries in the separate records of the
investor (parent) .......................................................................................
Example 1.9: Investment in subsidiary accounted for at fair value
through profit or loss in the separate financial
statements of the parent .................................................
Example 1.10: Investment in subsidiary accounted for at fair value with
adjustments in other comprehensive income in the
separate financial statements of the parent ....................
Example 1.11: Investment in subsidiary accounted for using the
cost method in the separate financial statements of the
parent ..............................................................................
Example 1.12: Investment in subsidiary accounted for using the
equity method in the separate financial statements of
the parent…………………… ...........................................
28
32
33
34
35
A group of entities and its financial statements: theory and background
SCHEMATIC ILLUSTRATION OF CHAPTER 1
Companies Act 71 of 2008:
Section 8 determines the
classification of companies:
Public listed company or
Private company (PIS >350)
but
Private company <PIS 350; and
Unlisted public company
Must comply with IFRS:
Control (IFRS 10.7):
l Power over investee;
l Exposure, or rights to, variable returns from involvement
with investee; and
l Ability to use power to affect amount of returns.
Must comply with IFRS for SMEs,
but may choose to apply IFRS
If one entity (P) controls another entity (S), the parent
shall prepare consolidated financial statements
(IFRS 10.4)
IFRS requirements for:
Preparation of consolidated financial statements:
l IFRS 10 Consolidated Financial Statements
requirements;
l Circumstances when consolidated financial statements
need not be prepared;
l Investment entities’ exemption from preparing
consolidated financial statements
and
l Accounting treatment in separate financial statements of
the parent:
l IFRS 12 Disclosure of Interests in Other Entities; and
l Accounting for subsidiaries in separate records of
investor (parent) in terms of IFRS 9 Financial
Instruments.
3
Chapter 1
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
4
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
the rights or control (e.g. a shareholders’ agreement) then that will constitute a
subsidiary relationship.
A grou
g up of enttitie
es and
a d itss finan
ncia
al stat
s tem
men
nts:: th
heory and
a d backkgrround
C mme
Com
ents
s
A su
ubsidiarry re
elattionship
p iss sett ou
ut in
n se
ectio
on 3 of the
e Co
omp
panies Actt, 20
008
8 ass follow
ws:
3
3(1)
A com
c mpa
any is a su
ubsidiarry of
o an
noth
her juriisticc pe
erso
on, –
(a
a) if th
hat juris
j stic person, one
o or mo
ore othe
o er subs
s sidia
arie
es of
o th
he ju
uristic pers
p son
n, orr on
ne
or mor
m re nom
n mine
ees of tha
at ju
uristtic person
n orr an
ny of
o itts subs
s sidia
arie
es, alon
ne or in
com
mbin
nation –
(i) is or are
e directtly or
o indirecttly able
a e to
o exxerc
cise
e, or co
ontrrol the
t exe
ercise of, a
majority of the
t generral vvotin
ng righ
r hts ass
a ocia
ated
d with
w issu
ued
d se
ecurritiess off tha
at
co
omp
panyy, whe
w ther pu
ursu
uant to a shar
s reho
olde
er agre
a eem
mentt or oth
herw
wise
e; orr
(ii)
(
ha
as or
o h
hav
ve the righ
hts to app
poin
nt or
o e
elec
ct, or
o cont
c trol the
e appo
a ointment or
o
electiion of, dire
ecto
ors of tthat compa
anyy wh
ho cont
c trol a majo
m ority
y off the
e vo
otess at a
meeting of the
t boa
ard;; or
(b
b) a whol
w lly-o
own
ned sub
bsid
diaryy orr an
noth
her juris
j stic perrson
n if all the
t gen
nera
al votin
v ng rrights
asssociated w
with issued
d se
ecurritie
es of the compan
ny are
a held
d or co
ontrrolle
ed, alon
a ne or
o
in com
c mbinatio
on, by pers
p son
ns contemplatted in p
para
agra
aph
h (a)).
2 The
T e Act
A furrthe
er det
d erm
min
nes tha
at for
f the
e purp
p posse of
o d
detterm
min
ning
g th
he con
ntro
ol of
o vvotiing
righ
r hts, th
he ffollo
owing
g sh
hou
uld be consiidered
d:
l vo
oting rrigh
hts tha
at are
a e ex
xercisablle o
only in
n cert
c tain
n circu
umsta
ances are
e to
o be
b ttak
ken
intto acc
a count onlly whe
w en tho
ose
e cirrcu
ums
stan
nce
es hav
h ve aris
a sen
n an
nd forr ass lo
ong ass th
hey
will cont
c tinu
ue, orr wh
hen
n th
he circ
c cum
msttancess are und
derr co
ontrol of the
e persson
n ho
oldiing
e votin
v ng rightss;
the
l vo
oting rrigh
hts th
hat are exe
e erciisable
e only
o y on ins
i tructio
on or with the con
c nse
ent of
an
noth
herr pe
ersson arre to be
e treatted
d as
s bein
b ng he
eld byy a no
omine
ee for
f that oth
her
pe
erso
on; an
nd
l vo
oting rrigh
hts held by a per
p rson as
a n
nom
min
nee
e fo
or a
ano
othe
er per
p rson
n are
a to be
e tre
eatted
ass he
eld by
y th
hat otherr persson, or
o h
held
d by
b a pers
p son
n in
n a fid
duciary
y cap
c aciity to be
tre
eate
ed as he
eld by the
e be
ene
eficciarry o
of th
hosse vot
v ting
g rig
ghts.
5
C
Cha
apte
er 1
Com
C
mme
ent
1 E
Eac
ch isssue
ed sha
are of a co
omp
pany, rega
r ardlesss of its cla
ass, has asso
ociated witth itt on
ne
g
genera
al vo
oting
g rig
ght, excep
pt to
o the
e ex
xten
nt provvided
d ottherrwisse by:
b
l the Co
omp
panies Act
A ; orr
l the pre
eferrencces, rig
ghtss, limita
atio
ons and
d ottherr termss de
eterrmin
ned by or in term
t ms of
o
the com
mpa
anyy’s Mem
M morand
dum
m of Inccorp
pora
ation
n (M
MoI)) (se
ection 37(2))..
2 H
How
wever, desspite
e an
nyth
hing
g to the
e co
ontra
ary in a co
omp
panyy’s Mo
oI, e
everry sh
hare
e isssue
ed by
b
tthat compa
anyy ha
as asso
a ocia
ated witth itt an irre
evocab
ble righ
r ht off the
e sh
hare
eho
older to votte on
o
a
any pro
opo
osal to am
mend prefe
p eren
nce
es, righ
r hts, lim
mitattions and
a
oth
her term
ms asssocciate
ed
w
with
h tha
at sha
s re ((sec
ction 37(3
3 3)). The
e sp
peccific con
ntin
ngen
nt votin
v ng rrigh
hts exe
e ercissablle by
b
tthe hollderrs of
o p
preference
e sh
hare
es und
u der succh ccon
nditio
onss will therefore hav
h ve tto be
b
ttake
en into
o accco
ountt in de
eterrmin
ning
g whet
w therr a co
omp
panyy (tthe inv
vesttor) ho
oldss th
he
m
majorityy vo
oting rights in
n an
noth
her ccom
mpa
any (the
e inves
stee
e) fo
or it to be dee
eme
ed to
o be
e th
he
ssubsidiaryy of succh com
c pan
ny (the inv
vesttor)..
3 S
Sha
aress do
o no
ot h
have
e a no
omin
nal or parr va
alue
e in terrmss of the
e C
Compan
niess Acct, 2
200
08
((sec
ction
n 3).
3 Any
A y sh
hare
es of
o a pre-e
exissting
g co
omp
pan
ny that ha
ave been issued
d w
with a
n
nom
mina
al or pa
ar vvalu
ue (in term
t ms o
of th
he old Co
omp
paniies Actt 61
1 off 19
973)), and tha
at arre
h
held
d byy a sha
areh
hold
der imm
med
diattely be
efore
e th
he e
effectivve date
d e (o
of th
he Act,
A i.e
e. 1 Ma
ay
2
2011), con
ntin
nue to havve the
t
nomin
nal or par va
alue asssigned
d to
o them wh
hen isssued
d,
ssubjjectt to
o any reg
gula
ations to be
e made
m e rega
arding the
eir tran
nsitiona
al stattus an
nd
cconv
verssion
n. The
T righ
hts of sha
s reholde
ers willl be
e pre
ese
erve
ed to
o the extent th
hat doiing so is
ccom
mpattible
e with
w the
e ne
ew Act.
A . Sh
hare
eho
olders will
w be com
mpe
ensated fo
or th
he losss off an
ny
ssuch
h rig
ghtss (S
Sche
edu
ule 5(6)
5 )).
B
Befo
ore
e the acc
a countin
ng treatm
men
nt of
o gro
g upss in
n te
erm
ms of
o IFR
RS can
c n be
ed
disc
cusssed
d, it shou
uld
b
be det
d term
min
ned
d whic
w ch rep
r portting
g frram
mew
worrk is
s rele
evant in termss off th
he Co
omp
pan
niess Act,
A
2
2008. Th
his disscussion co
omm
me
ence
es with a brie
ef exp
e possitio
on of the
e d
diffe
ere
ent cla
assses of
ccom
mpa
anie
es def
d fine
ed in the Acct.
3 The
T e Com
C mpa
anies Acct, 20
008 id
dentifie
es two typ
t es off co
ompan
nie
es tto be incorrpo
oratted
und
u der th
he Ac
ct. A co
om
mpany ca
an eithe
er be a p
proffit comp
pan
ny or a no
on--pro
ofit
com
c mpa
anyy. A profiit com
mpa
any is define
ed as a com
c mpa
anyy in
nco
orpo
orated
d fo
or th
he purpo
ose
e of
fina
f anccial ga
ain forr itss sha
s reh
hold
derrs. A non
n-p
proffit com
c mpa
anyy iss in
nco
orpo
orated
d fo
or p
pub
blic
the inco
ben
b nefiit and
a
ome a
and
d prop
pertty a
are
e no
ot dis
d trib
buta
able
e to itts iincorp
pora
ate
es. Pro
ofit
com
c mpa
anie
es can be
b eith
e her::
l a stat
s te-o
owned
d com
mpa
any (SOC
C Lttd);
l a priv
p vate
e co
om
mpa
any (Prop
prie
etarry Lim
L mited) (Pt
( y) Ltd
L d);
l a per
p rson
nal lia
abiliity com
c mpanyy (IIncorp
pora
ate
ed)((Incc); o
or
l a pub
p blic co
omp
pan
ny (Lim
( mite
ed))(Lttd).
6
A group of entities and its financial statements: theory and background
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
Public company
(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
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 (PIS):
• PIS > 350/holds assets in excess of
R5 million in fiduciary capacity – IFRS or
IFRS for SMEs
• PIS between 100 and 350 – IFRS or
IFRS for SMEs
• PIS < 100 and financial statements are
independently compiled – IFRS or IFRS
for SMEs
• PIS < 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 (PIS) of company.
7
C
Cha
apte
er 1
C mme
Com
ent
A co
omp
pan
ny may
m y a
alwa
ays ele
ect to us
se a “hig
“ gherr” fram
f mew
workk, b
but ne
everr a “lo
owe
er”
frram
mework.
Com
C
mme
ent
T
The
Pu
ublicc In
nterrest Sc
core
e (P
PIS) iss ca
alcu
ulate
ed by aw
ward
ding
g 1 mark for each
h off th
he
fo
ollow
wing:
l e
every R1
R milli
m ion turn
novver;
l e
every emp
e ployyee (av
vera
age num
mbe
er);
l e
every secu
s urityy ho
olde
er; and
a
l e
every R1
R milli
m ion thirrd party
p y ob
bliga
atio
on (R
Reg
gula
ation
n 26
6).
5 The
T e fo
ocu
us of thiss work
w k iss priva
p ate
ely ow
wned prof
p fit com
c mpaniies an
nd tthe
ereffore
e, from
f m the
t
dis
d cusssio
on above
e, iti iss cllear th
hat fin
nancia
al re
epo
ortin
ng willl be gov
g vern
ned
d byy IF
FRS o
or the
t
RS forr S
SME
Es. For the
e rem
main
nde
er o
of the
t e discusssion refe
r erence
e will
w there
eforre be
IFR
ma
made to the
e re
equ
uire
eme
entts of
o th
he rele
eva
ant IFR
RS
Ss, nam
mely:
l IFR
RS 10
0 Consolida
ate
ed Fin
F nan
ncia
al S
Sta
atem
ments
s;
l IFR
RS 12
2 Disc
clos
surre o
of Inte
I ere
ests
s in
n Oth
O er En
ntitiies
s;
l IAS
S 27
2 S
Sep
parrate
e Fina
F anc
cial Stat
S tem
men
nts; and
l IFR
RS fo
or SME
S Es..
The
T e fo
ollo
owin
ng two
o IF
FRS
Ss are
e disccusssed
d in
n Vo
olu
ume
e 2 of thiss wor
w k:
l IAS
S 28
2 IInv
vestments in As
A socia
ates
s and
a d Jo
oint V
Ven
nturres
s; and
a
l IFR
RS 11
1 Jo
oin
nt Arra
A ang
gem
ments
s.
6 IFR
RS 10
0 C
Co
onsolidatted
d Fin
F nan
ncia
al Sta
ate
eme
entts es
stab
blisshes principle
es forr the
t
pre
p sen
nta
ation
n and
a d prep
p parratio
on of co
onssolid
datted fin
nan
ncia
al stat
s tem
men
nts wh
hen
n an
a enttity
con
c ntro
ols on
ne or more
m e e
entiities (IF
( RS
S 10.1
1). It de
efines th
he principle
es of co
ontrrol,
esta
e ablish
hes co
ontrrol as the
e basi
b is for
f dettermin
ning
g whic
w ch enttitie
es are
a e co
onssolidatted
d, and
a
sets
s s out
o th
he acccou
untting
g re
equ
uire
eme
entts forr th
he pre
epa
ara
ation
n of
o suc
ch co
onssolid
datted
fina
f anccial sta
atem
me
entss (IF
FR
RS 10.
1 IN7
7).
7 IFR
I RS 12
2 D
Disc
clos
surre of Inttere
estts in Other Ent
E itie
es req
quirres an
n entit
e ty to
t dissclo
ose
info
i orm
matiion
n that ena
e able
es use
erss off itss fin
nan
ncia
al state
em
ments to
t eva
e alua
ate:
estts in
(a)
(
th
he natture
e of,
o and
a d rissks
s assso
ocia
ated
d with
w itss inttere
n othe
o er e
entiitiess; and
a d
(b)
(
th
he efffectt off th
hose in
nte
eressts on
n itss finan
ncia
al pos
p sitio
on, fin
nan
ncia
al perf
p form
mance
e and
a
c h flow
cash
ws (IFR
( RS 12
2.1)).
8 IAS
I S 27
2 Separa
ate Fina
F anc
cial Sta
S atem
me
ents
s con
c ntaiins acco
a oun
ntin
ng an
nd dissclo
osu
ure
entture
req
r quirrem
men
nts forr invvesstm
men
nts in sub
s bsid
diariess, jo
oin
nt ve
es and
da
asso
ociate
es whe
w en an
ent
e tity prrep
pare
es se
epa
arate fina
f anccial sttate
ementts. Th
he sta
and
darrd req
quirress an
a enttity
pre
p epa
aring ssep
para
ate fin
nan
ncia
al state
em
ments to
t acc
a cou
unt forr th
hose in
nve
estm
me
entss att co
ost or
in
i acc
a cord
dan
nce
e with IFR
RS 9 Fin
F nan
ncia
al Insttrume
entts ((IAS
S 27.I
2 N1).
9 Irre
esp
pecttive
e of whe
w the
er IFRS
S 10
1 Con
C nso
olid
date
ed Fina
F anc
cial Sta
ate
eme
entts or
IFR
I RS forr SME
Es is
i app
a plied, bot
b th stan
s nda
ards hav
h ve the sa
ame
e re
equ
uire
eme
entss with
w respe
ect
to
t a pare
ent an
nd itts sub
s bsid
diarriess – an
n en
ntity
y th
hat is a p
parentt sh
halll prrese
entt co
onssolid
datted
fina
f anccial sta
ateme
entss (IFR
RS 10..4 and
a d IF
FRS
S fo
or SM
S Es.9.2
2).
8
A grou
g up of enttitie
es and
a d itss finan
ncia
al stat
s tem
men
nts:: th
heory and
a d backkgrround
Where
e a pa
are
ent is linkked wiith a sub
s bsid
diarry or
o sub
s bsid
diarriess to
o fo
orm
m a largerr an
nd mo
ore
10 Wh
com
c mplexx eccon
nom
mic un
nit, it is cus
c tom
marry to
t refe
r er to
t tthe
e en
ntityy as
a a grou
g up. Th
he basic
cha
c aracte
eristic of such a gro
oup
p is that the
e man
m nagem
men
nt of
o th
he difffere
entt in
ndepen
nde
ent
par
p ren
nt and
a
ubssidia
aryy en
ntitiess co
omprissing the grroup
p is
s co-o
c ordina
ated
d in
n such
s h a way
w
su
tha
t at th
heyy arre ma
managed
do
on a centtrall an
nd unified bas
b sis in the
t e inttere
estt off the grou
g up as
a who
w ole.. T
This
s man
m agem
men
nt on
o a unif
u fied
d basiis is p
pos
ssib
ble be
eca
ause
e of
o the co
ontrrol,
imp
i pliccit in
i tthe
e pare
ent--su
ubsidia
ary re
elation
nship, wh
hich
h the
t
are
ent ex
xerccise
es ovver its
pa
sub
s bsid
diariess. Thi
T is con
c ntro
ol ma
m kess itt poss
siblle for th
he gro
g oup
p to
o b
be ma
managed
d a
as an
eco
e ono
omiic u
unit, in the
e ssense that the
e diffe
d erent pa
aren
nt and
a d sub
s bsid
diarry enttitie
es no
lon
l ger carr
c ry ou
ut the
t ir ccom
mm
merccia
al a
activities on
n a bas
b sis off co
om
mple
ete eccon
nom
mic
ind
i epend
den
nce
e.
A hou
ugh
h the discllosure
e re
equ
uire
ementts of the
e Act
A t in
n res
r pecct of grroup fina
f anc
cial
11 Alth
sta
s atem
men
nts (such
h as con
c sollida
ated
d ann
a uall fin
nan
ncia
al sstatem
men
nts) tre
eat the
e grou
up a
as an
eco
e ono
omiic uniit or
o business
s ent
e ity, th
hey
y do
d nott d
detrractt frrom
m tthe se
epa
ara
ate leg
gal
per
p rsonallitie
es of
o the
t e differen
nt pare
p entt an
nd sub
bsidia
ary entitie
es. Th
he dutty on
o the
ep
part of
the
t e pa
are
ent to su
ubm
mit grroup
p fina
f anccial sta
ate
eme
entss iss pur
p elyy an
n a
add
ditio
ona
al stat
s tuto
ory
req
r quirrem
men
nt.
Com
C
mme
ent
T
The
Co
omp
panies Actt, 2008
8 (A
Act) usses the
e te
erm “ho
olding com
mpa
any””, while
w e In
nterrnattional
F ancia
Fina
al Rep
R portiing Sta
and
dard
ds (IFR
RS) use
es the terrm “pa
aren
nt”, ind
dicatting
g that not
n only
compan
niess ma
ay be
b ssubsidiarie
es, as iindiicated in the d
definition belo
ow.. Th
he te
erm
m “pa
arent” is
used
d in thiss wo
ork to ccom
mplyy with IFRS
S.
T
The
e con
c ncep
pt of
o co
onttro
ol in ter
t rms o
of IFRS
S
1.3 Def
D finitio
ons
1
A grou
g up consistss off a parren
nt and
a its su
ubsidia
arie
es. A ssub
bsid
diary is
i d
defiined as
a an
a enttity
tha
t at iss co
ontrollled byy an
notherr en
ntityy (kkno
own
n as th
he paren
nt) (IF
( RS
S 10
0 Appe
A end
dix A).
An
A invvesstor con
c trols an
a inv
vesstee
e whe
w en the
e in
nve
esto
or is exp
possed
d, or
o has
h s riigh
hts, to
affe
var
v riab
ble retturn
ns fro
om its inv
volvvem
ment w
with the invvesstee
e and
a d ha
as the
e abilitty to
t a
ect
tho
t ose retturn
ns throug
gh its po
owe
er ove
o r th
he inve
i esttee (IF
FRS
S 10.6
6).
Com
C
mme
ent
IF
FRS
S fo
or SM
MEs de
efine
es a sub
s sidiiary
y ass an
a enti
e ty that
t t iss co
ontrrolle
ed by the
e pa
arent
(p
par 9.4
4).
2 It iss clea
c ar ttha
at cont
c trol iss es
sse
entiial. IF
FRS
S 10 Co
C nsolid
datted
d Fina
F anc
ciall Stat
S tem
men
nts
the
t ereffore
e re
equ
uire
es tha
t at a
an inve
estor, regardle
esss off th
he natture
e of
o itts invo
olve
ementt with
w
an
a entityy (th
he invvestee
e), ssha
all det
d term
min
ne whe
w eth
her it iss a pa
arent by
b ass
sesssin
ng wh
heth
her
iti conttrolls the en
ntityy (.5
5). In thiss asse
a esssme
entt all re
elevvan
nt fa
actss and
a cirrcumsstan
nce
es are
a
con
c nsid
derred an
nd such assse
essm
ment is rep
pea
ated
d iff fa
acts
s and
a d circu
ums
stance
es ind
dica
ate
tha
t at th
here a
are chang
gess to
o on
ne or mo
ore of the
e ellem
men
nts of con
ntro
ol liiste
ed bel
b ow
w.
9
C
Cha
apte
er 1
Com
C
mme
ent
T term
The
ms “invvesttor” and “inve
este
ee” a
are nott de
efine
ed in IF
FRS
S 10
0. “Inve
esto
or” iss ussed
d to refe
er
to
o a rep
portiing enttity that po
oten
ntially ccontrols one or m
morre othe
o er en
ntities, and
d “inve
este
ee” to
t
re
eferr to an enttity that
t t is, or ma
ay potentia
ally be, the
e su
ubsidiary of
o a rep
porting enttity.
1.4 Ele
E eme
ents of co
onttro
ol
1
2
3
4
5
Wh
When
n the d
defiinition
n of co
ontrrol is ana
a alyssed
d, th
hree elem
e mentss off co
ontrrol are
e evvide
entt:
An
A invvesstorr co
ontrrolss an
n in
nve
este
ee if, and
a d only if, the
e in
nvesto
or has
h alll the fo
ollo
owing:
(a)
(
p wer over the
pow
t e invvesstee;
(b)
(
e osu
expo
ure, or rig
ghtts to
o, var
v riab
ble return
ns from
f m in
nvo
olve
ementt with
w the
e in
nve
este
ee; and
(c)
(
th
he ab
bilitty to usse po
owe
er ove
er the
e invvesttee
e to
o affe
a ect th
he am
mou
unt o
of the
t
in
nve
esto
or’s
s re
eturrns (IF
FRS
S 10.7
7).
Wh
When
n an
n in
nve
esto
or ass
a sessses whe
w ethe
er an invvesstee
e iss conttrollled
d, facttorss such
ha
as the
t
pur
p rpo
ose an
nd dessign of
o tthe
e invesste
ee, the
e natu
n ure off the rele
r eva
ant ac
ctiviitiess and
a d ho
ow
dec
d cisiions a
abo
out tho
ose
e acctiv
vitie
es are
aem
made; wh
heth
herr the righ
r hts of the
e in
nve
esto
or g
give
e it
the
t e cu
urre
ent ab
bilityy to
o direcct the rellevantt ac
ctivvitie
es; wh
heth
herr the
e in
nve
esto
or is exp
e ose
ed to,
or
o has
h s rightts to
t var
v iab
ble return
ns from
f m itts invo
i olvvem
men
nt with
w h the inve
estee;; an
nd wh
heth
her
the
t e invesstor has the
e abili
a ity to use
e itts p
pow
werrs ove
o er th
he invvesstee
e to
o afffecct the am
mou
unt
of
o the
t invvesstorr’s return
ns a
are taken
n in
nto consideration
n.
In the
e mos
m st stra
s aightfo
orw
warrd sce
s ena
ario
o, an
a invvesstee
e, in the
e abs
a enc
ce of ad
ddition
nal
arra
a ang
gem
ments
s thatt alte
a er de
ecission
n-m
mak
king
g, is co
ontrolled by
b me
ean
ns off e
equ
uity
ins
i trume
entss (s
sha
aress) tha
t t give the hold
h derr prroportion
nate
e vo
otin
ng righ
hts
s in the
e in
nve
este
ee.
The
T e part
p ty w
who
o iss ab
ble to ex
xerccise
e votin
ng rightss su
ufficcient to
t det
d term
min
ne the
t invvesstee
e’s
ope
o era
ating
ga
and fin
nan
ncin
ng p
poliicie
es will
w co
ontrrol the
t e invesstee.
An
A in
nvesste
ee ma
ay howe
ever also
a o be
b de
esig
gne
ed so th
hat vo
oting righ
hts are no
ot the
t
in
dom
d min
nan
nt ffactor in
n dec
d cidin
ng who co
ontrolss the
t
nve
este
ee. Votin
ng rig
ghtss ma
may for
exa
e ample
e re
elatte only to ad
dminisstrative
e taskks an
nd rele
eva
ant acctivvitie
es be co
ontrollled
thro
t oug
gh contra
acttual arrange
ementts. In su
uch ca
ases a
all fac
f ctorrs men
m ntio
one
ed in 2 a
abo
ove
sho
s ould
d be
b co
onside
ered
d. Atttenttion
n sho
s ould
d also
a o be
b paid to the rrisk
ks to wh
hich
h the
t
inv
i esttee wa
as dessigned
d to
o be
b exp
e possed, th
he risk
r ks iti w
was
s de
esig
gne
ed tto pas
p ss on
o to oth
her
par
p rties in
nvo
olve
ed wit
w h th
he inv
vestee
e an
nd wh
heth
her the
e in
nve
esto
or iss expo
e ose
ed to som
s me or all
of
o tho
t se risks in the
t e assse
essm
me
ent.
Eacch of the
e elem
men
nts of co
ontrrol wil
w l no
ow be
e diiscu
usssed
d to
o hiighligh
ht its imp
i porrtan
nce
e in
the
t e assse
essm
me
ent of con
c ntro
ol.
1.5 Pow
P we
er
1
Pow
wer iss de
efin
ned
d ass exis
e sting righ
r hts tha
at give
g e th
he currren
nt abi
a lityy to direcct th
he rele
eva
ant
act
a tivittiess and fo
or the pu
urpose
e of
o IFR
I RS 10
0 Con
C nso
olid
date
ed Financiial Sttate
em
ments,
rele
r eva
ant acctiviitiess are
a acttivitiess of th
he inv
vesttee
e that signifiicantlyy a
affec
ct the
t invvesstee
e’s
retu
r urn
ns (Ap
( ppendiix A).
A
2 The
T e dete
d erm
mina
atio
on of the
e in
nve
esto
or’ss po
owerss de
epe
end
ds on the rele
r eva
ant acttivittiess, the
t
wa
w y dec
d cisio
ons
s abo
a ut the
e re
elevvan
nt act
a tivittiess arre ma
ade
e an
nd the
e rrigh
hts the
e in
nve
esto
ors
and
a d othe
er p
parttiess ha
ave
e in
n re
elation
n to the
e in
nve
este
ee (Ap
ppe
end
dix B .B10).
3 Pow
wer aris
a es fro
om rig
ghtss. Suc
S ch rig
ghtss can
c
be
e stra
s aigh
htfo
orwa
ard
d (e
e.g. th
hrough
h vvotiing
righ
r hts)) or
o ccom
mple
ex (e.g. em
mbe
edd
ded in co
ontrracctua
al a
arra
ang
gem
men
nts)) an
nd req
quire mo
ore
10
A group of entities and its financial statements: theory and background
4
5
6
7
8
9
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.B34−36).
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
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).
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
11
Chapter 1
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
2
3
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).
Although one investor can control an investee, more than one party can share in the
returns of an investee (IFRS 10.16).
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
2
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).
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
12
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.
A grou
g up of enttitie
es and
a d itss finan
ncia
al stat
s tem
men
nts:: th
heory and
a d backkgrround
Com
C
mm
mentt
In th
his boo
b ok, the
t follo
owing is used
u d th
hrou
ugho
out the texxt:
P = Parent
S = Subsid
diarry
2 A sim
s mple g
group, whic
w ch con
nsissts off a pa
aren
nt and
a d a singlle sub
s bsid
diary, ma
ay thu
us be
dia
d agra
amm
ma
atica
allyy re
epre
ese
ente
ed as folllow
ws:
P Lttd
%
51%
S Lttd
In the
e abo
a ove diagram
m, P Ltd
d has
h
m
mad
de an assse
essme
ent an
nd esttab
blish
hed
d thatt it
con
c ntro
ols S Ltd
d th
hrou
ugh
h th
he holdin
ng of the
e majo
m orityy o
of th
he votting
g riights, wh
hich
h in
n tu
urn
wa
w s obta
o aine
ed fro
om holldin
ng 51%
5 % of
o the iss
sue
ed equ
e uity sh
hare
e ca
apital of S Ltd
L .
fo
3 A com
c mplexx grou
up ma
ay be
e co
onsstitu
ute
ed by,, fo
or exa
am
mple
e, the
t
ollowin
ng ow
wne
ersh
hip
inte
i erest in
i the isssue
ed equ
e uity
y sh
hare
e capiital:
P Ltd
d
S1
1 Lttd
S2
2 Ltd
d
S3
3 Lttd
SS1
S 1 Lttd
SS
S2 Ltd
L
A com
c mpa
anyy is
s th
he fell
f ow
w su
ubssidiaryy off anotthe
er com
c mpa
anyy if both are
e subssidiariies of
the
t e sa
am
me parren
nt, for
f exxam
mple S2
S Lttd and
a d S3
S Ltd
d are
a fe
ellow
w ssub
bsid
diariess in the
t
exa
e ample
e ab
bov
ve.
Co
C mp
plexx grrou
ups are disc
d cussed
d in
n ch
hap
pter 7.
4 As
A ca
an be
e see
s n, the
ere
e is
s virtu
v ually no lim
mit to
o th
he va
arietty an
nd perrmu
uta
ation
ns of
ow
o nerrsh
hip inte
ere
estss that ccan
n exist with
w in a grou
up.
13
C
Cha
apte
er 1
Ex
xam
mple
e 1.1
S mple
Sim
e gro
g up
P Lttd ow
o ns 51% of the
e shares
s off S Ltd
d. Eac
ch share
e entittless th
he hol
h der to
o one ge
ene
eral
vvote
e at th
he annua
al gen
g neral me
eeting (A
AGM
M). Th
he rele
eva
ant acctivvitie
es a
are direccted
db
by the
t
A
AGM
M. S Ltd
L ha
as no
n oth
o her cla
asse
es of issued
d sharess.
P Lttd
51%
%
S Lttd
S Lttd is
i a su
ubssidiiaryy of P Lttd and
a d P Ltd
d iss th
he parren
nt o
of S Lttd, as P Ltd
d, by
b hol
h din
ng the
t
m
majoritty of
o the ge
eneral vo
oting
g riights (51
( %)), has
h the
e exis
e sting
g riights tha
t at give
e it the
e cu
urre
ent
a
abiliity to dire
d ect the
e re
elevvan
nt a
actiivitiies.
In
n th
he absen
nce
e of add
a itional arrran
nge
ementts tha
t at alte
a r decisio
on-m
makin
ng, the
e asse
esssme
ent
o
of con
c trol fo
ocu
uses
s on
o wh
w ich
h pa
artyy, if any,
a , is
s ab
ble to exxerc
cise voti
v ing rig
ghtss suff
s ficie
ent to
d
dete
erm
mine
e the inv
vesstee
e’s op
perrating an
nd financcial polic
p cies (IFR
( RS 10
0.B
B6).. In
n th
he mo
ost
sstraigh
htfo
orwa
ard
d sc
cen
nario, su
uch ass th
he one
o e abo
a ove, th
he inv
vesttor tha
at hollds a ma
ajorrity of
th
hos
se vot
v ing
g rig
ghts, in the ab
bsen
nce
e off otthe
er fa
acto
orss, co
onttrols th
he invvesstee
e.
Com
C
mm
mentts
a In all
a th
he exa
amp
ples
s in Vo
olum
me 1 whe
w re con
c ntroll wa
as obta
aine
ed thro
ough th
he ma
ajority
vvotin
ng righ
hts, it iss as
ssu
ume
ed th
hat the
e pa
aren
nt has
h the
e ab
bilityy to
o de
etermin
ne th
he rele
evant
a
activ
vitie
es, with
w houtt sp
pecifica
ally stat
s ting
g this fa
act.
b It is neccesssarry to
o distin
nguish betw
wee
en con
c trol and owne
o ersh
hip.. P Ltd con
ntro
ols 100
1 0% of
o
the (ne
et) asse
a ets of S Lttd, but P L
Ltd hass an
n eccon
nom
mic interestt (o
ownersh
hip inte
eresst) of
o
5
51%
% off the
e undivvide
ed net
n asssetss off S Ltd. P Ltd
d co
ontrrols 100%
% of the
e ne
et asse
a ets of
o
S Lttd, ther
t refo
ore 100
0% of S Lttd’s net asssetts are
a ttake
en up
u in th
he cconsolidated fina
ancial
sstate
eme
entss. Due
D e to P Ltd
d on
nly owning
g 51%
5 % off the
e net
n asssetss, th
he non
n n-co
ontro
ollin
ng
interestts (the
( e re
ema
ainin
ng 49%
4 %) iin the nett asssetts of
o S Lttd are
a als
so in
nclu
uded
d in
n th
he
ccons
solid
date
ed stat
s eme
ent of fina
f ncia
al po
osittion.
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.
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
16
A group of entities and its financial statements: theory and background
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
60%
60%
30%
30%
S1 Ltd
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 implication it also controls the relevant
activities of SS Ltd, thus establishing a parent-subsidiary relationship.
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
17
Chapter 1
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
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 interests in a subsidiary represent 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
A grou
g up of enttitie
es and
a d itss finan
ncia
al stat
s tem
men
nts:: th
heory and
a d backkgrround
its
i liabilitiess (.49
( 9(c))). Th
he situ
s uation
n w
where a subsidia
ary is pa
artia
ally
y-ow
wne
ed ca
an be
gra
g aph
hica
ally illu
ustrrate
ed as
a folllow
ws:
P Lttd
75%
%
25
5%
S Lttd
N
NCI
2 A pare
p entt prrese
entts non
n n-co
ontrollling
g in
nterrests in
i the co
onso
olid
date
ed sta
atem
me
ent of fina
f anc
cial
pos
p sitio
on wiithin equ
e uityy, ssep
para
ate
ely fro
om th
he equityy of
o the
t e own
o ners
s of
o the
t e p
pare
ent
(IF
( RS
S 10
0.22
2).
G
Gro
oup fin
f nan
nciial sttatem
ments
s
1.10
0 Prres
sen
nta
atio
on of co
ons
sollida
ate
ed fin
nan
ncial sta
ate
emen
nts
1
Fro
om the
ep
prio
or disc
d cusssio
on iti iss clea
ar th
hatt if on
ne ent
e tity (th
he parren
nt) con
c ntro
ols an
noth
her
ent
e tity (th
he su
ubssidia
aryy), the
e enti
e ity tha
at is the
e par
p rent sha
s all pre
p epa
are co
onssolid
datted
fina
f anccial sta
ateme
entss (IFR
RS 10..4).
Com
C
mme
ent
T IFR
The
RS for
f SM
MEs
s is also
o clearr tha
at a pa
aren
nt en
ntityy sh
hall pre
esen
nt ccons
solid
date
ed fina
f ancial
state
eme
entss tha
at in
nclu
ude all its sub
s bsidiarie
es (9.2
( 2).
2 The
T e te
erm
m g
group fin
nancia
al stat
s em
men
nts (grroup stat
s tem
men
nts)) iss co
om
mmo
onlyy use
u d ffor all
form
f ms of fin
nan
ncia
al stat
s em
men
nts pre
ese
enting infform
mation
n of
o a grrou
up o
of ent
e itie
es as
a ttho
ose
of
o a sing
gle e
enttity.
3 Co
C nso
olid
date
ed fin
nancia
al sstatem
men
nts consttitutte the
e m
mos
st imp
porttan
nt and
a d wide
w ely us
sed
form
f m of
o gro
g oup sta
ate
eme
entss and
a d arre def
d ine
ed as
a the
e fin
nan
ncia
al stat
s tem
men
nts of a gro
g oup
p in
wh
w ich
h the a
ass
setss, liiab
bilities,, eq
quity, inccom
me,, exxpe
ensses an
nd cas
c sh flow
ws of the
ep
pare
ent
and
a d itts sub
s bsid
diarriess are
a pre
ese
ente
ed ass th
hosse of
o a ssing
gle eccon
nom
mic en
ntityy (IFR
RS 10
App
A pen
ndixx A
A). In this
t s work
w k, th
he prima
ary foc
cuss is thu
us on the
e conssolida
ation of
o com
c mpa
any
fina
f anccial sta
ate
eme
entss in
n de
ealing
g with gro
oup
p sttate
ementts and
a d th
he und
u derrlyin
ng acc
a cou
untiing
tec
t chniqu
ues.
4 Co
C nso
olid
date
ed fin
nan
ncia
al ssta
atem
men
nts com
mplyy with
w h tthe ne
eed
d of
o userss of
o fina
f anc
cial
sta
s atem
men
nts to ob
btaiin info
orm
mation on
n th
he fina
f anccial po
osittion
n, resu
ultss off op
perrationss and
a
cha
c ang
gess in the fina
f anccial po
ositiion off th
he gro
g oup ass a wh
hole
e. In con
c nso
olidate
ed fina
f anc
cial
sta
s atem
men
nts, financial inform
mattion
n iss p
pres
sen
nted
d abo
a out the
e gro
g up as
s a single enttity
with
w hou
ut reg
gard
d for the
e le
ega
al bou
b und
daries of the sep
s parate
e le
ega
al e
entitiess. In
I ord
der to
obt
o tain
n a clearr pictu
ure off th
he fina
f anccial po
osittion
n and
a
aren
nt, it iis not
n
prrospeccts of a pa
suf
s fficiientt to
o hav
h e insightt in
nto on
nly the
e fiinancial sta
atem
mentss off th
he paren
nt as
a suc
ch.
The
T e intim
mate busin
nesss tties
s be
etw
wee
en the
e pare
p ent an
nd subsiidia
arie
es as we
ell as su
ubsub
s bsid
diariess re
equ
uire
e more
m e co
om
mple
ete infform
mattion
n.
19
C
Cha
apte
er 1
C mme
Com
ent
T Compa
The
anie
es Act,
A , 20
008 req
quire
es the follo
f owin
ng rega
r arding fina
ancial sstattementts:
29(1) Iff a com
2
mpa
anyy prrovid
dess an
ny ffina
ancia
al state
s eme
ents
s, inclu
udin
ng a
any
y an
nnual fina
f ancial
state
eme
entss, to
o an
ny p
person for anyy reaso
on, thos
t se stat
s ementss must
m t–
(a
a)
sa
atisfyy th
he fina
anc
cial rep
portting stand
dard
ds as to forrm and
d cconttentt, iff an
ny suc
ch
sta
andard
ds are p
pres
scribed
d;
(b
b)
pre
ese
ent fairly tthe sta
ate of affa
a airs and
d busi
b nesss of
o th
he com
mpa
any, an
nd exp
e plain
n th
he
tra
ansa
actionss an
nd th
he fina
f ancia
al p
position
n of the
e bu
usinesss of the
e companyy.
5 It iss obviious th
hatt co
onssolid
datted fin
nan
ncia
al stat
s em
men
nts sha
all in the
t e firrst insstan
nce
e co
omply
with
w h IA
AS 1 Pre
P esenta
atio
on of
o Fin
nan
nciial Stat
S tem
men
nts
s. Pa
art 1 Illu
I strratiive
Pre
P ese
entatio
on off Fina
ancial Sttate
ementts is in factt ba
ase
ed on
o the
e finan
ncial sta
s atem
men
nts
of
o a grou
up.
To
T sa
ave
e spac
ce in this book,, an abr
a ridg
ged
d state
em
ment of
o pro
p ofit or loss an
nd oth
her
com
c mpreh
hen
nsiv
ve inco
i om
me iis use
u ed in
i this
t s work
w k. The
T e re
ead
der mustt ho
owe
eve
er tak
t en
notice
tha
t at a co
omp
plette stat
s tem
men
nt of
o com
c mprehe
ens
sive
e in
nco
ome
e mus
m st be prep
p parred in pra
actice
e.
The
T e form
f matt of
o the state
eme
entt off prof
p fit or
o losss and
d oth
o er co
omp
prehen
nsivve inccom
me
(ac
( ccordin
ng to fun
f nctio
on)) off an
n in
ndivvidu
ual en
ntityy accco
ordiing to IAS 1 iss as
s fo
ollow
ws:
20.18
2
R
20.1
2
17
R
Rev
R
venue
C st off sa
Cos
ales
s
G oss pro
Gro
ofitt
O er inco
Othe
ome
e
D ribu
Dist
utio
on cos
c sts
A ministra
Adm
ativ
ve exp
e pensess
O er exp
Othe
e pensess
F ance ccostts
Fina
xxx
x
(xx)
( )
xxx
x
xx
(xx)
( )
(xx)
( )
(xx)
( )
(xx)
( )
xx
xx
(x)
(
xx
xx
xx
x
(x
xx)
(x
xx)
(x
xx)
(x
xx)
Proffit bef
P
b fore
e ta
ax
In
nco
ome
e ta
ax exp
e ensse
xxx
x
(xx)
( )
xx
xx
(x
xx)
P OFIT F
PRO
FOR
R THE
T E YEA
AR
xxx
x
xx
xx
Other com
O
c mp
preh
hen
nsiv
ve inc
com
me
M k-to
Mar
o-m
mark
ket resserrve
(fa
air valu
v ue adjjusttme
ent on invvesstme
entt)
In
nco
ome
e ta
ax rela
ating
g to
o ite
ems
s not rec
r lasssifie
ed
O er com
Oth
c mp
preh
hen
nsiv
ve inc
com
me for
f r the yea
y r, net
n of tax
x
xx
(xx)
( )
xx
xx
x
(x
xx)
xx
x
T TAL
TOT
LC
COM
MPR
REHE
ENS
SIVE
E IN
NCOM
ME FO
OR TH
T E YEA
Y AR
xxx
x
xx
xx
The
T e high
h hlig
ghte
ed se
ectio
on up
p to
o Prof
P fit b
beffore
e ta
ax, ass in
ndiccatted ab
bov
ve, is om
mittted in
mo
most exa
e ample
es in th
his wo
ork pu
urely to
o save
e spacce.
2
20
A grou
g up of enttitie
es and
a d itss finan
ncia
al stat
s tem
men
nts:: th
heory and
a d backkgrround
1.11
1 Ciircum
msttan
nce
es wh
hen
n con
c nso
olid
datted
d fiina
anc
cia
al stat
s tem
me
ents
s nee
n ed no
ot be
b
prrep
parred
d by
y the
t e pa
are
entt
1
It has
h s alrea
ady
y be
een
n esta
e ablishe
ed ab
bove thatt an enti
e ity tha
at iss a pa
are
ent sh
hall pre
ese
ent
con
c nso
olidate
ed fina
ancciall sttate
eme
entts. Ho
owe
eve
er, IFR
RS 10
0.4(a) alllow
ws a parren
nt n
not to
pre
p esent con
c nso
olidate
ed fina
f anc
cial sta
ateme
ents
s if it mee
m etss alll the fo
ollo
owing co
onditio
ons:
(i)) iti iss a whollly-o
ow
wned
d sub
s bsid
diarry o
or it iss a pa
artia
ally
y ow
wned su
ubsidia
ary an
nd all its
o her ow
oth
wne
erss, inclluding
g th
hosse no
ot oth
o herw
wisse enttitle
ed to vo
ote
e, hav
h ve be
een
i orm
info
med
d abou
ut, an
nd do
d no
ot obje
o ect to,, th
he par
p rent not
n pre
ese
entiing co
onssolid
datted
f anccial sta
fina
ate
eme
entss;
(ii)) its
i de
ebt orr equiity ins
stru
ume
entts are
e not
n tra
ade
ed in a pu
ublicc ma
m rke
et (like
( e the
t
J han
Joh
nne
esburg
g Stocck Exc
E cha
ange);
(iii)) iti did
d no
ot fiile (no
or iis it in
n th
he pro
oce
ess off filing
g) itts fina
f anccial sta
ate
eme
entss w
with
h a
s curitie
sec
es com
c mm
misssion
n or
o othe
o er reg
gula
atory org
gan
nisa
atio
on to
t iss
sue an
ny cla
ass of
i trume
ins
ent in a pub
p blic ma
arke
et; and
(iv)) its
i
mate
e or
o an
ny intterme
edia
ate pare
ent p
prod
ducces cons
c solida
ated
d fina
f anc
cial
ulltim
s atem
sta
men
nts in terrmss off IF
FRS
S th
hat are
e avaiilab
ble forr pu
ublic use
u e.
Com
C
mme
ent
In
n the case
e of an SM
ME, a subssidia
ary is not
n exc
e lude
ed ffrom
m co
onsolid
datio
on:
l ssimp
ply beccause the invvesttor is a ve
entu
ure cap
c pital org
gan
nisattion
n, m
mutu
ual fund
f d, unit
u trust
o
or simillar enti
e ty ((IFR
RS for
f SME
S Es.9
9.8));
l b
becausse itts busi
b ines
ss activ
a vitie
es a
are disssim
milarr fro
om tho
ose of the oth
her enttitie
es w
within
tthe gro
oup.. In succh case
c es the
t sub
bsid
diarry iss co
onso
olidated
d and add
ditio
onal infform
mation is
d
disc
closed abo
out tthe difffere
ent acti
a vitie
es of
o th
he subs
s sidiary (IF
FRS forr SM
MEss.9.9
9).
l b
becausse itt op
pera
ates
s in a ju
urissdicttion
n tha
at im
mpo
ose
es re
estrrictio
onss on
n tra
ansfferring cassh or
o
o
othe
er asse
a ets out
o of the
t jurisdicction (IFRS
S fo
or SME
S Es.9
9.9).
Itt ma
ay how
h weve
er be
b e
exclu
ude
ed frrom
m co
onso
olida
atio
on if:
l b
both
h of the
e follow
wing
g co
ondition
ns a
are met
m t:
• the
e pa
aren
nt iss itself a su
ubsidia
ary; and
d
• its ultiima
ate parent (orr an
ny iinte
erme
edia
ate parrentt) prod
p duce
es cconsoliidatted general
purposse fina
anciial stat
s tem
mentts that comply w
with
h full IF
FRS
Ss o
or with
w h the IFRS
S fo
or
SM
MEss (IF
FRS
S fo
or SME
Es.9.3).
A su
ubsidiarry iss also not con
nso
olida
ated
d if it iss acquired and held with th
he intentio
on of
o se
ellin
ng
o dispo
of
osing of it with
w hin one
e ye
ear from
f m its
s accquisition date (IFRS
S fo
or S
SME
Es.9
9.3A
A).
T carrryin
The
ng amo
a ountts of
o su
ubsidia
ariess that are
a nott conso
olida
ated
d arre d
discllose
ed eithe
e er in
n th
he
state
eme
ent of
o fiinan
ncia
al po
osittion or the nottes..
2 An
A en
ntityy tthatt iss exe
e mp
pted
d in
n acc
a cord
dan
nce
e with
w
pa
ara
agra
aph
h 4(a)
4 ) of IF
FRS 10 fro
om
con
c nso
olidatio
on may
m
nt sep
s para
ate
e fiina
anciial sta
ate
eme
ents as its
s only
o y fina
f anc
cial
pressen
sta
s atem
men
nts.
3 In Oc
O tob
ber 20
012
2 IF
FRS
S 10 was
w s ame
a end
ded
d to
o in
ntro
odu
uce an
n exxce
eption
n to
o th
he prin
p ncip
ple
tha
t at all
a sub
bsidia
arie
es sha
s all be co
onssoliidatted
d. Thi
T s e
exc
cep
ption rela
r ates
s to
t invvesttme
ent
ent
e titie
es and
a d will
w be
b dis
d scussse
ed nex
n xt.
21
C
Cha
apte
er 1
1.12
2 Inve
estm
me
entt en
ntittie
es
1
2
3
4
5
An
A invvesstm
mentt en
ntity iss de
efin
ned
d ass an
a e
entiity tha
t at:
(a)
(
o ainss fun
obta
f ds from
m one
o e or
o mo
ore in
nve
esto
ors fo
or the
e purp
p pos
se off prov
p vidiing
in
nve
estm
men
nt ma
m nag
gem
ment ser
s rvicces to the
em;
(b)
(
iss com
mmitted to
t its
i bu
usin
nesss pur
p rpose to invesst fun
nds so
olely for
f re
eturrns fro
om
capiital ap
ppre
ecia
atio
on, inv
vesstm
ment in
ncome
e, or
o both
b h; and
a d
(c)
(
m asu
mea
ures
s and evvalu
uate
es the
e perfo
orm
man
nce
e off su
ubs
stan
ntia
allyy all off itss in
nve
estm
men
nts
o a fa
on
air valu
v ue basis (IF
FRS
S 10 App
A pen
ndixx A).
A
In ass
a sesssin
ng wh
w eth
her an
n en
ntitty mee
m etss the def
d inittion
n ab
bovve, an
n entitty sha
s all con
c nsid
der
wh
w eth
her it h
has
s the fo
ollo
owiing typ
pica
al cha
c arac
cteristticss off an
n in
nvestm
men
nt enti
e ty:
(a)
(
it ha
as m
more tha
t an one
o e in
nvesstm
men
nt (IFR
RS 10.B8
85O
O);
it ha
(b)
(
as m
more tha
t an one
o e in
nvessto
or (IIFR
RS 10..B8
85Q
Q);
it ha
e enti
(c)
(
as inve
estorss th
hat are
e no
ot rela
r ated
d part
p tiess off the
e ty (IFR
( RS
S 10
0.B85T
T); an
nd
its ow
(d)
(
wne
ersh
hip in
nteres
sts are in the fo
orm
m of eq
quitty orr sim
s ilarr inte
eres
sts
(IIFR
RS 10..28
8).
An
A en
ntityy ssha
all con
nsiderr all
a fac
f cts an
nd circcum
msttan
nces
s, incclud
ding
g its purpo
ose
e and
a
des
d sign
n, wh
w en asssesssing wh
hetherr it is an invvesstm
men
nt entit
e ty. Th
his can
n be
b det
d erm
min
ned
from
f m doc
d cum
men
nts tha
at ind
i dica
ate the
e entitty’s
s in
nvesstm
men
nt obje
o ective
es ssuc
ch as
a the
t e en
ntity’s
offe
o erin
ng me
emo
ora
andum
m an
nd corrpo
oratte p
pub
blicatio
onss. Itt sh
hou
uld be
e cle
earr th
hat it doe
d es not
n
pla
p an to
t hol
h ld its
i invvesstmentts ind
i efin
nite
ely an
nd the
ereffore
e nee
n eds a cle
ear exxit stra
ate
egy
reg
r gard
ding th
he holdin
ng of iinvesttme
entss.
If th
he enttityy ob
btaiins be
ene
efits
s th
hat are
e not obt
o tain
nab
ble by oth
herr pa
artie
es, wh
hich in
ndicattes
tha
t at itt iss a relate
ed pa
arty to the inve
esttee, th
hen
n th
he enttityy is no
ot a
an invvessting
g e
entity.
on of
Exa
am
mple
es of such be
ene
efits
s are
a the a
acq
quissitio
on, usse, exxch
han
nge
e or exp
e loittatio
pro
p ocesse
es, as
ssetts or
o tech
t hno
olog
gy of an inv
vesstee
e (IFR
RS 10.
1 B8
85I).
inve
An
A
estme
ent prop
p perrty th
hat is there
eforre no
ot co
onssoliida
ated
d due to the
t
abo
a ove
eme
enttion
ned
d co
ond
ditio
ons
s sh
halll be
em
mea
asu
ured
d at
a fa
air vallue throu
ugh
h prrofit or lo
oss
s in
acc
a cord
dan
nce
e with
w IFR
RS
S 9 Fin
nan
ncia
al Ins
I stru
ume
entts (IFR
( RS 10
0.31
1).
Com
C
mme
ent
N with
Notw
hsta
andiing the
e req
quirrementts se
et out
o abo
a ove,, if a
an inve
estm
men
nt en
ntity
y ha
as a su
ubsidiary
that pro
ovid
des serrvices thatt re
elate
e to
o the
e in
nvesstme
ent enttity’s in
nvesstm
mentt acctivittiess, it sha
all
c solidate th
cons
hat sub
bsid
diaryy in
n acccorrdan
nce
e with IFR
I RS 10
1 and
a
ap
pplyy the
e re
equiirem
men
nts of
o
IFRS
S 3 to the
t acq
quissitio
on of
o th
he subs
s sidia
ary..
1.13
3 Co
onso
olid
dation
n pro
p oce
edu
ure
es
1
It has
h alrea
ady
y be
een
n essta
ablis
she
ed tha
t at iff on
ne enttityy co
ontrrolss anotthe
er entit
e ty, the
e fo
orm
mer
kno
k own
n as
a th
he paren
nt sha
s ll prep
p parre con
c nsolida
ated
d financial sta
s atem
men
nts (IF
FRS
S 10.4
4).
2 Bro
B oad
dly spe
eak
king
g, con
c nsolida
ated fiina
anciial sta
atem
mentss:
(a)
(
com
mbin
ne like
e item
ms of assse
ets, lia
abillitie
es, eq
quitty, inccom
me, exxpe
ensses an
nd ca
ash
flow
ap
ws o
of the
t e pa
are
ent witth tho
t ose off its
s subssidiariies. The
T
pprroac
ch of co
omb
biniing
s is cle
earrly e
eviden
nt in
i the
t wo
orkkshe
eetts thatt arre use
u ed in Vol
V lum
me 1 o
of this
like items
w k;
work
(b)
(
o et (ellimina
offse
ate) th
he ca
arryying
g a
amo
oun
nt of the parren
nt’s in
nvestm
men
nt in ea
ach
subssidiary
y and
a d th
he p
parrent’s po
ortio
on of eq
quityy o
of eac
e ch sub
s bsid
diary, an
nd exp
e plains
2
22
A grou
g up of enttitie
es and
a d itss finan
ncia
al stat
s tem
men
nts:: th
heory and
a d backkgrround
how
w to
o acco
oun
nt for
f an
ny rela
r ated
d p
purcha
ase
e diffe
d eren
nce
e (ssee
e 3
3.13
3 to
o 3.15
3 5 o
of this
w k);
work
(c)
(
e mina
elim
ate in fulll in
ntra
agro
oup
p asse
a etss an
nd liab
bilittiess, equ
e uity, in
nco
ome
e, exp
e pensess and
a
cash
h fflow
ws relatin
ng to tra
anssacctio
ons be
etw
ween e
enttitie
es of the
e grou
g up (proffits or
lo
ossses re
esultin
ng from intrag
grou
up tra
anssacction
ns tha
at are
e reco
r ogn
nise
ed in assse
ets,
such
h a
as invventorry a
and
d non
n -cu
urre
ent assse
ets, arre elim
min
nate
ed in fulll). Inttrag
gro
oup
lo
ossses ma
ay ind
dica
ate an
n im
mpa
airm
men
nt thatt re
equ
uires re
eco
ogn
nitio
on in the
t e co
onssolid
datted
finan
ncial stat
s tem
men
nts.
Com
C
mm
mentt
R er to chap
Refe
pter 5 ffor a de
etaiiled disscus
ssio
on of
o th
he ttrea
atme
ent of intra
agro
oup
p ba
alancess an
nd
intra
agro
oup
p tra
ansa
actio
ons
s, ass we
ell as
a cchap
pterr 6 for
f a diiscu
ussion of impa
airm
men
nt.
(d)
(
IA
AS 12
2 Inco
om
me Ta
axes app
a plie
es tto tem
mpo
ora
ary diffferrencess th
hatt arise
e from
m the
t
e mina
elim
atio
on of prof
p fits and
a
lo
ossses
s res
r ulting frrom
m intrrag
grou
up trranssacctio
ons
(IIFR
RS 10..B8
86)..
3 Co
C nso
olid
datiion of a sub
bsidia
ary begin
ns ffrom
m the
t da
ate the
e in
nve
esto
or o
obtain
ns con
c ntro
ol and
a
cea
c ase
es whe
w en the
e pa
are
ent los
ses co
ontrrol o
of the
t su
ubsidia
ary (IF
FRS
S 10.2
20).
4 The
T e fin
nan
ncia
al stat
s tem
men
nts of the
e pa
are
ent and itts sub
s bsid
diarriess ussed
d in
n th
he pre
p eparatiion of
the
t
c sollida
con
ated
d financcial sta
s tem
men
nts sha
s all ha
ave th
he sam
me re
eportin
ng da
ate
(IFR
( RS 10
0.B9
92)). If the reporrtin
ng dat
d eo
of a subssidiaryy diffe
d ers fro
om tha
at of
o the
t e pa
are
ent,
the
t su
ubsidia
ary ha
as to
t pre
p parre add
a ditio
ona
al fina
ancial info
orm
mattion
n ass o
of th
he sam
s me da
ate as
the
t
fin
nan
ncia
al sta
atem
mentss of
o the pa
are
ent to en
nab
ble th
he paren
nt tto conso
olid
date
e the
t
fina
f anccial infform
ma
ation
n of
o tthe
e su
ubssidiaryy, unle
u esss itt iss im
mprracttica
able
e to do
d so
o. Iff it is
imp
praccticcab
ble to do
o so
o, tthe
e most
m t re
ece
ent fin
nan
ncia
al sstatem
men
nts of the
e sub
s sid
diarry are
a
adju
a ustted for th
he effe
ectts o
of sign
s nificcan
nt tran
nsa
actio
onss o
or even
e ntss that occ
curr be
etw
wee
en the
t
dat
d e of tho
ose
e fina
f ancial sttate
eme
entts and
d the
t e date
d e of
o the
e con
c nsolida
ated
d fina
f anc
cial
stat
s tem
men
nts (IF
FRS
S 10.B
B93
3).
Com
C
mm
mentt
T e IF
The
FRS
S fo
or SME
S Es dete
d erm
mine
es that the
e finan
ncia
al sttate
eme
entss of the
e pare
p ent and
d th
he
s sidiiaryy tha
sub
at are
a used for the
e p
prep
para
ation
n off th
he cons
c solidated fina
anccial statem
ments
s ll ha
sha
ave
e the
e sa
ame
e re
epo
orting date
d e, un
nlesss itt is impracticcable to
o do
o so
o. In such
h a cas
se
t mo
the
ost rece
r ent fina
f ancial state
s eme
entss off the
e su
ubsiidia
ary is ussed
d, ad
djussted
d for the effec
e cts of
o
s nific
sign
cant tra
anssactions
s and
a
evventts that
t t occu
ur b
betw
wee
en the
t
re
eporrting
g date
d e off th
he
s sidiiaryy and th
sub
he d
date
e of the
e co
onso
olida
ated
d fin
nan
ncial sta
atem
men
nts (9.1
16)
5 In the pre
epa
ara
ation
n of
o cons
c solida
ated
d finan
ncial sta
s tem
men
nts the
e financiial sta
s atem
men
ntss sh
hall
be
b pre
epa
ared usin
u ng un
niform accco
ounting
g poli
p cie
es (IF
( RS
S 10
0.19). If a subsiidia
ary us
ses
acc
a countin
ng po
olicciess th
hat diffe
er from
f m ttho
ose ad
dop
pte
ed in the
e con
c nsolida
ated fina
f anc
cial
stat
s tem
men
nts,, ap
pprrop
priatte adjjustme
entts ssho
ould
d be
b ma
made to itss fin
nan
ncia
al sta
s tem
men
nts to
ens
e sure
e confform
mitty with
w h th
he gro
g up’’s acc
a countin
ng pollicie
es (IF
FRS
S 10
0.B
B87
7).
6 The
T e prof
p fit o
or losss and
a ea
ach
h co
ompon
nen
nt of
o oth
o er com
mp
preh
hen
nsivve inc
com
me, ass well as
the
e to
otall co
omp
pre
ehe
ensiive inc
com
me sh
hall be
e atttrib
buted to the
e own
o nerss of th
he parren
nt and
a
the
e no
on--controlling inttere
ests
s on
o the ba
asis
s off the pres
p sen
nt own
o nerrshiip inte
eressts (evven
n if
thiss re
esu
ultss in the
e non--co
ontrrolliing inttere
ests hav
h ing
g a defficitt ba
alance
e) (IFR
( RS 10
0.B9
94)).
23
C
Cha
apte
er 1
Com
C
mm
mentt
a W
Whe
ere pottenttial votting
g rig
ghtss exxist,, the prop
p portiion of pro
ofit or lloss
s an
nd cha
ange
es in
e
equity allo
a ocated to the
t parrentt an
nd non
n -contro
ollin
ng in
nterrests are d
dete
erm
mine
ed sole
s ly on
o
the bassis of
o th
he e
exis
sting owne
ersh
hip inte
eressts and
d do
o no
ot re
efle
ect tthe posssib
ble exe
e ercis
se
o
or convverssion
n of pottential voti
v ng righ
hts (and
( d ottherr de
eriva
atives) (IF
FRS 10.B8
89).
b If a sub
bsid
diaryy ha
as issu
ued cum
mullativ
ve pref
p fere
ence
e sh
hare
es that are
e classsified as
a e
equity
a
and arre held
h d byy non--con
ntro
olling
g in
nterrests, the
t
pa
aren
nt’s share
e of prrofit or losss is
ccalc
culated after a
adju
ustin
ng for
f the
t dividen
ndss atttribu
utab
ble to
t such
s h sh
hare
es, whe
w ethe
er o
or no
ot
ssuch
h divide
end
ds h
have
e be
een decclarred (IFRS 10.B95).
1.14
4 Diisc
closure off in
nterres
sts
s in
n othe
er entitiies
s
1
IFR
I RS 12
2 Dis
sclo
osu
ure
e o
of Intterestts in Oth
O er Entities
s spe
eciffies
s the
t
m imu
min
um
dis
d clo
osure re
equirem
me
entss for
f
ubssidiiaries,, join
nt arrang
gem
mentss, asssocciattes and
a
su
unc
u con
nso
olida
ate
ed stru
s uctu
ured enti
e tiess.
Com
C
mm
mentt
In th
his cha
apte
er the em
mpha
asiss falls on the
e ba
asic dissclo
osurre relat
r ting
g to su
ubsid
diarriess an
nd
b aus
bec
se a ch
hang
ge in own
o nersship
p is nott disscusssed in
n Vo
olum
me 1, disc
d clos
sure
e requirem
ments
r ating
rela
g to
o su
uch chang
ges are
e also
a
om
mitte
ed. Dissclo
osurre relatting
g to joint arra
a angements,
a ocia
asso
atess an
nd uncconsoliidatted strructured
d entit
e ties are
e discu
d usssed in Volum
me 2 of th
he
w rk.
wor
2 IFR
RS 12
2 re
equ
uire
es an
a en
ntity
y to
o discclosse info
orm
mation
n th
hat en
nab
bless us
serrs of
o fina
f anc
cial
sta
s atem
men
nts to evvalu
uate
e th
he na
aturre of,
o a
d riiskss asso
a ociate
ed with
w h itts inte
eressts in oth
her
and
ent
e titie
es; an
nd th
he efffect of
o tho
ose
e inte
eressts on its finan
ncia
al po
osition
n, fina
f anc
cial
per
p rforrma
ancce and
a d ca
ash
h flo
ows
s (IIFR
RS 12..1)..
3 An
A en
ntityy sh
hall diiscllose in
nfo
ormatio
on ab
boutt significantt ju
udgem
men
nts and
d ass
a um
mptions
s it
has
h s mad
m de in de
etermiinin
ng tha
at it has
h s cont
c troll of
o a
ano
othe
er enttity (IFR
RS 12.7) (s
see
cha
c apter 10 forr more
e de
eta
ail). Th
he follo
f ow
wing
g judge
em
men
nts and
a d assu
a umptio
onss mad
m de in this
reg
r gard
d shalll be disc
d clossed
d, nam
n melyy whe
w ere:
l it doe
d es n
not co
ontrrol ano
a other enttity evven tho
oug
gh it h
hold
ds mo
more tha
an hal
h f off th
he vvotiing
rightss off the othe
o er ent
e ity;
l it con
c ntro
ols ano
a other enttity evven
n thoug
gh it hold
h ds lesss than
n half
h of the
e vo
otin
ng righ
hts
s of
the
e otthe
er entit
e ty; and
l it iss an
a a
age
ent or a prin
p ncip
pal (IF
FRS
S 12
2.9
9).
Com
C
mm
mentt
E amp
Exa
ple of
o note
n e on signific
cantt jud
dge
eme
ents
s an
nd a
ass
sum
mptiions
s:
T e co
The
omp
panyy ha
as d
dete
ermined
d th
hat it co
ontrrolss S Ltd, ev
ven tho
ough
h it ow
wns lesss th
han 50%
%
o tthe votting
of
g rig
ghtss. The
T
facctorrs ttake
en into
o co
onssideratio
on in ma
aking th
his jud
dgement
inclu
ude
e the size of its blo
ock of sha
s ares
s, th
he rela
r ative
e siz
ze and
a d dispe
ersio
on of
o hold
h ding
gs by
b
o er shar
othe
s reho
olde
ers, the
e ab
bilityy to appoint and
a rem
movve th
he maj
m joritty of the direcctorss on
n th
he
B ard of Dire
Boa
D ecto
ors a
and the
e sh
haring of key
k ma
anag
gem
men
nt po
osittionss be
etw
ween
n the compan
ny
a d S Ltd.
and
L .
4 If a pare
p ent is an
n in
nve
estm
ment enttityy (ssee
e 1..12
2 ab
bovve), it sh
halll disclosse info
i orm
matiion
abo
a out sig
gnifica
ant jud
dge
ementts and
a d asssu
ump
ptio
onss mad
m de in dete
d erm
miniing that it iss in
nde
eed
2
24
A grou
g up of enttitie
es and
a d itss finan
ncia
al stat
s tem
men
nts:: th
heory and
a d backkgrround
an
a invvesstmentt en
ntitty (IFR
RS 10
0.9A
A). Th
he follo
f owing
g sh
hou
uld alsso be
b dis
sclo
ose
ed for
f ea
ach
unc
u con
nso
olida
ate
ed sub
s bsid
diarry:
l the
e su
ubssidiaryy’s nam
me
e;
l the
e prrinccipa
al plac
p ce of bu
usin
ness (and
d cou
c ntrry of
o in
nco
orpora
atio
on if diffe
eren
nt from
f m the
t
prin
ncipall place
e of bu
usines
ss) of the
e subs
sidiaryy; and
a d
l the
e prop
p porrtion
n of
o ow
ownersh
hip inttere
est he
eld byy the pa
are
ent an
nd, if diffferentt, the
t
pro
opo
ortio
on of vot
v ing
g rig
ghts held
h d (IFR
RS 10.
1 19B
B).
5 The
T e pare
p entt sh
hall disclosse info
i orm
matiion to
o en
nab
ble ussers
s of
o itts con
c nso
olida
ate
ed fina
f anc
cial
sta
s atem
men
nts:
(a)
(
to
o unde
ers
stan
nd:
l the co
omp
possitio
on o
of the gro
oup
p;
l the inttere
est that non-ccon
ntro
ollin
ng inte
i eressts ha
ave
e in
n th
he gro
oup
p’s acttivittiess and
a
c sh flow
cas
ws; and
(b)
(
to
o evvaluatte:
l the na
aturre and
a d exxtent of sig
s nifiicant res
r stricctio
ons on
n itss ab
bilitty to
t acc
a cess o
or use
u
a sets
ass
s, and
a se
ettle
e lia
abilitie
es, of the
e grrou
up;
l the na
ature of,, a
and ch
han
nge
es in, the riskks assocciatted
d w
with itss in
nte
eressts in
c nsolida
con
ated stru
s uctu
ured
d entit
e tiess (IFR
RS 12.
1 10).
Com
C
mm
mentt
E amp
Exa
ple of
o com
c mpo
osition of the
e grroup
p:
P ncip
Prin
pal sub
bsid
diarries
s:
T e co
The
onso
olida
ated
d fin
nanciall sta
atem
men
nts for the year e
ended 28 Feb
brua
ary 20..18 include
e th
he
a ounts of the
amo
t
co
omp
panyy and
a
its su
ubsidiariess. T
The princiipal su
ubsiidiariess and the
eir
a vitie
activ
es are:
a
So
outh
h Afric
can
su
ubsiidia
arie
es:
A Ltd (80
0%)
R earch and
Res
a d de
evelopm
men
nt off produ
ucts
s
B Ltd (75
5%)
Own
O
ner of ma
anu
ufaccturing pla
ant an
nd leas
l sing
g to
o th
he
c mpan
com
ny (parrentt)
Ge
erm
man subsidia
ary:
C Ltd (55
5%))
C sulttatio
Con
on serv
s vice
es
6 Wh
When
n th
he ffina
ancial sta
atem
me
entss off a subsidia
ary are
ea
as of
o a da
ate or for a pe
erio
od thatt is
diff
d fere
ent fro
om tha
at of
o the
t e co
onssolidatted
d fin
nan
ncia
al stat
s tem
men
nts,, an
ne
entity sha
s all dissclo
ose
the
t e date
e o
of the
t
end off th
he rep
porrting perriod
d of
o tthe
e finan
ncial sta
atem
me
entss o
of the
t
sub
s bsid
diary a
and
d th
he rea
r ason fo
or usi
u ng a d
diffe
ere
ent period
d (IIFR
RS 12.11).
7 Forr eac
e ch sub
bsid
dia
ary tha
at ha
as non
n-ccontrolling inte
i erestss th
hat are ma
ate
erial to
o the
t
rep
r portting
g en
ntitty, the
t e follow
win
ng sha
s all be
b d
disc
closed
d:
l the
e na
am
me of
o the subsiidia
ary;;
l the
e princcipa
al plac
p ce of bus
sinesss;
l the
e prop
porttion
n off ow
wne
ers
ship
p in
nterrestts held
h d by
b non
n n-co
ontrollling
g in
nterrestts;
25
Chapter 1
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).
26
A grou
g up of enttitie
es and
a d itss finan
ncia
al stat
s tem
men
nts:: th
heory and
a d backkgrround
Com
C
mm
mentt
E amp
Exa
ple of
o disc
d clos
sure:
N n-co
Non
ontrollling
g inttere
ests
s
T e follow
The
wing subsid
diarries havve mat
m teria
al NCI:
N
Na
ame
e
Principal pla
ace
e
of bu
usin
nes
ss
Ope
O
erating
g
seg
gmentt
Ow
wne
ership inttere
ests
s (%
%)
he
eld by NC
CI
20..18
2 17
20.
A Ltd
Nam
mib
bia
De
eale
er
25
5
25
5
B Ltd
Sou
uth Africa
Manu
ufaccture
er
20
20
0
The
T
e follow
wing
g is the
e su
umm
marrised finan
ncia
al in
nform
mattion
n of the
e P Ltd
d Grou
G up prep
p pare
ed in
a ordancce with
acco
h IIFR
RS, mo
odified fo
or fair
f
va
alue
e adju
a stm
mentts on accquisition an
nd
d eren
diffe
ncess in
n the G
Grou
up’ss acccou
unting policie
es, befo
b ore anyy in
ntrag
grou
up elim
mina
ations hav
ve
b en done
bee
e:
A Ltd
d
B Ltd
L
2 18
20.1
R’00
R
00
20
0.17
7
R’’000
0
20.1
2 18
R’00
R 00
20..17
R’0
000
Re
evenue
e
3 0
30
000
0
20
0 00
00
12
1 000
0
1 0
10
000
0
Prrofit
20
000
0
1 50
00
8
800
6
600
0
5
500
0
37
75
1
160
1
120
0
–
–
40
10
0
To
otal co
omp
preh
hen
nsiv
ve in
nco
ome
e
20
000
0
1 50
00
8
840
6
610
0
To
otal com
mprrehe
ensive inccome
atttribu
utab
ble to NCI
N
5
500
0
37
75
1
168
1
122
2
No
on-c
currrentt assetss
50
000
0
4 50
00
8 000
0
70
000
0
Cu
urre
ent ass
a ets
30
000
0
2 50
00
4 000
0
30
000
0
No
on-c
currrentt liabilitties
( 0
(2
000))
(1 500)
(1 40
00)
( 2
(1
200))
Cu
urre
ent liab
l ilitie
es
(5
500))
(800)
(1 60
00)
( 0
(1
000))
Ne
et asse
a ets
55
500
0
4 70
00
9 000
0
78
800
0
Ne
et asse
a ets attri
a ibuttable to
o NC
CI
13
375
5
1 17
75
1 800
8
15
560
0
Ca
ash flow
ws from
m operratin
ng activ
a vitie
es
4
480
0
45
50
2
280
3
320
0
Ca
ash flow
ws from
m in
nves
sting activvitiess
(130))
(85)
(20
00)
60
0
Ca
ash flow
ws from
m finan
ncin
ng activ
a vities
20
0
(125)
4
400
(3
300))
Ne
et in
ncre
eas
se in
n ca
ash
h an
nd cas
c h
eq
quiv
vale
ents
s
3
370
0
24
40
4
480
80
0
Divide
end
ds paid
p
to NCI du
uring
g th
he yyearr
80
0
7
70
40
–
Prrofit attribu
utab
ble tto NCI
N
Ottherr co
omp
preh
henssive
e inccom
me
27
C
Cha
apte
er 1
8 In the
t ca
ase of SM
MEss th
he folllow
wing
g sh
hall be
e disc
d clossed
d (IF
FRS
S fo
or SM
SMEs
s.9.23):
l the
e fa
act tha
at th
he sta
atem
me
entss arre con
c nso
olida
ate
ed fina
ancial sta
atem
ments
s;
l the
e bas
b sis forr conccludin
ng tha
at con
c ntro
ol exis
e sts w
when the
t e pare
ent do
oess not
n ow
wn,
dirrecttly or ind
directlyy th
hrou
ugh
h subssidiiaries, more
m e th
han
n ha
alf of
o the
t e vo
oting pow
p werr;
l any diffe
d ere
ence
e in
n th
he rep
portting
g date
d e off th
he fina
f anccial sta
ateme
entss of
o th
he parren
nt and
a
its su
ubsidia
arie
es use
u ed in the
t e prrep
para
atio
on of
o the
t e co
ons
solid
datted
d fin
nan
ncia
al stat
s tem
men
nts;
and
l the
e natu
ure an
nd exte
e entt of an
ny sign
s nifican
nt rest
r tricctions (e.g. ressultting
g fro
om
m bo
orro
owiing
arrran
ngeme
entss or re
egu
ulatoryy re
equ
uireme
entss) on
o the
t e ab
bilitty of
o subssidiaries to tra
ansfer
fun
ndss to
o the pare
p entt in the
e fo
orm
m off ca
ash
h divid
dends or to rep
payy loans
s.
Com
C
mm
mentt
T e dis
The
sclo
osurre re
elatting to the
t losss of co
ontro
ol of
o a sub
bsid
diaryy is disscusssed
d in
n chaptter 1
13.
A
Acc
co
oun
ntin
ng
g and
d disc
d clo
osu
ure
e in the
t e sep
s paratte fin
nan
nciall sttattem
me
entts of
the
e pare
en
nt
1.15
5 Ac
cco
ountiing
g of
o sub
s bsidia
arie
es in
n th
he se
s pa
aratte rec
corrds
so
of the
t e in
nve
esttor
(p
pare
ent)
1
Sep
S parrate
e fina
ancial sta
ate
eme
entss are
a de
efin
ned
d as
a tho
t ose prressentted
d by a par
p entt (ii.e.
inv
i esttor witth con
c ntro
ol of
o a su
ubssidiiaryy) in whi
w ch the
e in
nve
estm
mentss arre acc
a cou
unte
ed for at
cos
c st, in acc
a cord
dan
nce
e with
w IFRS
S 9 Fin
nan
ncial Ins
stru
um
ments or usiing the equ
e uity me
eth
hod
as
a descrribe
ed in IAS
I S 28
8. ((IAS
S 27.
2 10)). S
Sep
para
ate fin
nan
ncia
al state
em
ments are
a e prresentted
d in
add
a ditio
on to conso
olid
date
ed fina
ancciall sttate
eme
entts (IAS
S2
27.4
4). IFRS
S do
oes
s not req
quirre the
t
pre
p epa
arattion
n off se
epa
ara
ate financcial sttate
ementts and
a d th
hey
y are generrally only
o y prep
p parred
due
d e to
o lo
ocal re
egu
ulation
ns o
or iff re
equired
db
by othe
o er fina
f anccial sta
ateme
ent userss.
Com
C
mm
mentt
T e IFRS forr SM
The
MEss do
oess no
ot re
equire pre
esen
ntation of sep
para
ate fina
ancial stat
s tem
mentts fo
or
t parrentt entity or ffor the ind
the
divid
dual su
ubsid
diarriess (pa
ar .9
9.24
4).
H wev
How
ver, wh
hen a parrentt do
oes pre
epa
are sep
para
ate fina
anccial sta
atem
men
nts and
a d de
escribe
es
t m as
them
a con
c nform
min
ng to
t the
t
IFRS for SME
S Es, the
e entityy’s fina
anccial sta
atem
men
nts sha
all
c mply
com
y with all
a of
o th
he requ
r uire
eme
entss of the
e IFRS forr SM
MEs. The
T e en
ntity shall acc
a coun
nt fo
or
inve
estm
men
nts in su
ubssidia
ariess:
l at cost
c t lesss im
mpa
airm
men
nt; or
o
l at fair
f valu
ue with
w h ch
hang
gess in fair
f vallue reccogn
nise
ed in
n prrofitt or losss; or
o
l usin
ng the
t equ
uityy me
etho
od (9.26).
2 Invvesttme
ents in
i subsidia
arie
es are
e acc
a oun
nte
ed forr in
n an
a entityy’s se
eparate fina
f anc
cial
sta
s atem
men
nts as
s fo
ollow
ws::
l at cosst;
l in acccorrdance
e with
w IFRS
S 9 Fin
nan
ncial Ins
I stru
ume
entts; or
l using
g the equ
e uity me
ethod ass de
esccribed in IAS
S 28
2 IInv
vesttme
entts iin Ass
A soc
cia
ates
s and
Jo
ointt Ve
entture
es..
2
28
A grou
g up of enttitie
es and
a d itss finan
ncia
al stat
s tem
men
nts:: th
heory and
a d backkgrround
3 An
A en
ntityy cclas
ssiffiess fiina
anciial asssets such ass in
nve
estm
mentss in
n ssha
aress in
n term
ms of
IFR
I RS 9 Fin
F ancia
al In
nsttrum
me
ents
s on
o the ba
asiss off bo
oth::
l the
e en
ntityy’s bu
usin
nesss m
mod
del forr man
m naging
g the fina
ancial asssets a
and
l the
e co
ontrac
ctua
al cas
c h fllow
w ch
harractteriistic
cs of
o the
t e fin
nan
ncia
al asse
a et ((IFR
RS 9.4
4.1.1).
Tw
Two opttion
ns are
e ava
a aila
able
e in
n term
ms of IF
FRS
S 9 ffor ussing
g the fa
air vallue m
mod
del.
Invvesttme
ents in
n subs
s sidiaries may be
e cla
ass
sifie
ed as eitther finan
ncial a
ass
setss at
a fa
air vallue
thro
t oug
gh pro
ofit or losss, orr, at in
nitia
al reco
r ogn
nitio
on, the p
parrentt may
m ym
make
e an
a irre
i evocab
ble
dec
d cisiion to me
eassurre itts iinvesttme
ent in eq
quityy in
nstrum
men
nts at fair vvalu
ue thro
t oug
gh oth
her
com
c mpreh
hen
nsiv
ve inco
om
me. On
nce an
n in
nvesstm
men
nt in
n a su
ubs
sidia
aryy is de
esig
gna
ated
d as o
one
e of
the
t e tw
wo cat
c tegorie
es, this cclas
ssiffica
atio
on m
ma
ay not
n be
e ch
han
nge
ed. Th
he cclas
ssiffica
atio
on o
of the
t
inv
i esttme
ent may on
nly chang
ge if the
t e en
ntity’ss bu
usin
nesss mo
ode
el fo
or m
ma
ana
agin
ng fina
f anc
cial
ass
a setss chan
nge
es.
Com
C
mme
ent
E mples of fina
Exam
anciial asssetss cla
assified
d as
a at
a fa
air vvalu
ue thro
ough o
othe
er com
c mpre
ehen
nsiv
ve
in
ncom
me arre invvestments in
n sharres he
eld forr lo
ong
g-terrm pu
urpo
oses
s (e.g
( g. stra
s ategic
in
nvesstm
mentts). This ccould be
b th
he casse fo
or inve
estm
men
nts in
i subs
s sidia
arie
es, as
a inve
i estm
men
nts in
subssidia
arie
es are seld
s dom
m made
e wiith a view to spe
eculate witth th
he sha
s ares
s in the
e sh
hort term
o fo
or
or trradiing purposes
s (e
exce
ept whe
ere the
e in
nvesstorr is an invvesttme
ent entity – see
s
1.12
a ve).
abov
4 Tra
T anssacttion
n co
ostts on
o fina
f anc
cial insstru
umentts are
a de
efin
ned ass incre
eme
enttal cos
c sts tha
at are
a
dire
d ectly attribu
utable
e to
o the accqu
uisittion
n, iss
i ue orr disposa
al of a fina
ancciall asse
et (or
liab
l bility) (IF
FRS
S 9). An
A inccreme
enta
al cos
c st is
s one tha
at w
wo
ould
d no
ot havve been inccurrred
d if
the
t e entitty had
d not
n accqu
uire
ed the
e fiinancial assett (IIFR
RS 9). Tran
T nsa
action co
ostss are
a
typ
t pica
ally fees an
nd comm
missio
ons pa
aid to
o ag
gen
nts an
nd bro
oke
ers, le
evie
es of re
egulato
ory
ser
s rvicces an
nd sec
s curitie
es e
exc
change
es, an
nd tra
t nsffer taxxes
s an
nd duttiess. The
T e trreattme
entt of
the
t e tra
anssacctio
on cos
c sts is de
eterrmin
ned
d b
by IFR
I RS 9 and
a d is
s set out b
belo
ow. Brrieffly, su
uch
tran
t nsa
actiion costts are
e ccap
pita
alise
ed ag
gainstt th
he in
nves
stm
men
nt if the
e inve
estme
ent is
me
measure
ed a
at fair
f va
alue
e th
hrou
ugh
h othe
er ccom
mprrehe
enssive
e in
nco
ome
e or if the
e costt meth
m hod
d is
app
a plie
ed. Wherre the
t e invesstm
men
nt iss mea
m asu
ured
d at
a fa
air va
alue
e th
hrou
ugh
h prof
p fit or
o losss, the
t
tran
t nsa
actiion co
ostss arre exp
e pen
nse
ed in prof
p fit or
o losss. Tra
T ansa
acttion
n co
ostss on
o an
a invvesttme
ent
in
i a sub
s bsid
diarry that
t t iss accco
oun
nted
d fo
or iin term
t ms off th
he equ
e uityy meth
m hod
d are cap
pita
alis
sed
aga
a ainsst the
t inv
vesstm
ment.
5 At
A inittial reccog
gnittion
n, a finan
ncial ass
a set is me
eassure
ed at its fair valu
v ue, ge
ene
erallly beiing
the
t e co
onsside
era
ation
n give
g en, i.e
e. the
t
tra
anssac
ction pric
p ce. At initia
al re
eco
ogn
nitio
on, there
e is
s a
reb
r butttable pre
esu
ump
ptio
on tha
at the
t
tra
anssac
ctio
on pric
p ce is eq
qua
al to
o the fa
air val
v ue.. The
T
me
measure
eme
entt modelss ch
hos
sen to
o accco
oun
nt fo
or an
a invves
stm
ment in
n a su
ubssidia
aryy le
ead to
the
t e follow
win
ng acc
a countin
ng treatm
men
nts on
n initia
al re
eco
ogn
nitio
on:
l Fin
nan
ncia
al ass
a etss at faiir valu
v ue thro
t oug
gh pro
p ofit or losss
Th
he inve
estme
ent is reccog
gnissed
d att co
ost,, be
eing the fair valu
v ue, exxclu
udin
ng tran
t nsa
actiion
costss, w
whic
ch are
a e exxpe
ensed.
l Fin
nan
ncia
al ass
a et at
a fair
f va
alue
e th
hrou
ugh
h otthe
er com
c mpre
ehe
enssive
e in
nco
ome
e
Th
he inve
esttme
ent is reccog
gnissed
d att co
ost, be
eing the
t fair valu
v ue and
d trran
nsactio
on cos
sts
are
e ca
apiitalised to
o th
he inv
vesttme
entt.
l Fin
nan
ncia
al ass
a setss th
hat do
o no
ot hav
h ve quo
ote
ed pric
p cess in an
n activve ma
arke
et and
a dw
who
ose
fair va
alue can
c nnot be
e re
elia
ablyy mea
m asured
d.
29
C
Cha
apte
er 1
Th
his typ
t pe of
o inve
estme
ent is car
c rrie
ed a
at cos
c st. Initiial transa
action
n co
osts
s are
a cap
pita
alis
sed
to the
e in
nves
stm
men
nt.
Com
C
mme
ent
IF
FRS
S 3 Business
s Co
ombin
natio
ons
s de
etermin
nes tha
at accquisition-rela
ated
d co
ostss are
e exxpense
ed
in
n th
he perio
p odss in which the
ey are
a incurre
ed. (Re
eferr Exx 2.13.) Accqu
uisition--rela
ated
d co
ostss arre
d ned ass co
defin
ostss th
he acq
a uire
er incu
urs to effe
ect a b
bus
sine
ess com
mbination. Thosse ccosts
in
nclu
ude finderr’s fees
f s; advi
a isorry, lega
al, acccoun
ntin
ng, valu
uatiion and o
othe
er profe
p esssional or
o
conssultiing fee
es; generral adm
miniistra
ative
e cost
c ts, inclluding the
e costss of
o main
m ntaining
g an
a
in
nterrnal acq
quissitio
on d
depa
artm
men
nt (IFRS
S 3.53)). It is clea
c ar th
hat thiss de
efiniition
n is mu
uch bro
oade
er
th
han the
e on
ne for
f tran
t nsac
ction
n co
ostss on
n fin
nanccial insstrum
men
nts.. (Also see
e ch
hapter 2.10 o
of this
w k.)
work
T autthorrs are
The
a of
o the opin
nion
n th
hat tthe tran
nsa
actio
on ccostts on
o fiinan
ncia
al in
nstru
ume
entss sh
hould
b ccapitalissed
be
d ag
gain
nst the
t investm
men
nt in
n th
he sepa
s arate fina
f ncia
al state
s eme
entss off the
e pa
aren
nt
a d
as
discu
ussed abo
ove. Ho
owe
ever, due
d to the
t facct th
hat these and
d otherr co
osts are
e exxpense
ed
in
n th
he cons
c solid
date
ed fina
ancial stat
s ements, as
a requ
r uire
ed by
b IF
FRS
S 3, th
he amo
a ountt sh
houlld be
b
e inatted aga
elimi
ainsst th
he inve
estm
men
nt in
n the
e su
ubssidia
ary and
d tra
ansferrred to prof
p fit or
o lo
oss on a
p fform
pro
ma bas
b sis on
o ccons
solidation.. This asp
pectt is add
dres
sse
ed in
n de
etaill in cha
apte
er 5 (5..3) of
o
th
his w
worrk as
a well
w as ccha
apte
er 2 (2.10).
6 The
T e subsseq
que
ent me
eassure
em
ment off th
he ffina
ancial asssetts is
s as fo
ollo
owss:
l Fin
nan
ncia
al ass
a etss at faiir valu
v ue thro
t oug
gh pro
p ofit or losss
Aftter initial re
ecogniition
n, the
e fin
nan
ncia
al ass
a set is rem
measu
ure
ed at
a ffairr va
alue
e, and
a d any
a
ga
ain or los
ss due
d e to
o ccha
anges in the
e fair va
alue
e iss re
eco
ogn
nise
ed directtly in pro
ofit or
losss.
l Fin
nan
ncia
al ass
a etss at faiir valu
v ue thro
t oug
gh oth
o her com
mp
preh
hen
nsivve inc
i om
me
Aftter initiall re
eco
ognitio
on, the
e finan
ncial assset is reme
eassure
ed at fair valu
v ue and
a d any
a
ga
ain orr lo
osss due
d e tto ch
han
nge
es in th
he fair value
e iss reccog
gnissed
d in oth
her
comp
preh
hen
nsivve inccom
me an
nd acc
a cum
mulate
ed in equity
y th
hro
ough tthe markk-to
o-m
mark
ket
resserrve..
l Fin
nan
ncia
al ass
a setss th
hat do
o no
ot hav
h ve quo
ote
ed pric
p cess in an
n activve ma
arke
et and
a dw
who
ose
fair va
alue can
c nnot be
e re
elia
ablyy mea
m asured
d
Aftter iniitial re
eco
ogn
nitio
on, su
uch an
n in
nve
estm
ment is rettain
ned
d att itss initial cosst pric
ce,
unlesss there are
a e indiccationss th
hat the
e fiinanciial ass
a set ma
ay be im
mpa
aired
d. If
I th
herre are
a
dica
atio
ons
s off im
mpa
airm
men
nt (IAS
S 36.1
3 12), th
he rec
r cove
era
able
e amo
oun
nt, whi
w ch will b
be the
t
ind
fair va
alu
ue lesss costts tto sell
s , has to be
e ca
alcu
ulatted
d. Fair
F r va
alue
e iss de
efin
ned
d in
n IA
AS 36
mpa
airm
men
nt of
o As
A setts as
a the
e price
e th
hat wo
ould
db
be rec
r eivved to se
ell an
a ass
a set in an
Im
ord
derrly transa
action
n be
etw
wee
en ma
arke
et par
p rticiipa
antss att th
he me
eassure
ementt date
e (.6).
Th
he inve
esttme
ent in the
e sub
s sid
diarry iss im
mpaire
ed if tthe
e ca
arryying
ga
amo
oun
nt (cos
( st p
pric
ce)
excee
edss th
he reccovvera
able
e amo
a oun
nt. T
The
e fina
ancial assett will be
b writte
en dow
d wn to its
ely
able amo
a oun
nt, an
nd an
a impaiirm
ment lo
osss w
will be
b reccog
gnissed
d im
mm
med
diate
y in
reccovvera
pro
ofit or los
ss (IAS
( S 36.5
3 59 & .60).
l Th
he car
c rryin
ng am
mou
unt of fin
nancia
al a
asse
ets that are
e acco
oun
nted
d fo
or usiing the e
equ
uity
me
etho
od is inccrea
ase
ed ((or decre
eassed) to
o re
eco
ognise
e the in
nve
esto
or’ss sh
harre of
o the pro
ofit
(orr lo
oss) of
o the invvesstee
e afte
a er the
t
da
ate off accqu
uisition
n. Disstrib
bution
ns (div
( vide
end
ds)
recceivved
d from
m an
n in
nve
este
ee red
r duce th
he carryiing am
mou
untt of the
e finan
ncial ass
a set..
7 An
A en
ntityy sh
hall re
eco
ognise
e a divvide
end
d fro
om a sub
bsid
dia
ary in pro
p ofit or los
ss in
n itts sep
s para
ate
fina
f anccial sta
ateme
entss whe
w en itts righ
r ht to
o re
ece
eive
e th
he div
d ide
end is esttab
blish
hed
d (IAS
S 27
7.12).
3
30
A group of entities and its financial statements: theory and background
The accounting treatment of the different options to recognise an investment in a
subsidiary in the separate records of the parent can be illustrated as follows:
Accounted for in terms of IFRS 9:
Cost model:
Is the financial asset an investment in
equity instruments and/or that is not held
for trading?
No quoted prices
available in open
market or investor
chooses cost model
YES
CLASSIFICATION:
Is the equity
instrument
designated as at
FV through OCI?
Equity method
IAS 28
By choice
NO
NO
Classify as at
FV through P/L
YES
Measure at FV
Measure at FV
Capitalise
transaction costs
(debit
investment in
subsidiary)
Measure at FV
Expense
transaction
costs in P/L
Capitalise
transaction costs
(debit investment in
subsidiary)
Capitalise
transaction costs
SUBSEQUENT
RECOGNITION:
Recognise FV
gains/ losses in
OCI
Recognise FV
gains/ losses in
P/L
Retain at original
CA unless
impaired, then write
down to RA
In(de)crease
carrying amount
with investor’s
share of
profit/(loss)
RECOGNITION
OF DIVIDEND:
Recognise when
right to receive
the dividend is
established
Recognise
when right to
receive the
dividend is
established
Recognise when
right to receive the
dividend is
established
INITIAL
RECOGNITIION:
8
Measure at cost
Reduce carrying
amount with
dividend received
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 (example 1.9 to 1.12).
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.
31
C
Cha
apte
er 1
Ex
xam
mple
e 1.9
In
nve
estme
ent in su
ubs
sidiiary
y acc
a ounte
ed forr att fa
air v
value throu
ugh
h
p fit or
prof
o los
ss in
i the
t e se
epa
ara
ate fin
nancia
al stat
s tem
men
nts
s off th
he par
p ren
nt
O
On acq
quissition of the
e in
nvestm
men
nt:
Dr
R
Inv
vesttme
ent in B Ltd
L (Sttate
eme
ent of fina
anccial po
osition (SFP)))
Tra
anssacttion
n co
osts
s (P
Profit or
o lo
oss
s (P
P/L)))
Ban
B nk
Re
eco
ognitio
on o
of inv
i esttme
entt in B Ltd
d att fa
air valu
v ue
Crr
R
15 000
0
500
5
15
5 50
00
O
On recceip
pt of
o th
he divvide
end
ds b
by A Ltd:
L
D
Dividen
nd pa
aid o
on 31 Ja
anuaryy 20
0.18 in
n re
esp
pec
ct of
o prevviou
us rep
r portting
g pe
erio
od:
Dr
R
ank (SF
FP))
Ba
Div
D idend recceiv
ved
d (P
P/L)
Re
eco
ognitio
on o
of div
d ide
end
d re
eceive
ed from
f m B Ltd on
31 Ja
anuary
y 20
0.18
Crr
R
700
7
70
00
Com
C
mmentt
A e
An
entity reco
r ognisess a diviiden
nd from
f m a sub
bsid
diaryy in pro
ofit or losss in its sep
para
ate fina
f ancial
s eme
stat
entss whe
w n itts righ
r ht to
o re
ece
eive the divid
d den
nd is esta
e ablisshed
d. Eve
en tho
t ugh
h th
he
d den
divid
nd relattes to the pre
evio
ous rep
portting
g pe
eriod
d w
when
n A Ltd
d had no inte
eresst in
n B Ltd
d,
A Lttd’s rig
ght to receiv
ve the
e divid
dend
d was
w
esstab
blish
hed on
n 31
3 JJanu
uaryy 20.1
2 8 (post
a uisition
acq
n) and
a is ttherrefo
ore reccogn
nise
ed in
n profitt orr los
ss for
f the rep
portting
g pe
eriod
d ende
ed
3 D
31
Dec
cem
mberr 20
0.18
8 (IA
AS 36.1
3 12(h
h)).
D
Dividen
nd pa
aid o
on 31 Au
ugu
ust 20.18
8:
Dr
R
Ba
ank (SF
FP))
Div
D idend recceiv
ved
d (P
P/L)
Re
eco
ognitio
on o
of div
d ide
end
d re
eceive
ed from
f m B Ltd
L
Crr
R
800
8
80
00
O
On rem
mea
asu
ureme
ent at the
t e en
nd of the
t e re
eportin
ng per
p riod
d:
Dr
R
Inv
vestme
ent in B Ltd
L (SF
FP))
Rem
R mea
asu
urem
ment gain
g n (P
P/L
L)
Re
ecognitio
on o
of fair
f r va
alue
e adju
ustm
ment at tthe
e en
nd of
o the
t e
rep
porrtin
ng per
p riod
d ((110 000
0 0×R
R1,80) – R15
R 5 00
00)
3
32
Crr
R
3 000
0
3 00
00
A grou
g up of enttitie
es and
a d itss finan
ncia
al stat
s tem
men
nts:: th
heory and
a d backkgrround
Ex
xam
mple
e 1.10
0
In
nve
estme
ent in su
ubs
sidiiary
y acc
a ounte
ed forr att fa
air v
value wiith
a usttme
adju
entts in oth
o er comp
pre
ehensive
e in
nco
ome
e in
n th
he sep
parrate
e
fiina
anc
cial sta
ate
eme
entts o
of the
t e pa
are
ent
O
On acq
quissition of the
e in
nvestm
men
nt:
Dr
R
vesttme
ent in B Ltd
L (SF
FP)) (15 000 + 500)
Inv
Ban
B nk (SF
( FP)
Re
eco
ognitio
on o
of inv
i esttme
entt in B Ltd
d att fa
air valu
v ue plu
us
tra
ansacttion
nc
costts
Crr
R
15 500
5
15
5 50
00
O
On recceip
pt of
o th
he divvide
end
ds b
by A Ltd:
L
D
Dividen
nd pa
aid o
on 31 Ja
anuaryy 20
0.18 in
n re
esp
pec
ct of
o prevviou
us rep
r portting
g pe
erio
od:
Dr
R
ank (SF
FP))
Ba
Div
D idend recceiv
ved
d (P
P/L)
Re
eco
ognitio
on o
of div
d ide
end
d re
eceive
ed from
f m B Ltd on
31 Ja
anuary
y 20
0.18
Crr
R
700
7
70
00
Com
C
mm
mentt
T e same princip
The
ple reg
gard
ding the
e rig
ght to rece
r eive
e the
e divide
end
d ap
pplie
es as
a in
n exxam
mple
e 1.9
9.
D
Dividen
nd pa
aid o
on 31 Au
ugu
ust 20.18
8:
Dr
R
Ba
ank (SF
FP))
Div
D idend recceiv
ved
d (P
P/L)
Re
eco
ognitio
on o
of div
d ide
end
d re
eceive
ed from
f m B Ltd
Crr
R
800
8
80
00
O
On rem
mea
asu
ureme
ent at the
t e en
nd of the
t e re
eportin
ng per
p riod
d:
Dr
R
Inv
vesttme
ent in B Ltd
L (SF
FP))
Mar
M rk-tto-m
marrkett re
eserrve
e (otthe
er co
ompre
ehe
ensiive inccom
me ((OC
CI)))
Re
eco
ognitio
on o
of fair
f r va
alue
e adju
ustm
me
ent at tthe
e en
nd of
o the
t e
rep
porrtin
ng per
p riod
d ((110 000
0 0×R
R1,80) – R15
R 5 50
00)
Crr
R
2 500
5
2 50
00
33
C
Cha
apte
er 1
Ex
xam
mple
e 1.11
In
nve
estme
ent in su
ubs
sidiiary
y acc
a ounte
ed forr us
sin
ng tthe
e co
ost me
eth
hod
d
in
n th
he separate fina
anc
ciall sttate
ements of the
t e pare
ent
O
On acq
quissition of the
e in
nvestm
men
nt:
Dr
R
Inv
vesttme
ent in B Ltd
L (SF
FP)) (15 000 + 500)
Ban
B nk (SF
( FP)
Re
eco
ognitio
on o
of inv
i esttme
entt in B Ltd
d att co
ost plu
us
tra
ansacttion
nc
costts
Crr
R
15 500
5
15
5 50
00
O
On recceip
pt of
o th
he divvide
end
ds b
by A Ltd:
L
D
Dividen
nd pa
aid o
on 31 Ja
anuaryy 20
0.18 in
n re
esp
pec
ct of
o prevviou
us rep
r portting
g pe
erio
od:
Dr
R
Ba
ank (SF
FP))
Div
D idend recceiv
ved
d (P
P/L)
Re
eco
ognitio
on o
of div
d ide
end
d re
eceive
ed from
f m B Ltd on
31 Ja
anuary
y 20
0.18
Crr
R
700
7
70
00
Com
C
mm
mentt
T e same princip
The
ple reg
gard
ding the
e rig
ght to rece
r eive
e the
e divide
end
d ap
pplie
es as
a in
n exxam
mple
e 1.9
9.
D
Dividen
nd pa
aid o
on 31 Au
ugu
ust 20.18
8:
Dr
R
Ba
ank (SF
FP))
Div
D idend recceiv
ved
d (P
P/L)
Re
eco
ognitio
on o
of div
d ide
end
d re
eceive
ed from
f m B Ltd
Crr
R
800
8
80
00
O
On rem
mea
asu
ureme
ent at the
t e en
nd of the
t e re
eportin
ng per
p riod
d:
N
Not ap
pplicab
ble; th
he invvesttme
entt is ca
arrie
ed at cost. Th
he vvalue of the
e in
nve
estm
ment will only
b
be adjjustted
d if indiccationss o
of imp
pairrme
ent arre fou
und
d, a
and
d th
he ca
arryying
g amo
oun
nt o
of the
t
in
nve
estm
ment exccee
edss th
he reccov
vera
able
e am
a oun
nt, i.e
e. th
he fair valu
v ue lesss cossts to
o se
ell. In
ssuch
h a ca
ase
e th
he carryiing am
mountt (ccost p
price
e) of the
e in
nvestm
men
nt is w
writtten
n dow
wn tto the
t
re
eco
ove
erab
ble am
mou
unt, byy re
eco
ogn
nisin
ng an im
mpa
airm
men
nt lo
osss.
3
34
A grou
g up of enttitie
es and
a d itss finan
ncia
al stat
s tem
men
nts:: th
heory and
a d backkgrround
Ex
xam
mple
e 1.12
2
In
nve
estme
ent in su
ubs
sidiiary
y acc
a ounte
ed forr us
sin
ng tthe
e eq
quity
m tho
met
od iin the
t e se
epa
aratte fin
f anc
cia
al s
stattem
men
nts of the par
p entt
F
For this exa
e mp
ple, asssume
e th
he follo
f owiing infform
ma
ation
n to
o illlustratte the
t e eq
quitty met
m tho
od:
O
On acq
quissition of the
e in
nvestm
men
nt:
Dr
R
Inv
vesttme
ent in B Ltd
L (15
5 00
00 + 500
5 )
Ban
B nk (SF
( FP)
Re
eco
ognitio
on o
of inv
i esttme
entt in B Ltd
d att fa
air valu
v ue plu
us
tra
ansacttion
nc
costts
Crr
R
15 500
5
15
5 50
00
O
On recceip
pt of
o th
he divvide
end
ds b
by A Ltd:
L
D
Dividen
nd pa
aid o
on 31 Ja
anuaryy 20
0.18 in
n re
esp
pec
ct of
o prevviou
us rep
r portting
g pe
erio
od:
Dr
R
Ba
ank (SF
FP))
Inve
estm
ment iin B Lttd (P/L
( L)
eco
ognitio
on o
of div
d ide
end
d re
eceive
ed from
f m B Ltd on
Re
31 Ja
anuary
y 20
0.18 i..t.o
o. eq
quiity me
etho
od
Crr
R
700
7
70
00
Com
C
mm
mentt
T e same princip
The
ple reg
gard
ding the
e rig
ght to rece
r eive
ead
divid
den
nd appl
a ies as in exa
e mplle 1.9.
H wev
How
ver, in con
c trasst to
o th
he prev
p vious exam
mple
es, the
e div
vide
end recceivved is not
n reccogn
nise
ed
in profit orr losss, but
b rath
her cre
edite
ed a
aga
ainstt the
e assse
et, In
nvestm
mentt in B Ltd
L (SF
( FP) in te
erm
ms
o th
of
he equ
e ity met
m thod
d.
D
Dividen
nd pa
aid o
on 31 Au
ugu
ust 20.18
8:
Dr
R
B
Ban
nk (SF
( FP)
In
nve
estm
men
nt in
n B Ltd
d (P
P/L
L)
R
Rec
cog
gnittion o
of divi
d den
nd rec
ceiv
ved
d frrom
m B Lttd
Crr
R
800
8
80
00
35
C
Cha
apte
er 1
A
At th
he end
d of
o th
he rep
portting
g pe
erio
od:
Dr
R
Inv
vesttme
ent in B Ltd
L (10
0 00
00 × (100
000
0/15
500
00 × 10
00%
%)
Sha
S are of pro
ofit of sub
s bsid
diarry und
u er equ
e uityy me
ethod (P//L)
Re
eco
ognitio
on o
of par
p rent’s sh
hare
e in
n prrofits of B Ltd
L d affterr its
s
acquiisittion
n unde
er the
t e eq
quitty me
m tho
od
Crr
R
6 667
6
6 66
67
R
Rem
mea
asu
urem
me
ent at the
t e re
eportin
ng dat
d e:
N
Not ap
ppliccab
ble; as
s th
he invvesttme
ent is accou
untted forr i.tt.o. the equ
e uity me
ethod, no
o fa
air vallue
re
em
measurrem
men
nt is
s don
d e at
a th
he rep
porrting
gd
date
e. The
T e ca
arryying amo
a oun
nt o
of th
he invvesstmentt is
R
R20
0 66
67 aftter A Ltd
d’s sha
are
e off B Ltd’ss prrofitts (66
( 6,67
7%
%) has
h be
een
n ad
dde
ed to the
e co
ost of
th
he invvesttme
entt an
nd the
t e disstriibution
ns (divvidend
ds recceivved
d) had
h d be
een
n de
edu
ucte
ed.
Com
C
mm
mentt
It sh
hou
uld be
b note
n ed tthatt evven tho
ough IA
AS 27 allo
owss an
n en
ntityy to
o ele
ect to acc
a coun
nt fo
or its
inve
estm
men
nts in subssidia
aries att co
ost, in acc
a ordancce w
with
h IFR
RS 9 or
o byy applyying
g the e
equity
m thod
met
d, th
he ado
a optio
on of
o th
he cos
c tm
method is prev
p vale
ent in Sou
S th Afric
A ca and
a d the
ereffore
e this
w k givess prrece
wor
ede
ence
e to
o the cost me
etho
od. It iss hiighly unlikkelyy tha
at the equ
uity me
etho
od
w uld be
wou
b ado
a opte
ed to
o acco
ountt forr an
n inv
vesstme
ent in a su
ubsidia
ary in
i th
he sep
s para
ate fina
f ancial
s ementss withi
stat
w in tthe So
outh
h Affrica
an con
ntexxt. It w
was purelyy diiscu
usse
ed herre bec
b aus
se
IAS 27 listts it as an alte
erna
ative
e way
w of acco
a oun
nting
g for an
n invvesstme
ent in a su
ubsidiary.
P ase reffer to cha
Plea
apte
er 11 in Volu
V ume
e 2 of thiss w
work forr a dettaile
ed disccussion
n o
of th
he
e ity met
equ
m thod
d.
3
36
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 ..................................................................
39
41
41
42
42
42
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 settled
in cash ..........................................................................
Example 2.11: Contingent consideration – Financial liability
settled in shares ...........................................................
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 ..............................................
44
45
45
45
46
47
48
48
49
50
51
52
52
53
54
55
57
37
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: Subsequent measurement of contingent consideration
classified as equity .......................................................
Example 2.15: Subsequent measurement of contingent consideration
classified as a liability (to be settled in cash) ................
Example 2.16: Subsequent measurement of contingent consideration
classified as a liability (to be settled in shares) ............
57
58
58
58
59
60
61
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 2.17: Acquiring the assets and liabilities of another entity
in terms of a business combination ..............................
The link between IFRS 3 and consolidated financial
statements ...............................................................................................
Example 2.18: Acquiring an interest in an entity’s equity shares
in terms of a business combination ..............................
Disclosure ................................................................................................
Example 2.19: IFRS 3 Disclosure ................................................................
62
64
66
70
73
77
Self-assessment question
Question 2.1 ..........................................................................................................
38
79
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 accordance with 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.
39
Chapter 2
IFRS 3 can be summarised as follows:
IFRS 3
Business Combinations
Is IFRS 3
applicable?
The
acquisition
method
Subsequent
measurement
and accounting
2.2
Scope of IFRS 3
(IFRS3.2–2A)
2.3
Identifying a business combination (IFRS 3.3)
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 3.10–31)
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)
40
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). IFRS 3 does not apply to:
l the accounting for a joint arrangement in the financial statements of the joint
arrangement itself (accounted for in accordance with IFRS 11, refer to chapter 12
of Volume 2);
l the acquisition of an asset (or group of assets) that does not constitute a business
as defined in IFRS 3 (refer to example 2.1); and
l a combination of entities or businesses under common control (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).
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.
41
Chapter 2
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.
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. Ignore any
tax consequences.
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
Cr
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
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.
42
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
43
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 accordance with 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. According to IFRS 3, the guidance in IFRS 10 Consolidated Financial
Statements should be applied when identifying the entity that obtains control.
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 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
44
IFRS 3 Business combinations
exercise the right, it will influence the determination of control. Potential voting rights
are addressed in chapter 10 of Volume 2 in more detail.
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.
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 accordance with 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.
45
Chapter 2
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 acquired and liabilities 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 acquired and liabilities 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 accordance with 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, in which the acquiree is the lessor, as either
operating lease or finance lease in accordance with IFRS 16 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).
46
IF
FRS
S 3 Bu
usines
ss com
mbina
ations
2 Mea
M asu
urem
me
ent princ
ciplle
T
The
e accqu
uire
er ssha
all mea
m asu
ure the iden
ntiffiab
ble assetts acq
a quirred
d an
nd liabilittiess assu
a um
med at
th
heir acq
a quissitio
on-d
datte fairr vvalu
uess. The
T e e
effe
ect of an
ny reme
easure
eme
entt of ass
a etss and
a
liabiilitie
es to fa
air vallue att th
he accquisittion
n date
d e sho
s ould
d be
b takken
n in
nto accco
ount in
n the
t
cconsolida
ated
d fiinancial sta
atem
mentss. For
F exxam
mple
e, if mac
m chinerry is
i rem
r mea
asu
ured
d to
o itts fair
f
vvalu
ue at
a acq
a quissitio
on datte, the
e de
eprreciatiion on
n th
he ma
m chinery sho
s ould
db
be bas
b sed on
n th
he fair
f
vvalu
ue in the conso
olid
date
ed fina
anc
ciall state
eme
ents (a
also re
efe
er to
o th
he exa
e ample
es in
n cha
c pte
er 6).
6
Com
C
mm
mentt
C apte
Cha
er 9.3
9 pro
ovide
es exa
amp
pless relatin
ng to this
t s se
ectio
on, and
d chap
pter 9.4
4 expla
ainss th
he
e eptiionss to the
exce
e re
ecog
gnitiion and
dm
meas
sure
eme
ent prin
ncip
ples.
2
2.7 R
Rec
cogn
nisiing
g and
dm
mea
asu
urin
ng go
oodw
will orr a ga
ain
n from
m a ba
arg
gaiin
p rch
pur
has
se
G
Goo
odw
will is an
a ass
sett repre
ese
enting the
e fu
uturre eco
e ono
omiic b
ben
nefitts aris
a sing
g frrom
m otthe
er a
asse
ets
a
acquire
ed in a bus
sinesss com
c mbin
nation
n th
hat are not
n ind
divvidu
uallyy id
den
ntifiied
d an
nd separate
ely
re
eco
ogn
nise
ed.
A
At th
he acq
quisitiion da
ate, go
ood
dwilll shalll be
em
mea
asu
ured
d as
a th
he exccesss of
o ((a) over (b)
( be
elow
w:
(a
a) the agg
a greg
gate of:
o
(i) th
he ccon
nsid
derratio
on tra
anssferrred
d, m
me
easu
ure
ed in acc
corrdance
e w
with
h IF
FRS
S 3,
3 w
which
ge
ene
erally req
quirress ac
cqu
uisittion
n-da
ate
e fa
air valu
v ue;
(ii) th
ed in
he am
mou
unt of an
ny no
on-ccon
ntro
ollin
ng inttere
estss in the
t e acqu
uire
ee me
eassure
accco
orda
ancce witth IFR
RS 3 (i.e
e. eitherr at
a fa
air va
alue
e or
o at
a tthe
e non--co
ontrrolliing
in
nterrestts’ pro
opo
ortio
ona
ate share
e off the acq
a quirree’’s iden
ntifiab
ble nett assse
ets)); a
and
(iii) in
n a busin
nesss com
c mbin
nattion
n acchieve
ed in sta
age
es, the
e accqu
uisition
n-d
date
e fa
air vallue
off the acq
a quirer’ss p
prev
viou
uslyy held
d eq
quitty inte
eresst in th
he acq
quiiree
e.
(b
b) the net
n of the
e acq
a uissitio
on-d
date amo
a oun
nts of the
e id
den
ntifiiable ass
a setss acq
a uire
ed an
nd the
t
lia
abilities a
assum
med meassurred in accorrda
ance
e with
w h IF
FRS
S 3.
T
The
e ca
alcu
ula
ation
n of
o goo
g odw
will orr a ga
ain fro
om a ba
arga
ain pu
urch
hasse can be
b illu
ustrrate
ed as
fo
ollo
owss:
Con
C nsidera
atio
on
tra
ans
sferrred
d
Non-co
ontrrolling
g
in
nte
eres
sts
Tota
T
al net
n
a sets*
ass
G odw
Goo
will//
gain
g
n frrom
m
a ba
argain
n
p cha
purc
ase
e
* To
otal ne
et asse
a ets
s arre equ
e ual to ide
i entiffiab
ble as
ssetts acq
a quirred lesss liab
l bilitties
s asssu
ume
ed.
47
Chapter 2
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 accordance with 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. Ignore any tax consequences.
Goodwill is calculated as follows:
Consideration transferred
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
Non-controlling interests (25% × R1,65 million)
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 accordance with 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. Ignore any tax
consequences.
Goodwill is calculated as follows:
Consideration transferred
Non-controlling interests at fair value
Fair value of previously held equity interest (n/a)
1 400 000
430 000
–
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;
48
IFRS 3 Business combinations
(iii)
(iv)
for a business combination achieved in stages, the acquirer’s previously held
equity interest in the acquiree; and
the consideration transferred.
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 accordance with 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. Ignore any tax consequences.
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
Non-controlling interests (25% × R1,6 million)
1 100 000
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
accordance with 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.
49
C
Cha
apte
er 2
Ex
xam
mple
e 2.9
Co
ons
sid
dera
atio
on forr busine
ess
s co
ombin
nation
n
O
On 1 Jan
J nua
ary 20.19
9 P Ltd
da
acquire
ed a 90%
9 % inte
eresst in S Ltd.
L P Ltd
da
acqu
uire
ed the
e sh
harres
frrom
m Mr
M Co
C ntro
ola
all, the
e fo
orm
mer ow
wne
er. Fro
om that datte P Ltd
L ha
ad contro
ol ove
o er S L
Ltd as
p
per the
e defi
d inition
n off conttroll in
n accco
ordancce witth IFR
RS 10
0. The
T e con
c sid
dera
atio
on is to be
ssettled
d ass fo
ollow
ws:
l A cassh payym
ment off R800
0 000
0 .
l Trransfe
er o
of a ve
ehiccle to Mr Con
C trolall. The
T fair valu
v ue of the
t e ve
ehiccle is R7
75 000
0 0 and
a
the carr
c ryin
ng am
a ount in
i the reccorrds of P Ltd
L wa
as R6
65 000
0 0.
l P Ltd
d will
w ssetttle an ou
utsttandin
ng liab
bilityy off R40
R 00
00 o
on beh
half off M
Mr Con
C ntro
olall.
l P Ltd
d will
w iissue 3 000
0 0 sh
harres to Mrr C
Controlall. P Ltd’s
s sh
hare
es had a mark
m ket prrice
e of
10 pe
er sshare on 1 Janua
aryy 20
0.19 a
and
d R11
R pe
er ssha
are at the
ee
end
d off th
he fina
f anc
cial
R1
pe
erio
od.
Ig
gno
ore an
ny tax
t conse
equ
uen
nce
es.
T
The
e to
otall conssidera
atio
on is the
ereffore
e R94
R 45 00
00 (R8
800
0 00
00 + R7
75 000 + R40
R 00
000
0 +
R
R30
0 00
00 (3 000 × R10
R 0)). P Ltd
d shalll acco
a oun
nt for
f the
e trran
nsacctio
on in its ow
wn reccord
ds as
fo
ollo
owss:
Drr
R
Cr
R
1 January 20..19
9
IInve
estme
ent in S Lttd (SF
( FP)
Ban
B k (S
SFP
P)
Prop
P pertty, pla
ant and
a d eq
quipm
mentt (S
SFP
P) (ccarrryin
ng am
mount)
Gain
G n on
n trranssfer off ve
ehiccle (P//L)
Sun
S dryy lia
abiliities
s (S
SFP
P)
Sha
S re cap
c pital (S
SCE
E)
R
Rec
cog
gnittion o
of th
he consiide
erattion
n fo
or the bu
usin
nes
ss
c
com
mbina
atio
on o
of S Lttd
945 000
0
800
8
0 00
00
65
5 00
00
10
0 00
00
40
0 00
00
30
0 00
00
Com
C
mm
mentt
T e consid
The
dera
atio
on trrans
sferrred
d sh
hould be meas
m sure
ed a
at th
he acq
a uisiition
n-da
ate fairr valuess.
W
Whe
ere
e assse
ets or liabilitiess, w
who
ose
e acqu
a uisitio
on-d
date fair va
alue
es diff
d fer fro
om the
eir carrryiing
a
amo
oun
nts, arre tran
nsfe
erre
ed directtly to
t the
t e accqu
uire
ee (ins
( stea
ad of to
t the
t former ow
owners o
of the
t
a
acquire
ee)) ass pa
art of the
e co
onsside
era
ation trran
nsfe
erre
ed, the
ese
e as
sse
ets and/o
or liiabilities shall be
m
mea
asu
ured
d not
n at the
eir acq
quisition--da
ate fair valu
v ues, but at the
eir acq
a quissitio
on--da
ate carrryiing
a
amo
oun
nts, an
nd n
no ressultting
g gain
ns or
o lo
osssess will be
b rec
r cognis
sed on
n th
hem
m by th
he acq
quiirerr at
th
he acquiisitiion
n da
ate. This
T s iss be
eca
ausse the
t e ac
cqu
uire
er con
c trols the
t e assse
ets an
nd/o
or liab
bilities
b
befo
ore an
nd afte
a er the bu
usin
ness com
c mbin
nattion
n.
Iff the info
orm
mation pro
ovided
d in
n exam
mp
ple 2.9
2 9 sttate
ed tha
t at th
he veh
hiclle was
w s not transfferrred to
M
Mr Con
C ntro
olall b
but to
t S Ltd,
L , the to
ota
al co
onsside
era
ation wou
w uld ha
ave be
een R9
935
5 00
00 (R800
0 000
0
+ R65
R 5 00
00 + R4
40 000
0 0 + R
R30
0 00
00 (3 000 × R10
R 0)).. P Ltd’ss own
o n re
eco
ords wou
w uld
d also
cchange
e as
a fo
ollo
ows
s:
5
50
IFRS 3 Business combinations
Dr
R
Cr
R
1 January 20.19
Investment in S Ltd (SFP)
Bank (SFP)
Property, plant and equipment (SFP) (carrying amount)
Sundry liabilities (SFP)
Share capital (SCE)
Recognition of the consideration for the business
combination of S Ltd
935 000
800 000
65 000
40 000
30 000
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 accordance with IAS 32 Financial Instruments: Presentation as either
an equity instrument or as a financial liability. The classification is important as it will
impact the subsequent measurement of the contingent consideration. The subsequent
measurement is addressed in chapter 2.14. An asset will also be recognised by the
acquirer for the right it has to the return of previously transferred consideration if certain
specified conditions are met.
Example 2.10
Contingent consideration – Financial liability settled in cash
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 accordance with 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. Ignore any tax consequences.
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 (SFP)
Recognition of the consideration and contingent
consideration for the business combination of S Ltd
1 410 000
1 300 000
110 000
51
Chapter 2
Example 2.11
Contingent consideration – Financial liability settled in shares
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 accordance with IFRS 10. P Ltd shall settle the consideration by issuing
100 000 of 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 the share issue date.
Ignore any tax consequences.
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 (variable number of the P Ltd’s
own equity instruments to be issued).
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)
Recognition of the contingent consideration for the
business combination of S Ltd
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 of
Volume 2)
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
other comprehensive income in accordance with 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 transferred to retained earnings on the date
that control is obtained).
52
IF
FRS
S 3 Bu
usines
ss com
mbina
ations
Ex
xam
mple
e 2.12
2
Bu
usiine
ess co
omb
bin
nation ac
chie
eve
ed in sta
s age
es (10%
%–
–60%)
T
The
e isssue
ed sha
s are
e ca
apittal of
o S Ltd
L con
nsistss of 10
00 000
0 0 sh
harres. On
O 1 Ja
anu
uarry 20.1
2 18 P Ltd
L
a
acquire
ed 10
0 00
00 sh
hare
es in S Ltd at
a fair valu
v ue forr R
R10
00 000
0 0 (ttran
nsa
action co
ostss are
a
im
mm
mate
eria
al). Th
he invvesttme
ent wa
as cla
assiified
d as
a a finan
ncia
al ass
a set subse
equ
uen
ntlyy meassurred
a
at fa
air va
alue
e th
hrough
h othe
o er com
mp
preh
hen
nsivve inccom
me (OCI)). On
O 31 De
ece
emberr 20
0.18 the
t
fa
air value
e off the inve
estme
ent wa
as R13
R 30 00
00. On
n 1 Janua
ary
y 20
0.19
9 P Lttd acq
quired
d 50
0 000
0
ssharess in
n S Lttd at
a ma
marke
et vvalu
ue of R1
13 per sha
s re (tra
ans
sacction cos
c sts are
e im
mm
mate
eria
al).
F
From
m tha
at datte P Ltd
L d had
h
co
onttrol overr S Ltd
L ass p
perr th
he de
efin
nitio
on of co
ontrrol in
a
acco
ord
dan
nce witth IFR
I RS 10. Ig
gnore anyy ta
ax ccon
nse
equ
uencess.
Com
C
mm
mentt
T e ac
The
cquissitio
on date
d e is 1 Janu
uaryy 20
0.19
9 wh
hen
n P Ltd gaiined
d co
ontrrol o
over S Ltd thrroug
gh its
6 % intere
60%
est (see
e ch
hap
pter 2.5
5).
T
The
e fair valu
v ue o
of the
t co
onside
erattion
n is ca
alcu
ulatted ass fo
ollow
ws::
F
Fairr va
alue
e off co
ons
side
era
ation
n trran
nsfe
erre
ed (50
( 000
0 sh
hare
es × R13)
F
Fairr va
alue
e off th
he pre
p evio
ously h
held
d equ
e ity intere
est
650
6
0 00
00
1 0 00
130
00
T
Tota
al con
c nsid
dera
atio
on for
f the
e businesss com
mb
bina
atio
on
R7
780
0 00
00
P Lttd sha
s all acc
a count for
f the
e trrans
sacctio
on in itts own
o n re
eco
ordss as fo
ollo
owss:
Dr
D
R
Cr
C
R
1 January 20..18
8
F
Fina
anccial asssett (S
SFP
P)
Ban
B k (S
SFP
P)
R
Rec
cog
gnittion o
of th
he inv
ves
stmentt mad
m de in
n S Lttd
1 0 00
100
00
1 0 00
100
00
Dr
D
R
Cr
R
3
31 De
ecemb
berr 20
0.18
8
F
Fina
anccial asssett (S
SFP
P) (11300 0000 – 100 000)
Mark
M k-to
o-m
markket resservve (OC
CI)
R
Rec
cog
gnittion o
of th
he fair va
alu
ue adju
a usttme
ent on
n th
he
iinvesttme
entt
30
0 00
00
30
0 00
00
53
C
Cha
apte
er 2
Drr
R
C
Cr
R
1 Jan
J nua
ary
y 20
0.19
9
1
J1
J2
2
Invvesstmentt in S Ltd
L (SFP)
B nk (SF
Ban
FP) (500 0000 × R13)
Financciall assset (S
SFP
P)
Re
eco
ogn
nitio
on of the
e co
ons
side
era
atio
on ffor the
e
bu
usin
nes
ss com
c mbina
atio
on of
o S Ltd
7
780 00
00
Ma
ark-to--ma
arke
et rese
r ervve (S
SC
CE)
Rettain
ned
d ea
arniingss (S
SCE)
Trrans
sfe
er of
o mar
m rk-to-m
marrke
et re
ese
erve
e with
w hin equitty
00
30 00
650
6
0 00
00
1 0 00
130
00
30
0 00
00
2 Bus
B sine
ess
s co
om
mbinattion
ns ac
chie
eve
ed wit
w tho
out the
e trran
nsfe
er of
o consiide
erattion
n
T
The
e acq
a uissitio
on me
eth
hod a
as disscusse
ed sh
hou
uld sttill be
e app
a plied to su
uch
h bus
b sine
ess
ccom
mbin
nation
ns. Exam
mple
es of
o ssuc
ch circ
c cum
msta
anc
cess arre:
l Th
he accquiree
e rep
r purccha
ase
es its ow
wn sh
hare
es to su
uch
h an
a exten
nt tha
t at an
a exxistiing
invvesstorr (th
he acquiirerr) o
obta
ainss co
onttrol.
l Mino
orityy vveto
o righ
hts lap
pse
e th
hat prrevviou
uslyy kept
k t th
he accqu
uirer from
m con
c ntro
ollin
ng an
accqu
uiree in
n whic
w ch the
t e accqu
uire
er held
d th
he maj
m jority vot
v ting
g rig
ghts.
l Th
he acq
quiirerr an
nd accquiree
e agre
a ee to co
omb
bine
e th
heiir bus
b ine
esses by
y co
ontracct a
alon
ne.
Th
here iss n
no con
c nsid
dera
atio
on transfferrred
d an
nd no eq
quity in
nteresst iss held
d byy th
he acq
quirer
in th
he acq
quiiree
e befo
b ore
e or
o afte
a er the
e bus
b ine
ess co
ombin
nation.. T
This
s wou
w uld be
e, for
exxam
mple, w
with
h th
he purrpo
ose of forrming a dua
d al-liiste
ed ccorrporation
n.
Com
C
mm
mentt
In th
he latte
er exam
mple
e, th
he acq
a uire
er sh
hall attribu
ute the
t full net asssetts o
of (i.e. equ
e ity inte
i erests
in) tthe accquiree to the
e non-con
ntrolling
g in
ntere
estss in
n th
he post
p t-co
omb
bina
ation
n co
onssolid
date
ed
f ncia
fina
al state
eme
entss of the
e accquirer.
2
2.9 Me
Meas
sure
em
men
nt pe
p rio
od
In
n th
he secctio
onss ab
bovve, it was
w s in
ndiccate
ed tha
at th
he acquiirerr ne
eed
ds to
t identiffy and
a d re
ecognise
a
all the asssets and
d liiabilities of the
e acq
a uire
ee.. Fu
urth
herrmo
ore, th
he fairr va
alue of
o the
t va
ario
ous
a
asse
etss, liabilitie
es, no
on--contro
olling inttere
ests, con
nsid
derratiion, etc.
e , need
ds to be
e obta
o aine
ed.
F
From
m a prac
p cticcal poiint of vie
ew, on
ne sho
s ould
d bea
b r in
n mind
m d th
hat alll these
e re
equ
uire
eme
entts are
a
vvery
y tim
me
e-co
onssum
ming
g. The
T em
mea
asu
urem
ment p
perriod
d in
n IF
FRS
S 3 there
efore a
allo
owss th
he acq
quirer
ssom
me lee
ewa
ay tto fina
f alisse all
a tthe
e re
equ
uired p
proced
durres to co
omp
plete the
e ac
cco
oun
nting o
of the
t
b
busine
ess co
omb
bina
atio
on pro
p operly..
Iff th
he inittial acccountting
g fo
or the
e business co
omb
bina
atio
on is inccom
mple
ete
e att th
he end
d o
of the
t
re
epo
orting pe
erio
od in
i whi
w ich the com
c mbinattion
n trransacctio
on occ
currs, the
t e accqu
uire
er sha
s all rreport
p
prov
visiona
al am
a ountss in itss fin
nan
ncia
al stat
s tem
men
nts forr the ittem
ms for wh
hich
h th
he acccou
untting
g is
in
nco
omp
plette.
D
During
g the mea
m asu
ureme
ent period
d, the
t e accqu
uirer shalll re
etro
osp
pecttive
ely ad
djus
st th
he pro
ovission
nal
a
amo
oun
nts reccog
gnis
sed
d at
a th
he acquiisition
n da
ate to
o re
efle
ect new
w info
i orm
matiion ob
btaine
ed a
abo
out
fa
acts and
a d circu
ums
stan
nce
es tha
t at exis
e sted
d at
a th
he acq
quisition da
ate tha
at, if kkno
own
n, wou
w uld ha
ave
a
affecte
ed the
t me
eas
surem
men
nt of th
he am
a oun
ntss recog
gnised
da
at th
he acq
a quissitio
on date.
5
54
FRS
S 3 Bu
usines
ss com
mbina
ations
IF
D
During
g the mea
m asu
ureme
ent period
d, the
t e accqu
uirer shalll also
o recog
gnise ad
ddition
nal ass
a setss and
a
liabiilitie
es if new
n w in
nfo
orm
matio
on is ob
btained
d a
abo
out faccts an
nd circ
c cum
msttancces
s th
hat exxistted at
th
he accquisittion
n date
e th
hat, iff kn
now
wn,, wou
w uld ha
ave re
esulted
d in
n the re
ecogniition of
o ttho
ose
a
asse
etss an
nd liab
l bilitiess at the
ea
acqu
uisitio
on date
d e.
T
The
e meassurrem
men
nt peri
p iod en
nds
s ass soon
na
as the
t accqu
uirer re
ece
eive
es the
t e in
nforrma
atio
on it was
w
sseeking abo
a out fac
cts and circ
c um
msta
ancces tha
at exis
e ste
ed at
a th
he acq
quiisitiion da
ate or lea
arnss th
hat
m
morre info
orm
mation is nott ob
bta
aina
able
e. How
H wevverr, th
he me
eassure
eme
entt pe
erio
od sha
s all not
n t exxce
eed
o
one ye
ear fro
om the
e accqu
uisittion
n date
e.
T
The
e efffecct of
o the
e abov
a ve princ
ciple
e iss thatt good
dw
will is sub
bse
equ
uen
ntly ad
djussted for
f su
uch
cchange
es due to
o th
he facct th
hatt the cha
c anges res
sultting
g frrom
m new
w infform
ma
ation are
a pro
oce
ess
sed
re
etro
osp
pecctive
elyy, as
s if the
e in
nformatio
on had
de
exis
sted
d at th
he a
acq
quissitio
on datte. Th
his ressults in
na
fa
aire
er pre
p esen
nta
ation of
o the go
ood
dwill (o
or gai
g n from
m a ba
arg
gain
n purc
p cha
ase) at
a th
he acq
quiisitiion
d
date
e.
Itt is ve
ery importan
nt to
t not
n te tthatt no
ot all
a info
orm
mattion
n ob
bta
aine
ed in
i the
t meas
surrem
men
nt p
periiod
w
will ressultt in
n ch
han
nge
es to
t the
t e prrovvisio
ona
al a
amo
oun
nts at the acq
a quissitio
on datte. Th
he acq
quirer
sshould
d ap
pply p
pro
ofesssio
ona
al ju
udg
gem
men
nt to ensurre tha
at tthe ne
ew infform
ma
ation
n refle
r ectts the
t
ccircu
um
msta
ancces tha
at existe
ed a
at the
t e accqu
uisition
n date
d e and
a
ot thosse tha
at aro
a se the
ere
eaftter.
no
T
The
e sh
horrterr th
he tim
me period
d betw
b ween the est
e tima
ate
e off th
he pro
ovissio
onal amo
oun
nt a
at the
t
a
acquissitio
on dat
d te and
a d th
he recceip
pt of
o add
a ditio
ona
al in
nforma
atio
on aboutt th
he p
pro
ovission
nal am
mou
unt
in
n the mea
m surrem
men
nt per
p riod
d, the
t e mor
m re like
ely that the
e new
n w info
orm
mation re
elates to
o a
ccircu
um
msta
ancce thatt exxistted at the
e acqu
a uisitio
on date
d e. The
T e oppo
ositte is
i also
a o true..
A
Afte
er the
t
m asurrem
mea
men
nt perriod
d end
e ds, the
e acq
a quirrer sh
hall re
evisse the
e acco
a oun
ntin
ng forr a
b
busine
ess co
omb
bina
atio
on only to corrrecct an
a error in accco
orda
ancce witth IIAS
S 8 Acco
ounting
P
Poliicie
es, Ch
han
nge
es in Ac
Accounting Est
E tim
mate
es and
a d Erro
E ors
s.
Com
C
mm
mentt
C apte
Cha
er 9.7 of
o Volume 2 cont
c tains exxam
mple
es relat
r ting
g to the
e me
easure
ement peri
p od.
2
2.10
0 De
ete
erm
min
ning wh
what is pa
art off th
he busin
nes
ss co
ombin
nattio
on tra
t ans
sac
ctio
on
In
n cert
c tain
n ciircu
umsta
ance
es,, th
he acq
a quirrer an
nd the
e acqu
uire
ee ma
ay havve ha
ad a prep -exxistiing
re
elation
nsh
hip orr otthe
er arra
a ang
gem
men
nt beffore
e neg
n gotiiationss for the
e bus
b sine
esss co
om
mbin
natiion
b
began, and
a d m
may
y eve
e en entter in
nto an
n a
arra
ang
gem
men
nt durring
g the
t
ne
ego
otia
atio
ons th
hat is
ssepara
ate fro
om the
e bus
b ine
ess co
omb
bina
atio
on. Th
he acq
quiirerr sh
hall id
dentifyy an
ny am
mou
untss th
hat
a
are no
ot part of wh
hatt th
he ac
cqu
uirer and
a d the accqu
uire
ee exxcha
ang
ged
d in the
e bus
b sine
ess
ccom
mbin
nation
n, i.e. am
amountss th
hat are
e no
ot par
p rt off th
he exc
e cha
ange
e fo
or the
t accquiree.
T
The
e acqu
uire
er sha
all reccog
gnisse, ass par
p t o
of app
a plying th
he acq
quisition meth
m hod
d, only
o y the
t
cconsidera
atio
on ttran
nsfferrred for th
he acquiree
e and
a d on
nly the ass
a setss acqu
a uire
ed and liab
bilities
a
assu
um
med in the exc
e cha
ange
e for the
e acqu
uire
ee. Se
epa
arate transa
action
ns ssha
all be
b acccou
untted
fo
or sep
s para
ate
ely iin acc
a cord
dan
nce
e wiith the
e re
elevvan
nt IF
FRSs.
T
The
e fo
ollowin
ng fac
ctorrs sho
ould be
b co
onside
ered
d by
b the
t e acqu
uire
er to
t dettermin
ne wh
heth
herr a
sspecific trran
nsacctio
on form
f mss pa
art of
o the
t bu
usin
nes
ss com
c mbinattion
n:
l Th
he rea
aso
ons forr th
he tran
t nsa
actiion. A tra
ans
sacction
n ente
e ere
ed into
o prrimarily for
f the
e be
ene
efit
of the acq
a quirrer or the
en
new
w co
om
mbin
ned
d en
ntitty rath
r her than prima
arilyy fo
or the
e be
ene
efit of
a quirree orr itss fo
orm
merr ow
wnerss befo
ore the
e com
c mbinattion
n, is like
ely to be
e su
uch
h a
the acq
epa
aratte ttran
nsa
actiion. T
The
e po
ortiion off th
he transa
action
n price
e paid
p d (a
and
d any
a y re
elatted
se
55
Chapter 2
assets or liabilities) 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 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.
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 instrument). Acquisition-related costs must be distinguished from
transaction costs in accordance with IFRS 9 (e.g. brokerage fees), which may be
capitalised to the carrying amount of the investment in the separate records of investor. If
transaction costs were capitalised in the separate records of investor, the transaction
costs should be reclassified to profit or loss in accordance with IFRS 3 upon
consolidation.
56
IFRS 3 Business combinations
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 accordance with 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. Ignore any tax consequences.
P Ltd shall account for the transaction in its own records as follows:
Dr
R
Cr
R
1 October 20.18
J1
J2
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
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 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 as an intangible asset. An example is the
acquisition of the right to use its trade name under a franchise agreement that the acquirer
had previously granted to the acquiree. The right is now reacquired by the acquirer from
the acquiree in the business combination transaction.
57
Chapter 2
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). The acquirer shall derecognise the
indemnification asset only when it collects the asset, sells it or otherwise loses the right
to it.
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 (refer chapter 2.9).
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.
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;
• 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.
58
IFRS 3 Business combinations
The subsequent measurement of contingent consideration can be illustrated as follows:
Contingent
consideration
(always measured at fair
value at acquisition date)
Classified as
financial liability
(for example obligation
to issue variable number
of shares)
Subsequently
remeasured to fair
value in profit or loss
Example 2.14
Classified as equity
(for example obligation
to issue fixed number
of shares)
Not subsequently
remeasured
Classified as financial
asset
(for example right of return
of previously transferred
consideration)
Subsequently
remeasured to fair
value in profit or loss
Subsequent measurement of 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 accordance with
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. Ignore any tax
consequences.
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
700 000
60 000
continued
59
C
Cha
apte
er 2
Drr
R
Cr
R
3
31 De
ecemb
berr 20
0.19
9
E
Equ
uityy – con
c ntin
ngen
nt con
c nsid
dera
atio
on (SFP)
Sha
S re cap
c pital (S
SFP
P)
R
Rec
cog
gnittion o
of th
he iss
suin
ng of add
ditiion
nal s
sha
are
es in
n re
esp
pec
ct
o
of the
t co
ontiing
gent co
ons
sid
dera
atio
on for
f the
eb
busine
ess
s
c
com
mbina
atio
on o
of S Lttd
60 00
00
60
0 00
00
Com
C
mm
mentt
E en th
Eve
hou
ugh the
e tottal fair
f value of tthe 20 000
0 sh
hare
es increassed from R10
R 00 000
0 (20
0 00
00
× R5) to
t R14
R 0 000 (20
0 000 × R7
7), tthe con
ntingen
nt co
ons
side
eration wass no
ot remeassure
ed as
a
it wa
as clas
c ssified as equ
uity.. Acccorrdin
ng to
o IA
AS 32.2
3 22 cchange
es in
n th
he fa
air valu
v ue of
o an
a e
equity
instrum
mentt are no
ot rreco
ogniised
d in the
e fin
nanccial sta
atem
men
nts.
Ex
xam
mple
e 2.15
5
Su
ubs
seq
que
entt meas
surrem
men
nt of
o con
c ntinge
entt co
ons
sid
dera
atio
on
class
sifiied
d as
s a lia
abillity
y (to
o be
b sett
s tled
d in
n cas
c sh)
O
On 1 Jan
J nua
ary 20
0.19
9 P Ltd
L ac
cquired
d a 7
70%
% in
nteresst in S Ltd
L for R
R1,3
3 mill
m ion
n frrom
m a
fo
orm
merr ow
wne
er, pa
ayab
ble in ca
ash. From
m thatt da
ate P Ltd
d had co
ontrrol ove
er S Ltd
L ass pe
er the
t
d
definition off co
ontrol in accco
orda
ancce wit
w h IFR
RS 10. In
n te
erm
ms of the
e a
agre
eem
men
nt witth the
t
sselle
er, P Ltd
d w
will ha
ave to
o pay an
n extr
e ra R
R20
00 00
00 to
t the
e selle
er if tthe sa
aless of
o S Ltd
L
in
ncreasse byy m
more than 15
5%
% in
n tota
t al ov
ver the next thrree
e fiina
ancial pe
erio
odss. On
O
1 Ja
anu
uaryy 20.19 bot
b th P Ltd
L and the se
ellerr were
w e conffide
ent tha
at the
t e 15
5%
% incre
easse w
wou
uld
nde
eed
d ta
ake pla
ace
e. The
T e fa
air value
e off the ffina
anccial liability for the con
c ntingen
nt pay
p yme
entt is
in
e
estim
ma
ated
d att R110
0 000
0 .
B
By 31 De
ece
emb
berr 20
0.19, the
e sale
s es of S Lttd dec
d clin
ned
d so
omew
wha
at d
due
e to
o an
a advverrse
e
econom
micc cllima
ate
e. P Lttd now
n w esti
e ma
atess th
hat the
e 15%
% ta
arg
get will prob
bab
bly nott be
em
mett at
th
he en
nd of the
e third
t d fina
f anccial pe
erio
od. Th
he faiir valu
v ue of th
he fina
f anccial lia
ability fo
or the
t
ccontting
gen
nt pay
p yme
ent is now
we
estima
ated
d at
a R
R30 00
00. Ign
norre any
a y taxx con
c seq
que
encces.
P Lttd sha
s all acc
a count for
f the
e trrans
sacctio
on in itts own
o n re
eco
ordss as fo
ollo
owss:
Dr
D
R
Cr
C
R
1 January 20..19
9
IInve
estme
ent in S Lttd (SF
( FP)
Ban
B k (S
SFP
P)
Fina
F anciial liab
bility
y (S
SFP
P)
R
Rec
cog
gnittion o
of th
he consiide
erattion
n an
nd continge
entt
c
con
nsid
derratiion
n for th
he bus
sin
ness
s com
c mbin
nattion
n of S Ltd
1 410
4 0 00
00
1 300
3 0 00
00
1 0 00
110
00
co tinu
cont
ued
d
6
60
IF
FRS
S 3 Bu
usines
ss com
mbina
ations
Dr
D
R
Cr
R
3
31 De
ecemb
berr 20
0.19
9
F
Fina
anccial lia
ability (SF
( FP) (1110 0000 – 30
3 000)
0 )
Fair
F value
e ad
djus
stmentt (P
P/L))
R
Rec
cog
gnittion o
of th
he fair va
alu
ue adju
a usttme
ent on
n th
he liab
bilitty
ffor the
e contting
gen
nt con
c nsid
derration for th
he b
bus
siness
s
c
com
mbina
atio
on o
of S Lttd
80
0 00
00
80
0 00
00
Com
C
mme
ent
A th
At
he end
d off th
he tthird
d finan
ncia
al pe
erio
od the
t
liab
bilitty will
w be setttled
d. P Ltd
L sha
all ffirstly
re
eme
easure
e the
e lia
ability to
t fair
f value (wh
hich
h will equa
al th
he amo
a oun
nt to
o be
e pa
aid i.e. RN
Nil or
o
R 0 00
R200
00) thrroug
gh p
proffit or losss as
a illus
stratted abo
ove
e. Se
eco
ondly, P Lttd will
w dere
d ego
onise
e th
he
lia
abillity.
Ex
xam
mple
e 2.16
6
Su
ubs
seq
que
entt meas
surrem
men
nt of
o con
c ntinge
entt co
ons
sid
dera
atio
on
class
sifiied
d as
s a lia
abillity
y (to
o be
b sett
s tled
d in
n sha
s ares
s)
O
On 1 Jan
J nua
ary 20
0.19
9 P Ltd
L ac
cquired
d a 7
70%
% in
nteresst in S Ltd
L for R
R1,3
3 mill
m ion
n frrom
m a
fo
orm
merr ow
wne
er. Frrom
m th
hat da
ate, P Ltd ha
ad con
c ntro
ol ove
o er S Ltd
L ass pe
er the
e defin
d nition of
cconttroll in
n acco
a ord
dance wiith IFRS
S 10. P Ltd
d sha
s ll sett
s tle the
e con
c nsid
dera
atio
on by issuiing
100 00
00 of
o PL
Ltd’s sha
s aress to
o th
he form
f me
er o
own
ner at ma
arkket pricce of R1
13 per
p r sh
harre. P Ltd
L
a
and th
he sel
s ler ag
gree
ed tha
at P Ltd
L wo
ould issu
ue mo
ore sh
hares to the sselller if the
t e m
mark
ket
p
price of
o P Lttd’ss sh
harres de
eclin
ned
d belo
b ow R13 per
p r sh
hare
eb
by 28
2 Feb
F bru
uaryy 20
0.19. Ign
nore
e any
a
ta
ax con
nse
equ
uen
nces
s.
T
The
e fa
air val
v ue of the
e tota
al cconsid
dera
atio
on ffor the
e acq
a quissitio
on of S Ltd
d is
s R1,3
3 millio
m on on
1 Ja
anu
uaryy 20.19 and is cla
assified as a fin
nan
ncia
al liab
bility
y (fixe
( ed am
mountt fo
or variab
ble
n
num
mbe
er of
o shares
s).
O
On 28 Fe
ebru
uarry 20.
2 19 P Ltd
d’s sha
are
es wer
w re trad
t ding at
a R
R10
0 per sha
are
e, and
a P Ltd
d isssu
ued
130 00
00 sha
s aress to
o th
he sel
s ler..
P Lttd sha
s all acc
a count for
f the
e trrans
sacctio
on in itts own
o n re
eco
ordss as fo
ollo
owss:
Dr
D
R
1 Ja
anu
uarry 20.1
2 19
IInve
estme
ent in S Lttd (SF
( FP)
Fina
F anciial liab
bility
y (S
SFP
P)
R
Rec
cog
gnittion o
of th
he consiide
erattion
n pa
aid
d fo
or th
he bus
sin
ness
s
c
com
mbina
atio
on o
of S Lttd
Cr
C
R
1 300
3 0 00
00
1 300
3 0 00
00
co tinu
cont
ued
d
61
C
Cha
apte
er 2
Dr
D
R
2
28 Feb
bru
uary
y 20.19
F
Fina
anccial lia
ability (SF
( FP)
Sha
S re cap
c pital (S
SCE
E) (1000 0000 × R113)
R
Rec
cog
gnittion o
of sha
s res
s is
ssued
Cr
C
R
1 300
3 0 00
00
1 300
3 0 00
00
Com
C
mme
ent
B 2
By
28 Feb
F brua
ary 20.19 the
e fair valu
v e of
o th
he con
c nside
eration
n ha
ad not
n chang
ged, bu
ut P Lttd
isssue
ed more sha
s aress to the
e se
ellerr to
o co
omp
penssate
e fo
or th
he dec
d line
e in the
e in
ndividua
al ssharre
p e. Deta
price
D ails of
o th
he ccon
nside
erattion
n are
e th
here
efore ass fo
ollow
ws:
O 1 Ja
On
anua
ary 20..19:: 10
00 000
0 sha
aress at R13 each
h = R1,,3 millio
m on
O 2
On
28 Feb
F rua
ary 20.1
2 19: 130
0 00
00 shar
s res at R10
R 0 ea
ach = R1,3
R 3 million.
B
Bus
sin
nes
ss
s co
om
mbina
atiion
ns an
nd co
ons
so
olid
datted
d fina
ancia
al sta
ate
em
men
nts
s
2
2.15
5 Su
um
mmary
y of
o IFR
RS 3 for
f r th
he dirrec
ct acq
a quiisittion of
o ne
et a
ass
sets
s
as
s a bu
usiine
ess
s com
mbina
atio
on
IF
FRS 3 Bus
B siness
s Com
C mb
bina
atio
ons
s pres
p scriibes the accco
ountting
g trrea
atmentt off all bus
b sine
ess
ccom
mbin
nation
ns, irre
esp
pecctive
eo
of how
h w th
he businesss com
c mbin
nattion
n was
w efffec
cted
d. A bus
b sine
ess
ccom
mbin
nation
n ca
an be
e efffeccted
d thro
t oug
gh the
t e direcct acq
a quissitio
on of asssets and
d take
eovver of
liabiilitie
es of
o ano
a othe
er ent
e ity as a bus
b sine
ess, orr th
hrou
ugh
h an
n in
nve
estm
men
nt in
n th
he equ
e uityy of an
noth
herr
e
entitty. Th
he lattter wiill lea
l d tto the
e prep
p para
atio
on of co
onsolid
date
ed fin
nan
ncia
al stat
s tem
men
nts as
d
disc
cusssed
d in
n the nex
n xt se
ection
n of this cha
c pte
er.
T
To sum
s mm
marise the
e apprroa
ach requiired
d byy IF
FRS 3,
3 th
he follow
wing
g sttep
ps ssho
ould
d be
e fo
ollo
owe
ed:
D
Dire
ect ac
cqu
uisiitio
on of
o ass
a sets and
a d/orr ta
ake
eov
ver of lia
abillitie
es
S
Step
p 1: Enssurre tha
t at th
he asssetts acq
a quirred
d and//or lia
abiliities
s ass
a um
med
d in
n th
he tran
t nsa
actiion
rep
pressen
nt a businesss com
mb
bina
atio
on as
a deffine
ed in IFR
RS 3. Co
ons
side
erattion
n shou
uld
b givven
be
n to
o th
he con
c nce
ept of co
ontrrol in this
t s re
ega
ard ass well
w ass th
he def
d finittion
n of a
b sine
bus
ess
s ass expl
e lain
ned
d in the
e cha
c pte
er 2.2.
2
S
Step
p 2: Recog
gnise alll id
denttifia
able
e ass
a setss acqu
uire
ed and liab
bilitiies asssume
ed (ass part of
t e bu
the
usin
nesss com
c mbina
ation tran
nsa
actio
on)) accco
ordiing to the
e prin
p ncip
pless off IF
FRS
S 3 in
t e se
the
epa
aratte fina
f anccial sta
ateme
entss off th
he acq
a quirrer.. He
ere
e fo
ocus sho
s uld
d be
e plac
ced
o ide
on
enttificcatio
on of as
sse
ets and
d liab
bilitiies that ma
ay nott ha
ave
e app
a peared
d o
on the
t
s atem
sta
men
nt of
o fina
ancial position of the
e acqu
uire
ee beffore
e th
he bussinesss co
om
mbin
natiion
b t th
but
hat fo
orm pa
art off th
he busin
ness com
c mbiination
n tran
t nsa
actio
on (e
e.g. in
ntan
ngib
ble
a setss or
ass
o co
ontinge
entt liabiilitie
es, etc.)
e ). Ca
are sh
hou
uld also be
e tak
t ken n
not to
reccognis
se asssetts an
nd lia
abilitiess tha
t at do not form part
p t of
o the
t e bus
b sine
ess
c mbina
com
ation, i.e
e. th
hose tra
anssac
ction
ns th
hatt are
a e reg
r gard
ded
d as sep
s para
ate
t nsa
tran
actiions.
S
Step
p 3:
3 Me
Measure
e all id
den
ntifiiable ass
a setss a
and
d lia
abilitie
es a
at the
t ir res
r pecctiv
ve fair
f r va
alue
es as
p escribe
pre
ed by IFRS
S 3 in the
t e se
epa
aratte fina
ancial sta
atem
me
entss off the acq
a quirer. Mo
ost
a setss and
ass
a d liab
l bilities
s are
a
m asured
mea
d at
a the
eir accquisittion
n-da
ate
e fa
air va
alue
es,
a hou
alth
ugh
h ce
erta
ain exxceptio
onss to
o th
his me
eassure
em
ment ru
ule ha
ave
e be
een
n id
den
ntifie
ed by
6
62
IFRS 3 Business combinations
Step 4:
Step 5:
Step 6:
Step 7:
Step 8:
IFRS 3. Measure all assets and liabilities that cannot be measured reliably at
the acquisition date, at their provisional fair values.
Recognise the consideration paid for 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
the business combination transaction. Furthermore, certain components of the
consideration may be contingent and should be treated in accordance with 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
accordance with IFRS 3’s requirements in the separate financial statements of
the acquirer.
63
Chapter 2
Example 2.17
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 accordance with IFRS 3 Business
Combinations. 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 (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 individual financial statements. The project meets the definition of an
intangible asset in accordance with IAS 38 Intangible Assets but was not recognised
by S Ltd in its individual financial statements, as S Ltd could not previously demonstrate
the probability of future economic benefits in accordance with 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 individual financial statements. At the
acquisition date the fair value of the contingent liability was R300 000. The contingent
64
IFRS 3 Business combinations
liability forms part of the business combination transaction. The amount is not
deductible for taxation purposes.
Assume a tax rate of 28% and a capital gains tax inclusion rate of 80%.
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
accordance with 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
accordance with 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
accordance with 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
accordance with 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 the
assets and liabilities at their acquisition-date
fair values in P Ltd’s accounting records.
Are there assets and liabilities on S Ltd’s
statement of financial position that should
not be recognised in accordance with
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 be taken over in the business
combination?
Yes; existing goodwill is not an identifiable
intangible asset and deferred tax of the
acquiree may never be taken over in a
business combination.
Are all items of the consideration
transferred measured at fair value?
No; the deferred payment should be
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?
Yes; these transactions may not be
recognised as part of the acquisition journal
entry and should be accounted for in the postacquisition period (employees retrenched).
65
C
Cha
apte
er 2
T
The
e accqu
uisittion
n jo
ourn
nal en
ntryy is the
ere
eforre a
as follow
ws in th
he separrate
e financial sta
s atem
men
nts
o
of P Lttd (the
ere are
e no con
c nsolida
ated
d fiinanciial sta
s atem
men
ntss):
Dr
R
Crr
R
1 Jan
J nua
ary
y 20
0.16
JJ1
Prrope
ertyy, plan
p nt and
a equip
pme
ent (SF
FP))
Invvesstmentt prrope
ertyy (S
SFP
P)
Inttangib
ble ass
a setss (S
SFP
P) (9
900
0 00
00 + 20
00 000)
0 )
Trade
e re
ece
eiva
able
es (SF
FP)
Go
ood
dwilll (S
SFP
P) (bal
( lancing)
Lon
ng-tterm
m lo
oan
n (S
SFP
P)
T ade an
Tra
nd othe
o er pay
p yables (SFP)
C ntin
Co
nge
ent liab
bilityy (S
SFP
P)
B nk (SF
Ban
FP)
S are
Sha
e ca
apita
al (SC
( CE)
Lan
nd ((SF
FP)
Pro
ofit on tra
ansffer of lland
d (P
P/L
L)
T ade an
Tra
nd othe
o er pay
p yables (SFP) (a
at pres
p sent va
alue
e)
(F
FV = 1 milllion
n; i = 10
0%; n = 3)) orr (1 000
0 00
00 / 1.1
103)
12
200 00
00
7
700 00
00
1 100 00
00
200 00
00
12
12
251 315
500
5
0 00
00
3 0 00
300
00
3 0 00
300
00
2 000
0 0 00
00
1 000
0 0 00
00
2 0 00
200
00
4 0 00
400
00
7 1 31
751
15
Ac
cqu
uisiitio
on journa
al e
entrry in the separrate
e fiinanciial
sta
ate
eme
ents of
o P Lttd
JJ2
Otther exxpe
enses (P//L)
20
000 00
00
Pro
ovission
n fo
or re
etre
encchm
ment co
ostss (S
SFP
P)
2 000
0 0 00
00
Prrovide
e th
he retr
r renchm
me
ent cos
sts
s th
hat aro
ose
e as
s a separrate
e
tra
ans
sac
ction thro
oug
gh tthe
e po
ost-ac
cqu
uisition prof
p fit o
or los
l ss
Com
C
mme
ent
D erred ta
Defe
ax is
i not
n rreco
ogn
nised in
n th
his exa
e ample, as SARS accep
pts a
all tran
t nsfe
er va
alue
es of
o
a ets and
asse
d lia
abillities fo
or taxa
t ation p
purp
pose
es. Th
here
efore, the
t
taxx b
base
es of
o ass
a ets an
nd
lia
abillities are
a
eq
qual to
o th
he carryin
ng amoun
nts the
ereo
of and
a
th
here
e are no tem
mpo
orary
d rencess.
diffe
T
The
princip
pless illu
ustrrate
ed in
n th
his exa
amp
ple (exccep
pt fo
or th
he deferre
ed ttax)) ap
pplyy eq
qually to
t
b nes
busin
ss com
c mbinatio
ons wh
here
e co
ontro
ol is
s ob
btaiined
d th
hrou
ugh the
e accquisition of sha
s aress in a
subssidia
ary (as is disc
d cuss
sed
d in the next sect
s tion).
2
2.16
6 Th
he lin
nk betw
wee
en IIFR
RS 3 and c
consoliida
ated
d fina
f ancia
al s
sta
atem
me
entts
Itt is ve
ery imporrtan
nt to
t est
e abllish
h th
he link
l k be
etw
wee
en IFR
I RS 3 Bus
B sin
ness C
Com
mb
bina
atio
ons
s and
a
th
he pre
epa
arattion
n of
o conssolida
ated
d finan
ncial ssta
atem
men
nts ea
arly
y on
n. Wh
When re
eading
g IF
FRS
S 3,
3 it
a
appears tha
at tthe sttandarrd is only appliccab
ble to the d
dire
ect accqu
uisittion
n of
o ass
a setss and
a
liabiilitie
es tha
at fo
orm
m a bu
usin
nesss as
a def
d fine
ed iin the
t sta
and
dard. Thi
T is iss, how
h wev
ver, no
ot the
t ca
ase
a
as IFR
RS 3 is ap
ppliicable
e to
o all
a bussinesss com
c mbinattion
n tran
nsa
actio
onss whe
w ere co
onttrol is
on of
o
obta
aine
ed ovver an
noth
herr busiiness, whet
w the
er tha
t t hap
h ppens throu
ugh
h direc
ct acq
a quissitio
a
asse
etss an
nd takkeo
ove
er of
o liab
bilitiies off an
notther entit
e ty (ass was
w illu
usttrated in the pre
p evio
ous
la
e
examp
ple), or
o throug
gh invvesstm
men
nt in the
t e equ
e ity off anotthe
er ent
e ity.. The
T
atte
er w
wou
uld
re
eprresentt an o
own
nerrship inte
ere
est tha
at is o
obta
ained in an
notherr entitty w
whe
ere
e th
he acq
quirer
o
obta
ainss co
onttroll ov
ver the
e vo
otin
ng righ
hts of tha
at ent
e ity, ass discu
usssed
d ea
arlie
er in this ch
hap
pterr.
6
66
IFRS 3 Business combinations
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 accordance with 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
accordance with IAS 27 Separate Financial Statements either:
l at cost;
l in accordance with IFRS 9; or
l using the equity method as described in IAS 28.
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 2.2.
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.
67
C
Cha
apte
er 2
Com
C
mme
ent
* A prro form
f ma jou
urna
al en
ntryy is a jjourrnall en
ntry tha
at is
s not
n pro
ocesssed
d in
n th
he sepa
s aratte
fin
nan
ncia
al sttate
eme
ents
s off th
he acq
a uire
er or
o the
t
ind
divid
dua
al finan
ncia
al state
eme
entss off th
he
acqu
uiree
e, but prroce
esse
ed for the purp
p posses of dra
awing up
p co
onsolid
date
ed fina
f ancial
sttate
eme
entss. Pro fform
ma jour
j rnall en
ntrie
es th
here
eforre o
only
y ad
djust th
he ccons
solid
date
ed fina
f ancial
sttate
eme
entss an
nd a
are processsed
d to
o giv
ve effe
e ct to IF
FRS
S 3 req
quire
eme
ents
s an
nd to
t elim
e inatte
in
ntragroup tran
t nsacctio
ons and
d ba
alan
nces
s in acccord
dan
nce with
h IF
FRS
S 10
0.
S
Step
p 3:
3 M
Me
easure
e all id
den
ntifiiable ass
a setss a
and
d lia
abilitie
es a
at the
t ir res
r pecctiv
ve fair
f r va
alue
es as
p escribe
pre
ed by IF
FRS
S 3 in the
e con
c solida
ated
d financial sta
s atem
men
nts
s off the acq
a quirrer.
heir acq
Most assetts and
Mo
a d lia
abiilitie
es are
e m
mea
asu
ured
d at
a th
a uissitio
on-d
datte fair
f r va
alue
es,
a hou
alth
ugh
h ce
erta
ain exxceptio
onss to
o th
his me
eassure
em
ment ru
ule ha
ave
e be
een
n id
den
ntifie
ed by
bly at
IFR
RS 3. Me
eassure
ea
all ass
a setss and lia
abilitiess th
hatt ca
ann
not be
em
measurred
d re
eliab
t e acqu
the
uisiition dat
d te, at their prrovisio
ona
al fa
air va
alue
es. Allso, note
n e th
hatt ce
erta
ain
a setss and
ass
a d lia
abilitie
es ma
m y hav
h ve tto be
b ad
djussted
d to
o th
heir app
a rop
pria
ate fair vvalu
ues
b me
by
ean
ns of pro
o fo
orm
ma jou
urna
al e
entriess at
a th
he ac
cquisittion
n da
ate
e. This
T s wou
w uld be
d ne to ensurre com
don
c mplian
nce
e with
w the
e re
equ
uire
eme
entts of
o IFR
RS 3. No
ote tha
at w
whe
ere
a setss and
ass
a d lia
abillitie
es are
a e accqu
uire
ed dire
ecttly, no
o such
h pro
p forrma
a jo
ourrnal entries
w uld
wo
d be
e requ
uire
ed as the tran
t nsa
action is reccog
gnis
sed
d and
a
meas
surred direcctly
y in
t e ssep
the
para
ate fiina
anciial sttate
eme
entts of th
he ac
cqu
uire
er and
d no sub
s seq
que
ent
c nso
con
olidate
ed fina
anccial state
s em
men
nts are
e pre
p epared
d. All
A ide
enttifia
able
e ass
a etss and
a
l bilitties
liab
s arre the
t ereffore
e re
eco
ogn
nise
ed and mea
m asu
ure
ed by
b me
ean
ns of
o act
a tual jo
ourn
nal
e tries pro
ent
oce
esse
ed in
n the se
epa
ara
ate fin
nan
ncia
al sta
atem
mentss of
o the
e acq
a quirrer.
Howe
ever, whe
w ere
e an
n equ
e ity invvesstmentt iss accqu
uire
ed, the
e finan
ncial sta
s atem
men
nts of
t e accqu
the
uire
er and
a d a
acquire
ee are
e ssub
bseq
que
enttly con
nso
olid
date
ed. Th
herrefo
ore,, ce
erta
ain
a usttme
adj
ents ma
m y n
nee
ed to be
e done bot
b h at
a the
e acqu
a uisitio
on dat
d te as
a we
ell as
s bse
sub
equ
uently to ensurre tha
t at th
he con
nso
olidate
ed ffina
anccial sta
ate
eme
entss com
c mplyy with
w
t e re
the
equ
uire
eme
entss o
of IFR
RS 3. Ch
hap
pterr 6 de
ealss mai
m nlyy with the
e pro
p fo
orma fair
f
v ue ad
val
djusstm
ments ttha
at are req
quirred in conso
olid
date
ed fina
ancciall state
eme
ents.
S
Step
p 4:
4 A cho
c oice
e sh
hou
uld be
e made
e in
n re
esp
pect off th
he me
m asu
ure
eme
ent of the
e non--co
ontrrolliing
i erests
inte
s in the acq
a uiree.. Accco
ording
g to
o IF
FRS
S 3, a no
on-ccon
ntro
ollin
ng inte
i erest iin the
t
a quirree
acq
e is me
eassurred at the
e acqu
a uisitio
on date
d ee
either at
a the
t e fa
air valu
v ue of the
t e no
onc ntro
con
ollin
ng inte
ere
estss or at
a th
he no
on-c
con
ntro
ollin
ng inte
ere
estss’ prop
p porrtion
natte sha
s are of
t e accqu
the
uire
ee’ss identtifia
able
e net ass
a sets.
S
Step
p 5:
5 Elim
min
nate
e the co
ost price
e off th
he inv
vestme
entt off th
he acquiirerr (ffair va
alue
e o
of the
t
c nsid
con
derratio
on forr th
he bus
b sine
esss co
om
mbin
natiion) a
against th
he fair
f rly vallued equ
e uity
y of
t e accqu
the
uire
ee tha
at w
was
s in
nclu
ude
ed in the
e con
c sollida
ated
d fina
ancial sta
ateme
entss and
a
reccognis
se the
e am
a oun
nt of th
he no
on-ccon
ntro
ollin
ng inttere
estss ((as
s dete
d erm
mine
ed in
s ep 4
ste
4). No
ote he
ere that the
e equ
e ity of the acq
a quirree
e att th
he acq
quiisitiion da
ate is
i directly
ind
y fa
airlyy valu
ued byy en
nsu
urin
ng tha
t at all
a the ide
entifia
able
e assse
ets an
nd liab
bilities
o the
of
e acq
a uire
ee are
e me
m asu
ure
ed a
at the
eir acq
quiisitiion-da
ate fair valu
v uess (o
or oth
her
s eciffied
spe
d va
alues pe
er th
he exccep
ptio
ons to the
e mea
m asurem
ment prin
p ncip
ple of IFR
RS
S 3)) at
t e accqu
the
uisittion
n date
e. Itt is alsso imp
porrtan
nt to note
n e th
hat an
ny fair
f r va
alue
e adju
ustm
men
nts
t at w
tha
were mad
m de to the
e in
nve
estm
ment in the
e se
epa
ara
ate fina
ancciall sttate
eme
entts o
of the
t
a quirrer sh
acq
hou
uld be
e re
eve
erse
ed on a pro
o fo
orm
ma ba
asiss in
n orde
er for
f the
e hist
h toric
cal
c st p
cos
pric
ce of
o the invves
stmentt to
o be
e elim
mina
ated
da
againsst th
he equ
uity
y off th
he acq
a quirree
a the
at
t e ac
cqu
uisittion
n da
ate
e. Goo
G odw
will or a gain
g n frrom
m a ba
arga
ain pu
urch
hasse is th
herrefo
ore
k pt ccon
kep
nsta
ant at all subse
equ
uen
nt cconsollida
atio
on d
date
es.
6
68
IFRS 3 Business combinations
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
accordance with IFRS 3’s requirements in the consolidated financial
statements of the acquirer.
69
Chapter 2
Example 2.18
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 accordance with IAS 16 Property, Plant and
Equipment and IAS 40 Investment Property. S Ltd will therefore not process any
fair value remeasurments in its individual financial statements in respect of the
business combination transaction.
l PPE is depreciated over 10 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 accordance with
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 realise.
l Interest on the long-term loan had to be recognised in respect of S Ltd on
1 January 20.16.
l S Ltd expensed development cost of R100 000 (fair value on 1 January 20.16:
R300 000) in its individual financial statements. The project meets the definition of
an intangible asset in accordance with IAS 38 Intangible Assets, but was not
70
IFRS 3 Business combinations
recognised by S Ltd in its individual financial statements as the probability of future
economic benefits could not previously be demonstrated in accordance with 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 individual 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 P Ltd recognised the equity investment in S Ltd in its separate records using the
cost price method.
l Assume a tax rate of 28% and a capital gains tax inclusion rate of 80%.
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
J2
J3
Property, plant and equipment (SFP)
Equity at acquisition (SCE)
Deferred tax (SFP) (200 000 × 28%)
Pro forma remeasurement of property, plant and
equipment at group level
200 000
Investment property (SFP)
Equity at acquisition (SCE)
Deferred tax (SFP) (200 000 × 80% × 28%)
Pro forma remeasurement of investment property at
group level
200 000
Equity at acquisition (SCE)
Deferred tax (SFP) (100 000 × 28%)
Allowance for credit losses (SFP)
Pro forma provision for credit losses at group level
72 000
28 000
144 000
56 000
155 200
44 800
100 000
continued
71
C
Cha
apte
er 2
Dr
R
J4
4
5
J5
6
J6
Cr
R
Eq
quitty a
at acqu
uisition
n (S
SCE
E)
De
eferrred
d ta
ax (SF
( FP) (600 00
00 × 28
8%)
Lon
ng-term
m lo
oan
n (S
SFP
P)
Prro form
f ma reme
easure
eme
entt off loan at gro
oup
p le
eve
el
– inte
i ere
est rec
cog
gnis
sed
d
43 20
00
16 80
00
Inttangib
ble ass
a setss (S
SFP
P)
Equ
uityy att accquisition (SCE
E)
Defferrred taxx (S
SFP
P) ((300
0 00
00 × 28
8%))
Prro form
f ma rec
cog
gniitio
on of
o in
nta
ang
gible ass
a ets
s att grroup
lev
vel
3
300 00
00
Eq
quitty a
at acqu
uisition
n (S
SCE
E)
Contin
nge
ent liab
bility (S
SFP
P)
Prro form
f ma rec
cog
gniitio
on of
o con
c ntin
nge
ent liab
bility at
a g
gro
oup
p
lev
vel
3
300 00
00
60
0 00
00
216
2
6 00
00
84
4 00
00
3 0 00
300
00
Com
C
mm
mentt
W en rem
Wh
mea
asurring ass
setss an
nd liab
l bilitie
es of
o th
he acq
a quire
ee to
t fa
air valu
v ue on
o the
t acq
quissitio
on
d e in
date
n termss off IFR
RS 3, the pro
o fo
orma re
eme
eassure
eme
ent can
c be
e recorded
d in any e
equity
a coun
acc
nt of
o the
t
accquiree
e. For
F
ea
ase of reffere
ence
e, the
t
au
utho
ors reffer to “eq
quitty at
a
a quis
acq
sitio
on”.. Th
he sspecificc eq
quitty a
acco
ountt ussed is not imporrtant, a
as at
a accqu
uisition date
t
the
en
ntire
e eq
quitty b
bala
ance
e of
o the acq
quirree (in
nclu
uding any
a
remeasu
urem
men
nts) wiill be
b
e mina
elim
ated
d in
n th
he ma
ain elim
mina
atio
on jour
j rnall, agai
a instt th
he “invvesttme
ent in sub
bsid
diary
y”
r orde
reco
ed in
i th
he sep
s arate acco
a oun
nting
g re
ecorrds of the a
acq
quire
er.
A
Afte
er th
he abo
a ove
e fa
air valu
v ue rem
r mea
asu
urem
mentss, th
he equ
e uityy (now
w faiirly sta
ated
d) at
a acq
a quissitio
on will
w
b
be:
S
Sha
are capita
al (giv
ven)
2 100
1 0 00
00
R
Reta
ained ea
arniings (ggiveen)
5 0 00
500
00
E
Equ
uity at acquiisitiion (1444 0000 + 1555 2000 – 772 000
0 – 43
4 200
2 0 + 216
2 6 00
00 –
3
300 000
0)
1 0 00
100
00
E
Equ
uity (i.e
e. net
n as
ssett va
alue
e) a
at acq
a quissitio
on (fairlyy va
alue
ed)
R 700
R2
7 0 00
00
T
The
e pro
p
forma elim
min
nation jo
ourn
nal entryy is the
t ereffore
e pro
p ocessse
ed as
s fo
ollo
owss in
n the
t
cconsolida
ated
d finan
ncia
al stat
s tem
men
nts of P Ltd
L :
Drr
R
Crr
R
1 January 20.16
6
S
Sha
are ca
apita
al (SFP)
R
Rettain
ned
d ea
arniings
s (S
SCE
E)
E
Equ
uityy at accquiisitiion (SC
CE
E)
G
Goo
odw
will (SFP)) (b
bala
ancin
ng)
In
nve
estm
men
nt in
n S Ltd
d (S
SFP
P)
Non
N n-co
ontrrolliing intere
estss (S
SFP
P/SC
CE) (220%
% × 2 70
00 000
0 0)
E
Elim
min
nation
n off ow
wne
ers
s’ equity of S Ltd
L d at ac
cqu
uisittion
n
7
72
2 10
00 000
0
50
00 000
0
00 000
0
10
1 34
40 000
0
3 500
5 0 00
00
5 0 00
540
00
IF
FRS
S 3 Bu
usines
ss com
mbina
ations
Com
C
mm
mentt
T e prro form
The
ma fair
f
va
alue rem
mea
asu
urem
men
nts and
d elliminatiion jou
urna
al entri
e ies cou
uld als
so
h e been
hav
n co
omb
bine
ed in
nto one
o e jou
urna
al:
D
Dr
R
1J
Jan
nua
ary 20.1
2 16
Prrope
ertyy, plant and eq
quip
pme
ent (SF
FP)
Invves
stme
ent pro
operrty (SF
( P)
Allo
owa
ance
e fo
or crrediit lo
osse
es (S
SFP
P)
Lon
ng-tterm
m lo
oan (SF
FP)
Inttang
giblle asse
a et (S
SFP
P)
Contin
ngen
nt liability (SF
FP)
Deferrred tax (SF
FP) (((2
200
0 00
00 × 80
0%) +
(200
( 0 00
00 – 10
00 000
0 – 60
6 000
0 + 300
3 000
0)) × 28
8%)
Sh
hare
e ca
apita
al (S
SCE
E)
Re
etained
d ea
arningss (S
SCE)
Go
ood
dwilll (SFP)) (balan
ncin
ng)
Inv
vestment in
n S Ltd
d (S
SFP))
Non-controlliing inte
eressts (SF
( FP/S
SCE
E) (2
20%
%×27
700 000
0)
Prro form
ma jou
j rna
al en
ntry
y att ac
cquiisitiion
Cr
R
20
00 000
0 0
20
00 000
0 0
100 000
0
60 000
0
30
00 000
0 0
3 000
300
0
140 000
0
2 10
00 000
0 0
50
00 000
0 0
1 34
40 000
0 0
3 500
5 000
0
5 000
540
0
Com
C
mm
mentt
I ome
Inco
e an
nd exp
pensses
s of the
e su
ubsidia
ary are
a ba
ased
d on
n th
he amo
a oun
nts of
o the asssetss an
nd
l bilitie
liab
es reco
r ogn
nised
d in
n th
he cons
c solidated fina
anciial sstattem
mentts at
a th
he acq
a quis
sitio
on d
date.
F exa
For
amp
ple,, de
epre
eciation
n exxpen
nse
e rec
cognise
ed in
i p
profiit orr losss afte
a r the acqu
uisittion date
i b
is
based on the ffair va
alue
es of the
e re
elate
ed dep
prec
ciab
ble asssetss re
eco
ognised
d in
n th
he
c nsolidatted fina
con
anccial sta
atem
men
nts a
at the
t
acq
quisitiion da
ate. Th
here
efore
e post
p -acq
quissitio
on
a ustm
adju
men
nts, like
e de
epre
ecia
ation
n, amo
a ortisatio
on, etc.
e ., w
will subs
s sequen
ntly be pro
ocesssed
d due to
t abo
the
ove fair va
alue
e rem
mea
asu
urem
men
nts at
a acqu
uisition datte.
In
n th
his ch
hap
pterr the bas
b sic princiiple
es of
o bus
b sine
esss co
om
mbin
natiions wer
w re d
disc
cussse
ed, wh
hile
e in
th
he next cha
c apter the
ese
e prrincciples are
e app
a plied
d in
n orde
o er tto pre
p pare con
c nso
olidate
ed fina
f anc
cial
sstatem
men
nts.
2
2.17
7 Diisc
closure
F
For ea
ach bu
usin
nes
ss com
mb
bina
atio
on tha
t t occu
o urre
ed du
uring tthe cu
urre
ent re
eportin
ng per
p riod
d, the
t
fo
ollo
owin
ng shoulld be
b dis
d clo
osed
d by
b the accquirerr, unle
u esss it iis imp
praccticcab
ble to
t do
d so::
l the nam
n me of the
t e accqu
uire
ee;
l a desscrriptiion of the
e acqu
uire
ee;
l the acq
a uissitio
on dat
d e;
l the perc
p cen
ntag
ge of votting
g eq
quity inte
i erests
s accqu
uired;
l the prim
p marry rea
aso
ons fo
or th
he bu
usin
nesss com
c mbina
ation and
a d a de
esccrip
ption of
o how
h w the
t
accqu
uirer obta
aine
ed con
c ntro
ol of
o th
he acq
quiree
e;
l a de
escrripttion
n of th
he facctors tha
at ma
make up
p goo
g dw
will, su
uch ass e
expectted syyne
ergies
om co
omb
biniing op
peratio
ons
s off th
he acq
a quirree
e an
nd the
e acqu
uire
er, inta
ang
gible ass
a setss th
hat
fro
do
o no
ot qua
q alify
y fo
or sep
s ara
ate reccog
gnittion
n orr otthe
er fa
acto
ors
s;
73
Chapter 2
l
l
l
l
l
l
l
l
74
the acquisition-date fair value of the total consideration transferred and the
acquisition-date fair value of each major class of consideration, such as:
Ɣ cash;
Ɣ other tangible or intangible assets, including a business or subsidiary of the
acquirer;
Ɣ liabilities incurred, for example, a liability for contingent consideration; and
Ɣ 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:
Ɣ the amount recognised as of the acquisition date;
Ɣ a description of the arrangement and the basis for determining the amount; and
Ɣ 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:
Ɣ the fair value of the receivables;
Ɣ the gross contractual amounts receivable; and
Ɣ 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:
Ɣ a brief description of the nature of the obligation and the expected timing of any
resulting outflows of economic benefits;
Ɣ 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
Ɣ 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:
Ɣ a brief description of the nature of the contingent liability;
Ɣ an estimate of its financial effect (if practicable);
Ɣ an indication of the uncertainties relating to the amount or timing of any outflow;
Ɣ the possibility of any reimbursement; and
Ɣ 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):
Ɣ a description of the transaction;
Ɣ how the acquirer accounted for the transaction;
IFRS 3 Business combinations
Ɣ the transaction amount and the line item in the financial statements in which the
amount is recognised; and
Ɣ 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:
Ɣ 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
Ɣ 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:
Ɣ the amount of the non-controlling interests in the acquiree recognised at the
acquisition date and the measurement basis for that amount; and
Ɣ 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:
Ɣ the acquisition-date fair value of the equity interest in the acquiree held by the
acquirer immediately before the acquisition date; and
Ɣ 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:
Ɣ 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
Ɣ 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.
75
Chapter 2
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
sale in accordance with IFRS 5 Non-current Assets Held for Sale and
Discontinued Operations);
76
IFRS 3 Business combinations
l
• 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 2.19
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.
The fair value of the total consideration transferred amounted to
B64(f)
R507 000 and is made up out of the following:
Cash
457 000
Deferred payment
50 000
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.
B64(o)
77
Chapter 2
IFRS 3
disclosure
requirement
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(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 and 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)
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)).
78
IFRS 3 Business combinations
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 in accordance with IFRS 10 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.
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.
79
Chapter 2
l
l
l
l
The fair value of the non-controlling interests was R750 000 on 1 January 20.11.
Alpha Ltd recognised the equity investment in Omega Ltd in its separate records
using the cost price method.
The company tax rate is 28% and capital gains tax inclusion rate is 80%.
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.
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) (comments (a))
Share capital (SCE) (1 000 × R460)
Contingent consideration (SFP)
Deferred consideration (SFP)
Cr
R
1 250 000
120 000
20 000
30 000
460 000
50 000
250 000
600 000
(275 000 × 100/110)
Bank (SFP)
Accounting for the investment in Omega Ltd
(b) Pro forma journals entries in the group’s accounting records
Dr
R
J1
J2
1 January 20.11
Equipment (SFP) (comments (b)) (400 000 – 300 000)
Equity at acquisition (SCE)
Deferred tax (SFP) (100 000 × 28%)
Pro forma remeasurement of equipment at
group level
Equity at acquisition (SCE)
Indemnification asset (SFP) (300 000 × 50%)
Contingent liability (SFP)
Pro forma recognition of contingent liability at
group level
Cr
R
100 000
72 000
28 000
150 000
150 000
300 000
continued
80
IF
FRS
S 3 Bu
usines
ss com
mbina
ations
Dr
R
JJ3
Share cap
S
c pital (S
SCE
E)
R aine
Reta
ed ear
e rnin
ngs (SCE
E)
G odw
Goo
will (SF
( FP) (ba
alan
ncin
ng)
Eq
quitty at
a acqu
uisition
n (S
SCE
E)
No
on-c
con
ntro
ollin
ng inte
eressts (SF
FP//SC
CE)
Invves
stmentt in Om
meg
ga Ltd
d (S
SFP
P) (p
parrt (a
a))
E mina
Elim
atio
on of ow
wners’ eq
quitty o
of Om
O ega
a Ltd
L at
acqu
uis
sitio
on
Cr
C
R
1 000
0 0 00
00
9 0 00
900
00
178
8 00
00
78
8 00
00
750
7
0 00
00
1 250
2 0 00
00
Com
C
mme
ents
a
Th
he con
c side
erattion
n tra
anssferrred ma
ay incllude
e asse
a ets of the
e ac
cquirerr that hav
ve
carrying am
moun
nts tha
at diifferr fro
om the
eir fa
air vvalu
ues at the
e accquisition datte. IIf so
o,
the
e acqu
uirer sh
hall remeasu
ure the
e tra
anssferrred asssetts or
o liiabilitie
es to theirr fa
air
valuess and rec
cogn
nise
e th
he rresu
ultin
ng gain
g ns o
or lo
osses in prof
p fit or
o lo
osss. Howe
eve
er,
sometime
es the tra
ansfferre
ed ass
setss re
ema
ain w
with
hin the
e co
omb
bine
ed entit
e ty afte
a r th
he
busine
esss co
omb
bination
n an
nd tthe acq
quirrer the
erefo
ore retain contro
ol of th
hem
m. In
n this
situatiion,, th
he acq
a uire
er shal
s ll meas
m sure
e th
hosse asse
a ets at the
eir carr
c ryin
ng amo
a ounts
immediattelyy before
e the acqu
uisittion datte and
a sha
all not
n reco
ogn
nise a gain
g n or losss.
b
Acccorrding to
o IF
FRS
S 13
3 Fa
air V
Valu
ue Measu
urem
men
nt, fair value refers to the hig
ghest
and best
b t usse of
o a no
on-fiinan
ncia
al asse
a et. The
T erefo
ore,, altthou
ugh
h Alpha
a Lttd does
d s no
ot
intend
d to use th
he equ
e ipm
mentt aftter the acquissitio
on of
o Ome
O ega Ltd
d, th
he high
h hestt an
nd
be
est use
u of the
e eq
quipment w
will be to sell
s it ffor R40
R 00 000
0 and th
hus R4
400 000
0 will
w
be
e consid
dere
ed to
t be
b th
he fair
f value.
81
3
Consolidation at acquisition date
Review
3.1
Group statements and consolidated statements......................................
86
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...................................
86
86
88
88
88
89
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 .................................................................
89
89
90
90
91
91
96
97
97
101
101
83
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 share
of the 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 the fair value of the
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 .................
104
105
105
106
107
107
112
112
116
116
119
119
Self-assessment questions
Question 3.1
Question 3.2
Question 3.3
84
.....................................................................................................
.....................................................................................................
.....................................................................................................
122
124
127
Consolidation at acquisition date
SCHEMATIC ILLUSTRATION OF CHAPTER 3
CONSOLIDATION AT DATE OF
ACQUISITION
Basic consolidation procedure:
l Eliminate common items;
l Consolidate non-common items
Consolidation method in chapter 3:
1. Analysis of owners’ equity;
2. Pro forma journals;
3. Worksheet; and
4. Consolidated SFP
Wholly-owned subsidiary
Partially-owned subsidiary
Examples:
l Interest acquired at FV of
identifiable net assets;
l Interest acquired at a premium
(goodwill)
l Interest acquired at a discount (gain
from a bargain purchase)
Parent and non-controlling interests
NCI – Two options:
l Measure at their
proportionate share of the
identifiable net assets;
l Measure at fair value
Examples:
l Interest acquired at FV of identifiable net
assets – NCI at proportionate share;
l Interest acquired at a premium (goodwill)
– NCI at proportionate share;
l Interest acquired at a premium (goodwill)
– NCI at FV;
l Interest acquired at a discount (gain from
a bargain purchase) – NCI at
proportionate share.
85
Chapter 3
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
individual 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 individual 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
86
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
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
C
Conso
olid
dation at acquiisitiion da
ate
rec
r cord
ds of the
e he
ead
d offic
o ce (the
( e bran
b nch
h acco
oun
nt) is rep
placced
d on
n cconsollida
atio
on o
of the
t
rec
r cord
ds of tthe
e he
ead
d offic
o ce and
a d bran
nch
h, by
b the ne
et a
assetss off the b
branch
h. In
I a simiilar
ma
manner, the acc
a count for
f the
e in
nve
estm
ment in a sub
s sid
diarry in
n th
he pa
aren
nt’ss re
ecordss is
s in
effe
e ect re
epla
ace
ed on
o co
onssolid
dattion
n by tthe ap
pprropriatte portio
on of
o the
e in
nteresst o
of the
t
par
p ren
nt in
n th
he net
n asssetts o
of the subsiidia
ary..
Com
C
mm
mentts
A ssimp
ple con
nsolida
ation
n att th
he date
d e off accquisition can
n be
b expl
e lain
ned sch
hem
maticallly as
a
f ows:
follo
Whe
W
en one
o
conso
olida
ates two
o in
ndiviidua
al sttate
ements of ffina
ancia
al posit
p tion into one, it beco
b ome
es
t ffina
the
ancia
al sttate
ements of a ne
ew entit
e ty, the
t P Ltd grou
g up. The
T thicck dotte
d ed line sym
mbo
olise
es th
he
c solid
cons
dation or com
mbin
nation of the tw
wo state
s eme
entss into one
e co
onso
olida
ated
d sttate
eme
ent of
f ncia
finan
al po
osition at
a a specific re
eporting
g da
ate:
S P 1:: Elim
STE
mina
ate the
t com
mmo
on ite
ems
s (Indica
ated
d by high
hlighted
d blo
ocks
s):
P Ltd
S Ltd
d
Stat
S teme
ent of
o finan
ncial pos
sitio
on
Statement of finan
ncial po
ositio
on
AS
SSET
TS
AS
SSE
ETS
PP
PE
1 000
100
PP
PE
Invvestm
ment in S Ltd
d
80 000
Re
eceivables
50 000
0
Re
eceiv
vable
es
20 000
To
otal ass
sets
120 000
0
To
otal asse
a ets
2 000
200
EQ
QUIT
TY AND
A
LIABILIITIES
70 000
0
EQ
QUIT
TY AND
A D LIA
ABIL
LITIE
ES
Share capiital
1 000
100
Sh
hare
e cap
pital
50 000
0
Re
etained earn
e ingss
40 000
Re
etain
ned earn
ningss
30 000
0
Pa
ayables
60 000
Pa
ayab
bles
40 000
0
To
otal equi
e ity and
a
l ilitie
liabi
es
2 000
200
To
otal equ
uity and
a
liab
biliti es
120 000
0
ST
TEP
P 2: Afte
A er the
e co
omm
mon item
ms (IInve
estm
mentt in S Ltd
d in P L
Ltd’s
s financial state
s ements and
d Tottal e
equity
in S Ltd
d’s fina
f ncia
al statem
men
nts) h
have
e be
een elim
e minatted, the
e rem
main
ning item
ms are
a com
c mbine
ed on
o
a line-b
by-liine b
basiis:
P Ltd
d Gro
oup – Cons
C solid
dated
d Sttatem
men
nt of Financ
cial Posi
P ition
n
C culattions
Calc
s
R
PPE
100
0 00
00 (P
P) + 70 000
0 (S)
170 000
0
R
Rece
ivab
bles
20
0 000
0 (P) + 5
50 000 (S)
70 000
0
A ETS
ASSE
To
otal Ass
sets
s
240 000
0
EQUIITY AND
A D LIA
ABIL
LITIE
ES
Share
e cap
pital
R
Retai
ned earning
gs
Payab
bless
To
otal equ
uity and
d liab
bilitiies
100 000
0 (P))
100 000
0
40 000
0 (P)
40 000
0
60
0 000
0 (P) + 4
40 000 (S)
100 000
0
240 000
0
2 In this
t s ch
hap
pter, th
he on
nly ccas
se tha
t at iss diiscusssed
d is on
ne in
i whi
w ich the
e in
nve
estm
ment iin the
t
sub
s bsid
diary iis carr
c ried
d (in th
he reccords of the
e pa
are
ent) at the
e orig
o ina
al co
ostt prrice
e.
87
Chapter 3
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 the 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.
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 entity. 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 individual 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.
88
Consolidation at acquisition date
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
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.
89
Chapter 3
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
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.
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
which is the equity of the entity) 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.
90
Consolidation at acquisition date
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 (P Ltd: 200 000 shares/S Ltd: 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
method.
Ignore tax implications.
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 individual 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
91
C
Cha
apte
er 3
p
positio
on are
e tthen sim
mplyy a
add
ded
d toge
t eth
her on
n a line
l e-by
y-line basiis to prrodu
uce
e the
t
cconsolida
ated
d sttate
ementt off fin
nan
ncia
al pos
p itio
on.
A
An ana
alyysiss off eq
quity is use
ed in thiis wo
w rk to sim
mpllify the con
c nso
olida
atio
on pro
oce
ess. The
T
a
analysis of
o th
he equityy att accqu
uisittion
n co
omplie
es with
w h th
he req
r quirrem
ments of
o IFR
RS 3.
3
C
Calc
cullatiion
ns
C
C1 An
naly
ysiis o
of ow
o ners’ eq
quitty of
o S Ltd
L
P Lttd 100
1 0%
To
otal
i At
A acq
a quis
sitiion (31/12/2
20.1
18)
Sha
S are cap
pita
al
Ret
R ain
ned ea
arnin
ngss
Pur
P rcha
ase
e diffferrence
Con
C nsid
dera
atio
on
At ac
cqu
uisittion
n
80 000
8
0 0 (d
dr)
9 000
0 0 (d
dr)
80
0 00
00
9 00
00
8 000
89
0 0
–
89
9 00
00
–
R8
89 000
0 0 (ccr)
R 9 00
R89
00
Com
C
mm
mentts
T e reffere
The
ence
es to
t ((dr) and
d (ccr) in
i th
he abo
ove ana
alyssis refe
er to
o th
he rrelev
van
nt jo
ourn
nal e
entry
( ).
(J1)
F
From
m the
t an
nalyysis
s it is cle
ear tha
at the
t re is n
no purch
hasse d
diffe
ere
ence betw
b ween the
e fa
air vallue
o
of th
he ide
entiffiab
ble asssetts and
a d lia
abilitie
es of
o tthe accqu
uiree a
and
d the con
c nsid
dera
atio
on tran
t nsfferrred
b
by the pa
aren
nt tto obta
o ain the in
nve
estm
me
ent. IFRS
S 3 req
quiress th
hat the
e pu
urcchase diffferencce be
ccalc
cula
ated
d in
n th
he follo
f ow
wing
gm
mannerr:
C
C2 Prroo
of of
o c
calc
cula
atio
on of pu
urchas
se diffferren
nce
e off S Ltd
d in
n te
erm
ms of IFR
RS
S 3.32
89 00
C
Con
nsid
dera
atio
on transfferrred at ac
cquisittion
n da
ate: IF
FRS
S 3.32
3 2(a))(i)
00
N
Net of the
e id
den
ntifia
able ass
a etss ac
cqu
uire
ed and
a d th
he liab
bilities as
ssum
me
ed
(8
att accqu
uisittion
n da
ate
e: IF
FRS
S3
3.32
2(b)
89 000)
P
Purc
cha
ase
e differen
nce
e
R–
R
Com
C
mm
mentts
In o
orde
er to
o comply witth the req
quire
eme
entss off IF
FRS
S 3, thiis calc
c ulattion
n wiill be
b don
d e fo
or
e ry exam
eve
e mplle, eve
e n th
houg
gh the
t purrcha
ase
e difffere
ence
e is
s alsso refle
ecte
ed in
n the analyysiss.
In
n orde
o er to ap
pply
y th
he co
onssolid
dattion
n work
w ksh
hee
et met
m tho
od, prro form
f ma
a jo
ourn
nals mu
m st be
p
prep
parred tha
at a
are ussed
d so
olely to
o elim
e mina
ate inttrag
group items
s in the
e con
c solida
atio
on proc
p ces
ss.
W
With
h th
he abo
ove
e ana
a lysis as
a basis, th
he elim
min
natiion of the rela
ated
d item
ms can
c n be
e reco
ord
ded
a
as follo
owss byy m
mea
anss off a pro
o fo
orm
ma con
c nsolida
atio
on jou
j rna
al entr
e ry:
9
92
C
Conso
olid
dation at acquiisitiion da
ate
C
C3 Prro form
f ma
a co
ons
solida
atio
on jou
j urn
nal enttry
y
Drr
R
1
J1
Sh
hare
e capital (S))(SC
CE
E)
Re
etaiined earn
e ning
gs (S)
( (SC
CE))
Invvesttme
ent in S Ltd
L (P)(SF
FP))
Elimiina
atio
on of
o equ
e uity
y off S Ltd
d ag
gainstt in
nvestm
men
nt
ac
cco
ount att ac
cqu
uisitio
on
Cr
R
8
80 000
0
9 000
0
89
9 00
00
Com
C
mm
mentts
a T
The reffere
ence
es tto (S
S) and
a d (P
P) arre pure
p ely for
f purrpos
ses of clarity,, be
eing
g reffere
ence
es to
t
the resspe
ectivve fina
anciial sta
atem
ments in which these
e ittems a
app
pearr, nam
n melyy th
he
ssubs
sidiary (S)) an
nd th
he pare
p ent (P).
b T
The follow
wing
g ab
bbre
evia
ations tha
at are
a use
ed in tthe pro
o fo
orm
ma jjourrnals refer to
o th
he
d
diffe
eren
nt parts
p s o
of th
he fina
f ancial sstattem
mentts that are
e in
nfluencced by
y ea
ach pro
o fo
orm
ma
jo
ournal::
S
SFP
P – Sta
atem
men
nt off fin
nanccial pos
sitio
on
S
SCE
E – Sta
atem
men
nt off ch
hang
ges in equ
e uity
P
P/L – Pro
ofit o
or lo
osss
O
OCI – Oth
her com
mprrehe
ensive income
e.
B
By ne
ettin
ng offf th
he pro form
f ma
a jo
ournall e
entrry aga
ainst the
e am
a oun
ntss conttain
ned
d in
n the
t
sstatem
men
nts of fin
nan
ncia
al pos
p sitio
on of P Ltd
d and
a d S Ltd,
L , th
he no
on-ccom
mm
mon ite
ems w
which
re
em
main
n arre the
t en add
a ded
d to
ogethe
er on
o a line--by
y-lin
ne bas
b sis in the
e co
onssolidatted
d sttate
eme
entt of
financial pos
p sitio
on. Fo
or thiss pu
urpo
ose
e, use
u e is ma
ade
e off a conso
olid
dation wo
orks
she
eet.
C
C4 Co
ons
solida
atio
on wo
works
she
eett: P Lttd and
a d sub
s bsid
diary
PL
Ltd
S Ltd
Ld
Con
C
nso
olid
datiion
n
ad
djus
stm
men
nts
Drr
P
Pro
operty,, pla
antt an
nd
equiipm
ment
IInve
estme
ent in S Lttd
T
Tra
ade recceivvab
bles
s
91 000
89
9 000
48
8 000
65 0
000
–
4 0
44
000
C
Cr
89 000
0 (J1
1)
R 8 000 R10
R228
R 90
000
S
Sha
are ca
apita
al
R
Rettain
ned ea
arnings
s
T
Tra
ade and othe
o er
paya
able
es
200
0 000
8 000
80 0
000
90
000
20
0 000
20 0
000
Con
C
nso
olida
ated
d
1 6 00
156
00
–
92
2 00
00
R2
248
8 00
00
80
0 00
00 ((J1))
9 00
00 ((J1))
R 8 000 R10
R228
R 90
000 R89
R 9 00
00
200
2
0 00
00
8 00
00
40
0 00
00
89 000
0 0
R8
R2
248
8 00
00
T
The
e co
onssolid
datted state
eme
ent of fin
nan
ncia
al p
positio
on is prep
p parred
d fro
om the wor
w rkshee
et a
and
d it
sshould
d be
e clea
c ar to you
y u th
hat all inttrag
gro
oup ba
alan
nce
es hav
h ve now
w bee
b en elim
min
nate
ed an
nd the
t
re
em
main
ning
g item
ms were
w e add
a ded
d to
oge
ether on
n a line
l e-byy-line basiis. Th
he co
onssolid
datted
sstatem
men
nt of
o financcial pos
p sitio
on will the
t ereffore
e only
o y ccon
ntain ite
emss thatt resu
ult fro
om
trran
nsacctio
onss with partie
es outs
o side the gro
oup
p.
93
C
Cha
apte
er 3
P LTD
L D GRO
G OUP
C
CO
ONS
SOL
LID
DAT
TED
D ST
TA
ATE
EME
ENT
T OF
O FIN
F NAN
NCIAL
L PO
OSITIO
ON
N AS
S AT
A 31
3 DE
ECE
EMB
BER 2
20.1
18
A
ASSE
ETS
S
N
Non
n-c
currren
nt a
asse
ets
s
P
Pro
operty,, pla
antt an
nd equ
e uipm
men
nt (9
91 000
0 0(P)) + 6
65 000
0 0(S))
1 6 00
156
00
C
Currrent ass
a sets
T
Tra
ade recceivvab
bles
s (448 000((P) + 44
4 00
00(S
S))
92
2 00
00
T
Tottal ass
setts
R2
248
8 00
00
E
EQUIT
TY AN
ND LIA
ABIILIT
TIES
E
Equ
uity
y atttributab
ble to ow
wne
ers of the
t e pa
are
ent
S
Sha
are ca
apita
al (P)
R
Rettain
ned
d ea
arnings
s (P
P)
200
2
0 00
00
8 00
00
T
Tottal equ
uity
y
2 8 00
208
00
C
Currrent liab
bilities
s
T
Tra
ade an
nd othe
o er pay
p yablles (200 00
00(P
P) + 20
0 00
00(S
S))
40
0 00
00
T
Tottal equ
uity
y and lia
abilitie
es
R2
248
8 00
00
Com
C
mm
mentt
T e inv
The
vesstme
ent in the
e su
ubsiidiary iis not
n sett offf on
nly aga
ainsst the sha
are capita
al o
of th
he
s sidiiaryy, bu
sub
ut ra
athe
er agai
a nst the
e tottal equ
e uity of the
t sub
bsid
diaryy ass at the
e accquiisitio
on d
date
e,
i.e. sha
are cap
c pital and re
etained
d ea
arnin
ngs
s.
N e th
Note
here
eforre th
hat as a resu
ult of
o th
he cons
c solidation adjjusttme
ent, no item
m of
o th
he equ
e ity of
o
t sub
the
bsid
diaryy att accquisitio
on date
d e ap
ppe
earss in the eq
quity
y of the
e co
onso
olidated sttate
eme
ent of
o
f ncia
fina
al pos
p ition
n. O
Only the
t
share ca
apita
al and
a d re
etain
ned
d ea
arniingss of
o th
he parrentt arre
p sented in the
pres
t con
nsolida
ated
d sta
atem
men
nt of fin
nanccial positio
on.
S
Sup
ppo
ose tha
at exttraccts fro
om the stat
s tem
men
nts of profitt orr lo
oss an
nd oth
her co
omp
pre
ehe
ensive
in
nco
ome
e and
a sta
ate
eme
entss of
o chan
nge
es in equ
e uity
y off P Ltd
da
and S Ltd
d were
w e as
a follo
owss fo
or the
t
re
epo
orting pe
eriod end
e ded 31
1 Dece
ember 20
0.18:
E
EXT
TRA
ACT FRO
F OM TH
HE ST
TAT
TEM
MEN
NTS
S OF
O PR
ROF
FIT OR
R LOS
SS
AN
ND OT
THE
ER CO
OMP
PREHEN
NSIV
VE INC
CO
OME
E
OR TH
HE YEA
Y AR
R EN
NDED
D 31
1 DEC
CEM
MBE
ER 20
0.18
8
FO
P Lttd
S Lttd
P
Pro
ofit be
eforre ttax
IInco
ome ta
ax exp
e pen
nse
10
0 00
00
(3
3 00
00)
11 50
00
(3 50
00)
P
PRO
OF
FIT FO
OR T
THE
E YEA
Y AR
7 00
00
00
8 00
O
Oth
her co
omp
pre
ehensiive inc
com
me for th
he yea
y ar
T
TOT
TA
AL COM
C MP
PRE
EHE
ENS
SIV
VE IINC
COM
ME
E FO
OR TH
HE YE
Y AR
R
9
94
–
–
R7
7 00
00
R8 00
00
C
Conso
olid
dation at acquiisitiion da
ate
Com
C
mm
mentt
In th
his wor
w rk, the
t pre
esen
ntattion of the com
mpo
one
entss of pro
ofit or
o lo
oss in a siingle sttate
eme
ent of
o
p fit or
prof
o loss and
a d otther com
c mpre
ehen
nsivve inco
ome
e is ado
a opte
ed in term
ms of IA
AS 1
P sen
Pre
ntattion
n off Fin
nan
ncia
al Sttate
eme
ents
s (.12 & .8
81),, altthou
ugh inittial exa
amp
pless incclud
de no
n
item
ms of
o ottherr co
omp
preh
henssive
e inccom
me.
EX
XTR
RAC
CT FROM
M THE
E ST
TAT
TEM
ME
ENT
TS OF
O CH
HANG
GES
S IN
N EQ
QU
UITY
Y
FO
OR TH
HE YEA
Y AR
R EN
NDED
D 31
1 DEC
CEM
MBE
ER 20
0.18
8
R ain
Ret
ned
d ea
arning
gs
PL
Ltd
S Lttd
B
Ballance at 1 J
Jan
nua
ary 20..18
C
Cha
ang
ges
s in
n eq
quity for
f 20
0.18
8
T
Tottal com
c mprrehe
ens
sive
e in
ncom
me forr the yea
y r:
P
Pro
ofit for
f the
e ye
ear
D
Div
vide
end – fina
f al divid
dend 20.1
2 17
5 00
00
4 00
00
7 00
00
(4
4 00
00)
8 00
00
(3 000)
B
Ballance at 31 De
ece
emb
ber 20
0.18
8
R8
8 00
00
00
R9 00
P Lttd onl
o y obta
o ained co
ontrrol ove
er S Ltd
L on
n 31 Dec
D cem
mbe
er 20.
2 18. P Lttd therrefo
ore
e ha
ad no
in
nflu
uen
nce ove
o er the
e pe
erfo
orm
mance of
o S Ltd
L
fo
or th
he re
epo
ortin
ng perio
od e
end
ded
3
31 Dec
D cem
mbe
er 2
20.18 an
nd P L
Ltd ha
as no rig
ght to the
e prof
p fit for
f tha
at rep
r portting
g pe
erio
od. Th
hat
p
proffit “bellongs”” to
o the prev
p vious ow
wne
ers, fro
om wh
hom
m P Lttd obta
o ain
ned the
e sha
s ress.
T
The
e co
onssolidatted
d sttate
ementt off profit or
o lloss
s and
a d otthe
er com
c mprrehe
enssive
e in
nco
ome
e o
of the
t
g
grou
up forr th
he rep
porrting
g per
p riod
d will
w the
ere
eforre con
c ntaiin onlly the
t e profit of
o P Ltd
L fo
or the
t
re
epo
orting pe
erio
od; likkew
wise
e th
he co
onsolid
datted state
eme
entt off chan
nge
es in eq
quitty will
w l also
cconttain
n onlyy the prof
p fit for the
t e re
epo
ortin
ng per
p riod
d off P Ltd
d.
T
The
e diivid
den
nd o
of R3
3 000 that wa
as paiid by S Ltd
d iss a
also
o attri
a ibutab
ble to the pre
p evio
ous
o
own
nerss and no
ot to P L
Ltd. The
T e rettain
ned
d ear
e rnin
ngs
s of
o R9
9 000 of
o S Lttd at
3
31 Dec
D cem
mbe
er 2
20.18 is “pu
urcchased
d prof
p fit” and
d fo
orm
ms parrt of
o th
he “ne
et identiffiab
ble asssetts”,
th
hat we
ere
e taken
n overr in
n the b
busine
ess co
omb
bina
atio
on and
a d iss elimiina
ated
d on
n conssolida
ation.
T
The
e co
onssoliida
ated
d state
s em
men
nt of
o pro
p ofit or loss an
nd oth
her co
ompre
ehe
ensive
e in
ncome
e and
a
sstatem
men
nt off ch
han
nge
es in equ
e uity will th
herefo
ore be
e ass fo
ollow
ws:
P LTD
L D GRO
G OUP
P
E TRA
EXT
ACT
T FRO
F OM TH
HE CO
ONS
SOL
LID
DAT
TED
D STA
S ATE
EME
ENT
T OF
O PR
ROF
FIT OR
R LO
OS
SS
AN
ND O
OT
THE
ER CO
COMP
PRE
EHEN
NSIV
VE INC
CO
OME
E
OR TH
HE YEA
Y AR
R EN
NDED
D 31
1 DEC
CEM
MBE
ER 20
0.18
8
FO
P
Pro
ofit be
eforre ttax (on
nly P Ltd)
L )
IInco
ome ta
ax exp
e pen
nse (on
nly P L
Ltd))
10 000
(3 000)
P
PRO
OF
FIT FO
OR T
THE
E YEA
Y AR
7 000
O
Oth
her co
omp
pre
ehensiive inc
com
me for th
he yea
y ar
T
TOT
TA
AL COM
C MP
PRE
EHE
ENS
SIV
VE IINC
COM
ME
E FO
OR TH
HE YE
Y AR
R
–
R 000
R7
95
Chapter 3
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 (P)
Dividend paid (P)
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
2
3
96
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.
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
Consolidation at acquisition date
4
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
2
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
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).
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.
97
Chapter 3
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 (P Ltd: 200 000 shares/S Ltd: 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
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.
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
Trade and other payables
Excess/premium
109 000
(20 000)
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.
98
Consolidation at acquisition date
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
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
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
individual statements of financial position of P Ltd and its subsidiary, only the noncommon 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.
99
C
Cha
apte
er 3
C
C4 Co
ons
solida
atio
on wo
works
she
eett: P Lttd and
a d sub
s bsid
diary
P Ltd
L
ons
sollida
atio
on
Co
a
adju
usttme
entts
SL
Ltd
Dr
P
Pro
ope
ertyy, pllan
nt and
equipm
men
nt
G
Goodw
willl
IInvesttme
ent in S Ltd
L
T
Tra
ade
e receiivable
es
91 00
00
–
95 00
00
00
42 00
65
5 00
00
–
–
44
4 00
00
Crr
6 000
0 0 (J
J1)
95 000
0 (J
J1)
R2
228 00
00 R109
9 00
00
S
Sha
are
e ca
apittal
R
Rettain
ned
d ea
arn
ning
gs
T
Tra
ade
e an
nd oth
o her
paya
ables
2
200 00
00
8 00
00
80
0 00
00
9 00
00
00
20 00
0 00
00
20
Co
C
ons
solidate
ed
156
1
6 00
00
6 00
00
–
86
6 00
00
R2
248
8 00
00
80 000
8
0 0 (J
J1)
9 000
0 0 (J
J1)
R2
228 00
00 R109
9 00
00 R9
95 000
0 0
200
2
0 00
00
8 00
00
40
0 00
00
R95 000
R2
248
8 00
00
T
The
e la
ast co
olum
mn off th
he wo
orks
she
eet ca
an no
ow ea
asilyy b
be ad
dapted
d in
nto a co
onssolid
datted
sstatem
men
nt off fin
nan
ncia
al pos
p sitio
on.
P LTD
L D GRO
G OUP
P
CO
ON
NSO
OLID
DA
ATE
ED STA
S ATE
EM
MEN
NT OF
OF FIN
NA
ANC
CIA
AL POS
P SIT
TION AS
A AT
T 1 JANU
UAR
RY 20..19
A
ASS
SETS
S
N
Non
n-c
currren
nt a
asse
ets
s
P
Pro
operty,, pla
antt an
nd equ
e uipm
men
nt (9
91 000
0 0(P) + 6
65 000
0 (S)))
G
Goo
odw
will
T
Tottal non
n-c
currren
nt asse
a ets
s
C
Currrent ass
a sets
s
T
Tra
ade recceivvab
bles
s (42 000(P) + 44
4 00
00(S
S))
T
Tottal ass
a sets
156
1
6 00
00
6 00
00
1 2 00
162
00
86
6 00
00
R2
248
8 00
00
E
EQUIT
TY AN
ND LIA
ABILIT
TIES
S
E
Equ
uity
y atttributtab
ble to ow
wne
ers of the
t e pa
are
ent
S
Sha
are ca
apita
al (P)
R
Rettain
ned ea
arnings
s (P
P)
200
2
0 00
00
8 00
00
T
Tottal equ
e uity
y
2 8 00
208
00
C
Currrent liab
l bilitties
s
T
Tra
ade and othe
o er pay
p ables (200 00
00(P
P) + 20
0 00
00(S
S))
T
Tottal equ
e uity
y and lia
abilitie
es
40
0 00
00
R2
248
8 00
00
Com
C
mm
mentt
G odw
Goo
will is an inttang
gible
e asse
a et tthatt iss prese
ente
ed as a no
on-ccurre
ent asssett in
n th
he
c soliidatted stattem
con
mentt of fina
ancial p
pos
sition.
100
Consolidation at acquisition date
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
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 a 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 (P Ltd: 200 000 shares/S Ltd: 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.
101
Chapter 3
P Ltd recognised the equity investment in S Ltd in its separate records using the cost
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.
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 a 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 a 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
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
Gain from a bargain purchase – Parent
R89 000
(14 000) (cr)
89 000
(14 000)
Consideration
R75 000 (cr)
R75 000
102
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)
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 a bargain purchase (S)(P/L)
Elimination of common items and recognition
of gain from a bargain purchase at acquisition
Cr
R
80 000
9 000
75 000
14 000
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 a bargain
purchase
Trade and other
payables
200 000
8 000
80 000
9 000
–
–
20 000
20 000
R228 000 R109 000
Consolidated
156 000
–
106 000
R262 000
80 000 (J1)
9 000 (J1)
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.
103
C
Cha
apte
er 3
P LTD
L D GRO
G OUP
P
CO
ON
NSO
OLID
DA
ATE
ED STA
S ATE
EM
MEN
NT OF
OF FIN
NA
ANC
CIA
AL POS
P SIT
TION AS
A AT
T 1 JANU
UAR
RY 20..19
A
ASS
SETS
S
N
Non
n-c
currren
nt a
asse
ets
s
P
Pro
operty,, pla
antt an
nd equ
e uipm
men
nt (9
91 000
0 0(P) + 6
65 000
0 (S)))
C
Currrent ass
a sets
s
T
Tra
ade recceivvab
bles
s (62 000(P) + 44
4 00
00(S
S))
1 6 00
156
00
1 6 00
106
00
T
Tottal ass
a sets
E
EQUIT
TY AN
ND LIA
ABILIT
TIES
S
E
Equ
uity
y atttributtab
ble to ow
wne
ers of the
t e pa
are
ent
S
Sha
are ca
apita
al (P)
R
Rettain
ned ea
arnings
s (88 0000(P
P) + 14
4 00
00(g
gain fro
om a ba
arga
ain purrcha
ase)))
T
Tottal equ
e uity
y
C
Currrent liab
l bilitties
s
T
Tra
ade and othe
o er pay
p ables (200 00
00(P
P) + 20
0 00
00(S
S))
R2
262
2 00
00
200
2
0 00
00
22
2 00
00
2 2 00
222
00
40
0 00
00
T
Tottal equ
e uity
y and lia
abilitie
es
R2
262
2 00
00
Com
C
mm
mentt
T e ga
The
ain resu
r ultin
ng from
m the acqu
a uisittion of an inte
eresst in
n a sub
bsid
diaryy at lesss th
han
n the
e fa
air
v ue of
valu
o the
t
ide
entiffiab
ble asssetss an
nd liab
bilitie
es of tthe accquiree
e (ccalle
ed a gain fro
om a
b gain
barg
n pu
urch
hase
e) iss re
ecog
gnissed in pro
ofit or
o lo
oss on the
e accquiisitio
on date (IFRS
S 3.34
3 4). As
A
n cconsoliidatted stattem
no
mentt of pro
ofit o
or lo
osss and othe
o er co
omp
preh
hensive
e incom
me is prep
p pare
ed
in this example,, th
he amo
a ount iss ad
dde
ed to retained
d earn
e ning
gs at
a th
he end
d of
o th
he yyea
ar.
R mem
Rem
mbe
er, any
a gaiin (e
e.g.., a gain frrom
m a barrgain purchasse) that
t t wa
as reco
r ognised
d durin
ng
a re
eporrting
g pe
erio
od fo
orm
ms part
p of “rettained earrnings a
at the end
d off the
e ye
ear”” byy the
e en
nd of
o
t t rep
that
portting period
d.
C
Cons
solida
atiion
n of
o the
t es
statem
me
entts off fina
anc
cia
al pos
p sittion o
of a pa
parent
a
and
d par
p rtia
ally
y-o
ow
wne
ed su
ub
bsid
dia
ary
ya
at acq
a qu
uisiitio
on da
ate
e
3
3.16
6 No
on-co
onttro
ollin
ng
g in
nteres
sts
s (N
NCI)
1
Wh
Where
e th
he pa
aren
nt doe
d es nott accqu
uire
e th
he enttire
e issue
ed share
e ca
apital of a sub
bsid
dia
ary,
th
the
t e ow
wnerss othe
o er tha
t an the
e pare
p ent (a
and
d itss sub
s bsid
diarriess and
a
heirr no
om
mine
eess) are
a
refe
r erre
ed to as
s th
he no
on-ccon
ntro
ollin
ng intere
estss (N
NC
CI). In th
he pas
p st, the
e te
erm
m “mi
“ norrity
inte
i erest” w
was ussed
d fo
or this cat
c ego
oryy of own
o ners, but the ch
han
nge
e in
n te
erm
minolo
ogy
refl
r lectts the
t e fa
act tha
at the ow
wne
er of
o am
minoritty inte
eresst in
i an
a entityy migh
m ht con
c ntro
ol th
hat
ent
e tity an
nd con
nve
erse
ely, th
hat the own
o nerrs of
o a maj
m jority inte
ere
est mightt no
ot con
ntro
ol the
t
ent
e tity,, as
a dis
scussse
ed in ch
hap
pterr 1. N
Non
n-conttrollling
g inte
eressts (N
NCI) are
e th
herrefo
ore
def
d fine
ed as the equ
e uityy in
n a su
ubssidia
aryy no
ot attrribu
utable
e, dire
d ectlyy o
or indirecctlyy, tto the
t
par
p ren
nt (IFR
RS 10.. Ap
ppe
end
dix A).. Th
his ca
an diag
d gra
amm
mattica
ally be
e re
epre
ese
ente
ed as follow
ws:
P Lttd
70%
%
30
0%
S Lttd
104
N
NCI
Consolidation at acquisition date
2
3
4
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).
3.17 Analysis of owners’ equity
1
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 the
subsidiary, S Ltd at acquisition date in order to determine the following:
l the portion of equity at acquisition attributable to the parent, 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 a
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.
105
Chapter 3
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 (i.e. equity).
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
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;
106
Consolidation at acquisition date
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 their 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 at their 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.
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 (P Ltd: 100 000 shares/S Ltd: 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
107
Chapter 3
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
Other comprehensive income for the year
TOTAL COMPREHENSIVE INCOME FOR THE YEAR
–
–
R16 000
R14 000
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
S Ltd
14 000
8 000
Profit for the year
Dividend paid on 1 December 20.17
16 000
(4 000)
14 000
(2 000)
Balance at 30 September 20.18
R26 000
R20 000
Total comprehensive income for the year:
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.
P Ltd elected to measure any non-controlling interests in an acquiree at their
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
108
C
Conso
olid
dation at acquiisitiion da
ate
Com
C
mm
mentt
T e ca
The
alcu
ulatio
on of the pe
erce
enta
age ow
wnerrship in
n a su
ubsidiarry is a
alwa
ays bassed
d on
n th
he
n mber off sh
num
hare
es ((not the
e ca
arryying
g am
mou
unt of
o the investm
men
nt). It is also
a
asssum
med
d tha
at
o e vo
one
ote is atta
a ache
ed to
t eve
e ry sha
s are, as contro
ol iss as
ssumed to
o vvest in con
ntro
ol o
of th
he
v ng righ
voti
hts on sha
areh
hold
derss’ meet
m ting
gs (a
as disccussed
d in cha
apte
er 1
1) of
o th
his wor
w rk in
n th
he
a enc
abs
ce of
o other fa
actors. In Volu
V ume
e 1 it iss th
here
efore
e as
ssumed th
hat the
e pa
aren
nt exxerccise
es
c trol ove
con
er th
he sub
s bsidiaryy ass pe
er th
he defin
d nitio
on of
o co
ontrrol in te
ermss off IFRS 10..
C
Calc
cullatiion
ns
C
C1 An
naly
ysiis o
of ow
o ners’ eq
quitty of
o S Ltd
L
T
Tottal
i At
A acq
a quis
sition (30
0/9
9/20
0.18
8)
Sha
S are cap
pita
al
Ret
R ain
ned ea
arnin
ngss
P Ltd
L 75%
%
At ac
cquisittion
n
No
on--co
ontrrollling
g
in
nte
eres
sts (NCI)
8
80 000
0 (dr)
2
20 000
0 (dr)
60
6 000
0
15 000
0
20 000
2
0
5 000
0
Pur
P rcha
ase
e diffferrence
10
00 000
0 0
–
75
7 000
0
–
R2
25 000
0
–
Con
C nsid
dera
atio
on and
a d NCI
R 00 000
R10
0 0
R75 000
0 (crr)
R2
25 000
0 0 (c
cr)
Com
C
mm
mentt
A ffrom
As
m th
his poin
p nt onwa
ardss, in
n this w
work
k the abbrrevia
atio
on NCI
N willl be
e us
sed in the ana
a alysis
f ““non
for
n-co
ontrrolling inte
eressts”..
F
From
m the
t an
nalyysis
s it is cle
ear tha
at no
n pu
urch
has
se diffe
d ere
encce aris
a ses on
n accqu
uisiition. In tterm
ms
o
of th
he IFR
RS 3.3
32 cal
c cullatio
on,, it is also
a o clea
ar th
hat the
ere
e is no
o pu
urchasse difffere
encce:
C
C2 Prroo
of of
o c
calc
cula
atio
on of pu
urchas
se diffferren
nce
e off S Ltd
d in
n te
erm
ms of IFR
RS
S 3.32
75
C
Con
nsid
dera
atio
on transfferrred at ac
cquisittion
n da
ate: IF
FRS
S 3.32
3 2(a))(i)
5 00
00
25
A
Amo
oun
nt of
o non
n n-co
ontrrolling
g interestts: IFR
RS 3.3
32(a)(ii)
5 00
00
100
0 00
00
N
Net of the
e id
den
ntifia
able ass
a etss ac
cqu
uire
ed and
a d lia
abilitie
es ass
a sum
med
d att accqu
uisittion
n
da
ate: IF
FRS
S 3.32
2(b))
P
Purc
cha
ase
e differen
nce
e
(100 00
00)
R–
R
W
With
h th
he abo
ove
e ana
a lysis as
a basis, th
he elim
min
natiion of the rela
ated
d item
ms can
c n be
e reco
ord
ded
b
by mea
m anss off prro form
f ma co
onso
dation
n journ
nal enttrie
es.
olid
109
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)
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
individual 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
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
The last column of the worksheet is now adapted into a consolidated statement of
financial position.
110
C
Conso
olid
dation at acquiisitiion da
ate
P LTD
L D GRO
G OUP
P
CO
ONS
SOLID
DAT
TED
D STA
S ATE
EME
ENT
T OF
O FIN
NAN
NCIAL
L POS
SITIION
N
AS
S AT
A 30
3 SE
S PTEM
MBE
ER 20.18
8
A
ASS
SETS
S
N
Non
n-c
currren
nt a
asse
ets
s
P
Pro
operty,, pla
antt an
nd equ
e uipm
men
nt (2
23 000
0 0(P) + 5
50 000
0 (S)))
73
3 00
00
C
Currrent ass
a sets
s
T
Tra
ade recceivvab
bles
s (112 0000(P)) + 86
8 000
0 0(S))
1 8 00
198
00
T
Tottal ass
a sets
R2
271 00
00
E
EQUIT
TY AN
ND LIA
ABILIT
TIES
S
E
Equ
uity
y atttributtab
ble to ow
wne
ers of the
t e pa
are
ent
S
Sha
are ca
apita
al (P)
R
Rettain
ned ea
arnings
s (P
P)
100
1
0 00
00
26
6 00
00
N
Non
n-c
con
ntro
ollin
ng inte
ere
ests
s
126
1
6 00
00
25
5 00
00
T
Tottal equ
e uity
y
1 00
151
00
C
Currrent liab
l bilitties
s
T
Tra
ade and othe
o er pay
p ables (844 00
00(P
P) + 36
6 00
00(S
S))
1 0 00
120
00
T
Tottal equ
e uity
y and lia
abilitie
es
R2
271 00
00
Com
C
mm
mentt
In te
erm
ms of IF
FRS 10
0.22, the non-con
ntrolling
g intere
estss sh
hall be presen
nted
d se
eparrate
ely in
n th
he
c soliidatted statem
con
ment off financcial pos
sitio
on with
w in e
equity, from the
t equ
uity of the ow
wners
o th
of
he pare
p ent.. Th
his ccan
n be
e ob
bserrved
d th
hrou
ugh the
e to
otal amoun
nt fo
or e
equiity whic
w ch incl
i ude
es
t non
the
n-co
ontrrollin
ng interests.
T
The
e co
onssoliida
ated
d state
s em
men
nt of
o pro
p ofit or loss an
nd oth
her co
ompre
ehe
ensive
e in
ncome
e and
a
uity
cconsolida
ated
d sstatem
ment of
o chan
nge
es in equ
y will
w be ass fo
ollow
ws: (K
Kee
ep in min
nd tha
at the
t
cconttrollling
g inte
eres
st and
a d th
he non-ccon
ntro
ollin
ng inte
eressts on
nly origin
nate
ed on
n th
he lasst d
day of
th
he rep
portting
g perio
od and th
hatt P Ltd
d iss no
ot e
entiitled
d to
o th
he pre
e-accqu
uisition
n prof
p fits of S L
Ltd.)
P LTD
L D GRO
G OUP
P
E TRA
EXT
ACT
T FRO
F OM TH
HE CO
ONS
SOL
LID
DAT
TED
D STA
S ATE
EME
ENT
T OF
O PR
ROF
FIT OR
R LO
OS
SS
AN
ND O
OT
THE
ER CO
COMP
PRE
EHEN
NSIV
VE INC
CO
OME
E
OR THE
T E YEA
Y AR EN
NDE
ED 30 SE
EPT
TEM
MBER
R 20
0.18
8
FO
P
Pro
ofit be
eforre ttax (on
nly P Ltd)
L )
IInco
ome ta
ax exp
e pen
nse (on
nly P L
Ltd))
23 000
(7 000)
P
PRO
OF
FIT FO
OR T
THE
E YEA
Y AR
16 000
O
Oth
her co
omp
pre
ehensiive inc
com
me for th
he yea
y ar
T
TOT
TA
AL COM
C MP
PRE
EHE
ENS
SIV
VE IINC
COM
ME
E FO
OR TH
HE YE
Y AR
R
–
R16 000
111
C
Cha
apte
er 3
P LTD
L D GRO
G OUP
P
CO
ONS
SOLID
DAT
TED
D STA
S ATE
EME
ENT OF
O CH
HAN
NGES IN EQ
QUITY
Y
OR THE
T E YEA
Y AR EN
NDE
ED 30 SE
EPT
TEM
MBER
R 20
0.18
8
FO
B
Ballance at 1 O
Octtober 20.
2 .17
C
Cha
ang
ges
s in
n eq
quitty for
f 20
0.18
8
T
Total com
c mprrehe
ens
sive
e incom
me
or th
he yea
ar:
fo
P
Pro
ofit for
f the
e ye
ear (P))
D
Divide
end pa
aid ((P)
S
Sub
bsid
diarry acq
a quire
ed at the
t en
nd
of th
he repo
r orting period
d
B
Ballance at 30 Se
epte
emberr
20.18
N
Non
nconttro
ollin
ng
inte
ere
ests
s
T tal
Tot
equ
e
uity
y
114
4 000
0
–
114 00
00
16
6 00
00
(4
4 00
00)
16
6 000
0
(4
4 000))
–
–
16 00
00
(4 000)
–
–
25 00
00
00
25 00
Sh
harre
ca
apital
Reta
R ained
earn
e nings
To
ota
al
10
00 000
0 0
14
4 00
00
–
–
–
R 00 000
R10
0 0 R26
R 6 00
00 R
R126
6 000
0
R
R25 00
00 R151 00
00
Com
C
mm
mentts
a T
The sta
atem
men
nt o
of prrofitt or losss a
and oth
her com
c mpre
ehe
ensive inco
ome
e off S Ltd
d ca
anno
ot be
b
ccons
solidated, as P Ltd did
d no
ot h
have
e th
he pow
p wer tto con
c trol S Ltd during
g th
he repo
ortin
ng
p
period. There
efore
e, P Lttd coul
c dn
not obta
o ain eco
onomic
c be
eneffits from
m itt. The diviiden
nd of
o
R
R2 000
0 0 tha
at was
w paiid by
b S Ltd
d there
efore
e is nott atttributab
ble to P Lttd.
b T
The conce
ept “non
“ n-co
ontrrolling inte
eres
sts” only exxistts in
n relatio
on to
t th
he sub
s sidiiaryy. Be
eforre
a pa
aren
nt-ssubssidia
ary relatio
onsh
hip com
mess in
nto exissten
nce, no
on-ccontrolling
g inttere
estss ca
an
n
not exisst. In this
t
exa
amp
ple,, the
e non--con
ntrolling
g in
ntere
estss on
nly com
me into
o be
eing
g on
n th
he
la
ast dayy off the
e re
eporrting
g pe
eriod
d.
3
3.21
1 Interres
st acq
a quiire
ed a
at a pre
p emium
m – NCI
N I mea
m asu
ure
ed at the
eirr
porrtio
ona
ate
e sha
are of th
he su
s bs
sidiiary
y’s
s id
den
ntiffiable
en
net as
sse
ets
s att
prrop
ac
cqu
uis
sitio
on
n da
ate
e
Ex
xam
mple
e 3.5
Parttiallly--ow
P
wne
ed subsiidia
ary
y – Inttere
estt ac
cqu
uire
ed at a pre
p mium
m,
N meas
NCI
surred
d att th
heirr prop
porrtio
ona
ate sh
hare
e of
o th
he ide
enttifia
able
n assetts at
net
a acq
a quiisittion
n date
e
A
Assum
me the
e ssam
me basic in
nforrma
atio
on as
a in exxam
mple
e 3
3.4, with
w h th
he exc
cep
ptio
on tha
at the
t
p
pare
ent accqu
uired the 75
5% inttere
est in the
e subs
sidiaryy at
a a prrem
mium
m on
o the
e first da
ay o
of the
t
n
nextt re
epo
ortin
ng perriod
d.
112
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 (P Ltd: 100 000 shares/S Ltd: 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
method.
P Ltd elected to measure the non-controlling interests of the acquiree at their
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)
113
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
Cr
5 000 (J1)
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
Consolidated
73 000
5 000
–
193 000
R271 000
80 000 (J1)
20 000 (J1)
R210 000 R136 000 R105 000
100 000
26 000
25 000 (J1)
25 000
120 000
R105 000
R271 000
The consolidated statement of financial position is prepared from the information contained
in the worksheet.
114
C
Conso
olid
dation at acquiisitiion da
ate
P LTD
L D GRO
G OUP
P
CO
ONSO
OLID
DATED STA
S ATE
EM
MEN
NT OF
O FIN
NA
ANC
CIAL POS
P SIT
TION
N AS
A AT
T1O
OC
CTO
OBE
ER 20.18
8
A
ASS
SETS
S
N
Non
n-c
currren
nt a
asse
ets
s
P
Pro
operty,, pla
antt an
nd equ
e uipm
men
nt (2
23 000
0 0(P) + 5
50 000
0 (S)))
G
Goo
odw
will
73
3 00
00
5 00
00
78
8 00
00
C
Currrent ass
a sets
s
T
Tra
ade recceivvab
bles
s (107 0000(P)) + 86
8 000
0 0(S))
T
Tottal ass
a sets
E
EQUIT
TY AN
ND LIA
ABILIT
TIES
S
E
Equ
uity
y atttributtab
ble to ow
wne
ers of the
t e pa
are
ent
S
Sha
are ca
apita
al (P)
R
Rettain
ned ea
arnings
s (P
P)
1 3 00
193
00
R2
271 00
00
100
1
0 00
00
26
6 00
00
N
Non
n-c
con
ntro
ollin
ng inte
ere
ests
s
126
1
6 00
00
25
5 00
00
T
Tottal equ
e uity
y
1 00
151
00
C
Currrent liab
l bilitties
s
T
Tra
ade and othe
o er pay
p ables (844 00
00(P
P) + 36
6 00
00(S
S))
1 0 00
120
00
T
Tottal equ
e uity
y and lia
abilitie
es
R2
271 00
00
Com
C
mme
ents
s
a It is cle
ear thatt a conso
olida
ated
d sttatement of
o prof
p fit or
o lo
oss and o
othe
er com
c pre
ehen
nsiv
ve
in
ncom
me and
d sttate
eme
ent of
o chan
c nges in
n eq
quityy ca
annot be
b prep
p pare
ed, as the
ere has
h s no
ot ye
et
been
n an
ny perf
p form
man
nce in resp
r pecct off the
e cu
urre
ent rep
porting perriod
d, an
nd no
n cha
ange
es in
i
equitty have
h e ass ye
et oc
ccurred
d.
115
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 the fair value 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 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 (P Ltd: 100 000 shares/S Ltd: 80 000 shares)
Retained earnings
Trade and other payables
Total equity and liabilities
S Ltd
123 000
80 000
107 000
50 000
–
86 000
R310 000
R136 000
200 000
26 000
84 000
80 000
20 000
36 000
R310 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 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
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:
116
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
117
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
Cr
15 000 (J1)
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
118
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 (P Ltd: 100 000 shares/S Ltd: 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
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.
P Ltd elected to measure any non-controlling interests in an acquiree at their
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)
119
C
Cha
apte
er 3
Com
C
mm
mentt
C mpa
Com
are thiss an
nalyysis with th
he ana
a lysis of the equit
e ty of
o S Ltd
d in exxample 3.6
6 wh
here
e th
he
n -contro
non
ollin
ng interest ha
as a fair
f
value of R3
35 0
000
0. Itt sh
hould b
be clea
ar that
t t in
n this
e mple (as in exam
exa
e mplle 3.5)
3 the
e no
on-c
conttrollling intterests do nott ha
ave an inte
eresst in
n th
he
p cha
purc
ase diffe
d eren
nce
e.
C
C2 P
Proo
of of
o c
callcu
ulattion
no
of gain
g n frrom
m a ba
arg
gain
n purc
cha
ase
e off S Lttd in term
t ms
o IF
of
FRS
S3
3.32
2
C
Con
nsid
dera
atio
on transfferrred at ac
cquisittion
n da
ate: IF
FRS
S 3.32
3 2(a))(i)
5 00
00
65
A
Amo
oun
nt of
o non
n n-co
ontrrolling
g interestts: IFR
RS 3.3
32(a)(ii)
25
5 00
00
90
0 00
00
N
Net of the
e id
den
ntifia
able ass
a etss ac
cqu
uire
ed and
a d lia
abilitie
es ass
a sum
med
d
att accqu
uisittion
n da
ate
e: IF
FRS
S3
3.32
2(b)
(100 00
00)
G
Gain
n frrom
m a ba
arga
ain pu
urch
hasse
(R
R10 00
00)
T
The
e ga
ain fro
om a barg
b gain purc
p cha
ase
e ha
as no
n efffectt on
n th
he n
non
n-conttrollling
g in
nteressts.
C
C3 Prro form
f ma
a co
ons
solida
atio
on jou
j urn
nal enttry
y
Drr
R
1
J1
Sh
hare
e capital (S))(SC
CE
E)
Re
etaiined earn
e ning
gs (S)
( (SC
CE))
Invvesttme
ent in S Ltd
L (P)(SF
FP))
Ga
ain ffrom
m a ba
arga
ain pu
urch
hase (S
S)(P/L
L)
Non-cconttrollling
g in
nterrestts (SFP)
Elimiina
atio
on of
o com
c mm
mon ite
ems
s and rec
cog
gnition
ain fro
om a barg
b gaiin pur
p rchase
e and no
on-c
con
ntro
ollin
ng
of ga
inttere
estts at
a acqu
a uis
sitio
on
Cr
R
8
80 000
0
2
20 000
0
65
5 00
00
10
0 00
00
25
5 00
00
C
C4 Co
ons
solida
atio
on wo
works
she
eett: P Lttd and
a d sub
s bsid
diary
P
Pro
operty,, pla
antt an
nd
equiipm
ment
IInve
estme
ent in S Lttd
T
Tra
ade recceivvab
bles
s
C solida
Con
atio
on adjjus
stmentts
PL
Ltd
S Ltd
L
23
3 00
00
65
5 00
00
1 2 00
122
00
50
0 00
00
–
86
6 00
00
Drr
Cr
6 000
65
0 (J
J1)
R2
210
0 00
00 R1
136
6 00
00
S
Sha
are ca
apita
al
R
Rettain
ned ea
arnings
s
G
Gaiin from
m a ba
arga
ain
purcchase
N
Non
n-conttrolling
g
in
nterrestts
T
Tra
ade and othe
o er
paya
able
es
73
3 00
00
–
2 8 00
208
00
R2
281
1 00
00
100
1
0 00
00
26
6 00
00
80
0 00
00
20
0 00
00
80
0 00
00 ((J1)
20
0 00
00 ((J1)
–
–
0 (J
J1)
10 000
10
0 00
00
–
–
2 000
25
0 (J
J1)
25
5 00
00
84
4 00
00
36
6 00
00
R2
210
0 00
00 R1
136
6 00
00 R1
100
0 00
00
120
Co
onsoli-date
ed
100
1
0 00
00
26
6 00
00
1 0 00
120
00
R100 000
R2
281
1 00
00
C
Conso
olid
dation at acquiisitiion da
ate
T
The
e la
ast co
olum
mn off th
he wo
orks
she
eet ca
an no
ow ea
asilyy b
be ad
dapted
d in
nto a co
onssolid
datted
sstatem
men
nt off fin
nan
ncia
al pos
p sitio
on.
P LTD
L D GRO
G OUP
P
CO
ONSO
OLID
DATED STA
S ATE
EM
MEN
NT OF
O FIN
NA
ANC
CIAL POS
P SIT
TION
N AS
A AT
T1O
OC
CTO
OBE
ER 20.18
8
A
ASS
SETS
S
N
Non
n-c
currren
nt a
asse
ets
s
P
Pro
operty,, pla
antt an
nd equ
e uipm
men
nt (2
23 000
0 0(P) + 5
50 000
0 (S)))
C
Currrent ass
a sets
s
T
Tra
ade recceivvab
bles
s (122 0000(P)) + 86
8 000
0 0(S))
T
Tottal ass
a sets
E
EQUIT
TY AN
ND LIA
ABILIT
TIES
S
E
Equ
uity
y atttributtab
ble to ow
wne
ers of the
t e pa
are
ent
S
Sha
are ca
apita
al (P)
R
Rettain
ned ea
arnings
s (226 000
0 + 10 000(
0 (gaiin frrom
m a barg
b gain
n pu
urch
hase
e))
73
3 00
00
2 8 00
208
00
R2
281 00
00
100
1
0 00
00
36
6 00
00
N
Non
n-c
con
ntro
ollin
ng inte
ere
ests
s
136
1
6 00
00
25
5 00
00
T
Tottal equ
e uity
y
1 00
161
00
C
Currrent liab
l bilitties
s
T
Tra
ade and othe
o er pay
p ables (844 00
00(P
P) + 36
6 00
00(S
S))
1 0 00
120
00
T
Tottal equ
e uity
y and lia
abilitie
es
R2
281 00
00
Com
C
mm
mentt
A iin exam
As
e mple 3.3
3 tthe gaiin re
esu
ulting
g from the
e accquiisitio
on of
o an
a in
nterrest in a su
ubssidia
ary at
a
lesss tha
an the fair
f value of
o th
he iden
ntifia
able
e asssets an
nd lliabilitie
es of
o the accqu
uiree
e, ca
alle
ed a gain
f m a barrgaiin purc
from
p chas
se, is re
eco
ognised
d in pro
ofit or
o lo
oss
s at acq
quissition date (IF
FRS
S 3 ..34))).
A no conso
As
olida
ated
d sttate
eme
ent of pro
ofit or losss a
and oth
her com
mprrehe
enssive inccom
me is
p pare
prep
ed in this exa
amp
ple,, the
e amount is add
ded
d to rettained earrnings at the
t
end o
of th
he
y r.
yea
121
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 (P Ltd: 50 000 shares/S Ltd: 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
method.
Ignore tax implications.
Required
Prepare the consolidated statement of financial position of the P Ltd Group at
31 December 20.18.
122
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)
123
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 (P Ltd: 50 000 shares/S Ltd: 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
124
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
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
125
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
Cr
R
20 000
10 000
20 000
60 000
10 000
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
126
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
Cr
60 000 (J1)
10 000 (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 (P Ltd: 80 000 shares/S Ltd: 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
method.
Ignore tax implications.
Required
Prepare the consolidated statement of financial position of the P Ltd Group at
1 January 20.18.
127
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
128
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
Cr
R
50 000
7 000
8 000
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
Consolidation adjustments
Consolidated
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
16 000
15 000
30 000
20 000
50 000
R150 000
R90 000
Dr
Cr
48 000 (J1)
72 000
–
120 000
R192 000
50 000 (J1)
7 000 (J1)
8 000 (J1)
1 000 (J1)
16 000 (J1)
R65 000
R65 000
80 000
18 000
13 000
R192 000
129
4
Consolidation after acquisition date
Consolidation after acquisition contrasted with consolidation
at the 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 ..................................................................................
134
134
134
135
136
137
Consolidation procedure for the interest in a wholly-owned
subsidiary after acquisition date
4.6
4.7
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 the
fair value of the identifiable net assets. Parent
accounts for investment in subsidiary at cost in its
separate records. ...........................................................
Example 4.3
4.9
142
142
Interest in wholly-owned subsidiary acquired at the
fair value of the identifiable net assets. Parent
accounts for investment in subsidiary at fair value in its
separate records. ...........................................................
4.8
140
Interest acquired at a premium ................................................................
Example 4.4:
Interest acquired at a premium .....................................
Interest acquired at a discount .................................................................
Example 4.5:
Interest acquired at a discount .....................................
149
155
155
161
161
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................
166
166
131
Chapter 4
Consolidation procedures for the interest in a partially-owned
subsidiary after the acquisition date
4.12
Basic consolidation procedures ...............................................................
Example 4.6: Consolidation after acquisition date. Interest obtained
at fair value. ....................................................................
Example 4.7: Consolidation after acquisition date, NCI measured
at fair value at acquisition date .......................................
167
168
175
Other movements in equity of the subsidiary since
the acquisition date
4.13
Movement in equity ..................................................................................
Example 4.8: Consolidation where S Ltd’s equity includes a
mark-to-market reserve ..................................................
180
181
Self-assessment questions
Question 4.1 .......................................................................................................
Question 4.2 .......................................................................................................
Question 4.3 .......................................................................................................
132
188
193
195
Consolidation after acquisition date
SCHEMATIC ILLUSTRATION OF CHAPTER 4
CONSOLIDATION AFTER ACQUISITION
Basic consolidation procedure:
l Eliminate common items;
l Consolidate non-common items
Consolidation method in chapter 4:
1. Analysis of owners’ equity;
2. Pro forma journals;
3. Worksheet; and
4. Consolidated SFP
New issues:
l Intragroup dividend;
l Fair value adjustments on investment in
subsidiary
Wholly-owned subsidiary
Partially-owned subsidiary
Examples:
l Interest acquired at FV of
identifiable net assets;
l Interest acquired at a premium –
goodwill
l Interest acquired at a discount –
gain from a bargain purchase
Parent and non-controlling interest
NCI – Two options:
l Measure at their
proportionate share
of the identifiable net
assets;
l Measure at fair value
Examples:
l Interest acquired at FV of
identifiable net assets;
l Consolidation where subsidiary’s
equity includes a mark-to-market
reserve
133
Chapter 4
Consolidation after acquisition contrasted with consolidation
at the 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.
134
C nso
Co
olid
dation aftter acquiisitiion da
ate
Com
C
mme
ent
T
The
allo
oca
ation
n off th
he subs
s sidiaryy’s p
proffit betw
b wee
en tthe “at” and “sin
nce” perio
ods can be
b
illusttrate
ed as
a follo
f ows:
Purch
hase
ed pro
p ofit
Eliimin
nate
e at acq
quissitio
on
A
i ii
Acquisition
Onset of business
activities
The gra
T
aph below
w is a repr
r rese
enta
ation
n of a pro
ofita
able
e subsid
diarry with
w the
e arrrow
w siigniifyin
ng
a upwa
an
ard pro
ofit-ttren
nd.
Ea
arned pro
ofit
Re
eco
ognise P’s inte
eres
st since
s e accqu
uisitiion
Tota
T al
i A
At ac
cqu
uisittion
n
S
Sharre ca
apittal
R
Reta
ained
d ea
arningss
P Lttd 100%
%
A
At
Sinc
S ce
XX
X XX
XX (dr)
X XX
XX (dr)
XX
X XX
XX
X XX
XX
P
Purc
chasse differ
d rencce
XX XXX
X
–
XX
X XX
XX
–
C
Cons
side
eration
XX
X XX
XX (cr)
XX
X XX
XX
iii S
Sinc
ce acqu
uisittion
n
To begi
b nning of c
currrentt ye
ear:
• T
R
Reta
ained
d ea
arningss
Currrentt year:
• C
P
Profit for the
e ye
ear
D
Divid
dend
d
–
X XX
XX
(XX
XX)
Th
his who
w ole
s
section
n re
epre
esen
nts ear
e ned
d
p
proffit frrom
m the
grou
g up’s
s
pe
ersp
pecttive
–
X XXX
X
(X
XXX)
4
4.4 Inv
ves
stm
men
nt in
i su
s bs
sidiiary car
c rrie
ed at fair val
v lue
e in
n th
he se
epa
ara
ate reco
ords
o the
of
t ep
pare
ent
1 Afte
A er init
i ial rec
cog
gnittion
n, a
an inve
estme
ent in a sub
s sidiaryy sha
s ll be
b carr
c ried
d eithe
er at
a itts fair
f r
val
v ue orr att its
s cost
c t price
e in
n the se
epa
aratte rec
r cord
ds of the
e pare
p ent (IF
FRS 9.5
9 5.2.1). In
cha
c apte
er 1 (1.1
15) the
e acco
a oun
ntin
ng trea
t atm
men
nt of
o the invves
stmentt in
n th
he sub
s bsid
diarry iin the
t
sep
s parrate
e re
eco
ordss of
o the
t e pa
are
ent is disscu
usssed. Iff an inve
esttme
ent in a su
ubsidia
ary is
cla
c ssified
d a
as a fina
f anccial as
sse
et at
a fair
f
va
alue
e thro
oug
gh oth
her co
omp
pre
ehensive inccom
me
(OC
( CI), chan
nge
es in fair vvalu
ue are
e reco
ogn
nise
ed in oth
herr co
om
mpre
ehe
ens
sive
e in
nco
ome
e and
a
acc
a cum
mulate
ed in equityy th
hro
ough the
t
mark
k-to
o-m
markket re
eserve
e. On
O co
onso
olid
dation
n, any
a
fair
f r va
alue
ea
adju
ustm
me
entss th
hat we
ere re
ecog
gnised
d in
n th
he pa
aren
nt’ss se
epa
aratte reccord
ds sin
nce
acq
a quissitio
on must
m t be
b revverrsed
d to
t obttain
n the
t
accqu
uisiition-d
date
e ffair va
alue, i.e
e. the
t
con
c nsid
derratio
on tra
ansfferred
d fo
or th
he invvesttme
ent in the
e su
ubs
sidiiaryy.
135
Chapter 4
2
3
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):
P Ltd’s records: 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
Cr
R
100 000
100 000
10 000
10 000
P Ltd’s records: 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
Cr
R
20 000
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.
136
C nso
Co
olid
dation aftter acquiisitiion da
ate
P
Pro fo
orm
ma journa
als
s fo
or th
he rep
porrtin
ng period end
e ded
d 31
1 Dec
D cem
mbe
er 2
20.19:
Drr
R
J1
2
J2
31 De
ece
emb
berr 20
0.19
9
Ma
ark-to--ma
arke
et rese
r ervve – Be
egin
nning of yea
y ar (SC
CE)
ent in S Ltd
L ((SF
FP) (1110 000
0 0 – 100
1 000)
Investtme
Re
eve
ersa
al of
o fair va
alue
e ad
djustm
men
nt o
on inv
ves
stmentt
in S Ltd
L d att be
egin
nniing
g off the yea
y r att grrou
up lev
l el
Ma
ark-to--ma
arke
et rese
r ervve (O
OC
CI)
Investtme
ent in S Ltd
L ((SF
FP) (1330 000
0 0 – 110
1 000)
Re
eve
ersa
al of
o fair va
alue
e ad
djustm
men
nt o
on inv
ves
stmentt in
n
S Ltd
d fo
or the year at
a g
gro
oup
p levell
Cr
R
10 000
0
10
0 00
00
20 000
0
2
20
0 00
00
A
Afte
er re
eco
ogn
nitio
on of the
e prro fform
ma
a journ
nalss abovve, the inve
estme
ent in S Ltd
L wiill be
b ttak
ken
in
nto accco
ountt in
n th
he ana
a alyssis of the equ
e uity at accqu
uisittion
n at th
he orig
gin
nal con
nsiderratiion of
R
R10
00 000
0 0 fo
or cconsollida
atio
on p
purpossess.
4 The
T e que
q estio
on wh
hetherr ta
ax sho
ould be
b tak
ken
n in
nto acccou
untt on
n th
he mo
ove
eme
entts in fair
f
val
v ue in te
erm
ms of taxx a
allo
oca
ation
n prin
p ncip
pless aris
a sess. In this
t s wor
w rk, de
eferrred
d ttax is
acc
a cou
unte
ed forr at the
e ra
ate
e ap
ppliicable
e to
o ca
apittal gai
g ins, i.e
e. 80%
8 % of
o th
he current tax
t x ra
ate,
for
f exxam
mple
e 80%
% × 28
8% = 22,4
2 4%
%. Itt is reg
garrded as
a a re
efle
ectio
on of the
e ap
pprrop
priatte tax
t
con
c nse
equ
uences
s th
hatt wou
w ld follow
w frrom
m th
he ma
ann
nerr in
n whic
w ch the
e entit
e ty exp
peccts to
rec
r cover the
e ca
arryying amo
a oun
nt of
o this
t s in
nvestm
men
nt, i.e. th
hrou
ugh
h sale
s e off th
he invvesttme
ent
(IA
( S 12.5
1 51)). In
n th
his cha
aptter taxx im
mplica
ation
ns are
e ig
gno
ored
d fo
or th
he sake of sim
mpliicityy and
a
to
t first
f t illusttratte the
t efffecct off th
he acc
a cou
unting revverrsall off the fa
air value
e ad
djusstm
men
nts. In
cha
c apter fivve (an
nd furrthe
er) in th
his wo
ork, how
h wevver, th
he revverrsall of
o the fa
air vallue
adj
a usttme
ent will be
b adju
a usted forr th
he tax efffectt.
Com
C
mme
ent
Itt sh
houlld be
b note
ed tha
at in
nvesstm
mentts in
n subssidia
arie
es are
a mo
ostlyy ca
arrie
ed at cosst in
n th
he
state
eme
ent of fina
anciial pos
p sition of
o S
Soutth Afric
A can co
omp
panies. For
F this
s re
easo
on the
t
cost
m el is
mod
s ad
dop
pted
d in this
s wo
ork.
4
4.5 Intrrag
gro
oup
p divi
d ide
end
d
1
IFR
RS 10
0.B86(c) re
equires tha
t at all
a intrrag
grou
up tra
anssaction
ns sh
hall be
e elim
e minate
ed on
first ex
con
c nso
olidatio
on. The
T
xam
mple tha
at is discu
usssed
d in
n this
t s w
worrk is inttrag
gro
oup
div
d ide
ends.
2 A div
d ide
end re
epre
ese
ents a dist
d tributio
on of a po
ortio
on of the com
c mpa
any
y’s prrofitts to its
sha
s arehollde
ers in pro
opo
ortio
on to their sh
hare
eho
olding
g. D
Diviidendss are
a no
orm
mally dec
d clarred
from
f m reta
r aine
ed ea
arningss (e
eve
en tho
t ough th
hey
y may
m y be
e distrribu
uted
d frrom
m any resserrve)). Itt is
imp
i porrtan
nt to
o re
emem
mbe
er th
hat a div
d ide
end is a dist
d tributio
on to the
t e ow
wne
ers
s of the
e com
c mpa
any
state
and
a d not
n an
n ex
xpe
ensse; the
erefore itt iss in
nclu
ude
ed in the
t
eme
ent off ch
han
nge
es in e
equ
uity
and
a d not in
i tthe sta
ateme
ent of pro
ofit or losss and
a d otthe
er com
mpre
ehe
enssive
e in
ncome
e.
3 Wh
When
n a divvide
end
d iss prropose
ed it imp
pliess th
hatt the dire
d ecto
ors of a com
c mpa
anyy ca
alcula
ated
da
div
d ide
end an
nd ma
ade
e a ssuggesstio
on on
n wha
w t itt sh
hou
uld be
e in
n the
t ir opi
o nio
on. Su
uch
h a
dis
d trib
bution mus
m st be
b au
uthorissed
d by
b resollutio
on byy the
t e boa
b rd of direccto
ors. The
T
me
memo
orandu
um
m of
o incorrpo
orattion
n ma
may alsso re
equ
uire
e furtthe
er ap
ppro
ova
al byy the
t
137
Chapter 4
4
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 individual 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
6
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
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
138
Consolidation after acquisition date
7
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 individual
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 individual
records:
Records of S Ltd:
Dr
R
Cr
R
15 March 20.19
Shareholders for dividend (SFP))
Bank (SFP)
Payment of dividend payable
9
10 000
10 000
On the date when the cash is received, the shareholders (P Ltd) will reverse the
asset, dividend receivable, through the following journal:
Records of P Ltd:
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
139
Chapter 4
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
Cr
R
10 000
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.
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
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.
140
C nso
Co
olid
dation aftter acquiisitiion da
ate
2 The
T e basi
b ic ccon
nsolida
atio
on p
pro
oced
durress co
ons
sist of the
e fo
ollow
win
ng:
l elim
min
nation
n off co
omm
mon ittem
ms;
l elim
min
nation
n off inttrag
gro
oup ite
emss (ssucch as
a divi
d idendss);
l conso
olid
dation of rem
ma
ainin
ng non-ccom
mmon itemss on
n a line-b
by-lline
e ba
asis.
3 In cha
c apte
er 3
3, atte
a entiion is paid to
t the
t eliimin
nattion
n off co
ommo
on item
ms at acq
quissition da
ate.
Thi
T is in
nvo
olve
es:
l the
e to
ota
al equ
e uity of th
he sub
bsid
dia
ary as
s att th
he accquisition
n da
ate
e, bein
b ng elimin
natted
again
nst the
e in
nvesstm
men
nt in
n th
he sub
s bsid
diary; an
nd
l a purrch
hase
e diffe
d ere
ence, name
ely go
oodwill or gain
g n frrom
m barg
b gaiin pur
p rchase
e, beiing
reccog
gnissed
d.
4 In the
t e firrst parrt of
o th
his ch
hapter, th
he elim
e min
nation of inttrag
group ite
emss is
s introd
ducced
d with
w
refe
r ere
ence to
o divid
d den
ndss pa
aid byy the sub
s sid
diarry.
Com
C
mm
mentt
T e eliimin
The
natio
on of iintra
agro
oup
p de
ebtss an
nd unre
u ealised
d prrofitt on
n inttrag
grou
up tran
t nsacctions is
e lain
exp
ned in cha
c pter 5.
5 Co
Consolidattion of
o the
e s
stattem
men
nts
s o
of pro
p ofit orr lo
oss
s and otthe
er com
c mp
preh
hen
nsiive
inc
i com
me an
nd the
t e state
eme
entts of
o cha
c ang
ges
s in
n equity
As
A sta
ated a
abo
ove, it folllow
ws tha
at bec
b cause co
onso
olid
datiion is ca
arrie
ed outt on
n a da
ate
e affter
acq
a quissitio
on,, th
he sta
atem
ment of pro
ofitt orr lo
oss an
nd oth
herr co
om
mpre
ehe
ens
sive
e in
nco
ome
e and
a
sta
s atem
men
nt o
of cha
c ang
ges in eq
quitty of
o the
t su
ubsidia
ary for th
he period
da
after acq
a uisitio
on will
w
be
b co
omb
bine
ed witth the
t e sttate
eme
entt off prrofit or lo
osss an
nd oth
herr co
omp
pre
ehe
ensiive inccom
me
and
a d state
em
ment off ch
han
nge
es in
i equ
e uityy of the
e pare
p entt for th
he sam
me re
eportin
ng per
p riod
d, in
nto
a con
c nsolida
ated
d stat
s tem
men
nt of
o prof
p fit or
o los
ss and
a d othe
er com
c mprrehenssive inco
ome a
and
da
con
c nso
olidate
ed stat
s tem
men
nt o
of cha
c nge
es in e
equ
uityy.
The
T e con
c sollida
ated
d stat
s tem
men
nt of
o prof
p fit o
or loss
l s and
a d otthe
er com
c mpre
ehe
ens
sive
e in
nco
ome
e and
a
con
c nso
olidate
ed stat
s tem
men
nt o
of cha
c nge
es in e
equ
uityy off the g
grou
up will th
huss inc
clud
de::
l all the d
disc
clossab
ble de
ebitt an
nd cre
editt item
ms in
i the
t e sttate
eme
entt off profiit or
o lo
osss and
a
herr co
ompre
ehe
ensive
e in
ncome
e fo
or tthe
e re
epo
ortin
ng pe
eriod and
a d in
n th
he sta
ate
eme
ent of
oth
chang
gess in
n eq
quitty of
o the subsiidia
ary forr the peri
p iod
d sin
nce
e accqu
uisiition
n; and
a d
l the
e corrres
spo
ond
ding
g item
ms in
n the
e sta
s atem
men
nt off prof
p fit orr losss and
d oth
her
comp
preh
hen
nsivve inccom
me and
a d sttate
ementt off ch
han
nge
es in
n equ
e ity of the
e pa
are
ent.
In orderr tto dra
aw up a co
onsolid
dated sttate
ementt of
o pro
ofit o
or losss and oth
her
com
c mpreh
hen
nsiv
ve inc
i om
me ffor a gro
oup
p of entit
e tiess conssistting
g of
o sep
s ara
ate leg
gal en
ntities
and
a d to
o pre
p sen
nt the
t erein tthe re
esults of the gro
g oup ass a siingle eco
ono
omic enttity, itt is
ess
e sen
ntia
al th
hat all intrag
group and com
c mmon ite
emss be
e exclude
ed..
In con
nso
olid
dating the sta
s atem
men
nt of chang
gess in
n equ
e uity
y, th
he eliiminattion
n of
o com
c mm
mon
item
i ms re
esults in the exc
e cisio
on of the rreta
aine
ed ea
arniings
s of
o the
t
ubs
sidia
aryy ass a
at the
t
su
acq
a quissitio
on da
ate fro
om the con
c nso
olida
ate
ed reta
ain
ned ea
arn
ning
gs at the
e beg
b ginn
ning
g o
of the
t
cur
c rren
nt rep
r orting
g pe
erio
od. In add
dition, th
he elim
e minatio
on of intrrag
grou
up item
ms results in the
t
exc
e clussion
n of divvidend
ds re
eceive
ed by th
he pa
arent fro
om th
he su
ubsidia
ary frrom
m the
t
sta
s atem
men
nt o
of pro
p ofit or losss and
a d othe
o er ccom
mprrehenssive in
nco
ome
e and
a d diivid
den
nds pa
aid by
the
t e su
ubssidia
ary
y fro
om the
e cons
solida
ated
d sttate
ementt off ch
han
nge
es in
n equ
e ity.
141
Chapter 4
6
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 the fair value
of the identifiable net assets. Parent accounts for investment
in subsidiary at cost in its separate records.
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 cost price
Trade receivables
S Ltd
20 000
88 000
132 000
80 000
–
60 000
Total assets
EQUITY AND LIABILITIES
Share capital (P Ltd: 100 000 shares/S Ltd: 80 000 shares)
Retained earnings
Trade and other payables
R240 000
R140 000
100 000
15 000
125 000
80 000
11 000
49 000
Total equity and liabilities
R240 000
R140 000
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.
142
Consolidation after acquisition date
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
–
–
R13 000
R7 000
Other comprehensive income for the year
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
Retained earnings
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
S Ltd
7 000
8 000
13 000
–
(5 000)
7 000
–
(4 000)
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 recognised the equity investment in S Ltd in its separate financial records using
the cost method.
Ignore tax implications.
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
143
C
Cha
apte
er 4
l
onssolidattion
n wo
w rksshe
eet in whic
w ch th
he re
ema
aining non
n -co
omm
mon itemss are
a
a co
co
omb
bined on a line
e-by-liine ba
asiss.
equ
T
The
e an
nalyysiss of th
he own
o nerrs’ e
uityy off S Ltd
d is
s no
ow de
ealt witth in suc
s ccesssiv
ve period
ds:
i At
A acqu
a uisitio
on date
d e
ii Sinc
S ce acq
a quissitio
on datte:
• To
T beg
b ginn
ning
g of
o cu
urre
entt ye
ear
• Curr
C ren
nt ye
earr.
C
Calc
cullatiion
ns
C
C1 An
naly
ysiis o
of ow
o ners’ eq
quitty of
o S Ltd
L
T al
Tot
A acq
a quis
sitiion
n (1//7/2
20.17))
i At
Sha
S are capita
al
Ret
R tain
ned ea
arningss
P Ltd
L 10
00%
%
Att
80
0 00
00 (dr)
8 00
00 (dr)
8
80 000
0
8 000
0
Pur
P rcha
ase
e differrence
88
8 00
00
–
8
88 000
0
–
Con
C nsid
deratio
on
88
8 00
00 (cr)
8
88 000
0
iii Sin
S nce ac
cquisittion
n
• To
T beg
ginn
ning
g of
o cu
urre
ent ye
ear:
Not
N t ap
ppliccab
ble
• Cur
C rren
nt yea
y r:
Pro
P ofit for
f the
e ye
ear (peer sttateeme
ent of
o profi
p it orr los
ss
an
nd othe
o er ccom
mpre
ehen
nsivve in
ncome)
Div
D idend
Sinc
ce
–
–
7 00
00
(4
4 00
00)
7 00
00
(4 000)
R 00
R91
00
00
R3 00
Com
C
mm
mentt
a T
The wo
ordss “a
at” a
and
d “ssince” as
a hea
adin
ngs to the
e co
olum
mnss that a
are ussed to ana
alys
se
P Lttd’s inte
erest in S Ltd
d (1
100%),, are
e abbrrevia
atio
ons for the
e termss “a
at accquisitiion”” an
nd
““sinc
ce acq
a uisiition
n”.
b T
The pe
eriod
d “tto the beg
ginn
ning
g off the curre
c ent ye
ear” falls awa
a ay for the
t
firsst re
epo
ortin
ng
p
period followiing the
e accqu
uisition da
ate as the
e inves
stme
ent wa
as o
only
y ob
btaiined
d at th
he
b
beginniing of the
t yea
ar.
F
From
m the
t an
nalyysis
s it is cle
ear tha
at the
t re is n
no purch
hasse d
diffe
ere
ence betw
b ween the
e fa
air vallue
o
of th
he nett id
dentifia
able
e ass
a etss off the acq
a quirree an
nd the
t co
onside
erattion
n trrans
sferre
ed to o
obta
ain
th
he invvesttme
entt.
144
Consolidation after 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)
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
Share capital (S)(SCE)
Retained earnings (S)(SCE)
Investment in S Ltd (P)(SFP)
Elimination of common items at acquisition
Cr
R
80 000
8 000
88 000
The analysis of the owners’ equity of S Ltd since acquisition provides the information for
the following pro forma consolidation journal entry by means of which the intragroup
transaction (dividend from S Ltd to P Ltd, R4 000) is eliminated:
Dr
R
J2
Dividend received (P)(P/L)
Dividend paid (S)(SCE)
Elimination of intragroup dividend
Cr
R
4 000
4 000
The consolidation procedures can once again be done by means of a consolidation
worksheet.
145
C
Cha
apte
er 4
C
C4 Co
ons
solida
atio
on wo
works
she
eett: P Lttd and
a d sub
s bsid
diary
P Lttd
S Lttd
Co
ons
solida
atio
on
a
adju
ustm
me
ents
s
Dr
P
Pro
operty,, pla
antt an
nd
equiipm
ment
IInve
estme
ent in S Lttd
T
Tra
ade recceivvab
bles
s
P
Pro
ofit
D
Divide
end fro
om S Ltd
L
P
Pro
ofit bef
b fore
e ta
ax
IInco
ome ta
ax exp
e pen
nse
P
Pro
ofit for
f the
e ye
ear
D
Divide
end pa
aid
R
Rettain
ned ea
arnings
s
For
F the
t e ye
ear
Beg
B inning
g of the
e ye
earr
End
E of the
e ye
ear
S
Sha
are ca
apita
al
T
Total equ
e uity
T
Tra
ade and othe
o er
paya
able
es
2
20 000
0
80 000
8
88 000
0
–
13
32 000
0
60 000
R 40 000
R24
0 R140 000
1
13 000
0
4 000
0
1
17 000
0
(4 000
0 0)
1
13 000
0
(5 000
0 0)
10 000
–
10 000
(3 000)
7 000
(4 000)
8 000
0
7 000
0
1
15 000
0
10
00 000
0
11
15 000
0
3 000
8 000
11 000
80 000
91 000
Cr
8 000
88
0 (J
J1)
4 000
0 0 (J
J2)
4 000
0 (J
J2)
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
0 0 (J
J1)
8 000
80
0 0 (J
J1)
12
25 000
0
49 000
R 40 000
R24
0 R140 000 R9
92 000
0 0
Con
C
nso
oli-da
ate
ed
R9
92 000
0
174 000
* R292 000
Com
C
mm
mentt
N e th
Note
hat cert
c tain
n am
mounts in the
t con
nsolida
ated
d co
olum
mn repr
r rese
ent eith
her sub
btota
als or ttotals
in that co
olum
mn and
a d do
o not
n reflect a horrizontal to
otalling of the
e o
other co
olum
mnss in
n th
he
w rksh
wor
heett. Th
hesse a
amounts are id
den
ntifie
ed with
w h an
n *.
146
C nso
Co
olid
dation aftter acquiisitiion da
ate
T
The
e la
ast collum
mn of the
e work
w ksh
hee
et can
c no
ow, on
nce
e ag
gaiin, be ad
dap
pted
d in
nto co
onssolid
datted
financial sta
s atem
men
nts:
P LTD
L D GRO
G OUP
P
CO
ONS
SOL
LID
DAT
TED
D STA
S ATE
EME
ENT
T OF
O FIN
F NAN
NCIIAL
L PO
OS
SITION
N AS AT
A 30 JU
UNE
E 20
0.18
8
A
ASSE
ETS
S
N
Non-c
currren
nt a
asse
ets
s
P
Pro
operty,, pla
antt an
nd equ
e uipm
men
nt (2
20 000
0 0(P)) + 8
80 000
0 0(S))
C
Current ass
sets
T
Tra
ade recceivvab
bles
s (132 0000(P)) + 60
6 000
0 0(S)))
T
Tottal ass
setts
E
EQ
QUIT
TY AN
ND LIA
ABIILIT
TIES
E
Equ
uity
y atttributab
ble to ow
wne
ers of the
e pa
are
ent
S
Sha
are ca
apita
al
R
Rettain
ned
d ea
arniings
s
1 0 00
100
00
1 2 00
192
00
R2
292
2 00
00
100
1
0 00
00
18
8 00
00
T
Tottal equ
uity
y
1 8 00
118
00
C
Current liab
bilities
s
T
Tra
ade an
nd othe
o er pay
p yablles (1225 000(
0 (P) + 49
4 0
000((S))
1 4 00
174
00
T
Tottal equ
uity
y and lia
abilitie
es
R2
292
2 00
00
Com
C
mm
mentt
A the at--acq
As
quissitio
on equ
e ity of S L
Ltd wa
as elim
e inatted as pa
art of
o tthe bassic elim
minatio
on
jourrnal entry, the
e eq
quitty will
w be
b rep
presented by the
e sh
hare
e ca
apita
al o
of P Ltd
d, th
he reta
aine
ed
e ning
earn
gs of
o P Ltd
d an
nd the grow
g wth
h in reta
aine
ed earn
e ning
gs of
o S Ltd
d sin
nce acq
quissitio
on.
P LTD
L D GRO
G OUP
P
E TRA
EXT
ACT
T FRO
F OM TH
HE CO
ONS
SOLID
DAT
TED
D STA
S ATE
EME
ENT
T OF
O PR
ROF
FIT OR
R LOS
SS
AN
ND OT
THE
ER CO
OMP
PREHEN
NSIV
VE INCO
OME
E
FO
OR
R TH
HE YE
EAR
RE
END
DED
D 30 JUN
J NE 20..18
P
Pro
ofit be
eforre ttax (177 0000(P
P) + 10
0 00
00(S
S) – 4 0
000(J2))
IInco
om
me ta
ax exp
pen
nse (4 0000(P)) + 3 0000(S))
23 00
00
(7 000)
P
PROF
FIT FO
OR T
THE YEA
Y AR
00
16 00
O
Oth
her co
omp
pre
ehensiive
e inc
com
me
e for th
he yea
y ar
–
T
TOTA
AL CO
C MP
PRE
EHE
ENS
SIV
VE IINC
COM
ME
E FO
OR TH
HE YE
EAR
R
R 00
R16
00
P
Pro
ofit attr
a ribu
utab
ble to:
O
Ow
wners of
o th
he parren
nt
R 00
R16
00
T
Tottal com
c mprrehe
ens
sive
e in
ncom
me atttributa
able
e to
o:
O
Ow
wners of
o th
he parren
nt
R 00
R16
00
147
C
Cha
apte
er 4
Com
C
mm
mentt
A cord
Acc
ding to IAS
S 1 Guidanc
ce on
o Implementin
ng the
e pro
ofit atttribu
utab
ble to the
t
ow
wners
s uld be
sho
e prrese
ente
ed belo
b ow the
e sta
atem
men
nt of
o prof
p fit or
o lo
oss and o
othe
er com
c mpre
ehen
nsiv
ve
inco
ome
e. In
n th
his exa
e mple, the subsid
diarry iss whol
w ly o
own
ned and
d as th
he pare
p ent is the
t
only
o ner, all of the
own
t pro
ofit is ulltimately a
attrib
buta
able
e to the
e ow
wne
ers of
o th
he p
pare
ent.
P LTD
L D GRO
G OUP
P
EX
XTR
RAC
CT FROM
M THE
T E CO
ON
NSO
OLIDA
ATE
ED STA
S ATEM
MEN
NT OF
OF CH
HANG
GES
S IN
N EQU
UITY
Y
FO
OR
R TH
HE YE
EAR
RE
END
DED
D 30 JUN
J NE 20..18
Sh
harre
capita
al
Rettain
ned
d
earrnin
ngs
s
T al
Tota
eq
quity
B
Ballance at 1 J
July
y 20.17
C
Cha
ang
ges
s in
n eq
quity for
f 20
0.18
8
T
Tottal com
c mprrehe
ens
sive
e in
ncom
me forr the yea
y r:
P
Pro
ofit for
f the
e ye
ear
D
Div
vide
end
100
0 00
00
7 000
107 00
00
–
–
16
6 000
(5
5 000))
16 00
00
(5 000)
B
Ballance at 30 Ju
une
e 20
0.18
8
100
0 00
00
*R
R18
8 000
R118 00
00
*
15
1 000
0 (P) + 3 00
00(S
S – ana
alyssis (tota
al)) = 18 000
Com
C
mm
mentt
N e th
Note
hat onlly th
he parrent’s (P
( Ltd)
L ) div
vide
end ap
ppea
ars in the
t
conso
olida
ated
d sttate
eme
ent of
o
c nge
cha
es in
n eq
quitty o
of th
he grou
g up. This is
s co
orre
ect as
a the diviiden
nd paid
p d by
y S Ltd
d to P L
Ltd is
a intra
an
agro
oup-item that had
d be
een
n eliimin
nate
ed on
o cons
c solid
datiion..
Iff th
he sam
s me exam
mple
e iss ussed
d, but
b the
e pare
p ent ch
hose to a
acc
count for
f the
e in
nve
estm
men
nt iin the
t
ssubsidiaryy in tterm
ms of IF
FRS
S 9 an
nd me
eassurre the
t
nvesstm
men
nt at
a fair
f r va
alue, a ma
mark-toin
m
marrkett re
ese
erve
e wou
w ld havve been reccog
gnissed
d in
n itss se
epa
ara
ate reccord
ds,, which wou
w uld ha
ave
to
o be reve
erssed at acquiisitiion
n. Exa
E amp
ple 4.3
3 dea
d ls with
w h th
his sce
ena
ario
o.
148
Consolidation after acquisition date
Example 4.3
Interest in wholly-owned subsidiary acquired at the fair value
of the identifiable net assets. Parent accounts for investment
in subsidiary at fair value in its separate records.
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 (P Ltd: 100 000 shares/S Ltd: 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
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
149
Chapter 4
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.
Solution 4.3
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.
150
C nso
Co
olid
dation aftter acquiisitiion da
ate
C
Calc
cullatiion
ns
C
C1 An
naly
ysiis o
of ow
o ners’ eq
quitty of
o S Ltd
L
T al
Tot
A acq
a quis
sitiion
n (1//7/2
20.17))
i At
Sha
S are capita
al
Ret
R tain
ned ea
arningss
P Ltd
L 10
00%
%
Att
80
0 00
00 (dr)
8 00
00 (dr)
8
80 000
0
8 000
0
Pur
P rcha
ase
e differrence
88
8 00
00
–
8
88 000
0
–
Con
C nsid
deratio
on (90
( 000
0–20
000((J1)))
88
8 00
00 (cr)
8
88 000
0
iii Sin
S nce ac
cquisittion
n
• To
T beg
ginn
ning
g of
o cu
urre
ent ye
ear:
Not
N t ap
ppliccab
ble
• Cur
C rren
nt yea
y r:
Pro
P ofit for
f the
e ye
ear (peer sttateeme
ent of
o profi
p it orr los
ss
an
nd othe
o er ccom
mpre
ehen
nsivve in
ncome)
Div
D idend
Sinc
ce
–
–
7 00
00
(4
4 00
00)
7 00
00
(4 000)
R 00
R91
00
00
R3 00
Com
C
mm
mentt
a T
The wo
ordss “a
at” a
and
d “ssince” as
a hea
adin
ngs to the
e co
olum
mnss that a
are ussed to ana
alys
se
P Lttd’s interest in S Ltd (1
100
0%) are
e ab
bbre
evia
ations for the
e terrmss “a
at accquisitiion”” an
nd
““sinc
ce acq
a uisiition
n”.
b T
The pe
eriod
d “tto the beg
ginn
ning
g off the curre
c ent ye
ear” falls awa
a ay for the
t
firsst re
epo
ortin
ng
p
period followiing the
e accqu
uisition da
ate as the
e inves
stme
ent wa
as o
only
y ob
btaiined
d at th
he
b
beginniing of the
t yea
ar.
c T
The elimin
natio
on o
of th
he inve
estm
men
nt in
n P Ltd
d is don
ne at
a the orig
gina
al co
onssideratio
on (cost
p
price
e). If th
he fa
air vvalu
ue adju
a ustm
men
nt was
w not revverssed, a purrcha
ase difffere
ence
e off R2
2 00
00
w
wou
uld hav
h ve been
b n crreatted.. Th
his w
wou
uld be inco
orre
ect, as the
e co
onsiiderratio
on paid
p d fo
or th
he
in
nve
estm
ment eq
qualled
d the
e fa
air value
v e off the
e ne
et asse
a ets take
t en ove
o r.
F
From
m the
t an
nalyysis
s it is cle
ear tha
at the
t re is n
no purch
hasse d
diffe
ere
ence betw
b ween the
e fa
air vallue
o
of th
he nett id
dentifia
able
e ass
a etss off the acq
a quirree an
nd the
t co
onside
erattion
n trrans
sferre
ed to o
obta
ain
th
he invvesttme
entt.
C
C2 Prroo
of of
o c
calc
cula
atio
on of pu
urchas
se diffferren
nce
e off S Ltd
d in
n te
erm
ms of IFR
RS
S 3.32
88 00
C
Con
nsid
dera
atio
on transfferrred at ac
cquisittion
n da
ate: IF
FRS
S 3.32
3 2(a))(i)
00
–
A
Amo
oun
nt of
o non
n n-co
ontrrolling
g interestts: IFR
RS 3.3
32(a)(ii)
88 00
00
N
Net of the
e id
den
ntifia
able ass
a etss ac
cqu
uire
ed and
a d lia
abilitie
es ass
a sum
med
d
att accqu
uisittion
n da
ate
e: IF
FRS
S3
3.32
2(b)
P
Purc
cha
ase
e differen
nce
e
(8
88 000)
R–
R
151
Chapter 4
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
J2
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
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 pro forma 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
Cr
R
4 000
4 000
The consolidation procedures can once again be done by means of a consolidation
worksheet.
152
Consolidation after acquisition date
C4 Consolidation worksheet: P Ltd and subsidiary
P Ltd
Consolidation
adjustments
S Ltd
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
–
Cr
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
Consolidated
100 000
–
192 000
* R292 000
4 000 (J3)
4 000 (J3)
* 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 R94 000
23 000
–
* 23 000
(7 000)
* 16 000
(5 000)
R94 000
174 000
* R292 000
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
153
Chapter 4
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
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
107 000
–
–
16 000
(5 000)
16 000
(5 000)
Balance at 30 June 20.18
100 000
*R18 000
R118 000
*
15 000(P) + 3 000(S – analysis (total)) = 18 000
154
Consolidation after acquisition date
4.8 Interest acquired at a premium
Example 4.4
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 (P Ltd: 100 000 shares/S Ltd: 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.
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
Other comprehensive income
TOTAL COMPREHENSIVE INCOME FOR THE YEAR
–
–
R24 000
R10 000
155
Chapter 4
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 4.4
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.
156
C nso
Co
olid
dation aftter acquiisitiion da
ate
C
Calc
cullatiion
ns
C
C1 An
naly
ysiis o
of ow
o ners’ eq
quitty of
o S Ltd
L
T al
Tota
n (3
31/1
12/2
201
16)
i At acquisittion
Share
e ca
apittal
etain
ned
d ea
arning
gs
Re
epre
ese
ente
ed by
b goo
g odw
will – Pare
P entt
Equityy re
onsiideratiion
Co
nce
e ac
cqu
uisiitio
on
ii Sin
• To beeginnninng of
o curr
c rentt ye
ear:
Re
etain
ned
d ea
arning
gs (44 0000 – 2 5000)
• Cuurrent yea
y ar:
Pro
ofit forr the
e yearr
Divvide
end
d
P Ltd
L 10
00%
%
Att
Sinc
ce
40
0 00
00 (dr)
2 50
00 (dr)
4
40 000
0
2 500
5
42
2 500
7 50
00 (dr)
4
42 500
5
7 500
5
50
0 00
00 (cr)
R5
50 000
0
1 500
1 50
00
10
0 000
(6
6 00
00))
00
10 00
(6 000)
R 5 500
R55
00
R5 50
Com
C
mmentt
T
The
ch
hang
ge in reta
r ained earn
e ning
gs ssince th
he acq
quissition date
d e un
ntil tthe be
eginning
g o
of th
he
c rent rep
curr
portting period
d is calccula
ated
d as
s follow
ws:
Rettain
ned
earrnin
ngs
Balanc
ce at
a 1/1/2
20.1
18 from
m sta
atem
men
nt of
o ch
hangess in equ
uityy
Balanc
ce at
a 31/1
3 2/20.16 (a
acquisition
n da
ate)
40
000
0
(2 5
500
0)
The
ereffore
e: In
ncre
ease
e un
ntil 1/1//20.18
R 5
R1
500
0
OR
R
P Ltd
d 10
00%
%
To
otal
At
i At acq
quis
sitio
on (31//12//2016)
Sha
are cap
pita
al
Retain
ned earrnin
ngs
4
40 000
0 0 (drr)
2 500
5 0 (drr)
40
0 00
00
2 50
00
Equityy rep
pressen
nted
d by goo
odw
will – Pare
ent
42 500
0
7 500
5 0 (drr)
42
2 50
00
7 50
00
Consid
dera
atio
on
5
50 000
0 0 (crr)
R
R50
0 00
00
ii Sin
nce acq
quisitiion
• To beg
ginn
ning
g of currren
nt ye
ear:
Retain
ned earrnin
ngs (4 000
0 0– 25
500 )
1 500
0
S ce
Sinc
15
500
0
157
Chapter 4
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
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.
158
Consolidation after acquisition date
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
40 000
(16 000)
18 000
(8 000)
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
24 000
(19 000)
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
Consolidation adjustments
Dr
Cr
7 500 (J1)
50 000 (J1)
Consolidated
45 000
7 500
–
137 000
R189 500
52 000
–
6 000 (J2)
52 000
(24 000)
6 000 (J2)
9 000
6 500
15 500
100 000
115 500
2 500 (J1)
40 000 (J1)
R56 000
28 000
(19 000)
R56 000
74 000
R189 500
159
Chapter 4
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
137 000
R189 500
100 000
15 500
Total equity
115 500
Current liabilities
Trade and other payables (25 000(P) + 49 000(S))
74 000
Total equity and liabilities
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
160
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
*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 4.5
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 (P Ltd: 100 000 shares/S Ltd: 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.
161
Chapter 4
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 4.5
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.
162
C nso
Co
olid
dation aftter acquiisitiion da
ate
Com
C
mm
mentt
T s co
This
omp
preh
henssive
e ap
ppro
oach
h iss at this
s sta
age
e still be
eing
g ussed delibe
erate
ely. It will
w soo
on be
b
a pare
app
ent tha
at it is no
ot nece
n essaryy to usse all thre
ee of the
ese ste
eps wh
hen
n prrepa
arin
ng
c solidatted stattem
con
mentts.
C
C1 An
naly
ysiis o
of ow
o ners’ eq
quitty of
o S Ltd
L
T al
Tota
n (3
31/1
12/2
20..16))
i At acquisittion
Share
e ca
apittal
Re
etain
ned
d ea
arning
gs
Ga
ain from
f mb
barg
gain
n purc
p cha
ase – Par
P entt
Co
onsiideratiion
nce
e ac
cqu
uisiitio
on
ii Sin
• To beeginnninng of
o curr
c rentt ye
ear:
etain
ned
d ea
arning
gs (44 0000 – 2 5000)
Re
• Cuurrent yea
y ar:
Pro
ofit forr the
e yearr
Divvide
end
d
P Ltd
L 10
00%
%
Att
40
0 00
00 (dr)
2 50
00 (dr)
40
0 00
00
2 50
00
42
2 500
(3
3 50
00))(cr)
42
2 50
00
(3
3 50
00)
39
9 000
39
9 00
00
Sinc
ce
1 50
00
1 500
10
0 000
(6
6 00
00)
10 000
(6 000)
R 4 500
R44
R 500
R5
C
C2 P
Proo
of of
o c
callcu
ulattion
no
of gain
g n frrom
m a ba
arg
gain
n purc
cha
ase
e off S Lttd in term
t ms
o IF
of
FRS
S3
3.32
2
3 00
39
00
C
Con
nsid
dera
atio
on transfferrred at ac
cquisittion
n da
ate: IF
FRS
S 3.32
3 2(a))(i)
–
A
Amo
oun
nt of
o non
n n-co
ontrrolling
g interestts: IFR
RS 3.3
32(a)(ii)
3 00
39
00
N
Net of the
e id
den
ntifia
able ass
a etss ac
cqu
uire
ed and
a d lia
abilitie
es ass
a sum
med
d
att accqu
uisittion
n da
ate
e: IF
FRS
S3
3.32
2(b)
(4
42 500)
G
Gain
n frrom
m a ba
arga
ain pu
urch
hasse
R 50
R3
00
F
From
m the
t ab
bovve ana
a alyssis iti iss clear th
hat thrree co
onsolid
dation
n journ
nal enttrie
es are
a req
quiired
d:
C
C3 Prro form
f ma
a co
ons
solida
atio
on jou
j urn
nal enttrie
es
D
Dr
R
J1
Sharre ccap
pital (S
S)(S
SCE
E)
R aine
Reta
ed ear
e rnin
ngs (S))(SCE
E)
Invvesstmentt in S Ltd
L (P)(S
SFP
P)
Re
etaiined
d earn
e ning
gs ((Ga
ain from a ba
arg
gain
n pu
urch
hasse)
(S)(S
SCE
E)
Elim
mina
atio
on of com
c mm
mon
n ite
em
ms at
a a
acq
quis
sitio
on da
ate and
a d
re
eco
ogn
nitio
on of gaiin ffrom
m a barg
gain
n purc
p cha
ase
e att
ac
cqu
uisitio
on
Crr
R
40 00
00
2 50
00
39
9 00
00
3 50
00
co tinu
cont
ued
d
163
C
Cha
apte
er 4
Drr
R
2
J2
Divid
den
nd rece
r eive
ed (P)(P//L)
Divvide
end
d pa
aid (S)(S
SCE
E)
Elim
mina
atio
on of
o intr
i rag
grou
up div
vide
end
d
Cr
R
0
6 000
6 00
00
Com
C
mm
mentt
T e ga
The
ain from
f m a barrgain purc
p chasse o
orig
ginated at acq
quis
sition, that
t t is on 31//12//20.16. This
g n ha
gain
ad bee
b n in
ncluded
d in the
e co
onso
olida
ated
d prrofitt or los
ss fo
or th
he yea
y r en
nded 31/12
2/20
0.16
6.
H wev
How
ver, as the
e cu
urrent con
c soliidattion ha
as been
b n do
one
e for the year
y r en
nded
d 31/12
2/20
0.18
8,
t
the
gain that
t t origin
nate
ed on acquissitio
on wou
uld no
ow be inccluded in the
e co
onssolid
date
ed
r ained earn
reta
nings att the begin
nnin
ng o
of th
he yea
y ar in
n the
e co
onsolid
date
ed sstate
eme
ent of cha
c nge
es
in equitty.
C
C4 Co
ons
solida
atio
on wo
works
she
eett: P Lttd and
a d sub
s bsid
diary
P Ltd
S Lttd
C
Consolida
atio
on
a
adjusttme
entts
Dr
P
Pro
operty,, pla
antt an
nd
equiipm
ment
IInve
estme
ent in S Lttd
T
Tra
ade recceivvab
bles
s
2
25 000
0 0
3
39 000
0 0
7
70 000
0 0
3 0
30
000
0
–
6 0
67
000
0
R 34 000
R13
0 0
R9
97 0
000
0
P
Pro
ofit
D
Divide
end fro
om S Ltd
L
3
34 000
0 0
6 000
0 0
1 0
18
000
0
–
P
Pro
ofit bef
b fore
e ta
ax
IInco
ome ta
ax exp
e pen
nse
4
40 000
0 0
(1
16 000
0 0)
18 0
1
000
0
( 0
(8
000
0)
P
Pro
ofit for
f the
e ye
ear
D
Divide
end pa
aid
R
Rettain
ned ea
arnings
s
For
F the
t e ye
ear
Beg
B inning of the
e ye
ear
2
24 000
0 0
(1
19 000
0 0)
10 0
1
000
0
( 0
(6
000
0)
5 000
0 0
5 000
0 0
40
000
0
40
000
0
2 500
5 0 (J
J1)
End
E of the
e ye
ear
S
Sha
are ca
apita
al
1
10 000
0 0
10
00 000
0 0
80
000
0
40 0
4
000
0
4 000
40
0 0 (J
J1)
T
Total equ
e uity
T
Tra
ade and othe
o er
paya
able
es
11
10 000
0 0
4 0
48
000
0
2
24 000
0 0
4 0
49
000
0
R 34 000
R13
0 0
R9
97 0
000
0
Cr
39
9 00
00 (J1)
Co
ons
soliid ed
date
55 000
–
137 000
R192 000
52 000
–
6 000
0 0 (J
J2)
52 000
(24 000)
6 00
00 (J2)
28 000
(19 000)
3 50
00 (J1)
9 000
10 000
19 000
100 000
119 000
73 000
R4
48 500
5 0
R 8 50
R48
00
R192 000
T
The
e la
ast collum
mn of the
e work
w ksh
hee
et can
c no
ow, on
nce
e ag
gaiin, be ad
dap
pted
d in
nto co
onssolid
datted
financial sta
s atem
men
nts.
164
Consolidation after acquisition date
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
165
C
Cha
apte
er 4
P LTD
L D GRO
G OUP
P
EX
XTR
RAC
CT FROM
M THE
E CO
ON
NSO
OLID
DA
ATE
ED STA
S ATEM
MEN
NT OF
OF CH
HANG
GES
S IN
N EQU
UITY
Y
OR TH
HE YEA
Y AR
R EN
ND
DED
D 31
1 DEC
CEM
MBE
ER 20
0.18
8
FO
Sh
hare
e
cap
c
pita
al
B
Ballance at 1 J
Jan
nua
ary 20..18
C
Cha
ang
ges
s in
n eq
quity for
f 20
0.18
8
T
Tottal com
c mprrehe
ens
sive
e in
ncom
me forr the yea
y r:
P
Pro
ofit for
f the
e ye
ear
D
Div
vide
end
B
Ballance at 31 De
ece
emb
ber 20
0.18
8
*
Ȝ
Re
etaine
ed
ea
arning
gs
T al
Tota
eq
quiity
10
00 000
0 0
* 0 00
*10
00
110 00
00
–
–
28
8 00
00
(19
9 00
00)
28 00
00
((19 000)
R 00 000
R10
0 0
ȜR
R19
9 00
00
R119 00
00
(5
( 000(
0 (P) + 1 500
0(S
S – ana
a alysiis (s
sincce)) + 3 50
00 (J
J1 – Gain
G
fro
om a ba
arga
ain purrcha
ase))) = 10 000
0
10
1 000
0 (P) + 5 50
00(S
S – ana
alyssis (tota
al)) + 3 500 (J
J1 – Ga
ain from
m a ba
arga
ain purc
p chase) = 19
1 000
0
Com
C
mm
mentt
W ere a gain
Whe
g n fro
om a barg
b gain
n pu
urch
hase iss crreatted on acq
quissitio
on, the am
mou
unt mus
m st be
b
a ed to the
add
e co
onssolid
date
ed reta
aine
ed earning
gs at the
e be
egin
nnin
ng a
and
d th
he end
e d off th
he
r ortin
repo
ng perriod
d to
o determine if the
e ba
alan
nce
es a
are co
orrect. It is onlly crea
c ated
d on
o
c solidattion an
con
nd is nott re
eco
ognised
d in
n th
he ind
divid
dual re
eco
ordss off th
he sub
bsid
diary.
R mem
Rem
mbe
er th
his is pu
urely a calcullatio
on to te
est if
i yo
our con
nsolida
ated
d figures are corr
c rect.
C
Cons
solida
atiion
n of
o a par
p rtia
ally
y-o
ow
wne
ed su
ubsid
dia
ary
y com
c mp
parred
d
w
with tha
t at of a wh
ho
olly
y-o
own
ne
ed su
subs
sid
diary affte
er acq
a quisiitio
on
4
4.10
0 Co
onso
olid
dation
n of
o a who
w olly
y-o
own
ned sub
s bsidiary
y afte
a er acq
a quisitio
on
1
The
T e fiirst pa
art of this
t s chap
pte
er was
w s de
ediccatted to proce
edu
ures fo
or the
t e co
onssolidattion
n of a
wh
w ollyy-ow
wn
ned su
ubsidia
ary aftter acquiisitiion da
ate..
Sin
S nce conssolida
ation takkes placce aftter the acq
quisition date
e, tthe
e stat
s em
men
nts of
fina
f anccial po
osittion
n, stat
s em
men
nts of pro
ofit or losss and
a d othe
er com
c mprrehe
ens
sive
e in
nco
ome
e and
a
sta
s atem
men
nts of
o cha
c ang
gess in
n equ
e uityy o
of the
t e pare
p entt and
a
th
he su
ubs
sidia
aryy mus
m st be
con
c nso
olidate
ed. Th
he pro
oce
eduress fo
or the
t e co
onssolidattion
n of
o stat
s tem
men
nts of pro
ofitt orr lo
oss
and
a d oth
o er co
omp
pre
ehensiive in
nco
ome
e a
and
d stat
s em
men
nts of chan
nge
es in eq
quity we
ere
dis
d cussse
ed iin 4.6.
4 .
2 The
T e cons
c solida
ation of
o th
he sta
atem
me
entss off fin
nan
ncia
al pos
p sitio
on, sta
atem
me
ents
s off prrofit or lo
oss
and
a d othe
o er ccom
mprreh
hensivve inco
ome and
a d sttate
ementts o
of cha
c ang
gess in eq
quitty of
o ap
pare
ent
and
a d subssidiary
y unde
er thre
t ee difffere
entt sittua
ation
ns recceivved
d attten
ntio
on, i.e.:
l intere
est in su
ubssidia
aryy ac
cqu
uire
ed at the
e fair va
alue
e of
o the
t
identtifia
able
e ass
a setss and
a
bilittiess ac
cqu
uire
ed;
liab
l intere
est in sub
s bsid
diary a
acq
quirred
d att a pre
emiium
m; and
a d
l intere
est in sub
s bsid
diary a
acq
quirred
d att a dis
scou
untt.
4
4.11
1 Co
onso
olid
dation
n of
o a part
p tially-ow
wn
ned
d sub
bsid
dia
ary
y affterr a
acq
quis
sition
n
1
The
T e pos
p sib
bility
y th
hat the
e in
nte
eresst in
n a su
ubs
sidiaryy iss no
ot held
h d in
n fu
ull (i.e
e. th
hatt it wa
as not
n
wh
w ollyy ow
wned)) iss discu
usssed
d in ch
hap
pterr 3. Th
he res
r st o
of th
his chaptter is ded
dicate
ed tto the
t
con
c nso
olidatio
on pro
oce
edu
uress att a da
ate after acq
quissition of a sub
s bsid
diarry whi
w ich is pa
artia
ally
ow
o ned
d.
166
Consolidation after acquisition date
2
3
4
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 the 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;
167
Chapter 4
l
a consolidation worksheet in which:
• the individual 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;
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 4.6
Consolidation after acquisition date. Interest obtained at fair
value.
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 cost price
Trade receivables
S Ltd
15 000
70 000
119 000
50 000
–
86 000
Total assets
EQUITY AND LIABILITIES
Share capital (P Ltd: 100 000 shares/S Ltd: 80 000 shares)
Retained earnings
Trade and other payables
R204 000
R136 000
100 000
14 000
90 000
80 000
15 000
41 000
Total equity and liabilities
R204 000
R136 000
168
Consolidation after acquisition date
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
–
–
R10 000
R9 500
Other comprehensive income for the year
TOTAL COMPREHENSIVE INCOME FOR THE YEAR
EXTRACT FROM THE STATEMENTS OF CHANGES IN EQUITY
FOR THE YEAR ENDED 20 JUNE 20.18
Retained earnings
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
S Ltd
9 000
9 500
10 000
–
(5 000)
9 500
–
(4 000)
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 recognised the equity investment in S Ltd in its separate financial records using
the cost method.
Ignore tax implications.
169
Chapter 4
Solution 4.6
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 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)
R95 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
170
(87 500)
R–
Consolidation after acquisition date
C3 Pro forma consolidation journal entries
Dr
R
J1
Share capital (S)(SCE)
Retained earnings – Beginning of year (S)(SCE)
Investment in S Ltd (P)(SFP)
Non-controlling interests (SFP)
Elimination of owners’ equity of S Ltd on acquisition
Cr
R
80 000
7 500
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
J2
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
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
J3
Non-controlling interests (P/L)
Non-controlling interests (SFP)
Recognition of non-controlling interests in the
profit for the year (9 500 × 20%)
Cr
R
1 900
1 900
171
Chapter 4
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
J4
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
Cr
R
3 200
800
4 000
The consolidation process is now completed by using the 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
Cr
Consolidated
15 000
70 000
119 000
50 000
–
86 000
R204 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:
Total comprehensive
income
NCI in profit
Dividend
Retained earnings
For the year
At beginning of year
10 000
–
9 500
–
16 300
–
10 000
–
(5 000)
9 500
–
(4 000)
5 000
9 000
5 000
9 500
End of year
Share capital
14 000
100 000
15 000
80 000
80 000 (J1)
Total equity
Non-controlling
interests
114 000
–
95 000
–
800 (J4)
90 000
41 000
R204 000
R136 000
Trade and other
payables
172
70 000 (J1)
65 000
–
205 000
R270 000
28 300
–
3 200 (J4)
1 900 (J3)
4 000 (J4)
16 300
(1 900)
(5 000)
9 400
10 600
7 500 (J1)
400 (J2)
20 000
100 000
17 500 (J1)
400 (J2)
1 900 (J3)
120 000
19 000
131 000
R93 800
R93 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
173
C
Cha
apte
er 4
Com
C
mm
mentt
T e pro
The
ofit attribu
utab
ble to
t the non
n-co
ontrrollin
ng inte
i eressts is obta
o ained frrom
m the
e analyysiss, i.e
e.
t
the
po
ortio
on of prrofit fo
or the
e yyearr attrib
a buta
able
e to the
t
non-con
ntrolling
g interests
( 5
(9
500 × 20%
2 %). The
T e prrofitt atttrib
buta
able to the
e own
o ers of the
e pare
p ent is the
e diffferrenc
ce
b wee
betw
en the tota
al comprehen
nsivve p
profiit fo
or th
he yea
y ar, le
ess the
e po
ortio
on attri
a ibuttable to
o th
he
n -contro
non
ollin
ng in
nterrests (1
16 300
3 – 1 90
00), i.e.. the
e ba
alan
ncin
ng fiigurre.
In th
he casse of
o th
he allo
ocattion of the
e to
otal com
mprrehe
ens
sive inccom
me, as the
ere is no
n o
othe
er
c mpre
com
ehensivve inco
i ome
e fo
or th
he year
y r, th
he sam
s me amo
a ounts are
a use
ed ffor the disstrib
butio
on of
o
t tota
the
al co
omp
preh
hen
nsive in
ncom
me.
Re
etaine
ed
ea
arniing
gs
T al
Tota
Non-co
ontrolling
g
in
nte
eres
sts
10
00 000
0
* 10
0 60
00
110 60
00
@ 17
1 9
900
0
128 50
00
–
–
14
4 40
00
(5
5 00
00)
14 40
00
(5 000)
19
900
0
(8
800
0)
16 30
00
(5 800)
R 00 000
R10
0
# R20
R 0 00
00
R120 00
00
’ 19 0
’R1
000
0
R139 00
00
Sh
hare
e
cap
pita
al
B
Ballance at
1 Ju
uly 20..17
C
Cha
ang
ges
s in
n eq
quitty
fo
or 20.
2 18
T
Total com
c mprrehe
ens
sive
e
in
ncome
e for th
he yea
y ar:
P
Pro
ofit for
f the
e ye
ear
D
Divide
end pa
aid
B
Ballance at
30 Jun
J ne 20.1
2 18
*
@
#
’
To
ota
al
eq
quitty
9 000(
0 (P) + 1 600
0(S
S – ana
a alysiis (s
sincce)) = 10
1 6
600
17 500
0 + 400
0 = 17 900
0(an
nalyysis)
0(P)) + 6 00
00(S – analyssis (total)) = 20
2 0
000
14 000
alyssis
Ana
T
The
e next
n t exa
e amp
ple sh
how
ws the con
nso
olid
dation affterr a
acquissitio
on of a pa
artiallyy-o
own
ned
ssubsidiaryy. Ho
owe
eve
er, in thiss cas
c se the
t e non--co
ontrrolliing interrestts are
e mea
m asu
ured
d a
at fair
f
vvalu
ue at the
e a
acq
quissitio
on da
ate. Th
he ba
asicc in
nformatio
on is ve
ery sim
mila
ar to the
e pre
p evio
ous
e
examp
ple, bu
ut itt sh
hou
uld be reg
garrded as
a a se
epa
ara
ate exa
ample
e.
174
Consolidation after acquisition date
Example 4.7
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 cost price
Trade receivables
S Ltd
15 000
76 000
119 000
50 000
–
86 000
Total assets
EQUITY AND LIABILITIES
Share capital (P Ltd: 100 000 shares/S Ltd: 80 000 shares)
Retained earnings
Trade and other payables
R210 000
R136 000
100 000
14 000
96 000
80 000
15 000
41 000
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 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
–
–
R10 000
R9 500
Other comprehensive income for the year
TOTAL COMPREHENSIVE INCOME FOR THE YEAR
175
Chapter 4
EXTRACT FROM THE STATEMENTS OF CHANGES IN EQUITY
FOR THE YEAR ENDED 30 JUNE 20.18
Retained earnings
P Ltd
Balance at 1 July 20.17
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
S Ltd
9 000
9 500
10 000
9 500
(5 000)
(4 000)
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 the
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 recognised the equity investment in S Ltd in its separate financial records using
the cost method.
Ignore tax implications.
Solution 4.7
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
176
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
At
Since
NCI
80 000
7 500
60 000
5 625
20 000
1 875
87 500
10 375
3 125
65 625
10 375
–
21 875
–
3 125
101 000
76 000
25 000
Equity represented by goodwill – Parent
Equity represented by goodwill – NCI
Consideration and NCI
ii Since acquisition
• To beginning of current year:
Retained earnings (9 500 – 7 500)
P Ltd 75%
2 000
1 500
500
25 500
• Current year:
Profit for the year
Dividend
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
76 000
25 000
Consideration transferred at acquisition date: IFRS 3.32(a)(i)
Amount of non-controlling interests: IFRS 3.32(a)(ii)
101 000
Net of the identifiable assets acquired and liabilities assumed at acquisition
date: IFRS 3.32(b)
(87 500)
Goodwill
R13 500
C3 Pro forma consolidation journal entries
Dr
R
J1
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
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%)
Cr
R
80 000
7 500
13 500
76 000
25 000
500
500
continued
177
Chapter 4
Dr
R
J3
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
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
Cr
R
2 375
4 000
C4 Consolidation worksheet: P Ltd and subsidiary
P Ltd
Consolidation
adjustments
S Ltd
Dr
Property, plant and
equipment
Goodwill
Investment in S Ltd
Trade receivables
15 000
50 000
13 500 (J1)
76 000
119 000
–
86 000
R210 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)
Profit for the year
NCI in profit
Dividend paid
Retained earnings
For the year
At beginning of
year
10 000
–
(5 000)
9 500
–
(4 000)
2 000
9 000
5 500
9 500
End of year
Share capital
11 000
100 000
15 000
80 000
Total equity
Non-controlling
interests
116 000
95 000
–
–
96 000
41 000
R210 000
R136 000
Trade and other
payables
178
Cr
76 000 (J1)
Consolidated
65 000
13 500
–
205 000
R283 500
28 500
–
3 000 (J4)
28 500
(12 000)
2 375 (J3)
4 000 (J4)
16 500
(2 375)
(5 000)
9 125
10 500
7 500 (J1)
500 (J2)
19 625
100 000
80 000 (J1)
119 625
1 000 (J4)
25 000 (J1)
500 (J2)
2 375 (J3)
26 875
137 000
R107 875
R107 875
R283 500
Consolidation after acquisition date
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 (J4))
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
179
C
Cha
apte
er 4
Com
C
mm
mentt
T e am
The
mou
unt attrributable to
t th
he non
n-co
ontrrollin
ng inte
eres
sts is
i obta
o aine
ed from
m th
he ana
a lysis,
i.e. the
e port
p ion of prrofitt fo
or the
t
ye
ear attribu
utab
ble to the
e nonn -con
ntro
olling interests
( 5
(9
500 × 25%
2 %). The
T e am
mou
unt attrribu
utable to
t the ow
wnerrs of
o th
he par
p ent is the
e diffferrenc
ce
b wee
betw
en th
he tota
t al co
omp
preh
hensive
e in
ncom
me for the yea
ar, lesss th
he porti
p ion attrributable to
o th
he
n n-contro
non
ollin
ng in
nterrestts (1
16 500
5 – 2 37
75), i.e.. the
e ba
alan
ncin
ng fiigurre.
P LTD
L D GRO
G OUP
P
CO
ONS
SO
OLID
DAT
TED
D STA
S ATE
EMEN
NT OF
O CH
HAN
NGES
S IN
N EQ
QUITY
Y
FO
OR
R TH
HE YE
EAR
RE
END
DED
D 30 JUN
J NE 20..18
B
Ballance at 1 J
July
y 20.17
C
Cha
ang
ges
s in
n eq
quity for
f 20
0.18
8
T
Tottal com
c mprrehe
ens
sive
e in
ncom
me
fo
or the yea
ar:
P
Pro
ofit for
f the
e ye
ear
D
Div
vide
end pa
aid
B
Ballance at 30 Ju
une
e 20
0.18
8
Sh
harre
ca
apittal
Re
etaiine
ed
ea
arniing
gs
To
otal
Non
N
n-contro
ollin
ng
i erests
inte
s
T tal
Tot
equity
e
100 00
00
* 10
0 50
00
110 500
5
@2
25 500
5 0
136 00
00
–
–
Ž 14
4 12
25
(5
5 00
00)
14 125
0 )
(5 000)
2 375
3 5
(1 000
0 0)
16 50
00
00)
(6 00
R100 00
00 # R19
R 9 62
25
R
R119 625
6
R2
26 875
8 5
R146 50
00
* 9 000(
0 (P) + 1 500
0(S
S – ana
a alysiis (s
sincce)) = 10
1 5
500
@ Ana
alyssis
Ž Con
nso
olida
ated
d SC
CI
# 14 000
0(P)) + 5 62
25(S – analyssis (total)) = 19
1 6
625
O
Oth
herr mo
move
em
men
nts
s in
ne
equ
uity
y of
o the
e su
s bs
sidiarry sin
nc
ce the
t e acq
a quisiitio
on
d
datte
4
4.13
3 Mov
vem
men
nt in eq
quitty
In
n the discu
usssion
n up
u to
t this poin
p nt, move
ementts in the
e equ
e uity of th
he sub
bsid
dia
ary we
ere
re
esttrictted
d to
o incre
easses in rettain
ned
d earn
ning
gs from one
e rrepo
ortiing pe
erio
od to
t the
t e ne
extt. The
T
e
equity of a sub
s bsid
diarry can
c alsso cha
ang
ge due
e to
o:
l ch
han
nges in the
t
markk-to
o-m
markket re
eserve
e whe
w re a ssub
bsid
dia
ary ha
as inve
estme
entss th
hat
arre acc
a oun
nte
ed for
f in term
t ms of IFR
RS 9;
l the isssu
ue o
or buy
b y-ba
ackk off sh
hares (discu
uss
sed
d in Vo
olum
me 2, chaptter 14
4); and
a d
l reme
eassure
ementt of
o pro
ope
ertyy, pla
ant an
nd eq
quipm
men
nt and
d fina
anc
ciall in
nstrum
men
nts
(disccusssed
d in
n ch
hap
pterr 6)).
In
n te
erm
ms of
o IAS
S 1..79
9(b)), th
he natture
e and
a pu
urpo
ose
e off evverry rese
erve with
w hin equityy has to be
d
disc
clossed
d byy w
way
y of a desscrription. An
A ent
e tity ca
an therrefo
ore
e no
ot cre
c ate
e a ge
eneral resserrve
w
with
hout any purpo
ose
e
T
The
e ca
ase
e will n
now
w be
b add
a dressse
ed wh
w ere
e a su
ubsidia
ary ha
as a mar
m rk-to-m
marrke
et re
ese
erve
e th
hat
fo
orm
ms parrt of
o e
equity at acquiisitiion an
nd tha
t at has
h ch
hanged
d sinc
s ce due
d e to
o th
he reccognitiion of
fa
air vallue
e ad
djusstm
men
nts. Th
his res
serrve is treate
ed exa
e actlly the sa
ame
e ass re
eta
aine
ed ear
e rnin
ngs
s in
th
he con
nso
olid
datio
on pro
oce
esss.
180
Consolidation after acquisition date
Example 4.8
Consolidation where S Ltd’s equity includes a 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 (P Ltd: 100 000 shares/S Ltd: 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
R37 600
R19 300
Other comprehensive income
TOTAL COMPREHENSIVE INCOME FOR THE YEAR
181
Chapter 4
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.
All companies in the group classify equity investments in terms of IFRS 9 in their
individual financial statements and recognise 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
Final dividend declared (registration date for payment – 31 January 20.19)
R6 000
Ignore tax implications.
Solution 4.8
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.
182
C nso
Co
olid
dation aftter acquiisitiion da
ate
C
Calc
cullatiion
ns
C
C1 An
naly
ysiis o
of ow
o ners’ eq
quitty of
o S Ltd
L
To
otall
i At
A acq
a quis
sition (1//1/2
20.1
16))
Sha
S are cap
pita
al
Mar
M rk-to-m
marrkett re
eserrve
Ret
R ained ea
arnin
ngss
Pur
P cha
ase
e diffferrencce
Con
C nsid
dera
atio
on (49
( 800
0–50
000((J1)) and
NCI
iii Sin
S ce acq
quiisittion
n
• To
T beg
b ginn
ning
g of cu
urre
ent yea
ar:
Mar
M rk-to-m
marrkett re
eserrve
(1 50
00 – 1 0
000
0)
Ret
R ained ea
arnin
ngss (20 000 – 5 000)
• Cur
C rren
nt year
y r:
Prof
P fit for
f the
t e ye
ear
Mar
M rk-to-m
marrkett re
eserrve
Fina
F al divid
d den
nd paid
p d
Inte
erim
m dividend
d paid
d
A
At
P Ltd
L 80%
S nce
Sin
NC
CI
50
0 00
00
1 00
00
5 00
00
40
0 000
0
800
8
4 000
0
10 00
00
20
00
1 00
00
56
6 00
00
–
44
4 800
8
–
00
11 20
–
56
6 00
00
R44
4 800
8
11 20
00
50
00
15
5 00
00
40
00 MM
M
12
2 00
00 RE
E
10
00
3 00
00
00
14 30
16
6 80
00
2 50
00
(3
3 00
00))
(5
5 00
00))
13
3 44
40 RE
E
2 00
00 MM
M
(2
2 40
00) RE
E
(4
4 00
00) RE
E
3 36
60
50
00
((600)
(1 000)
R
R82
2 80
00
R19
R
9 04
40 RE
E
R2
2 40
00 MM
M
R16 560
Com
C
mm
mentt
T e ab
The
bbre
eviation
ns R
RE (Re
( tain
ned earrnin
ngs)) an
nd MM
M (Ma
ark--to-m
marrkett) are used
u d to
o ide
entify
t different rese
the
r erve
es in
n th
he anal
a lysiss to
o sim
mplify the
t calcula
atio
on of
o th
he to
otals att the
e en
nd of
o
t
the
yea
ar at
a th
he botttom
m off the ta
able
e. The
e to
otalss re
epre
esent the
t
pa
arent’s inte
eresst in
n th
he
d eren
diffe
nt re
eservess siince
e accquiisitio
on u
untiil the end of the curr
c rentt reporrting
g pe
eriod
d.
C
C2 Prroo
of of
o c
calc
cula
atio
on of pu
urchas
se diffferren
nce
e off S Ltd
d in
n te
erm
ms of IFR
RS
S 3.32
44
4 80
00
C
Con
nsid
dera
atio
on transfferrred at ac
cquisittion
n da
ate: IF
FRS
S 3.32
3 2(a))(i)
11 20
00
A
Amo
oun
nt of
o non
n n-co
ontrrolling
g interestts: IFR
RS 3.3
32(a)(ii)
6 00
00
56
N
Net of the
e id
den
ntifia
able ass
a etss ac
cqu
uire
ed and
a d lia
abilitie
es ass
a sum
med
d
att accqu
uisittion
n da
ate
e: IF
FRS
S3
3.32
2(b)
G
Goo
odw
will
( 6 00
(56
00)
R–
R
183
Chapter 4
C3 Pro forma consolidation journal entry
Dr
R
J1
J2
J3
J4
J5
J6
J7
184
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)
Mark-to-market reserve (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
1 000
5 000
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
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
Non-controlling interests (P/L)
Non-controlling interests (SFP)
Recognition of non-controlling interests in S Ltd’s
profit for the period
3 360
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)(P/L) (4 000 + 2 400)
Non-controlling interests (SFP) (1 000 + 600)
Dividend paid (S)(SCE) (5 000 + 3 000)
Elimination of intragroup dividend and recognition
of dividend paid to non-controlling interests
6 400
1 600
5 000
44 800
11 200
100
3 000
3 360
500
8 000
Consolidation after acquisition date
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
20 000
38 800
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
44 800
2 000
3 200(J1)
500(J6)
37 600
Total equity
Non-controlling
interests
64 000
–
6 400(J7)
Total omprehensive
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
185
Chapter 4
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))
Total equity and liabilities
186
41 000
R228 400
Consolidation after acquisition date
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 (S)
–
2 500
R47 300
TOTAL COMPREHENSIVE INCOME FOR THE YEAR
Total comprehensive income attributable to:
Owners of the parent
Non-controlling interests (Analysis)
41 440
3 360
R44 800
Total comprehensive income attributable to:
Owners of the parent (41 440 + 2 000(S – Analysis))
Non-controlling interests (3 360 + 500(S – Analysis))
43 440
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
100 000
Ŷ 400
Total
Noncontrolling
interests
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
Ž(1 600)
2 500
(11 600)
Total comprehensive
income for the
year:
Profit for the year:
Mark-to-market
reserve
Dividend
–
–
_
2 000
Balance at
31 December 20.18 R100 000 ƇR 2 400 * R68 440 R170 840
Ŷ
#
Ƈ
Ž
*
R16 560 R187 400
(Analysis)
25 000(P) + 12 000(S – analysis (since)) = 37 000
(Analysis)
(600 (Final) + 1 000(Interim))
49 400(P) + 19 040(S – analysis (total)) = 68 440
187
Chapter 4
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 cost price
Trade receivables
S Ltd
41 000
56 000
29 000
35 000
–
52 000
Total assets
EQUITY AND LIABILITIES
Share capital (P Ltd: 8 000 shares/S Ltd: 4 000 shares)
Retained earnings
Long-term borrowings
Trade and other payables
R126 000
R87 000
80 000
18 000
10 000
18 000
40 000
18 000
2 000
27 000
Total equity and liabilities
R126 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)
16 000
–
R16 000
7 000
–
R7 000
PROFIT FOR THE YEAR
Other comprehensive income
TOTAL COMPREHENSIVE INCOME FOR THE YEAR
188
Consolidation after acquisition date
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
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
Other comprehensive income for the year
Dividend
Balance at 31 December 20.18
S Ltd
10 000
14 000
16 000
–
(8 000)
7 000
–
(3 000)
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 recognised the equity investment in S Ltd in its separate financial records using
the cost method.
Ignore tax implications.
Required
Prepare the consolidated financial statements of the P Ltd Group for the reporting
period ended 31 December 20.18.
189
Chapter 4
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))
Total assets
EQUITY AND LIABILITIES
Equity attributable to owners of the parent
Share capital (P)
Retained earnings
Total equity
Non-current liabilities
Long-term borrowings (10 000(P) + 2 000(S))
Current liabilities
Trade and other payables (18 000(P) + 27 000(S))
Total equity and liabilities
76 000
4 000
80 000
81 000
R161 000
80 000
24 000
104 000
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(J2))
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
190
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
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 (since)) = 12 000
Ȝ18 000(P) + 6 000(S – analysis (total)) = 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
ii Since acquisition
• To beginning of current year:
Retained earnings (14 000 – 12 000)
• Current year:
Profit for the year
Dividend
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
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
191
Chapter 4
C3 Pro forma consolidation journal entries
Dr
R
J1
J2
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
56 000
3 000
C4 Consolidation worksheet: P Ltd and subsidiary
Property, plant and
equipment
Goodwill
Investment in S Ltd
Trade receivables
Consolidation adjustments
P Ltd
S Ltd
41 000
35 000
Dr
Cr
4 000 (J1)
76 000
4 000
–
81 000
56 000
29 000
–
52 000
R126 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:
Total comprehensive
income
Dividend
Retained earnings
For the year
At beginning of
year
16 000
7 000
20 000
–
–
–
16 000
(8 000)
7 000
(3 000)
8 000
4 000
10 000
14 000
12 000 (J1)
12 000
End of year
Share capital
18 000
80 000
18 000
40 000
40 000 (J1)
24 000
80 000
Total equity
Long-term
borrowings
Trade and other
payables
98 000
58 000
104 000
10 000
2 000
12 000
192
18 000
27 000
R126 000
R87 000
56 000 (J1)
Consolidated
R161 000
28 500
–
3 000 (J2)
3 000 (J2)
20 000
(8 000)
12 000
45 000
R59 000
R59 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 20.14
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.
All companies in the group classify equity investments in their separate financial
statements in terms of IFRS 9 and recognise fair value adjustments in a mark-to-market
reserve (other comprehensive income). By the reporting date the fair value of P Ltd’s
investment in S Ltd had not changed.
Ignore tax implications.
Required
Prepare an analysis of the owners’ equity of S Ltd at 31 December 20.18.
193
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)
4 800 RE
4 000 MM
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)
155 000
37 400
192 400
Net of the identifiable assets acquired and liabilities assumed at
acquisition date IFRS 3.32(b):
Goodwill
194
(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 cost price
Financial assets at cost price
Inventories
Trade receivables
Bank
Total assets
EQUITY AND LIABILITIES
Share capital (P Ltd: 75 000 shares/S Ltd: 60 000 shares)
Retained earnings
Long-term borrowings
Trade and other payables
Bank overdraft
Total equity and liabilities
S Ltd
390 000
330 000
–
80 000
255 000
55 000
400 000
–
50 000
165 000
105 000
–
R1 110 000
R720 000
300 000
375 000
225 000
210 000
–
240 000
240 000
150 000
50 000
40 000
R1 110 000
R720 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
–
R258 000
–
R180 000
Other comprehensive income
TOTAL COMPREHENSIVE INCOME FOR THE YEAR
195
Chapter 4
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
225 000
180 000
258 000
–
(108 000)
180 000
–
(120 000)
Balance at 31 December 20.18
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
Retained earnings
R139 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.
All companies in the group recognise equity investments in their separate financial
records using the cost method.
Required
Prepare consolidated financial statements for the P Ltd Group for the reporting period
ended 31 December 20.18.
196
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
50 000
29 000
869 000
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
R1 529 000
Non-controlling interests (C1)
300 000
455 800
755 800
98 200
Total equity
854 000
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
675 000
Total equity and liabilities
R1 529 000
197
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
TOTAL COMPREHENSIVE INCOME FOR THE YEAR
342 000
–
R342 000
Profit attributable to:
Owners of the parent
Non-controlling interests
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))
306 000
36 000
R342 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
Balance at
31 December
20.18
Total
Noncontrolling
interests
Total
equity
* 257 800
557 800
#86 200
644 000
306 000
(108 000)
306 000
(108 000)
36 000
(24 000)
342 000
(132 000)
Share
capital
Retained
earnings
300 000
–
–
R300 000 ƇR455 800 R755 800 ƔR98 200 R854 000
* 225 000(P) + 32 800(S – analysis (since)) = 261 000
@ (S – analysis)
# (Analysis)
Ƈ 375 000(P) + 84 000(S – analysis) = 459 000
Ɣ (Analysis)
198
Consolidation after acquisition date
Calculations
C1 Analysis of owners’ equity of S Ltd
Total
P Ltd 80%
At
i At acquisition (1/1/20.15)
Share capital
Retained earnings
Equity represented by goodwill
– Parent and NCI
NCI
Since
240 000
139 000
192 000
111 200
48 000
27 800
379 000
303 200
75 800
29 000
26 800
2 200
408 000
R330 000
*78 000
Consideration and NCI
(*12 000 × R6,50)
ii Since acquisition
• To beginning of current year:
Retained earnings (180 000 – 139 000)
• Current year:
Profit for the year
Dividend
41 000
32 800
8 200
86 200
180 000
(120 000)
144 000
(96 000)
36 000
(24 000)
R509 000
R80 800
R98 200
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
199
Chapter 4
C3 Pro forma consolidation journal entries
Dr
R
J1
J2
J3
J4
200
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
Cr
R
240 000
139 000
29 000
330 000
78 000
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%)
8 200
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
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
96 000
8 200
36 000
24 000
120 000
Consolidation after acquisition date
C4 Consolidation worksheet: P Ltd and subsidiary
P Ltd
Property, plant and
equipment
Financial assets
Goodwill
Investment in S Ltd
Inventories
Trade receivables
Bank
Consolidation adjustments
Dr
Cr
Consolidated
400 000
50 000
–
–
165 000
105 000
–
R720 000
790 000
50 000
29 000(J1)
29 000
330 000(J1)
–
245 000
360 000
55 000
R1 529 000
Revenue
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
–
2 445 000
(1 222 500)
1 222 500
(652 500)
–
Profit before tax
Income tax expense
366 000
(108 000)
300 000
(120 000)
570 000
(228 000)
Profit for the year
Non-controlling
interests
Dividend
Retained earnings
For the year
At beginning of
year
End of year
Share capital
Total equity
Non-controlling
interests
258 000
180 000
342 000
–
(108 000)
150 000
–
(120 000)
60 000
36 000(J3)
225 000
180 000
139 000(J1)
8 200(J2)
375 000
300 000
675 000
–
240 000
240 000
480 000
–
225 000
150 000
375 000
210 000
–
R 1 110 000
50 000
40 000
R720 000
260 000
40 000
R572 200 R1 529 000
Long-term
borrowings
Trade and other
payables
Bank overdraft
390 000
S Ltd
–
330 000
80 000
255 000
55 000
R1 110 000
96 000(J4)
120 000(J4)
257 800
240 000(J1)
24 000(J4)
R572 200
(36 000)
(108 000)
198 000
78 000(J1)
8 200(J2)
36 000(J3)
455 800
300 000
755 800
98 200
201
5
Intragroup transactions
Intragroup transactions within a group of entities
5.1
Intragroup transactions ............................................................................
206
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 ..............................................................
206
208
210
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 ...............................................
210
211
Intragroup transactions within a group
5.6
Intragroup sales of trading inventories and other assets .........................
216
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 ......................................................................
217
221
225
226
228
236
236
237
239
240
240
241
203
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......................
242
243
245
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 ......................
250
250
251
251
253
254
255
263
263
265
271
271
272
272
273
310
Self-assessment questions
Question 5.1 ..........................................................................................................
Question 5.2 ..........................................................................................................
204
313
318
Intragroup transactions
SCHEMATIC PRESENTATION OF CHAPTER 5
INTRAGROUP
BALANCES
l Loans
l Transaction
INTRAGROUP TRANSACTIONS
Trading inventories
Property, plant and
equipment
costs
l Bank accounts
Unrealised profit in:
l closing inventories;
l opening inventories;
l write-down to net realisable
value;
l tax implications
Unrealised profit in:
l non-depreciable
property;
l depreciable property,
plant and equipment;
l tax implications
205
Chapter 5
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:
Pro forma consolidation journal:
Dr
R
Loan from parent (S)(SFP)
Loan to subsidiary (P)(SFP)
Elimination of intragroup loan
Cr
R
100 000
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.
206
Intra
agro
oup
p tra
anssacctions
Com
C
mm
mentt
P = Parent
S = Subsid
diarry
3 The
T e acco
a om
mpanyiing inttere
est on
n th
he loa
l n sho
s ould
d allso be
e ellimina
ated
d. Sup
S ppo
ose inttere
est
wa
w s cha
c rge
ed on
o the
e lo
oan at 8%
% fo
or the
t fulll ye
earr.
Pro
P o fo
orm
ma co
ons
solidattion journa
al:
D
Dr
R
Fin
nan
nce inccom
me (P)(
( (P/L)
F ancce ccos
Fina
sts (S)(
( (P/L)
Eliminattion
n of
o in
ntra
agrroup in
nte
eres
st (100
( 0 00
00 × 8%
% × 12/12)
Crr
R
8 000
0 0
8 00
00
4 Oth
O herr tra
anssac
ction
ns inccurrred
d be
etw
wee
en e
enttitie
es with
w hin the gro
g up sh
hould be elimin
natted
in
i a sim
mila
ar ma
ann
ner.. T
The
e fo
ollo
owin
ng co
onssolidattion
n jourrna
al ent
e ry is fo
or exa
e amp
ple
pre
p epa
ared
d o
on con
nso
olid
datio
on to ellimina
ate inttrag
group re
ent wh
herre S Ltd
L pa
aid re
ent to
P Ltd.
L . On
O ccon
nso
olidatio
on, th
he gro
g oup
p iss re
ega
arde
ed ass on
ne rep
porrting ent
e ity, an
nd on
nce
aga
a ain th
he gro
oup
p as
a en
ntity
y can
c nno
ot p
pay
y rent
r t to itse
elf an
nd sh
hould the
ere
eforre be
elim
e min
nate
ed:
Pro
P o fo
orm
ma co
ons
solidattion journa
al:
D
Dr
R
Ottherr incom
me (P))(P/L)
O her exp
Oth
pen
nse
es (S)((P/L
L)
Eliimiination of
o in
ntra
agrrou
up ren
r nt
Crr
R
2
20 000
0 0
20
0 00
00
Com
C
mmentts
T e co
The
onso
olida
atio
on jo
ourn
nal to elim
e mina
ate intrragrroup
pm
mana
age
eme
ent fees
f s is
s the
e sa
ame
e ass th
he
jourrnal ab
bove
e, but
b the de
escrriptio
on refe
ers to the elimin
natio
on of intra
i agro
oup
p mana
agement
f s.
fees
5 Co
C nsideration
n mus
m st be
e give
g en to
o th
he efffecct of th
he eliiminattion
n of
o inttrag
gro
oup
tran
t nsa
actiions, suc
s ch as
a tho
ose
e re
eflecte
ed in the jou
urnalss ab
bovve rela
r atin
ng to
t the
t inttrag
gro
oup
inte
i erest and
a d re
entt on
n th
he non
n-ccontrolling in
nte
eressts in a par
p rtially-ow
wned sub
s bsid
diarry. As
nei
n the
er the
t e profit nor
n r th
he net ass
a etss of th
he grroup
p is affe
a ecte
ed by
y th
he pro
o fform
ma
con
c nso
olidatio
on jo
ourn
nals above
e, the no
on-ccon
ntro
ollin
ng inttere
estts will alsso no
ot be
infl
i uen
nce
ed. In the exa
e amp
ple ab
bovve a similar am
mou
untt is de
ebitted an
nd cre
editted ag
gain
nst
the
t e prrofit o
of th
he gro
oup
p o
on con
c nso
olidatio
on and the
t refore
e th
he non-ccon
ntro
olling inte
eres
sts
are
a e no
ot in
nflu
uen
nce
ed by
b the
t e eliiminattion
n.
6 Ano
A oth
her exxam
mple
e of
o in
ntra
agrroup
p bala
b ancces
s is de
ebe
entu
ure
es. De
ebe
entu
ures
s isssu
ued
d byy one
o
ent
e tity wh
hich
h are
a he
eld byy an
notherr entitty in the
t
sa
ame
e grou
g up (in
ntra
agro
oup
p debe
entture
es)
are
a e elimiinated
d fro
om
m the ccon
nsolida
ated
d sstatem
men
nt of
o fin
nan
ncia
al pos
p sitio
on in the
t sa
ame
e way
w
as
a intrag
grou
up recceivvab
ble an
nd payyab
ble am
mou
untss: the
t e va
alue
e of
o th
he iss
sue
ed deb
d ben
nturres
is
i set
s offf ag
gain
nst the
e deb
d entture
es held b
by the
t e otther entitty in
n th
he sam
me
e grroup. Bot
B th the
t
par
p rent (P
( Ltd
d) and
d the
t
su
ubssidiiaryy (S Ltd
d) wo
w uld
d have
h e to
t comp
ply with IFR
RS
S 9
207
2
Chapter 5
Financial Instruments. This standard requires the investment in debentures and
the debenture liability to be accounted for at amortised cost.
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
Cr
R
10 000
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 in terms of 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
208
In
ntra
agro
oup
p tra
anssacctions
o
othe
er com
c mpreh
hen
nsivve inccom
me. Th
he folllow
wing cos
c sts, pa
aid
d in
n ca
ash
h, w
were inccurred
d th
hat
re
elate to
t the
t accqu
uisittion
n:
Bro
B okerag
ge
R1
R 60
00
Tra
T ansffer taxxes
s
R 00
R20
Val
V uattion
n fe
ees
s
R4
R 20
00
T
The
e jou
urn
nal enttry in the
e se
epa
aratte rec
r ord
ds o
of P Ltd
L at 1 Januarry 20.
2 18 willl be
e as
a follo
ows
s:
D
Dr
R
IInve
estme
ent in S Ltd (SF
( FP)
V
Valuattion
n exxpe
ense (P
P/L
L)
Ban
B k (S
SFP
P)
R
Rec
cog
gnition o
of in
nve
estm
me
ent in S Ltd
L an
nd c
cap
pita
alisatio
on of
ttran
nsa
action
n co
osts (880 000
0 0 + 1 60
00 + 20
00)
Crr
R
8
81 800
8 0
4 200
2 0
86
6 00
00
Com
C
mmentt
T e tra
The
anssacttion co
osts
s in
n th
he exa
e amp
ple are
e th
he b
brokera
age
e and tra
ansfer dutties, i.e
e.
increme
enta
al cost
c ts th
hat wo
ould no
ot ha
ave
e be
een inccurre
ed if th
he enti
e ty h
had no
ot accqu
uired
d th
he
s res in S Ltd.
sha
L In tterm
ms of
o IF
FRS
S 9 suc
ch cos
c ts are
a cap
pitallised wher
w re the fina
anciial a
asse
et
is m
meas
sure
ed at
a fair valu
ue thro
t ough otther co
omp
preh
hensive
e incom
me. The valua
v atio
on cost
c ts fa
all
u er the
und
t bro
oade
er d
defin
nitio
on of
o accquisition--rela
ated
d co
osts
s in IFR
RS 3 an
nd are
a exp
penssed
d.
In te
erm
ms of
o IF
FRS
S 3 the
e broke
erag
ge a
and tra
ansffer taxe
t es are
a exp
pen
nsed
d in the
e co
onssolid
date
ed
f ncia
fina
al stat
s ementss. This
T s im
mplies tha
at thes
t se tran
nsa
actio
on cossts sho
ould
d be
e reve
r erse
ed
a ainstt th
aga
he inve
estm
men
nt in S Ltd
L
an
nd exp
pensed
d th
hrou
ugh a pro form
f ma jou
urna
al on
o
c solidattion.
con
P
Pro fo
orm
ma con
c nso
olid
dation
n jo
ourrnal:
D
Dr
R
T
Tra
ansa
action co
osts
s on
n FIIs (P)((P/L
L)
In
nve
estm
men
nt in
n S Ltd
d (P
P)(S
SFP)
R
Rev
verrsal off tra
ans
sac
ctio
on cos
c sts inc
currred
do
on acq
a quis
sitio
on of
iinv
vesttme
entt in S Ltd
d
Crr
R
1 800
8
1 80
00
Com
C
mm
mentts
N pro
No
o form
ma con
nsolida
ation
n jo
ournal en
ntry is re
equired
d fo
or the va
alua
ation
n exp
e ens
se
( quis
(acq
sitio
on-re
elatted cos
st in te
erm
ms o
of IFRS 3),
3 as it sho
s uld be
e exxpense
ed in
i both
b h th
he
s arate fina
sep
f ncia
al state
eme
entss of the
e pa
aren
nt and the conso
olida
ated
d fin
nanc
cial sta
atem
men
nts of
o
t gro
the
oup.
209
2
C
Cha
apte
er 5
5
5.4 Ban
B nk
k ov
verrdrraftts an
nd gu
g ara
anttee
es
O
On conso
olid
dation, th
he ban
nk overd
drafft of
o o
one
e en
ntitty in tthe grroup
p sho
s ould
d onlyy be
e sset off
a
againsst th
he favvourab
ble ba
ank ba
alan
nce
e off an
notherr en
ntitty in
n th
he gro
oup
p, iff bo
oth en
ntities ha
ave
th
heir acco
a oun
nts at the sam
s me ba
ankk an
nd wh
hen
n all of
o the folllow
wing thre
t ee condiitions ha
ave
b
been met
m t:
l bo
oth en
ntitie
es havve bank accou
unts at
a th
he sam
me fin
nan
ncia
al in
nstitution
n;
l the ban
b nk itse
elf wo
ould
d set off the two
t o ac
cco
oun
nts ag
gain
nst ea
ach otther in
n te
erm
ms of an
gree
em
mentt be
etw
wee
en the
t tw
wo enti
e itiess cconc
cerrned and
a d the ban
b nk; and
d
ag
l the grou
g up has
s th
he inte
enttion
n to
o se
ettle
e th
he am
amountss on
n a ne
et bas
b is.
Itt is cle
earr tha
at tthe
e se
et off
o of
o b
ban
nk acc
a cou
untss withi
w in a grou
up doe
d es nott co
ons
stitu
ute inttrag
gro
oup
trran
nsacctio
onss an
nd req
quirres sp
pecial treatm
men
nt.
Com
C
mm
mentt
E en witho
Eve
w out con
nsid
dering the condittion
ns state
ed abov
a ve, the
e offfsettting
g off ite
ems sho
ould
d no
ot
b d
be
done in
n co
onso
olida
ated
d fin
nan
ncial sta
atem
men
nts bassed on the
e req
quirrem
mentts of IA
AS 1:
A e
An
entiity sha
s ll no
ot o
offse
et asse
a ets and
d lia
abilitiess orr inccom
me and
a exp
pen
nses
s, unless req
r uire
ed
o p
or
perm
mitte
ed by
b an
a IFRS
S (IAS 1.3
32).
A enttity rep
An
portts ssepa
arattelyy bo
oth ass
setss and
a
liab
bilities,, an
nd inco
ome
e and
a
exxpen
nses.
O settiing in the
Offs
t sta
atem
mentt of pro
ofit or losss an
nd othe
o er co
omp
preh
hen
nsive
e in
ncom
me or fina
f ancial
p ition
pos
n, exce
e ept whe
en offs
o setting reflects
s th
he subs
s stan
nce of the tra
ansa
actio
on or
o othe
o er even
nt,
d racts frrom the
detr
e ab
bility
y off usserss bo
oth to und
u erstand th
he tran
t nsacctions, oth
her eve
entss an
nd
c ditio
con
onss tha
at have
e oc
ccurrred
d an
nd to
o as
ssesss the
t enttity’s
s future
e ca
ash flow
ws (IAS
S 1..33)).
A
Any
y no
ote to the fina
ancial sta
atem
me
entss off an
n enti
e ty in the
t e grroup, con
nce
erning
g a co
ontin
nge
ent
liabiilityy in
n re
esp
pect of
o a gu
uarrantee
e mad
m de in favvour of
o a
ano
othe
er ent
e tity in the gro
g up,, fa
alls
a
awa
ay on
o co
onso
olid
datiion be
eca
aus
se bot
b h the ite
em gu
uara
anteed
d and
a d th
he n
nett assse
ets ba
ackiing
ssuch
h gua
g aran
ntee will
w no
ow appea
ar in the
t e co
ons
solidatted
d sttate
eme
entts of
o tthe grroup
p, wh
w ich
h is
re
ega
arded ass on
ne ent
e tity forr re
eportin
ng pur
p rposes
s.
T
The
e dire
d ec
ct m
me
eth
hod
d of
o p
pre
epa
ariing
gc
con
nsoliida
ate
ed fin
nan
nc
ciall stattem
me
entts
5
5.5 The
T e dire
d ectt met
m ho
od
In
n th
he rem
ma
aind
der of this cha
c apter the
e direcct me
etho
od is applie
ed to pre
epa
are co
onssolid
datted
financial state
eme
entts. Th
he diirecct me
ethod in
nvo
olve
es the pre
epa
aration
n of a se
et of
cconsolida
ated
d finan
ncial sta
s atem
men
nts wiitho
out the
e utilis
u sation
n off a wo
orksshe
eet. To
o prep
p parre the
t
cconsolida
ated
d fiinancial sta
atem
mentss, th
he folllow
wing
g in
ndivid
dua
al finan
ncia
al ssta
atem
men
nts off bo
oth
th
he paren
nt and
a the
e subs
s sidiaryy are
a req
quirred
d:
l sta
ate
eme
entss of
o profit or
o lo
oss
s an
nd oth
o her com
mp
preh
hen
nsivve inc
i om
me;
l sta
ate
eme
entss of
o ch
han
nge
es iin equ
e uity; an
nd
l sta
ate
eme
entss of
o fin
nan
ncia
al p
pos
sitio
on.
In
n add
a itio
on, pro
o fo
orm
ma jou
urna
als for th
he elim
min
nation
n off in
ntra
agro
oup
p ite
em
ms and
a d trranssacctio
ons
a
and the ana
a alyssis of the
e eq
quity of the
t e su
ubssidiaryy arre pre
p epa
ared
d to
o do
o th
he co
onso
olid
datiion of
th
he fina
ancciall sta
ate
eme
entss.
dire
A
An exa
am
mple
e ccontain
ning intr
i ragrou
up balan
nces will
w be
e d
disc
cussse
ed nex
n xt using th
he d
ect
m
method
d fo
or the
t firs
st time
t e.
2
210
Intragroup transactions
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 cost price
Investment in S Ltd: Loan
Inventories
Trade receivables
Bank
S Ltd
80 000
90 000
50 000
65 000
55 000
30 000
150 000
–
–
55 000
35 000
–
Total assets
EQUITY AND LIABILITIES
Share capital (P Ltd: 100 000 shares/S Ltd: 80 000 shares)
Retained earnings
Long-term borrowings
Loan from P Ltd
Trade and other payables
Bank overdraft
R370 000
R240 000
100 000
125 000
75 000
–
70 000
–
80 000
90 000
–
50 000
10 000
10 000
Total equity and liabilities
R370 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
–
R86 000
–
R70 000
Other comprehensive income for the year
TOTAL COMPREHENSIVE INCOME FOR THE YEAR
211
C
Cha
apte
er 5
Com
C
mm
mentt
F m th
From
his point fo
orw
ward
d in cha
apte
er 5 the
e inform
mattion in the
t sta
atem
men
nt off financcial possitio
on
r ated to sha
rela
are cap
c pital tha
at was
w pre
eviouslyy prrese
ente
ed as
a fo
ollows::
Sha
S
are cap
pita
al (P
P L
Ltd: 10
00 000 sha
ares/S Ltd: 80
8 000
0 shar
s res)), w
will be pre
esented as
a
( 0 00
(100
00/8
80 000
0 0 sh
hare
es) whe
w ere the
e firs
st figurre re
elattes to the
t parrentt’s (P
( Ltd)
L ) nu
umb
ber of
o
s res and
sha
d th
he seco
s ond figure to the
t num
mbe
er of
o sh
hare
es of
o th
he subs
s sidiiary
y.
EX
XTR
RAC
CT FROM
M THE
E ST
TAT
TEM
ME
ENT
TS OF
O CH
HANG
GES
S IN
N EQ
QU
UITY
Y
OR TH
HE YEA
Y AR
R EN
NDED
D 31
1 DEC
CEM
MBE
ER 20
0.18
8
FO
Re
etained
d earn
e nings
P Ltd
L
B
Ballance at 1 J
Jan
nuary 20.
2 .18
C
Cha
ang
ges
s in
n eq
quity for
f 20
0.18
8
T
Tottal com
c mprrehe
ens
sive
e in
ncom
me forr the yea
y r:
P
Pro
ofit for
f the
e ye
ear
O
Oth
her com
mpreh
hensive in
nco
ome
e
D
Div
vide
endss
B
Ballance at 31 De
ece
emb
ber 20
0.18
8
S Ltd
d
7 0
75
000
0
60 00
00
8 0
86
000
0
–
(3
36 0
000
0)
70 00
00
–
( 000)
(40
R 25 0
R12
000
0
R 00
R90
00
O
On 1 Jan
J uary 2
20.15, th
he dat
d e on
o whi
w ich P Ltd
d accqu
uire
ed tthe inttere
est in S Ltd
L , th
he equ
e uity
y of
S Lttd was
w s as fo
ollo
owss:
Sha
S are cap
pita
al
R80
R 0 00
00
Reta
R ained ea
arningss
R45
R 5 00
00
eleccted
P Ltd
L
d to
t me
eassure
e the
t e non
n n-co
ontrollling
g inte
eres
sts in
n an
a ac
cqu
uiree at th
heir
p
prop
porrtion
natte ssha
are of the
e accqu
uire
ee’ss id
dentifia
able
e net
n asssetts at
a acq
a uissitio
on date
d e.
P Lttd reccognissed the equ
e uityy inv
vesstm
men
nt in
n S Lttd in
i its
i sep
parrate
e finan
ncial rec
r cord
ds usiing
th
he cosst met
m tho
od.
Ig
gno
ore taxx im
mpllica
atio
ons..
2
212
Intragroup transactions
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
R470 000
213
C
Cha
apte
er 5
Com
C
mm
mentts
a C
Calc
cula
ation
ns are
a sho
own
n in bra
acke
ets but
b do nott forrm part
p t of the
e fin
nanc
cial sta
atem
ments.
b It is no
ot ne
ece
essa
ary to reco
r ord all the
e prro fo
orm
ma cconsoliidattion jou
urna
al entri
e ies, bu
ut th
he
a
aggregate efffectt off all th
he pro
p forrma
a jo
ourn
nals is accou
unte
ed ffor, forr exxam
mple
e th
he
e
elim
mina
ation
n of
o in
ntra
agro
oup divvide
ends and
a
de
ebtss is
s done
e altho
ough the pro
o fo
orm
ma
ccons
solidation jou
urna
al entri
e ies are
e no
ot sho
s wn.. Ussua
ally at least tthos
se jour
j rnall en
ntrie
es
w
whic
ch have
h e an
n efffec
ct on
n the subssidia
ary’ss eq
quitty are show
s wn..
c T
The intrragrroup
p loan doe
d es not
n appe
a ear in the
t con
nsolidatted statem
mentt of fina
anciial posi
p ition
n.
d T
The po
ositivve ban
b nk bala
b ance
e off P Ltd
d an
nd the ban
nk ove
o rdra
aft of
o S Lttd may
m y no
ot be
e se
et
o
off; as there is
i n
no evid
e encce of
o P Ltd
d providin
ng a gu
uara
ante
ee for tthe ban
nk ove
o erdra
aft of
o
S Lttd or
o an agre
eement witth the ban
nk in
n te
erms of which
h th
he amo
a ountts may
m y be
e se
et offf.
P LTD
L D GRO
G OUP
P
E TRA
EXT
ACT
T FRO
F OM TH
HE CO
ONS
SOLID
DAT
TED
D STA
S ATE
EME
ENT
T OF
O PR
ROF
FIT OR
R LOS
SS
AN
ND OT
THE
ER CO
OMP
PREHEN
NSIV
VE INC
CO
OME
E
OR TH
HE YEA
Y AR
R EN
NDED
D 31
1 DEC
CEM
MBE
ER 20
0.18
8
FO
P
Pro
ofit be
eforre ttax (1222 000
0 (P + 10
00 000
0 0(S)) – 32 000
0(J5
5)
IInco
om
me ta
ax exp
pen
nse (366 0000(P
P) + 30
0 00
00(S
S))
190 00
00
(66 000)
P
PROF
FIT FO
OR T
THE YEA
Y AR
O
Oth
her co
omp
pre
ehensiive
e inc
com
me
e for th
he yea
y ar
00
124 00
–
T
TOTA
AL CO
C MP
PRE
EHE
ENS
SIV
VE IINC
COM
ME
E FO
OR TH
HE YE
EAR
R
P
Pro
ofit attr
a ribu
utab
ble to:
O
Ow
wners of
o th
he parren
nt
N
Non
n-conttrolling
g in
nterestts
R124 00
00
110 00
00
14 00
00
00
R124 00
T
Tottal com
c mprrehe
ens
sive
e in
ncom
me atttributa
able
e to
o:
O
Ow
wners of
o th
he parren
nt
N
Non
n-conttrolling
g in
nterestts
110 00
00
00
14 00
R124 00
00
Com
C
mmentt
T e profit forr the
The
e ye
ear atttribu
utab
ble to the
t non
n-co
ontrrolling inte
eressts is obta
o aine
ed from
f m th
he
a alysis of the eq
ana
quitty of
o S Ltd
d (C
Calculattion
n C1
1). The
T am
mount attrib
a buta
able
e to
o the
e ow
wne
ers of
o
t
the
pa
arent iss th
he diffe
eren
nce
e be
etw
ween
n th
he tota
al p
profit fo
or the
t
ye
ear and
d the am
moun
nt
a butable
attri
e to
o NC
CI.
A ttherre iss no
As
o ottherr co
omp
preh
henssive
e inc
com
me for
f the
t rep
porting perriod
d in thiss exxam
mple
e, th
he
a butable
attri
e to
otal co
omp
preh
henssive
e incom
me is the
t
same as the
e attrib
a buta
able
e prrofitt for th
he
y r.
yea
2
214
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
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 (since)) + 10 (gain from a bargain purchase) = 97 000
125 000(P) + 36 000(S – analysis (total)) + 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
Gain from a bargain purchase – Parent
125 000
(10 000)
100 000
(10 000)
25 000
–
Consideration and NCI
115 000
R90 000
25 000
ii Since acquisition
• To beginning of current year:
Retained earnings (60 000 – 45 000)
• Current year:
Profit for the year
Dividend
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
215
Chapter 5
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
J2
J3
J4
J5
Loan from P Ltd (S)(SFP)
Investment in S Ltd: Loan (P)(SFP)
Elimination of intragroup loan
50 000
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
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
3 000
Non-controlling interests (P/L)
Non-controlling interests (SFP)
Recognition of non-controlling interests in profit
for the year
14 000
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
50 000
10 000
90 000
25 000
3 000
14 000
40 000
Intragroup transactions within a group
5.6 Intragroup sales of trading inventories and other assets
1
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
216
Intragroup transactions
2
3
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.
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 interest of simplifying the initial discussions, tax implications in respect of
unrealised profit are initially ignored.
217
C
Cha
apte
er 5
E
Exp
plan
nattory
ye
examp
ple
P Lttd sold
s d in
nve
ento
orie
es to
t SL
Ltd at
a cos
c st pric
p e plus
p s 25
5%
%. A
At th
he end
d of
o th
he rep
portting
g pe
erio
od,
S Ltd
L ha
ad R50
R 0 000
0
off in
nvento
orie
es on
o ha
and whic
w ch we
w re purch
hassed fro
om
m P Lttd. To
otal
ssale
es of
o inve
entorie
es fro
om P L
Ltd to S Ltd
d du
urin
ng the
t e cu
urre
ent reporrting p
period
d am
mountted to
R
R10
00 000
0 0.
Ig
gno
ore taxx im
mpllica
atio
ons..
T
The
e prro fo
orm
ma conso
olid
dation jou
urn
nal ent
e try for the
e elim
e mina
atio
on of
o the un
nrea
alissed inttrag
gro
oup
ssale
es is as
a follo
ows
s:
D
Dr
R
R
Rev
ven
nue
e (P
P)(P
P/L))
Cos
C t off sa
aless (S
S)(P
P/L))
E
Elim
min
nation
n off in
ntra
agro
oup
p sa
ale
es
Crr
R
10
00 000
0
1 0 00
100
00
Com
C
mmentt
T e ab
The
bove
e journal e
entrry co
orre
ectss the
e fig
gure
es for
f reve
enu
ue and
a cosst o
of sa
aless ass prrese
ente
ed
in th
he sepa
s aratte fiinan
ncia
al sttate
eme
ents of the enttitie
es, a
as both
b h wo
ould
d be
e ov
versstate
ed from
f m th
he
g up’s
grou
s pe
ersp
pecctive
e. The
T
pro
o fo
orm
ma cons
c solidation jou
urna
al entry
e y h
has no efffectt on
n th
he
c solidatted pro
con
ofit o
of the gro
oup as an equ
ual deb
bit a
and
d creditt is reccogn
nise
ed in
i th
he p
profit
b ore tax of the conso
befo
olida
ated
d en
ntityy. It doe
es how
h weve
er have
h e th
he effec
e ct of sh
how
wing the
e lin
ne
item
ms, (co
onso
olida
ated
d) reve
r enue and
a
(co
onso
olid
date
ed) cos
st of
o sa
aless to
o pa
artie
es outs
o side
e th
he
g up corr
grou
c rectly.
T
The
e ne
ext ste
ep is to elimin
natte the
t un
nrea
alissed
d prrofiit cont
c tain
ned
d in
n th
he clo
osin
ng invventtories
th
hro
ough th
he follow
wing
g pro for
f ma
a journ
nal::
D
Dr
R
C
Cos
st of
o sale
es (P)(P/L
L)
In
nve
ento
orie
es (S)(SF
FP)
E
Elim
min
nation
n off th
he unr
u reallise
ed intrrag
grou
up pro
ofitt in
nclu
ude
ed in
i
tthe
e clo
osiing
g inven
nto
orie
es of
o S Lttd (50
( 000
0 × 25//125
5)
2
218
Crr
R
10 000
0
10
0 00
00
In
ntra
agro
oup
p tra
anssacctions
Com
C
mm
mentt
a O
Only
y th
he prof
p it on in
nven
ntorriess at the
e en
nd of
o th
he reporting perriod tha
at was
w purchase
ed
from
m an entit
e ty w
with
hin the grroup
p has to be elim
min
nate
ed. The
e in
nven
ntorriess that hav
ve
a
alreadyy be
een sold to
o ou
utsid
de part
p ties havve alre
a eadyy re
ealissed..
b P Lttd sold
s d the in
nventorriess to S Ltd at cosst price
p e (C
CP) plu
us 25%
2 %. As
A the
t
invventtorie
es
w
were
e re
eco
ogniised
d in
n S Lttd’s reccord
ds at the
e se
ellin
ng pric
p ce (SP
( P) (125
5%), th
he profit
““con
ntain
ned
d” in
n the
e se
ellin
ng price
p e ca
an be
b dete
d ermiined
d th
hrou
ugh the
e follow
wing rattio:
CP + pro
ofit = S
SP
10
00 + 25
5 = 125
5
2
T
The unrea
alise
ed p
profiit is detterm
mine
ed as
a 25
/1225 × SP, therefore
e 25/125 × 50
5 000
0 = R10
R 000
c F
For pro
ofit or
o lo
osss an
nd equi
e ity item
ms, it iss im
mporrtan
nt to
o ind
dica
ate in tthe pro
o forrma
a journal
w
who
o the
e bu
uye
er an
nd sell
s er wer
w re. If th
he subs
s sidiary
y was the
t selller,, the
e efffecct off the
e prro
form
ma jour
j rnall ne
eeds to
o be ta
ake
en in
nto accou
unt beffore
e the prof
p it (o
or losss) or
o e
equity
ccom
mpon
nen
nt ca
an b
be ana
a alyse
ed for
f con
nsollida
ation
n pu
urpo
osess. In
n th
he e
exam
mplle abov
a ve P Lttd
w
was
s the selle
s er w
whic
ch would ha
ave no efffectt on
n th
he ana
alyssis o
of the
t
eq
quityy off th
he
ssubs
sidiary and
d th
hus no effe
ect on NCI.
T
The
e effec
e ct of the abo
ove
e jourrna
al ent
e ry is that the
e ttota
al am
mou
unt of th
he un
nrea
alis
sed
in
ntra
agroup
p pro
p fit is debite
ed ag
gain
nst the
e ccon
nso
olida
ate
ed ccos
st of
o sal
s es,, whic
w ch lea
adss to
o a
d
decrea
ase
e in the
e conssolida
ated
d profiit of th
he g
gro
oup.
3 Elim
E min
nattion
n of
o unre
u ealise
ed pro
ofitt wherre a sale
s e is
sm
mad
de by
b a par
p rtially--ow
wne
ed
sub
s bsidia
ary
T
The
e elimiination
n of
o th
he am
mou
unt of the
e unre
ealiised
d in
ntra
agrroup prof
p fit in
i cclos
sing in
nve
ento
orie
es,
w
whe
ere a su
ubsidia
ary whic
w ch is partia
ally ow
wne
ed is the sseller, iss not
n infflue
encced
d byy the
t
e
exis
sten
nce
e off th
he non
n n-conttrollling
g in
nteressts. Th
he total (10
00%
%) unrrea
alise
ed intrag
grou
up pro
ofit
iss sttill elim
min
nate
ed as a debit ag
gain
nst the
e ccostt off sa
ales o
of the se
ellerr and a cre
c edit ag
gain
nst
th
he invven
ntorriess of
o the
t
urcchasing ent
e tity. On
O co
onso
olid
datiion, 100
1 0% of ea
ach
h line ite
em
pu
sshould
d be
e co
onssoliidated
d an
nd the
ereffore
e 100% of
o the
t tra
anssaction
n shou
uld be
e ellimiina
ated
d.
E
Exp
plan
nattory
ye
examp
ple
P Ltd hass in
nve
ento
orie
es on ha
and
d amo
a oun
nting to
t R10
R 00 000 (at
( cost pricce to P Ltd
d) w
which
w
was
s pu
urchassed
d frrom
m S Ltd (in wh
w ich
h P Ltd
d has
h a 90%
% iinte
erest). S Ltd
d mak
m kess a pro
ofitt of
2
25%
% on
o the
t co
ost pricce of go
oods
s sold
s d to
o P Ltd. The
T e to
ota
al sa
ale
es of
o in
nve
entorie
es from S Ltd
L
to
o P Lttd duri
d ing
g the curr
c rent re
epo
ortin
ng period
d amo
a oun
nted
d to
o R250
R 0 000
0 0.
Ig
gno
ore taxx im
mpllica
atio
ons..
T
The
e prro fo
orm
ma conso
olid
dation jou
urnal ent
e try to elim
e min
nate
e th
he intr
i ragrou
up ssale
es is as
a folllow
ws:
D
Dr
R
R
Rev
ven
nue
e (S
S)(P
P/L))
Cos
C t off sa
aless (P
P)(P
P/L))
E
Elim
min
nation
n off in
ntra
agro
oup
p sa
ale
es
Crr
R
25
50 000
0
2 0 00
250
00
219
2
Chapter 5
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)
Cr
R
20 000
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.
220
Intragroup transactions
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
ASSETS
Investment in S Ltd: 64 000 shares at cost price
Inventories
Trade receivables
Total assets
EQUITY AND LIABILITIES
Share capital (100 000/80 000shares)
Retained earnings
Trade and other payables
Total equity and liabilities
P Ltd
S Ltd
70 000
10 000
130 000
–
30 000
106 000
R210 000
R136 000
100 000
26 000
84 000
80 000
20 000
36 000
R210 000
R136 000
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
–
–
R10 000
R5 500
Other comprehensive income
TOTAL COMPREHENSIVE INCOME FOR THE YEAR
221
Chapter 5
Retained
earnings
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
S Ltd
21 000
14 500
10 000
–
(5 000)
5 500
–
–
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 recognised the equity investment in S Ltd in its separate financial records using
the cost method.
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.
222
Intragroup transactions
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(J1))
Cost of sales (50 000(P) + 40 000(S) – 50 000(J1) + 2 000(J2))
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
12 800
700
R13 500
12 800
700
R13 500
223
Chapter 5
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 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(J2))
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
87 500
Net of the identifiable assets acquired and liabilities assumed
at acquisition date: IFRS 3.32(b)
Purchase difference
224
(87 500)
R–
In
ntra
agro
oup
p tra
anssacctions
C
C3 Prro form
f ma
a co
ons
solida
atio
on jou
j urn
nal enttrie
es
D
Dr
R
J1
J2
2
Crr
R
Re
eve
enue (S
S)(P/L
L)
Cost o
of sale
s es (P)(
( (P/L
L)
Elimiina
atio
on of
o in
ntragrrou
up sal
s es
5
50 000
0
Co
ost of sales (S))(P//L)
Invventtories (P))(SF
FP))
Elimiina
atio
on of
o the un
nrea
alis
sed
d intra
agro
oup
p proffit
inc
clu
ude
ed in th
he clo
osin
ng inv
ven
ntorries
s of P Ltd
d
2 000
0
50
0 00
00
2 00
00
(10
0 00
00 × 25
5/12
25)
Com
C
mme
ent
a J1
1 ha
as no
n effe
e ect o
on the
t con
nsolida
ated
d pro
ofit,, the
ereffore
e it is not
n incllude
ed in th
he ana
a alysiis
off S Ltd’’s owne
o er’ss eq
quityy.
b W
Where the
t
sub
bsid
diary iss the selle
s er, the
t
pro
o fo
orma
a conssolid
datio
on journal en
ntryy forr the
elliminatiion of the un
nrea
alise
ed intra
agro
oup pro
ofit is rreco
ogn
nised
d before com
c mme
encing witth
th
he anal
a ysiss off the
e eq
quityy off the
e su
ubsidia
ary
c W
Where the
t dire
ect method iss ap
pplie
ed, the
e prro fo
orm
ma jo
ourn
nal enttry iis direc
d ctly acccou
unte
ed
fo
or in
n the
e an
nalyysis (se
ee J3).
J
d Th
he followiing conso
olida
ation
n jo
ourn
nals
s do
o not
n havve to
t be
b pre
eparred wh
hen the
e d
direc
ct
m
meth
hod is app
a plied
d, as
a all
a th
he req
quire
ed info
i orma
atio
on can
c
be obtain
ned dirrectlly from
m the
an
naly
ysiss of the equity
y of the
e subsid
diarry.
Furth
herr pro
o fo
orm
ma c
consolida
ation
n jo
ourn
nal enttries
D
Dr
R
J3
J4
J5
Cr
C
R
Sha
S are cap
c pital (S))(SC
CE))
Reta
R aine
ed earn
e ning
gs (S)(
( SCE)
In
nvesstm
mentt in S Ltd
L (P)(
( SFP
P)
N -con
Nonntro
olling
g in
ntere
estss (S
SFP)
Elim
E minatio
on o
of equ
e ity of S Ltd at
a acqu
a uisiition date
d e
80 000
0
7 500
0
Reta
R aine
ed earn
e ning
gs – Be
egin
nnin
ng of
o ye
ear (S))(SC
CE)
N -con
Nonntro
olling
g in
ntere
estss (S
SFP)
Rec
R cognitiion of non
n-co
onttrolling
g intere
ests
s
in
i th
he reta
r aine
ed ear
e nings of tthe subsidia
ary
for
f the
e ye
ear 1
1/7//20..15–
–30
0/6/2
20.1
17
1 400
0
Non
N n-co
ontrollin
ng interestts (P/L
L)
N -con
Nonntro
olling
g in
ntere
estss (S
SFP)
Rec
R cognitiion of the
e no
on-c
con
ntrolling in
nterrests
in
i th
he pro
p ofit ffor the
e ye
ear
700
0
70 000
0
17 500
0
1400
0
700
0
5
5.8 Un
U rea
alis
sed
d pro
p ofitt in
n op
penin
ng invento
ories
s
1
Up
U to thiis p
poin
nt in th
he disscu
ussiion, onlyy inttrag
gro
oup prrofitt in invven
ntories
s sttill on ha
and at
the
t e en
nd of
o tthe
e re
eportin
ng p
perriod
d ha
as bee
en disscusse
ed. Be
eca
ause the clo
osin
ng invventtories
of
o one
o e re
epo
ortin
ng period
da
are the
e open
ning in
nve
entorie
es of the
e fo
ollow
win
ng rep
r portting
g pe
erio
od,
the
t e elimiina
ation
n of
o unre
u ealise
ed pro
p fit at
a tthe
e en
nd of (sa
ay) 20
0.17
7 nec
n ess
sarrily afffectts the
t
bal
b ancce of the
e con
c sollida
ated
d re
eta
aine
ed earrnin
ngss brou
ugh
ht fo
orw
ward
d from
m 20.1
2 17, ass well
w
as
a the
e cons
c solida
ated
d prof
p fit of
o 20.
2 18.. It mustt be
e re
em
mem
mbe
ered
d th
hatt ea
ach
h entitty iin the
t
225
2
Chapter 5
2
group is a separate entity and that each entity in the group draws up its own
separate financial statements. 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
J2
226
Revenue (P)(P/L)
Cost of sales (S)(P/L)
Elimination of intragroup sales
50 000
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
In
ntra
agro
oup
p tra
anssacctions
F
First ens
e ure
e th
hat the con
c nso
olida
ated reta
r aine
ed ea
arniings a
at the
t
be
eginniing off 20
0.18 a
agrree
w
with
h the con
c nsolida
ated
d re
eta
aine
ed ear
e rnin
ngss att the
e end
e of 20
0.17
7:
3
31 Dec
D cem
mb
ber 20.18
8 – Pro
o fo
orm
ma co
ons
soliida
atio
on jou
j urna
al ent
e trie
es
D
Dr
R
J1
Re
etaiined earn
e ning
gs – B
Beginning
g of ye
ear (P)(SC
CE))
Cost o
of sale
s es (P)(
( (P/L
L)
Ad
djustm
men
nt to
t ens
e sure
e th
hatt the con
c nso
olida
ate
ed reta
r aine
ed
ea
arniing
gs at
a the be
egin
nnin
ng of 20.18
8 is in agree
eme
entt
wiith the
e co
ons
solida
ated
d re
eta
aine
ed ear
e rnin
ngs
s att th
he
en
nd of
o 2
20.17
Crr
R
5 000
0
5 00
00
Com
C
mmentt
T s journal can
This
c be exp
plained
d ass fo
ollow
ws, as it iss a com
mbin
natiion of tthe folllowing two
o prro
f ma jourrnalss:
form
A th
At
he beg
b ginning of tthe rep
porting perriod
d the
e fo
ollow
wing
g prro fo
orma jo
ourn
nal is done
d e:
R
Re
etained
d ea
arningss – Beg
B ginn
ning
g of yea
ar (P
P)(S
SCE
E)
IInve
ento
oriess (S
S)(S
SFP
P)
Ad
djus
stm
men
nt to
o e
ensu
ure that the
t e co
ons
solid
date
ed rettain
ned
ea
arniings
s att th
he b
beginn
ning
g 20
0.18
8 arre in
n agre
a eem
mentt with
w
th
he cons
c soliidatted rettain
ned earrnin
ngs
s at the
e en
nd o
of 20.1
2 7.
R
5 000
0
50
000
0
Oncce the invventorie
O
es are
a solld by
b tthe S Ltd,
L
the
e fo
ollow
wing pro
p form
ma jou
urna
al woul
w ld be
b
r orde
reco
ed on
o date
d e of salle to
o acccou
unt for the
e rea
alisatio
on of
o th
he profi
p it:
R
Invven
ntoriies (S)(SF
FP)
C
Cos
st off sa
ales (P))(P//L)
Re
eco
ognitio
on of
o re
ealisattion
n of pro
ofit
R
5 000
0
50
000
0
By tthe end
B
d off the
e re
eporrting
g pe
eriod th
he pro
p form
ma journa
al (a
as sh
how
wn a
above) is put
p thro
oug
gh
inste
ead
d.
N
Now
w elim
e mina
ate
e in
ntra
agro
oup
p ssale
es an
nd unrea
alised prrofit in
n clos
c sing
g iinventtories fo
or the
t
ccurrrent re
epo
ortin
ng perriod
d:
D
Dr
R
J2
2
J3
3
Re
eve
enue (P
P)(P/L
L)
Cost o
of sale
s es (S)(
( (P/L
L)
Elimiina
atio
on of
o in
ntragrrou
up sal
s es du
urin
ng the
t cu
urre
ent
ye
ear
8
80 000
0
Co
ost of sales (P))(P//L)
Invventtories (S))(SF
FP))
Elimiina
atio
on of
o unr
u eallise
ed pro
p ofit in the
e cllos
sing
g
ven
nto
orie
es of
o S Lttd a
at 31/1
3 12//20..18 (25
5 00
00 × 33
31/3//133
31/3)
inv
6 250
2
Crr
R
80
0 00
00
6 25
50
T
The
e elim
e mina
atio
on of un
nre
ealissed
d pro
p ofit in es
sse
encce co
omp
prisses th
he de
eferrme
ent o
of the
t
re
eco
ogn
nitio
on of the pro
p ofit fro
om on
ne rep
porrting
g per
p riod
d to
o th
he follow
win
ng rep
portting
g p
periiod
(ccom
mpa
are
e J2
2o
of 20.1
2 17 witth JJ1 of 20.18
8 abov
ve). In
n th
he above
e exa
e mp
ple, th
he par
p rentt was
w
227
2
Chapter 5
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
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
ASSETS
Investment in S Ltd: 45 000 shares at
cost price
Inventories
Trade receivables
Total assets
EQUITY AND LIABILITIES
Share capital (100 000/50 000 shares)
Retained earnings
Total equity and liabilities
S Ltd
20.18
20.17
20.18
67 500
30 000
62 500
67 500
40 000
102 500
–
20 000
60 000
–
30 000
55 000
R160 000
R210 000
R80 000
R85 000
100 000
60 000
100 000
110 000
50 000
30 000
50 000
35 000
R160 000
R210 000
R80 000
R85 000
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
TOTAL COMPREHENSIVE INCOME
FOR THE YEAR
15 000
–
50 000
–
5 000
–
5 000
–
R17 500
R55 000
R5 000
R5 000
228
Intragroup transactions
Retained earnings
P Ltd
20.17
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
S Ltd
20.18
20.17
20.18
45 000
60 000
25 000
30 000
15 000
50 000
5 000
5 000
–
–
–
–
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 recognised the equity investment in S Ltd in its separate financial records using
the cost method.
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.
229
C
Cha
apte
er 5
So
oluttion
n 5.4
5
T
The
e co
onssoliidated
d finan
ncial sta
atem
me
entss o
of th
he P Ltd
d G
Gro
oup
p fo
or the
t e re
epo
ortin
ng pe
erio
ods
e
ended 31 Dece
ember 20
0.17 a
and
d 20
0.18 will
w be
e prrep
pare
ed as folllow
ws by ap
pplyying
g th
he d
dire
ect
m
method
d:
R
Rep
porrtin
ng per
p riod
d end
e ded 31
1 Dece
em
mbe
er 2
20.1
17:
P LTD
L D GRO
G OUP
P
CO
ONS
SOLID
DAT
TED
D STA
S ATE
EME
ENT
T OF
O FIN
NAN
NCIAL
L POS
SITIION
N
AS
A AT
A 31 DE
ECE
EMBE
ER 20.
2 17
A
ASS
SETS
S
C
Currrent ass
a sets
s
IInve
entorie
es (30 000
0(P
P) + 20 000
0(S) – 2 000(J2))
T
Tra
ade recceivvab
bles
s (62 500(P) + 60
0 00
00(S
S))
48
8 00
00
122
1
2 50
00
1 0 50
170
00
T
Tottal ass
a sets
R1
170
0 50
00
E
EQUIT
TY AN
ND LIA
ABILIT
TIES
S
E
Equ
uity
y atttributtab
ble to ow
wne
ers of the
t e pa
are
ent
S
Sha
are ca
apita
al (P)
R
Rettain
ned ea
arnings
s (S
SCE
E)
100
1
0 00
00
62
2 70
00
N
Non
n-c
con
ntro
ollin
ng inte
ere
ests
s (A
Ana
alyssis)
162
1
2 70
00
7 80
00
T
Tottal equ
e uity
y
T
Tottal equ
e uity
y and lia
abilitie
es
1 0 50
170
00
R1
170
0 50
00
Com
C
mm
mentt
T e fig
The
gure
es and
a acrrony
ymss in bra
acke
ets fulfiil th
he ro
ole of a work
w kshe
eet a
and
d are not inten
nde
ed
f p
for
pub
blica
ation
n.
2
230
In
ntra
agro
oup
p tra
anssacctions
P LTD
L D GRO
G OUP
P
CO
CONS
SOL
LID
DAT
TED
D ST
TA
ATE
EME
ENT
T OF
O PRO
P OFIT OR
OR LO
OSS
AN
ND OT
THE
ER CO
OMP
PREHEN
NSIV
VE INCO
OME
E
FO
OR TH
HE YEA
Y AR
R EN
NDED
D 31
1 DEC
CEM
MBE
ER 20
0.17
7
R
Rev
ven
nue
e (770 0000((P) + 500 0000(S) – 300 0000(JJ1)))
C
Cos
st of
o sale
es (335 000
0 0(P) + 25
2 0
000(S) – 30
3 000(
0 (J1)) + 2 00
00(JJ2)))
90 00
00
((32 000)
G
Gro
oss pro
ofit
O
Oth
her exp
pen
nse
es (15 000
0 0(P)) + 1
15 000
0 0(S)))
58 00
00
((30 000)
P
Pro
ofit be
eforre ttax
IInco
om
me ta
ax exp
pen
nse (5 0000(P)) + 5 0000(S))
00
28 00
((10 000)
P
PROF
FIT FO
OR T
THE YEA
Y AR
O
Oth
her co
omp
pre
ehensiive
e inc
com
me
e for th
he yea
y ar
00
18 00
–
T
TOTA
AL CO
C MP
PRE
EHE
ENS
SIV
VE IINC
COM
ME
E FO
OR TH
HE YE
EAR
R
R 00
R18
00
P
Pro
ofit attr
a ribu
utab
ble to:
O
Ow
wners of
o th
he parren
nt
N
Non
n-conttrolling
g in
nterestts
17 70
00
30
00
R 00
R18
00
T
Tottal com
c mprrehe
ens
sive
e in
ncom
me atttributa
able
e to
o:
O
Ow
wners of
o th
he parren
nt
N
Non
n-conttrolling
g in
nterestts
17 70
00
30
00
R 00
R18
00
P LTD
L D GRO
G OUP
P
CO
ONS
SO
OLID
DAT
TED
D STA
S ATE
EMEN
NT OF
O CH
HAN
NGES
S IN
N EQ
QUITY
Y
FO
OR TH
HE YEA
Y AR
R EN
NDED
D 31
1 DEC
CEM
MBE
ER 20
0.17
7
Share
S
ca
apittal
B
Ballance at 1 J
Jan
nuary 20.
2 .17
C
Cha
ang
ges
s in
n eq
quitty for
f 20
0.17
7
T
Total com
c mprrehe
ens
sive
e incom
me
fo
or th
he yea
ar:
P
Pro
ofit for
f the
e ye
ear
A
Acq
quissitio
on of
o ssub
bsid
diaryy
B
Ballance at
31 Dec
D cem
mbe
er 20.1
2 17
Re
etaiine
ed
ea
arniing
gs
To
otall
N
Nonc
conollin
ng
tro
inte
eres
sts
s
T al
Tota
eq
quiity
1 0 00
100
00
45
5 00
00
14
45 000
0 0
–
1 5 00
145
00
–
–
17
7 70
00
–
17
1 700
7 0
–
300
3 0
7 500
5 0
18
8 00
00
7 50
00
R1
100
0 00
00
R62
R 2 70
00
R
R16
62 700
7 0
R
R7 800
8 0
R1
170
0 50
00
Co
omment
Ass cont
c trol of the sub
s bsidiiaryy w
was ob
btain
ned
d in
n th
he currren
nt rrepo
ortin
ng perriod (o
on
1 Jan
nuarry 20.1
2 7), th
he no
on-cconttrolling in
nterrestts sho
ould
d be
b
prrese
ente
ed in th
he
co
onso
olidated fin
nan
ncial sta
atem
men
nts for the
e period
d.
231
2
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
At
NCI
Since
50 000
25 000
45 000
22 500
5 000
2 500
Purchase difference
75 000
–
67 500
–
7 500
–
Consideration and NCI
75 000
R67 500
7 500
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(J2))
–
–
–
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
7 500
Amount of non-controlling interests: IFRS 3.32(a)(ii)
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
Revenue (S)(P/L)
Cost of sales (P)(P/L)
Elimination of intragroup sales
30 000
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
30 000
2 000
(10 000 × 25/125)
continued
232
Intragroup transactions
Dr
R
J3
J4
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(J2))
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
224 500
Total equity and liabilities
R224 500
233
Chapter 5
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(J2))
Cost of sales (20 000(P) + 30 000(S) – 2 000(J1) – 20 000(J2) + 3 000(J3))
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
Non-controlling interests
53 600
400
R54 000
Total comprehensive income attributable to:
Owners of the parent
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
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
234
Retained
earnings
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
At
Since
NCI
50 000
25 000
45 000
22 500
5 000
2 500
75 000
–
67 500
–
7 500
–
Consideration and NCI
ii Since acquisition
• To beginning of current year :
Retained earnings
75 000
R67 500
7 500
(30 000 – 25 000 – 2 000(J1))
3 000
Purchase difference
2 700
300
7 800
• Current year :
Profit for the year
(5 000 + 2 000(J1) – 3 000(J3))
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
75 000
Net of the identifiable assets acquired and liabilities assumed
at acquisition date: IFRS 3.32(b)
Purchase difference
(75 000)
R–
235
C
Cha
apte
er 5
C
C3 Prro form
f ma
a co
ons
solida
atio
on jou
j urn
nal enttrie
es
D
Dr
R
J1
2
J2
3
J3
4
J4
5
J5
6
J6
Crr
R
Re
etaiined earn
e ning
gs – B
Beginning
g of ye
ear (S)(SC
CE))
Cost o
of sale
s es (S)(
( (P/L
L)
Ad
djustm
men
nt to
t ens
e sure
e th
hatt the con
c nso
olida
ate
ed reta
r aine
ed
ea
arniing
gs at
a the be
egin
nnin
ng of 20.18
8 arre in
n agre
a eem
men
nt
wiith the
e co
ons
solida
ated
d re
eta
aine
ed ear
e rnin
ngs
s att th
he e
end
d off
20
0.17
7
2 000
0
Re
eve
enue (S
S)(P/L
L)
Cost o
of sale
s es (P)(
( (P/L
L)
Elimiina
atio
on of
o in
ntragrrou
up sal
s es forr th
he cur
c ren
nt y
yea
ar
2
20 000
0
Co
ost of sales (S))(P//L)
Invventtories (P))(SF
FP))
Elimiina
atio
on of
o unr
u eallise
ed intr
i rag
grou
up pro
ofitt inclu
ude
ed
ven
ntories
s of
o P Lttd at
a 31/1
3 12/2
20.18 (155 0000 × 255/12
25)
in inv
3 000
0
Sh
hare
e capital (S))(SC
CE
E)
Re
etaiined earn
e ning
gs (S)
( (SC
CE))
Invvesttme
ent in S Ltd
L (P)(SF
FP))
Non-cconttrollling
g in
nterrestts (SFP)
Elimiina
atio
on of
o own
o nerrs’ equ
e uity
y att ac
cqu
uisiitio
on of
o S Ltd
5
50 000
0
25 000
0
2
Re
etaiined earn
e ning
gs – B
Beginning
g of ye
ear (S)(SC
CE))
Non-cconttrollling
g in
nterrestts (SFP)
Re
eco
ogn
nitio
on of non-c
con
ntro
ollin
ng inttere
ests
s in
n re
etaine
ed
ea
arniing
gs of
o the su
ubsidia
ary
y fo
or th
he period
d sinc
s ce
ac
cqu
uisittion unti
u il beg
b inn
ning
g of
o currrent ye
earr
300
3
No
on-con
ntro
ollin
ng inte
eressts (P//L)
Non-cconttrollling
g in
nterrestts (SFP)
Re
eco
ogn
nitio
on of non-c
con
ntro
ollin
ng inttere
ests
s in
n proffit for
the yea
y r
400
4
2 00
00
20
0 00
00
3 00
00
67
7 50
00
7 50
00
30
00
40
00
Com
C
mm
mentt
N e th
Note
hat J1 on
nly m
mov
ves the
e R2
R 0
000
0 to
o the
e curre
c ent rep
portting pe
eriod
d – the repo
ortin
ng
p od in whic
peri
w ch the
t inv
venttorie
es are
a solld to
o parties outside
e th
he grou
g up, thus re
ealising
g th
he
p fit.
prof
5
5.9 Intrrag
gro
oup
p pro
p ofit in in
nve
ento
oriies
s att acq
quis
sition
n date
d e
In
ntra
agrroup prof
p fit in
n in
nve
ento
orie
es at
a acq
a quissitio
on datte sho
s ould
d not be
b elim
min
nated,, be
eca
ausse itt is
a
as a res
r ult of tra
anssacctions be
eforre the
e e
entitiess bec
b cam
me pa
art of
o the
e sam
s me gro
oup
p, i.e.
i
re
epo
orting en
ntityy.
5
5.10
0 Lo
oss
ses
s on
o inttragro
oup inv
i ven
nto
orie
es
A
As in
i the
t e ca
ase
e off profits on intragro
oup
p sa
ales, lossess o
on intr
i ragrou
up salles ca
ann
not, fro
om
th
he point of vie
ew of co
onso
olid
datiion, be reg
r ard
ded
d ass nece
n ess
sarily rea
alissed. Unle
U esss th
he net
n
2
236
Intragroup transactions
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 amount to R50 000. On
31 December 20.18, P Ltd writes the inventories down to the 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:
P Ltd’s records:
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 year according to IAS 2 requirements
Cr
R
11 000
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.
237
C
Cha
apte
er 5
Com
C
mm
mentt
T e follow
The
wing tab
ble illus
strates thiss prrinciple
e cle
earlyy:
Inv
venttory
y
Va
alue
e ac
ccordin
ng
at selling
g prrice
e
to
o grroup
R
R
50 000
40
4 000
0 0
Nett re
ealis
sab
ble
va
alue
e
R
39
9 00
00
(50
0 00
00 × 100
0/12
25)
itte-d
dow
wn in
n P Ltd
d’s rreco
ordss
R11
R 000
0
Unrrealiised
U
d prrofit
R 000
R10
0
A tthe value should
As
d be R40
R 000 frrom
m the grou
g up’s pe
ersp
pective and th
he net
n rea
alisa
able
e
v ue is
valu
i lo
owe
er (R39
( 9 00
00), no
o fu
urth
her pro
o fo
orma
a cons
solid
dation jou
urna
al iss re
equiired
d fo
or
c soliidattion purposes
con
s.
Iff P Ltd
d did not
n t re
ecog
gnise the
e write
w e-d
dow
wn tto net
n rea
alissab
ble vallue in its ind
dividu
ual reccord
ds,
th
he un
nrea
alissed inttrag
gro
oup
p prrofit wou
w uld firsstly
y ha
ave
e to
o b
be elim
e min
nate
ed and then
n the wrrite
d
dow
wn wou
w uld ha
ave
e to be
e do
one
e on
n a prro form
ma ba
asiss ass fo
ollow
ws:
P
Pro fo
orm
ma con
c nso
olid
dation
n jo
ourrnals:
Drr
R
C
Cos
st of
o sale
es (S)(P/L
L)
In
nve
ento
orie
es (P)(SF
FP)
E
Elim
min
nation
n off un
nre
ealis
sed
dp
proffit incllud
ded in clo
osing
iinv
venttorries
s (50 000
0 x 25/1
2 25)
Cr
R
10 000
0
10
0 00
00
a
and
Drr
R
C
Cos
st of
o sale
es (Los
ss on
o writ
w te d
dow
wn of
o inve
ento
orie
es to
t net
n
re
ealiisab
ble va
alue
e) (S
S)(P
P/L
L)
In
nve
ento
orie
es (P)(SF
FP)
IInv
venttorries
s written do
own
n to
o th
heirr ne
et real
r lisa
able
e valu
v ue
a
at the
t en
nd of
o tthe ye
ear acc
corrdin
ng to IAS
S 2 requirem
me
ents
s (4
40
Cr
R
1 000
0
1 00
00
0
000
0 – 39 000
0)
E
Exp
plan
nattory
ye
examp
ple
S Lttd (su
( ubsidia
ary) se
ellss in
nve
ento
orie
es to
t PL
Ltd (th
he par
p rent) at
a cos
c st plus
p s 25
5%
%. The
T e closiing
in
nve
ento
orie
es in the
e reco
r ord
ds of P Ltd
d at
a 3
31 De
ece
emb
berr 20.18 am
mou
unt to R50 00
00. At
3
31 Dec
D cem
mbe
er 2
20.18, P Ltd
L write
w es the
e inve
entorie
es do
own
n to
t nett rreallisa
able
e valu
v ue at
3
31 Dec
D cem
mbe
er 20.18
8 off R44
R 4 00
00 in its se
epa
aratte reccord
ds. Ig
gnore taxx im
mpllica
atio
ons. The
T
jo
ourrnal en
ntryy in
n the reco
ord
ds o
of P Lttd at
a 31
3 D
Decem
mber 20.18
8 is ass follow
ws:
2
238
In
ntra
agro
oup
p tra
anssacctions
P Lttd’s
s re
eco
ord
ds:
Drr
R
C
Cos
st of
o sale
es (Los
ss on
o writ
w te d
dow
wn of
o inve
ento
orie
es to
t net
n
rea
r lisa
able
e va
alue
e) (P/L
( L)
In
nve
ento
orie
es (SFP)
IInv
venttorries
s written do
own
n to
o th
heirr ne
et real
r lisa
able
e valu
v ue
a
at the
t en
nd of
o tthe ye
ear acc
corrdin
ng to IAS
S2
rreq
quirrem
men
nts
Cr
R
0
6 000
6 00
00
T
The
e ne
et reallisa
able
e va
alue of
o th
he invventorriess (R
R44
4 00
00) is mo
ore tha
an the
e origiinal co
ost price
to
o the
t
grou
up (R50 00
00 × 100/125
5 = R
R40
0 00
00) and th
here
efore a furthe
er pro
o fform
ma
cconsolida
ation jo
ourrna
al en
ntryy iss re
equired in
n re
esp
pecct off th
he e
elim
minatio
on of unrrea
alise
ed pro
ofit..
P
Pro fo
orm
ma con
c nso
olid
dation
n jo
ourrnal:
Drr
R
C
Cos
st of
o sale
es (S)(P/L
L) (444 000
0 0 – 40
4 000
0 0)
In
nve
ento
orie
es (P)(SF
FP)
E
Elim
min
nation
n off un
nre
ealis
sed
dp
proffit in the clo
osin
ng inv
ven
ntorries
s
o
of P Ltd
L at 31 De
ecemb
ber 20
0.18
8
Com
C
mm
mentt
T e follow
The
wing tab
ble iillus
strates thiss prrinciple
e cle
earlyy:
In
nve
ento
ory at
selling pric
ce
R
50 000
Writte-o
W
off to
o ne
et re
ealisab
ble valu
v ue in
P Lttd’s reccord
ds
Unrealiised
U
d prrofit fro
om grou
g up’ss
p spectivve
pers
Add
A
ditional elim
minatio
on of
o un
nrea
alised
p fit re
prof
equired
d through pro
o forrma
a
c soliidattion jou
con
urna
al
Cr
R
0
4 000
4 00
00
Net
N rea
alisa
able
e Valu
V ue acc
a cord
ding
g
vallue
to gro
oup
p
R
R
4 000
44
0 0
40
0 00
00
R 60
000
R10 000
R4 000
5
5.12
2 Ge
enera
al ap
a pro
oac
ch to
o ta
ax in res
spect of
o the
e allloc
cattio
on o
of inc
com
me
e ta
ax
an
nd the elim
e min
nattio
on of
o un
nrea
alis
p ofitt
sed pro
1
As
A ha
ad bee
b en exp
e plaiine
ed e
earlierr in the
e ccha
apte
er, unrrea
alise
ed intrag
grou
up pro
ofitss or
o lo
oss
ses
are
a e ellimiina
ated
d on con
c sollida
atio
on. In the
e RSA
R A, how
h wevver,, intragro
oup
p prrofits and
a d lo
oss
ses
are
a e ta
axa
able
e or dedu
ucttible
e in
n th
he same
e way
w ass any oth
herr prrofits or lossses, as ea
ach
ent
e tity in the
e grrou
up sub
s bmits its
i ow
own ta
ax retturn
n an
nd willl be ta
axe
ed on
o its taxxab
ble inccom
me.
If acc
a ord
ding
gly no
o ad
djustm
men
nt to
t the
t co
ons
solid
datted taxx exp
e pensse is ma
ade
e in
n th
he g
gro
oup
sta
s atem
men
nts, such
h ta
ax expen
nse
e, bec
b cau
use of the
e elim
e mina
atio
on of unrea
alised inttrag
gro
oup
pro
p ofitss or
o loss
sess, will
w be
e disp
d pro
oportio
ona
atelyy high
h h ((or low
w) in relatiion to
o th
he pro
ofit
bef
b fore
e ta
ax o
of the
t group
p. IIt is
s th
hus ap
ppro
oprriate thatt an
n adju
ustm
men
nt b
be ma
ade
e in respe
ect
239
2
Chapter 5
2
3
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 therefore 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.
Solution 5.5
The necessary pro forma consolidation journal entries will be as follows:
Dr
R
J1
Revenue (S)(P/L)
Cost of sales (P)(P/L)
Elimination of intragroup sales
Cr
R
200 000
200 000
continued
240
In
ntra
agro
oup
p tra
anssacctions
D
Dr
R
J2
2
3
J3
Crr
R
Co
ost of sales (S))(P//L)
FP))
Invventtories (P))(SF
Elimiina
atio
on of
o unr
u eallise
ed intr
i rag
grou
up pro
ofitt inclu
ude
ed
osing inv
ven
ntories
s of
o P Lttd (100
( 0 00
00 × 25
5/12
25)
in clo
2
20 000
0
De
eferrred
d ta
ax (S)(
( (SF
FP)
Inccom
me tax exp
pen
nse
e (S
S)(P
P/L)
Ad
djustm
men
nt for
f de
eferrred
d ta
ax on
o R2
20 000
0 0
un
nrea
alis
sed
d in
ntra
agro
oup
p prof
p fit (20
( 000
0 × 28%
%)
5 600
6
20
0 00
00
5 60
00
Com
C
mm
mentt
T e de
The
eferrred
d ta
ax o
on the un
nrea
alise
ed pro
ofit can
n be
e expl
e aine
ed as follow
ws in term
ms of
o
IAS 12.11:
In th
he reccord
ds of
o P Ltd (tthe purchase
er) the
t
invventtorie
es wou
w uld havve had
d th
he fo
ollo
owin
ng
a oun
acco
nting
g an
nd tax
t valu
uess:
Carr
C ryin
ng
amo
a oun
nt
T bas
Tax
se
Te
emp
pora
ary
diifferen
nce
Defferrred tax
x
@ 28%
2 %
R100
R 0 00
00
R 0 00
R100
00
R0
R
R
R0
For the
F
e grroup, afte
a er th
he pro
p forrma
a journals ha
ad b
been
n ta
aken in
nto acc
cou
unt, the
e va
alue
es
w uld be
wou
b as
a follo
f ows:
Carr
C ryin
ng
amo
a oun
nt
T bas
Tax
se
Te
emp
pora
ary
diifferen
nce
Defferrred tax
x
@ 28%
2 %
R80
R 0 00
00
R 0 00
R100
00
(R
R20
0 00
00)
R 600d
R5
6 dr
T e DT
The
TA cha
c ange
es from
m R0
0 to
o R5
5,6, the
erefo
ore req
quirring a debi
d it ad
djusstme
ent of R5
R 600
0.
Com
C
mm
mentt
T e ne
The
et adju
a ustm
men
nt afte
a r ta
ax amoun
nts to R14 4
400 an
nd a porti
p ion of the
e after
a r ta
ax
a ustm
adju
men
nt iss alloca
ated
d via
a th
he ana
a lysis of
o S Ltd
d’s o
own
ner’’s equi
e ty to th
he non
n n-co
ontro
ollin
ng
interestts.
Ex
xam
mplle 5.6
5
Allocattion of
A
o inco
om
me ttax
x an
nd the
e elim
mina
atio
on of un
nrea
alis
sed
d
proffit includ
ded
d in
n op
pen
nin
ng and
a d clos
c sing inve
enttorries
s
A
Assum
me tha
at a
at 28
2 Fe
ebru
uarry 20.
2 19 (i.e. a yea
y ar late
er tthan in exa
e amp
ple 5.5) P Ltd
d had
h
in
nve
ento
orie
es on ha
and
d to
o the va
alue
e of
o R15
R 50 000
0 (at
( co
ost priice to
o P Lttd) wh
hich
h itt had
h
a
acquire
ed fro
om S Ltd
L at the
e ssam
me pro
p ofit ma
ark--up
p ass durin
ng the
e prevviou
us rep
r portting
g pe
erio
od.
T
Tota
al sale
s es of
o iinventtoriies fro
om S Ltd
d to
o P Ltd
d fo
or the
t cu
urre
ent rep
porrting peri
p iod am
mou
untted
to
o R30
R 00 000
0 0. A
Aga
ain asssum
me a com
c mpa
anyy ta
ax rate
r e off 28
8%
%.
241
2
C
Cha
apte
er 5
So
oluttion
n 5.6
5
B
Bas
sed on
n th
he F
FIF
FO cosst form
f mula, it is ass
a um
med
d that the
e in
nvento
orie
es w
which P Ltd
d ha
ad on
h
hand at
a 28
2 Feb
F bru
uaryy 20
0.18 w
werre sold
s d enti
e rely
y duri
d ng the
e cou
c rse
e off th
he cur
c rren
nt repo
ortiing
p
period. The
T
fo
ollow
win
ng pro
o fo
orm
ma con
nso
olid
dation jou
urn
nal en
ntrie
es will be nec
n cesssary at 28
F
Feb
brua
ary 20
0.19
9:
D
Dr
R
J1
2
J2
J3
3
4
J4
J5
5
Re
etaiined earn
e ning
gs – B
Beginning
g of ye
ear (S)(SC
CE))
De
eferrred
d ta
ax (S)(
( (SF
FP)
Cost o
of sale
s es (S)(
( (P/L
L)
Ad
djustm
men
nt to
t ens
e sure
e th
hatt the con
c nso
olida
ate
ed
retain
ned
d earn
ning
gs at the
e be
eginning
g off 20
0.19
9 are
a in
gree
em
ment with
w h the c
con
nso
olida
ate
ed rreta
aine
ed earnings
ag
at the
ee
end of 20
0.18
8
14 400
4
5 600
6
Inccom
me tax
x exxpe
ense
e (S
S)(P
P/L
L)
Defferrred taxx (S
S)(S
SFP
P)
Ta
ax imp
i plic
catiions of
o re
eallisa
atio
on of
o u
unrrealise
ed pro
ofit
in op
pen
ning
g in
nve
ento
orie
es of
o P Ltd
L
5 600
6
Crr
R
20
0 00
00
5 60
00
Re
eve
enue (S
S)(P/L
L)
Cost o
of sale
s es (P)(
( (P/L
L)
Elimiina
atio
on of
o in
ntragrrou
up sal
s es
30
00 000
0
Co
ost of sales (S))(P//L
Invventtories (P))(SF
FP))
Elimiina
atio
on of
o unr
u eallise
ed intr
i rag
grou
up pro
ofitt inclu
ude
ed
in P Ltd
L d’s clo
osin
ng inv
ven
ntorries
s (150 000
0 × 25//125
5)
3
30 000
0
De
eferrred
d ta
ax (S)(
( (SF
FP)
Inccom
me tax exp
pen
nse
e (S
S)(P
P/L)
Ad
djustm
men
nt of
o def
d errred tax
x on
o R30
R 0 00
00
un
nrea
alis
sed
d in
ntra
agro
oup
p prof
p fit (30
( 000
0 × 28%
%)
8 400
4
3 0 00
300
00
30
0 00
00
8 40
00
Com
C
mm
mentt
B 28 February 20
By
0.19
9 th
he in
nve
ento
ories
s on hand
h d a
at th
he end
e d off the
e prev
p vious re
epo
ortin
ng
p od are
peri
e assum
med
d to havve bee
b en ssold. Th
he intra
agro
oup pro
ofit hass the
erefore
e re
ealissed from
t
the
gro
oup’s pers
p specctiv
ve and
a
furrthe
ermo
ore the
e ta
axattion
n ha
as ther
t refo
ore beccom
me pay
p yable
e,
n ess
nec
sitatting the
e reco
ogniition
n of a tax
x expe
e ense ((J2 abo
ove
e) and
a
the
e re
eve
ersal off th
he
t porraryy difffere
tem
ence
es.
5
5.14
4 Allloc
cattio
on of
o inc
com
me
e ta
ax in re
esp
pec
ct of
o fair
f r valu
ue ad
djus
stm
me
ents
s
on
n fiina
anc
cia
al ass
a set at fa
air va
v lue
e th
hro
oug
gh OCI
T
The
e accco
ounting
g trrea
atme
entt off fin
nan
ncia
al asse
a ets at faiir valu
v ue thro
t oug
gh OC
OCI was
w s discu
usssed
d in
cchapte
er 4 (4
4.4). As
A the
e effe
e ct of taxxation on
n in
ntra
agro
oup
p trransacctio
onss is
s introducced
d, the
t
ta
ax imp
pliccatiions of
o fair va
alue
e adju
a ustm
mentss to
o fin
nan
ncia
al a
ass
setss at fa
air vallue throu
ugh
h OCI
O
a
also
o warrrantt attten
ntio
on. In terrms
s off tax re
equ
uire
ementts, cap
pita
al gain
g ns tax
t x is pa
ayab
ble
e wh
hen
na
financial assset at fair valu
v ue thrroug
gh OC
CI (the
e in
nve
estm
me
ent in the
e su
ubssidiiaryy) is sold
s d to
oa
hird
d par
p ty. (S
See
e IA
AS
S 12.5
51 on
n th
he asssu
ump
ptio
on tha
at the
e car
c ryin
ng am
mou
untt o
of the
t
th
2
242
In
ntra
agro
oup
p tra
anssacctions
nve
estm
ment will ultim
matelyy be
e re
eco
ove
ered
d th
hro
oug
gh sale
s e.) De
eferre
ed tax
t is there
eforre ttak
ken
in
in
nto accco
ountt at th
he cap
pita
al g
gain
ns ratte on
o any gain
g ns or los
sse
es on
o financ
cial assse
et a
at fair
f
vvalu
ue thro
t oug
gh OC
CI. The cap
c pital ga
ains ta
ax ratte iss calc
c cula
ated as
a 80%
8 %o
of the
t co
omp
pan
ny tax
t
ra
ate
e, as 80%
8 %o
of th
he cap
c pita
al g
gain
n is taxxab
ble. As th
he taxx ra
ate is set
s t at 28
8% in thiss wor
w k, the
t
ccapital ga
ainss ta
ax rate
r e will
w be
b 22,4%
% (8
80%
% × 28%
%).
A
At th
he end of
o e
every rep
r portting
g pe
erio
od, the
e in
nve
estm
men
nt in the subsiidia
ary is me
easure
ed a
at fair
f
vvalu
ue in th
he pa
are
ent’s ind
dividua
al fin
nancia
al sta
s atem
men
nts
s. Ga
Gainss o
or lossse
es on
n the
t
re
em
measurrem
men
nt of
o fina
f anccial as
ssetts are
a e re
eco
ognise
ed in
i O
OC
CI th
hro
oug
gh tthe markk-to
o-m
mark
ket
re
ese
erve
e. On
O co
ons
solid
dattion
n of th
he fina
f ancciall state
eme
ents o
of the pa
aren
nt a
and
d th
he sub
bsid
dia
ary,
th
he mark
m k-to
o-m
markett rese
ervve is re
everse
ed to dete
erm
mine
e the
t e orig
o gina
al con
nsiderratiion
trran
nsfe
erre
ed to
t o
obtain
n the con
c ntrolling in
nte
eresst in
n th
he sub
bsid
dia
ary at
a the
t e accqu
uisittion
n da
ate
e.
T
The
e de
eferred
d ta
ax tha
at was
w s ta
aken in
nto
o accco
ount on
n any
a ga
ains
s or lo
osses on fin
nan
ncia
al a
asse
ets
va
a
at fair
f
alue
e tthro
oug
gh OC
CI mu
ust also be
e reve
r erssed on
n con
c nso
olida
atio
on of the fina
f anc
cial
sstatem
men
nts of
o tthe pa
aren
nt and
a d th
he sub
s bsid
diarry.
Com
C
mm
mentt
It sh
hould be
b note
n ed that the
e co
ost met
m thod
d iss mo
ostlyy ap
pplied in Sou
S uth A
Africa to
t mea
m asurre an
a
inve
estm
men
nt in
n a sub
bsid
diarry in
n th
he p
pare
ent’s sepa
s aratte finan
ncia
al re
eco
ords
s. The
T
ma
ajoriity of
o
e mples in this
exa
t
wo
ork is th
here
efore
e ba
ase
ed on
o th
he cost
c t me
etho
od.
Ex
xam
mplle 5.7
5
In
nco
om
me ttax allloc
catiion
n an
nd rev
verrsal off fa
air vallue
e ad
dju
ustm
ment on
n
fiina
anc
cial as
sse
et at
a fa
air value
e th
hro
oug
gh OC
OCI
O
On 2 Jan
J nuary 2
20..17
7 P Ltd
d acqu
uire
ed an 80
0% intere
est in S Ltd
L at R8
8 000.. P Ltd
d clas
c ssifies
th
he invvesstmentt in
n te
erm
ms of
o IFR
RS 9 in itts ssep
parrate
e fin
nan
ncia
al stat
s tem
men
nts an
nd reccog
gnis
ses
fa
air vallue ad
djusstm
men
nts in a m
mark-to
o-m
marrkett re
ese
erve
e (o
othe
er com
c mprreh
hensiv
ve in
nco
ome
e).
O
On 31 De
ece
emb
ber 20
0.17
7 th
he ffairr va
alue
e of th
he inve
esttme
ent in S Ltd
L wa
as R
R9 50
00.
O
On 31 De
ece
emb
ber 20
0.18
8 th
he ffairr va
alue
e of th
he inve
esttme
ent in S Ltd
L wa
as R
R10
0 000
0 0.
A
Assum
me a com
mpa
any taxx ra
ate of 28
8% and
d th
hatt 80
0% of the
e ca
apital ga
ain is sub
s bjecct to
o ccapital
g
gain
ns tax
t .
So
oluttion
n 5.7
5
R
Rep
porrtin
ng per
p riod
d end
e ded 31
1 Dece
em
mbe
er 2
20.1
17:
O
On con
nso
olidatio
on the
e fo
ollowin
ng pro
o fo
orm
ma jourrna
al iss do
one
e to
o re
everse
e th
he mov
m vem
ment in the
t
nt during 20.
fa
air va
alue
e of
o tthe
e in
nve
estm
men
2 .17, to det
d term
min
ne the
e con
c nsid
dera
atio
on pa
aid at
a
acquissitio
on date
d e:
Drr
R
M
Mark-tto-m
marke
et re
eserve
e – Beginnin
ng of
o year
y r (P
P)(O
OCII)
In
nve
estm
men
nt in
n S Ltd
d (P
P)(S
SFP) (9 500
5 – 8 00
00)
R
Rev
verrsal off fa
air valu
v ue gain o
on inv
ves
stm
ment in
n S Ltd
d
a
at the
t en
nd of
o tthe ye
ear at gro
oup
p le
evel
Cr
R
5
1 500
1 50
00
243
2
C
Cha
apte
er 5
T
The
e taxx effe
e ct w
willl be
e ass fo
ollo
ows
s:
Drr
R
D
Defferrred taxx (P
P)(S
SFP
P)
In
nco
ome
e ta
ax e
expensse of
o OC
O I (P
P)(O
OCI) (11 5000 × (880%
% × 28%
2 %))
R
Rec
cog
gnition o
of defe
d erre
ed tax
x on
n re
eve
ersal o
of fair
f r va
alue
e gain
n
o
on inv
ves
stm
ment in
n S Ltd
d at
a th
he end
e d of
o th
he y
yea
ar at
a gro
g up lev
vel
Cr
R
336
3
33
36
Com
C
mm
mentt
T e de
The
eferrred taxx on
n the move
m eme
ent in the
t fair va
alue
e of the
e invvesstme
ent can
n be
e exxpla
aine
ed
a follo
as
ows in term
t ms o
of IA
AS 12.11:
In the reccord
ds of
o P Ltd
L (the
e in
nvesstorr) th
he inve
estm
men
nt wou
w uld havve had
h d the fo
ollo
owin
ng
a oun
acco
nting
g an
nd tax
t valu
uess:
Ca
arrying
g
am
mou
unt
Tax
x ba
ase
e
Tem
T
mporrary
y
d eren
diffe
nce
e
De
eferrred
d ta
ax
@ 80%
% × 28
8% (or 22,4%
%)
9 50
00
8 000
1 500
0
33
36cr
For the
F
e grroup, afte
a er th
he pro
p forrma
a journals ha
ad b
been
n ta
aken in
nto acc
cou
unt, the
e va
alue
es
w uld be
wou
b as
a follo
f ows:
Ca
arrying
g
am
mou
unt
Tax
x ba
ase
e
Tem
T
mporrary
y
d eren
diffe
nce
e
De
eferrred
d ta
ax
@ 80%
% × 28
8% (or 22,4%
%)
8 00
00
8 000
0
0
The
T
e de
eferrred taxx ba
alan
nce nee
edss to be ad
djustted fro
om R33
R 36 to R0,
R therefo
ore req
quiriing a
d bit adjusstm
deb
mentt of R33
36.
R
Rep
porrtin
ng per
p riod
d end
e ded 31
1 Dece
em
mbe
er 2
20.1
18:
W
Whe
en the
e conssolida
ation of
o P Ltd
L and S L
Ltd is done for th
he rep
portting
g peri
p od en
ndin
ng on
3
31 Dec
D cem
mbe
er 20.18
8, th
he tottal mo
ove
eme
entt in
n th
he fairr va
alue of
o the
t e in
nvestm
men
nt mu
must be
re
eve
erse
ed in two
o step
s ps to detterm
min
ne the
e acctu
ual con
nsid
derration tra
anssferrred
d on
o acq
a quissitio
on.
F
For this purp
p posse, the
e fo
ollo
owin
ng pro
o fo
orm
ma co
ons
solidation journa
als are prep
p parred:
Drr
R
Cr
R
M
Mark-tto-m
marke
et re
eserve
e – Beginnin
ng of
o year
y r (P
P)(S
SCE
E)
(1
1 50
00 × (100%
% – 22
2,4%
%))
D
Defferrred taxx (P
P)(S
SFP
P) (1
( 500
5 × (8
80%
% × 28%
%))
In
nve
estm
men
nt in
n S Ltd
d (P
P)(S
SFP) (9 500
5 – 8 00
00)
R
Rev
verrsal off fa
air valu
v ue adjus
stm
ment on in
nve
estme
ent in S L
Ltd at
b
beg
ginnin
ng of
o tthe
e ye
ear at gro
oup
p le
eve
el
M
Mark-tto-m
marke
et re
eserve
e (P
P)(O
OCI) (110 000
0 – 9 50
00)
In
nve
estm
men
nt in
n S Ltd
d (P
P)(S
SFP)
R
Rev
verrsal off fa
air valu
v ue adjus
stm
ment on in
nve
estme
ent in S L
Ltd
ffor cu
urre
ent year at
a gro
g oup
p le
evell
1 164
336
3
1 50
00
500
5
50
00
co tinu
cont
ued
d
2
244
Intragroup transactions
Dr
R
Deferred tax (P)(SFP) (500 × (80% × 28%))
Income tax expense of OCI (P)(OCI)
Deferred tax effect of reversal of fair value adjustment on
investment in S Ltd for current year at group level
Cr
R
112
112
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
1 552
20 400
2 048
10 000
–
11 200
–
Total equity and liabilities
R34 000
R21 200
245
Chapter 5
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
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
(112)
–
–
Other comprehensive income for the year, net of tax
338
–
TOTAL COMPREHENSIVE INCOME FOR THE YEAR
R14 788
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
1 164
6 000
4 000
–
388
14 400
–
7 200
–
R1 552
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 1 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 80% of a capital gain is subject to capital
gains tax.
246
Intragroup transactions
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 (2 048 – 336(J1) – 112(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
247
C
Cha
apte
er 5
P LTD
L D GRO
G OUP
P
CO
ONS
SO
OLID
DAT
TED
D STA
S ATE
EMEN
NT OF
O CH
HAN
NGES
S IN
N EQ
QUITY
Y
FO
OR TH
HE YEA
Y AR
R EN
NDED
D 31
1 DEC
CEM
MBE
ER 20
0.18
8
Sha
S
are
capiitall
B
Ballance at 1 J
Jan
nua
ary 20..18
C
Cha
ang
ges
s in
n eq
quity for
f 20
0.18
8
T
Tottal com
c mprrehe
ens
sive
e in
ncom
me
fo
or the yea
ar:
P
Pro
ofit for
f the
e ye
ear
B
Ballance at 31 De
ece
emb
ber 20
0.18
8
Re
etaiined
ea
arniings
Tot
T tal
Noncontrrolling
g
inttere
estts
T tal
Tot
equ
e
uity
y
10
0 00
00
*9
9 20
00
19
9 20
00
2 80
00
22
2 00
00
–
18
8 00
00
18
8 00
00
1 44
40
19
9 44
40
R 0 00
R10
00 ŽR
R27
7 20
00
R37
R 7 20
00
R4
4 24
40
R 1 44
R41
40
* 6 00
00 + 3 200
0 (analyysiss) = 9 2
200
Ž 20
2 400
4 + 8 96
60 (ana
alyssis) – 3 000
0(J5
5) + 84
40(JJ6) = 27 20
00
Com
C
mm
mentt
A P Ltd
As
L is the
t
selller of the
e invven
ntoriies, the
e unre
ealis
sed pro
ofit tha
at was
w elim
minate
ed on
o
c soliidattion sh
con
houlld be
b take
en into
o acco
a ountt when
w n th
he bala
ancces of the
e co
onssolid
date
ed
r ained earningss arre chec
reta
c cked.
C
Calc
cullatiion
ns
C
C1 An
naly
ysiis o
of ow
o ners’ eq
quitty of
o S Ltd
L
T al
Tota
A acq
a quis
sitiion (1//1/2
20.17))
i At
Sha
S are capita
al
Ret
R tain
ned ea
arningss
Pur
P rcha
ase
e differrence
P Ltd
d8
80%
%
At
Sin
nce
e
NC
CI
10 000
0
–
8 000
0 0
–
2 00
00
–
0
10 000
–
8 000
0 0
–
2 00
00
–
10 000
0
R 000
R8
0 0
2 00
00
Con
C nsid
deratio
on
(1
10 000
0 – 1 50
00(JJ1) – 50
00(JJ2))) an
nd NC
N I
iii Sin
S ce acquisittion
n
• To
T beg
ginn
ning
g of
o cu
urre
ent year :
Ret
R tain
ned ea
arningss (44 0000 – 0)
• Cur
C rren
nt yea
y r:
Pro
P ofit for
f the
e ye
ear
4 000
0
3 200
2
80
00
2 80
00
0
7 200
5 760
7
1 44
40
R2
21 200
0
R8 960
9
R4
4 24
40
Com
C
mm
mentt
A P Ltd is th
As
he selle
s er, the
t intrragrroup
p sa
ale of inve
i ento
ories ha
as no
n effe
e ect on
o the
t ana
alyssis of
o
t equ
the
uity of S Lttd.
2
248
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)
8 000
2 000
Amount of non-controlling interests: IFRS 3.32(a)(ii)
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
J2
J3
J4
J5
Mark-to-market reserve – Beginning of year
(P)(SCE)(1 500 × (100% - (80% × 28%))
Deferred tax (P)(SFP) (1 500 × (80% × 28%)
Investment in S Ltd (P)(SFP) (9 500 – 8 000)
Reversal of fair value adjustment on investment
in S Ltd at beginning of year at group level
Cr
R
1 164
336
1 500
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 year at group level
500
Deferred tax (P)(SFP)(500 × 80% × 28%)
Income tax expense of OCI (P)(OCI)
Tax effect of reversal of fair value adjustment on
investment in S Ltd for current year at group level
112
500
112
Revenue (P)(P/L)
Cost of sales (S)(P/L)
Elimination of intragroup sales
30 000
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
30 000
3 000
(15 000 × 25/125)
J6
J7
Deferred tax (P)(SFP)
Income tax expense (P)(P/L)
Deferral of the applicable tax on the unrealised
intragroup profit (3 000 × 28%)
Share capital (S)(SCE)
Investment in S Ltd (P)(SFP)
Non-controlling interests (SFP)
Elimination of owners’ equity at acquisition of S Ltd
840
840
10 000
8 000
2 000
continued
249
Chapter 5
Dr
R
J8
J9
Cr
R
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
800
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.
250
In
ntra
agro
oup
p tra
anssacctions
5
5.17
7 Intra
agrrou
up ga
ain on
n non
n n-d
dep
pre
ecia
ablle pro
p ope
ertty, pla
ant a
and
d equ
uipm
me
entt
S
Sho
ould
d one en
ntity
y in
n th
he gro
oup
p se
ell a non
n n-de
eprreciab
ble pro
ope
ertyy to
o an
notther entit
e ty iin the
t
g
grou
up at a gai
g n, the
e fu
ull intrrag
grou
up gain mu
ust, ass lo
ong
g as
s th
he asssett is
s he
eld withiin the
t
g
grou
up, be
e elimina
ated
d fo
or con
c nso
olida
atio
on purpo
ose
es. The rreas
son
n iss th
hat a gai
g n on
o the
e sa
ale
o
of a non
n n-de
eprreciiable pro
ope
erty
y, pla
p nt an
nd equ
uipme
ent ite
em will onl
o ly be re
egarde
ed as
re
ealise
ed wh
hen th
he asssett iss sold
d to
o a th
hird
d part
p ty outtsid
de the
e gro
g up. Reg
R gard
dless of
w
whe
ethe
er the
t e assse
et was
w s so
old by
y th
he paren
nt or
o by
b a who
w olly
y-ow
wne
ed subsidia
ary to an
noth
her
e
entitty in the
e g
grou
up, th
he full amo
a oun
nt of
o tthe
e un
nre
ealised
d gain
g n iss reve
r ers
sed an
nd de
ebitted
a
againsst th
he gro
oup
p ga
ain. The sale of
o pro
p operty ha
as no
n inccom
me tax
t x im
mplicattion
ns (it
( how
h wev
ver
h
has ca
apita
al gai
g ns taxx im
mpliication
ns wh
hich
h arre initiallyy ig
gno
ored
d fo
or the sa
ake of sim
mplicitty).
Ex
xam
mplle 5.9
5
N n-de
Non
eprrec
ciab
ble
e prrop
pertty acq
a quiired
d frrom
m the pa
aren
nt
A
Assum
me tha
at P Ltd
L so
old pro
ope
ertyy (w
which origin
nallly cos
c st R10
R 00 000
0) to S Ltd
L , a w
whollyo
own
ned
d subssidiary
y, at R150
0 000 on
n 2 JJan
nua
ary 20
0.17. S Ltd solld the
e prop
p perrty at
R
R25
50 000
0 0 on
o 30
0 Jun
J e 20.19
9 to
o a thir
t rd party.. P L
Ltd’’s rep
porting
g per
p riod
d end
e ds on
3
31 Dec
D cem
mbe
er.
So
oluttion
n 5.9
5
T
The
e follow
win
ng p
pro forrma
a jo
ournall en
ntrie
es will be
e re
equ
uire
ed o
on con
nso
olid
datio
on::
al ent
3
31 Dec
D cem
mb
ber 20.17
7 – Pro
o fo
orm
ma co
ons
soliida
atio
on jou
j urna
e try
D
Dr
R
O
Oth
her inccom
me ((Ga
ain on sale o
of prop
p pertty) (P))(P//L)
Prop
P pertty (S)(
( (SF
FP)
E
Elim
min
nation
n off th
he unr
u reallise
ed intrrag
grou
up ga
ain inc
clud
ded
d
iin the
t prroperty of
o S Lttd
Crr
R
5
50 000
0
50
0 00
00
Com
C
mm
mentt
F m the perrspe
From
ectivve of
o the gro
oup, the
e transsacttion did
d no
ot ta
ake
e pla
ace
e an
nd the carrryin
ng
a ount off th
amo
he prop
p pertty iss sttill R10
00 000
0. Itt is cle
ear tha
at th
he carrryin
ng amo
a oun
nt of th
he
p pertty (a
prop
as pres
p sen
nted in S Ltd’s
L s statemen
nt of
o fin
nan
ncia
al po
ositiion at R
R15
50 000
0 ) sh
hould be
b
r uced by R50
redu
R 000
0. Furt
F herrmore, the ga
ain on
o the sale
e th
hat was
w s re
ecog
gnissed by P L
Ltd in
its p
profit orr losss, is n
now
w de
eemed to b
be unre
u ealissed
d fro
om the
t perrspe
ectivve of
o th
he gro
g up ((as a
t d pa
third
arty wa
as not invo
olve
ed), and
d sh
hould th
here
eforre b
be reve
erse
ed.
T e ga
The
ain on
o sale
s e of pro
operty will be inc
clud
ded in the
t line
e ite
em, “otherr inc
com
me” in th
he p
profit
o lo
or
oss secction off the
e sttate
eme
ent of
o p
profit orr losss and
a oth
her com
c mpre
ehe
ensiv
ve inco
ome
e.
251
2
C
Cha
apte
er 5
3
31 Dec
D cem
mb
ber 20.18
8 – Pro
o fo
orm
ma co
ons
soliida
atio
on jou
j urna
al ent
e try
D
Dr
R
R
Rettain
ned
d ea
arniings
s – Be
egin
nnin
ng of
o yea
y ar (P
P)(S
SCE)
Prop
P pertty (S)(
( (SF
FP)
A
Adjjus
stm
mentt to
o en
nsu
ure
e that tthe
e co
ons
soliida
ated
d re
etaiine
ed
e
earrnin
ngs
s att th
he beg
b ginn
ning o
of 20.1
2 18 are
a e in ag
gree
em
ment w
with
h
tthe
e co
ons
soliidated
d re
etaiined e
earn
nin
ngs at the
e end of 20
0.17
7
Crr
R
5
50 000
0
50
0 00
00
Com
C
mm
mentt
In 2
20.17 th
he con
c soliidatted pro
ofit for
f tthatt rep
portting
g pe
eriod
d was
w deb
bited
d with
w the
e un
nrea
alise
ed
g n of R5
gain
50 000.
0 . Th
he resu
r ultin
ng effec
e ct was
w tha
at th
he rretained
d ea
arningss att the
e en
nd of
o 2
20.17
w s red
was
ducced by the
e un
nrea
alise
ed gain
g n. The reta
aine
ed e
earn
ning
gs at
a th
he e
end of 20.17 beccam
me
t
the
reta
aine
ed ear
e ning
gs at
a the
t
beg
ginn
ning
g off 20
0.18
8. A
As th
he assset is sstill owned
d within
n th
he
g up, and th
grou
he gain is
s sttill regard
ded as un
nrea
alise
ed (rea
( ason
ns abo
ove)), th
he adjustment
n eds to
nee
t be
b repe
eate
ed with
w reffere
ence
e to the
e 20
0.18
8 lin
ne itemss.
3
31 Dec
D cem
mb
ber 20.19
9 – Pro
o fo
orm
ma co
ons
soliida
atio
on jou
j urna
al ent
e try
D
Dr
R
R
Rettain
ned
d ea
arniings
s – Be
egin
nnin
ng of
o yea
y ar (P
P)(S
SCE)
Othe
O er inco
ome
e (G
Gaiin on
o sale
s e off prropertyy) ((P)((P/L
L)
A
Adjjus
stm
mentt to
o en
nsu
ure
e that tthe
e co
ons
soliida
ated
d re
etaiine
ed
e
earrnin
ngs
s att th
he beg
b ginn
ning o
of 20.1
2 19 are
a e in ag
gree
em
ment w
with
h
tthe
e co
ons
soliidated
d re
etaiined e
earn
nin
ngs at the
e end of 20
0.18
8
a
as we
ell as
a to
t g
give
e re
eco
ogn
nitio
on to the
e fa
act tha
at the
t
u
unrrea
alise
ed inttrag
gro
oup
p ga
ain ha
as bee
b en rea
r lise
ed by the
e
d
dis
sposall off th
he ass
a et dur
d ring
g 20.1
2 19
Crr
R
5
50 000
0
50
0 00
00
Com
C
mm
mentt
In 20.19 when
w n th
he p
prop
pertyy is solld to
o a thirrd partyy, th
he follo
owin
ng appl
a lies:
In S Lttd’s reccord
ds a gain
g
of R100 000
0 iss sh
how
wn, i.e. R2
250 000 – R150
0 00
00 (pric
( ce at
a
w ch S Lttd purc
whic
p chassed pro
operty intrragrroup
p fro
om P L
Ltd)..
F m th
From
he pers
p spe
ectivve of
o th
he grou
g up the gain
n sh
hou
uld h
how
weve
er be
b R15
R 50 000,
0
i.e. R2
250
0 00
00
– R100
0 00
00 (orig
gina
al co
ost to the
t gro
oup)). Byy re
ecog
gnissing
g the pro form
f ma jourrnal above
e, th
he
c rect gain of
corr
o R150
R 0 00
00 (100
( 0 00
00 + 50
0 00
00 (pro
( o forrma
a ad
djusttme
ent)) is reccogn
nise
ed in th
he
c soliidatted pro
con
ofit o
or lo
oss..
F
From
m the
t e th
hree
e pro
p forrma
a jo
ourrnals abo
a ove
e, itt iss clear th
hat in the yea
y ar of
o the inttrag
gro
oup
ssale
e off prop
pertty, the
e gain
n on
n the sa
ale of pro
ope
ertyy will
w b
be sh
how
wn at
a R50 000
0 0 in P Ltd
d’s
p
proffit or
o losss fo
or 20.
2 17, bu
ut n
no such ite
em will appe
earr in the 20.
2 17 co
onso
olid
date
ed pro
ofit or
pprrop
lo
oss
s, as
a a re
esu
ult of
o the
t re
ecorrdin
ng of the
e ap
priate jou
j urna
al entr
e ry. Wh
hen
n th
he pro
ope
erty
y is
e
eventu
uallyy sold
s d to
o a thiird pa
arty in 20
0.19
9, the ga
ain on the
e sale
s e off prrop
pertty will
w ap
ppe
ear as
R
R10
00 000
0 0 in
n th
he pro
ofit or losss of S Ltd
L fo
or 20.1
2 19, bu
ut a
as R150 00
00 iin the
t co
onssolid
datted
p
proffit or
o lo
osss fo
or 20.1
2 19.
2
252
Intragroup transactions
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).
253
Chapter 5
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
Cr
R
5 000
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
Cr
R
1 000
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:
254
In
ntra
agro
oup
p tra
anssacctions
Drr
R
R
Rettain
ned
d ea
arniings
s – Be
egin
nnin
ng of
o yea
y ar (P
P) (SC
CE) (5 0000 – 1 000)
A
Acc
cum
mula
ate
ed d
deprecciation: Equipm
ment (S
S)(S
SFP
P)
Equ
E ipm
men
nt (S
S)(S
SFP)
A
Adjjus
stm
mentt to
o en
nsu
ure
e that tthe
e co
ons
soliida
ated
d re
etaiine
ed
e
earrnin
ngs
s att th
he beg
b ginn
ning o
of 20.1
2 19 agr
a ree
es with
w h th
he
c
con
nso
olid
date
ed retain
ned
d ea
arning
gs of
o 20.1
2 18.
C
Cr
R
4 00
00
1 00
00
5 00
00
Com
C
mm
mentt
T s pro form
This
f ma con
nso
olida
ation
n jo
ourn
nal is purrelyy a combinattion
n off the two pro
o fo
orm
ma
jourrnals th
hat wer
w re p
prep
pare
ed for the
t con
nsollida
ation
n off the
e prreviouss reporrting
g pe
eriod
d, b
but in
r ation
rela
n to the
e cu
urren
nt repo
ortin
ng perio
p od’s
s (2
20.19) figu
f res and
d fin
nan
ncial sta
atem
men
nts.
5 Sho
S oulld the
t e as
sse
et be
b sold by a partia
ally-ow
wne
ed sub
bsidia
ary to an
noth
herr en
ntitty in the
t
gro
g oup
p, th
he releva
antt po
ortion of the unr
u realise
ed gaiin, as
s in the cas
c se of
o invventtories in
sim
s mila
ar circ
c cum
msta
anccess, m
must be
e alloccate
ed to
o th
he no
on-ccon
ntro
ollin
ng intere
estss in
n the
t
sub
s bsid
diary. As
s and
a
wh
hen
n th
he unrea
alissed ga
ain is rea
alis
sed
d, a po
ortiion there
eof is on
nce
aga
a ain alloca
ate
ed to th
he non-c
con
ntro
ollin
ng inte
eressts in the
e su
ubssidiaryy.
Ex
xam
mplle 5.11
5 1
Con
C
nso
olid
datiion
n ad
dju
ustm
me
ent forr in
ntra
agrroup sale
s es of de
epre
eciiab
ble
p perrty, plan
prop
nt and
a d eq
quiipm
men
nt wit
w h the su
ubs
sidiiary
y as
a the
t
s ing
sell
g en
ntitty
T
The
e follow
win
ng a
are the abri
a idged fin
nancia
al sttate
ementts of
o P Ltd
L and itts ssub
bsid
diarry S L
Ltd for
th
he rep
portting
g perio
odss 20
0.18 a
and
d 20
0.19:
S ATEM
STA
MEN
NTS
SO
OF FIN
F NAN
NCIAL
L PO
OSITIO
ON
N AS
S AT
A 31
3 DE
ECE
EMB
BER
R
P Lttd
S Lttd
20
0.18
8
20.19
9
20.18
2 19
20.1
A
ASSE
ETS
S
P
Pla
ant at
a cos
c st prrice
e
A
Acc
cum
mula
ate
ed d
deprecciation
20
2 000
0 0
(2 000
0 0)
20 000
0
0 )
(4 000)
4
40 000
0 0
(4 000
0 0)
40 00
00
00)
(8 00
IInve
estme
ent in S Ltd: 45 00
00 ssha
aress
T
Tra
ade recceivvab
bles
s
18
1 000
0 0
67
6 500
5 0
74
7 500
5 0
0
16 000
67 500
5
106 500
5
3
36 000
0 0
–
4
45 000
0 0
00
32 00
–
54 00
00
T
Tottal ass
setts
E
EQ
QUIT
TY AN
ND LIA
ABIILIT
TIES
S
Sha
are ca
apita
al (100
0 00
00/5
50 000
0 sha
aress)
R
Rettain
ned
d ea
arniings
s
R
R16
60 000
0 0
R
R190 000
0
R8
81 000
0 0
R 00
R86
00
10
00 000
0 0
60
6 000
0 0
100 000
0
90 000
0
5
50 000
0 0
3
31 000
0 0
50 00
00
36 00
00
T
Tottal equ
uity
y and lia
abilitie
es
R
R16
60 000
0 0
R
R190 000
0
R8
81 000
0 0
R 00
R86
00
255
2
Chapter 5
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
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
31 000
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.
256
Intragroup transactions
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
R171 250
257
Chapter 5
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
258
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
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
(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
J1
J2
J3
J4
Cr
R
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
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
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
for the year
2 500
250
50 000
25 000
67 500
7 500
375
375
259
C
Cha
apte
er 5
Com
C
mm
mentt
B caus
Bec
se S Ltd
L is the sellling en
ntity, th
he “othe
er inco
ome
e” withi
w n profi
p it or lo
oss of S L
Ltd is
d ited
deb
d with the
t unrreallised
d in
ntragro
oup gain. Sim
S milarrly, the rea
alise
ed portion
n is cre
edite
ed to
t
t “oth
the
her exp
pen
nsess” of
o S Ltd
d. This
T s prroce
edure ens
e ures th
hat a porti
p ion of the un
nrea
alise
ed
intra
agro
oup
p ga
ain is
i a
alloc
cate
ed to
t th
he n
non
n-co
ontro
ollin
ng interest in S Ltd, just as
a a po
ortio
on of
o
t rea
the
alise
ed porti
p ion is alloc
a cate
ed to th
he nonn -con
ntro
olling in
nterrest in S Lttd.
R
Rep
porrtin
ng per
p riod
d end
e ded 31
1 Dece
em
mbe
er 2
20.1
19
P LTD
L D GRO
G OUP
CO
ONSO
OLID
DAT
TED STA
S ATE
EMEN
NT OF
O FIN
NANC
CIAL
L POS
P SIT
TION
N
AS
A AT
A 31 DE
ECEM
MBE
ER 20..19
A
ASSE
ETS
S
N
Non-c
currren
nt a
asse
ets
s
P
Pla
ant (20
( 000
0(P
P) + 40 000
0(S)) – 2 50
00(JJ1)))
A
Acc
cum
mula
ate
ed d
deprecciation (4 000
0(P)) + 8 000(S) – 50
00(JJ1 & 2)))
57 50
00
(11 500)
00
46 00
C
Current ass
sets
T
Tra
ade recceivvab
bles
s (106 5000(P)) + 54
5 000
0 0(S)))
T
Tottal ass
setts
E
EQ
QUIT
TY AN
ND LIA
ABIILIT
TIES
E
Equ
uity
y atttributab
ble to ow
wne
ers of the
e pa
are
ent
S
Sha
are ca
apita
al
R
Rettain
ned
d ea
arniings
s
160 50
00
R2
206 50
00
100 00
00
00
98 10
N
Non-c
con
ntro
ollin
ng inte
ere
ests
s
00
198 10
8 40
00
T
Tottal equ
uity
y
2 50
206
00
T
Tottal equ
uity
y and lia
abilitie
es
2
260
R2
206 50
00
Intragroup transactions
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
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
261
Chapter 5
Calculations
C1 Analysis of owners’ equity of S Ltd
Total
i At acquisition (1/1/20.18)
Share capital
Retained earnings
P Ltd 90%
At
Since
NCI
50 000
25 000
45 000
22 500
5 000
2 500
75 000
–
67 500
–
7 500
–
Consideration and NCI
ii Since acquisition
• To beginning of current year:
Retained earnings
75 000
R67 500
7 500
(31 000 – 25 000 – 2 250(J1))
3 750
Purchase difference
• Current year :
Profit for the year (5 000 + 250(J2))
3 375
375
7 875
5 250
4 725
525
R84 000
R8 100
R8 400
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
262
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
2 500
250
250
In
ntra
agro
oup
p tra
anssacctions
5
5.19
9 Allloc
cattio
on of
o inc
com
me
e ta
ax an
nd tthe
e elim
e min
nattion
n of
o unr
u rea
alis
sed
d gai
g n
inclu
ude
ed in
n de
eprec
cia
able
e pro
p ope
erty
y, pla
p antt an
nd eq
quiipm
ment
A
As in
i the
t e ca
ase
e off in
nvento
orie
es, deferred
d ta
axa
ation iss calc
c cula
ated on
o the
e elimina
ation o
of the
t
entt. The
in
ntra
agroup
p unre
u ealiised prof
p fit o
on the
t e sa
ale of pro
ope
ertyy, plan
nt and
a eq
quip
pme
T inttrag
gro
oup
g
gain
n on
o the
t e sa
ale off a de
eprreciiab
ble asssett is
s re
ealiised
d b
by me
ean
ns of the
e peri
p odica
al and
a
cconttinu
uou
us dep
pre
ecia
atio
on of
o tthe assse
et. The
T e re
ela
ated
d defe
erre
ed tax
t x will tthus red
r uce
ea
as the
t
d
deprecciattion
n iss writte
en offf on
n an
a ass
a set of wh
hich
h th
he ca
arry
ying
g va
alue include
es un
nrea
alis
sed
g
gain
n. In
n th
he disscussiion be
elow
w, iti iss asssu
ume
ed tha
at the
t se
ellin
ng ent
e ity tra
ades in
n th
he rele
eva
ant
d
deprecciab
ble prroperty, pla
ant an
nd equip
pme
ent (in
nve
ento
orie
es in the
e reco
r ord
ds of
o the
e sselliing
e
entitty)..
Ex
xam
mplle 5.12
5 2
Allo
A
ocatio
on of
o incom
me ttax
x on
n unre
u eallise
ed gain inc
clud
ded
d
in
n deprec
ciab
ble
e prrop
pertty, pla
antt an
nd eq
quip
pm
men
nt
O
On 31 Dec
D cem
mbe
er 20.
2 18, P Ltd
L pu
urch
hassed
d all
a its pla
antt at R20
R 0 0
000
0 frrom
m S L
Ltd,, a
ssubsidiaryy in
nw
whic
ch iti hold
ds a 90
0%
% interestt. S Lttd iss a manufa
actu
urer off plantt an
nd rea
alis
sed
a ga
ain of R5
5 00
00 on thiis part
p ticu
ularr tra
anssacctio
on. De
epre
ecia
atio
on is pro
p vid
ded for byy usin
u ng the
t
sstraigh
ht-line ba
asis
s att a ratte o
of 10%
1 % on
o cosst. The repo
r ortiing
g da
ate of bo
oth P Ltd
d an
nd S Ltd
L
iss 31 Dec
D cem
mbe
er. Asssume
e a comp
pan
ny ta
ax ratte of
o 28%
2 %.
So
oluttion
n 5.12
5 2
T
The
e ne
ece
essaryy prro form
f ma
a co
ons
solidattion
n jo
ournall en
ntries forr th
he rep
r portting
g pe
erio
odss endiing
3
31 Dec
D cem
mbe
er 2
20.18, 20
0.19 a
and
d 20
0.20 will
w be reccorrde
ed a
as follo
f ows:
(a
a) At 31 Dece
em
mbe
er 20.1
2 18
D
Dr
R
J1
2
J2
Re
eve
enue (S
S)(P/L
L)
Cost o
of sale
s es (S)(
( (P/L
L)
ant (P)(SF
FP))
Pla
Elimiina
atio
on of
o in
ntragrrou
up sal
s e and
a d off un
nrea
alis
sed
d
oup
p ga
ain
n inclu
ude
ed in P Lttd’s
s plan
p nt
inttragro
on
n 31
1/12/2
20.1
18
2
20 000
0
De
eferrred
d ta
ax (S)(
( (SF
FP)
Inccom
me tax exp
pen
nse
e (S
S)(P
P/L)
Re
eco
ogn
nitio
on of defferred
d ta
ax on
o unrrea
alised inttrag
gro
oup
p
ga
ain inc
clud
ded
d in
n P Ltd’s
s pllant (55 0000 × 288%)
1 400
4
Crr
R
15
5 00
00
5 00
00
1 40
00
Com
C
mm
mentt
W en one
Whe
e ite
em tha
at is
s classsifie
ed a
as inve
ento
ory in the
e re
ecorrds of the
e se
ellerr is so
old to
t
a other entityy withi
ano
w n th
he gro
oup, the
e gross profi
p it in
ncluded
d in
n the ssellin
ng pricce mus
m st be
b
e mina
elim
ated
d ass it is reg
gard
ded as be
eing un
nrea
alise
ed. This iss done
d e byy adju
a stin
ng both
b h th
he
r enue and cosst off sa
reve
ales line
e ite
emss, i.e
e. th
he sell
s ing pric
ce is de
ebitted aga
ainsst re
evenue
e an
nd
t
the
cos
st price
p e iss crrediited
d ag
gain
nst cos
st of
o saless. T
The
e taxx adju
a stm
mentt is su
ubse
equ
uenttly
d e.
don
263
2
Chapter 5
(b) At 31 December 20.19
Dr
R
J1
Retained earnings – Beginning of year (S)(SCE)
(20 000 – 15 000 – 1 400)
Deferred tax (S)(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
J2
Cr
R
3 600
1 400
5 000
Accumulated depreciation – Plant (P)(SFP)
Other expenses (Depreciation) (S)(P/L)
Recognition of the portion of unrealised intragroup
gain realised during the year ended 31/12/20.19 (5 000
500
500
× 10%)
J3
Income tax expense (S)(P/L)
Deferred tax (S)(SFP)
Writing back of deferred tax (500 × 28%)
140
140
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 (S)(SFP) (1 400 – 140)
Accumulated depreciation – Plant (P)(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
J2
Cr
R
Accumulated depreciation – Plant (P)(SFP)
Other expenses (Depreciation) (S)(P/L)
Recognition of the portion of unrealised intragroup
gain realised during the year ended 31/12/20.19 (5 000
3 240
1 260
500
5 000
500
500
× 10%)
J3
264
Income tax expense (S)(P/L)
Deferred tax (S)(SFP)
Reversal of deferred tax (500 × 28%)
140
140
In
ntra
agro
oup
p tra
anssacctions
Com
C
mm
mentt
It sh
hould be
b clea
c ar th
hat the
t unrrealise
ed profi
p t re
ealisses ove
er th
he dura
d atio
on of
o th
he usef
u ful life of
o
t ass
the
set thro
oug
gh th
he reve
ersa
al of
o th
he exce
e esss de
epre
eciation
n. By
B th
he e
end
d of the
e ussefu
ul liffe
t full pro
the
ofit would hav
ve rea
r lised frrom
m the
e pe
ersp
pecctive
e off the
e grroup
p, and
a no furrthe
er prro
f ma jourrnals woul
form
w d be re
equired
d
Ex
xam
mplle 5.13
5 3
A oca
Allo
atio
on of
o inc
i com
me tax
x an
nd inttragro
oup
p trran
nsa
action
ns
P Ltd
L acquiired
d a 70%
% in
nterres
st in
n S Ltd
L on
n 1 Ja
anu
uaryy 20.1
2 15 forr R
R24
4 50
00,, whe
w n the
t
re
eta
aine
ed ear
e rnin
ngs
s off th
he latter am
mou
unte
ed to R2
25 000
0 0. P Ltd wa
was of
o the op
pinio
on tha
at the
t
a
asse
etss of S Ltd
d were
e sh
how
wn at fairr va
alue
es at this
t s da
ate
e.
T
The
e follo
f owing
g are
a e the
t
a
abridg
ged fina
ancial state
em
ments off the
t e two
t o ent
e titie
es at
3
31 Dec
D cem
mbe
er 2
20.18:
S ATE
STA
EMEN
NTS
S OF F
FINA
AN
NCIA
AL PO
OSIITIO
ON AS
SA
AT 31
3 DE
D CE
EMB
BER
R 20.1
2 18
P Ltd
d
A
ASSE
ETS
S
P
Pla
ant:
S Ltd
Ld
19 000
0
18 0
000
0
Gros
G ss car
c rryin
ng am
mount
Accu
A umula
ated
d de
epreciatio
on
6 000
60
0
(4
41 000
0)
4 0
40
000
0
(22 0
000)
IInve
estme
ent in S Ltd at
a cos
c t prrice
e
IInve
enttorie
es
T
Tra
ade recceivvab
bles
s
24 500
2
0
17 000
0
2 700
28
0
–
15 0
000
0
3 0
30
000
0
T
Tottal ass
setts
E
EQ
QUIT
TY AN
ND LIA
ABIILIT
TIES
S
Sha
are ca
apita
al
R
Rettain
ned
d ea
arniings
s
D
Defferrred taxx
T
Tra
ade an
nd othe
o er pay
p yablles
R89 200
0
R6
63 0
000
0
25 000
2
0
4 000
45
0
0
8 000
0
11 200
10 0
000
0
3 6
38
600
0
60
000
0
84
400
0
T
Tottal equ
uitiies an
nd liab
l bilitties
s
R89 200
0
R6
63 0
000
0
ST
TAT
TEM
MEN
NTS OF
O PR
ROF
FIT OR
R LOS
L SS A
AN
ND OT
O HE
ER C
CO
OMP
PRE
EHEN
NSIV
VE INC
CO
OME
E
OR TH
HE YEA
Y AR
R EN
NDED
D 31
1 DEC
CEM
MBE
ER 20
0.18
8
FO
P Ltd
Ld
S Ltd
L
R
Rev
ven
nue
e
C
Cos
st of
o sale
es
40
0 00
00
(20
0 00
00)
30 00
00
(15 000)
G
Gro
oss pro
ofit
O
Oth
her exp
pen
nse
es
20
0 00
00
(13
3 30
00)
00
15 00
(10 000)
P
Pro
ofit be
eforre ttax
IInco
om
me ta
ax exp
pen
nse
6 70
00
(1 90
00)
00
5 00
(1 400)
P
PROF
FIT FO
OR T
THE YEA
Y AR
O
Oth
her co
omp
pre
ehensiive
e inc
com
me
e
T
TOTA
AL CO
C MP
PRE
EHE
ENS
SIV
VE IINC
COM
ME
E FO
OR TH
HE YE
EAR
R
4 80
00
–
R4
4 80
00
00
3 60
–
R3 60
00
265
2
Chapter 5
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
Other comprehensive income for the year
Balance at 31 December 20.18
S Ltd
40 200
35 000
4 800
–
3 600
–
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%.
P Ltd recognised the equity investment in S Ltd in its separate financial records using
the cost method.
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.
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.
266
Intragroup transactions
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(J1))
Accumulated depreciation (41 000(P) + 22 000(S) – 800(J1) – 800(J2))
Current assets
Inventories (17 000(P) + 15 000(S) – 1 000(J7))
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 (8 000(P) + 6 000(S) – 896(J1) + 224(J4) – 336(J4) + 336(J5) –
280(J8))
Current liabilities
Trade and other payables (11 200(P) + 8 400(S))
Total liabilities
Total equity and liabilities
R124 300
25 000
52 591
77 591
14 061
91 652
13 048
19 600
32 648
R124 300
267
Chapter 5
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(J6))
Cost of sales (20 000(P) + 15 000(S) – 1 200(J4) – 10 000(J6) + 1 000(J7))
60 000
(24 800)
Gross profit
Other expenses (13 300(P) + 10 000(S) – 800(J2))
35 200
(22 500)
Profit before tax
Income tax expense (1 900(P) + 1 400(S) + 224(J3) + 336(J5) – 280(J8))
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
*44 724
69 724
12 808
82 532
7 867
7 867
1 253
9 120
R25 000 ŽR52 591 R77 591
R14 061
R91 652
Share
capital
Retained
earnings
25 000
–
* 40 200 + 5 388 (analysis) – 864(J4) = 44 724
Ž 45 000 + 8 311 (analysis) – 864(J4) + 1 200(J4) – 336(J5) – 1 000(J7) + 280(J8) = 52 591
268
In
ntra
agro
oup
p tra
anssacctions
Com
C
mm
mentt
It is imp
porttantt to notte in
n th
his exam
e mplle th
hat the
e subsid
diarry sold a plan
p nt to
o the
e pa
aren
nt, w
while
t
the
parrentt so
old inve
ento
orie
es to
o th
he ssubs
sidiary. Alll th
he jo
ournalss th
hat affe
ecte
ed the pro
ofit or
o
losss of the
e su
ubssidia
ary (jou
urna
als 4 to
o 6)
6 were
w e taken
n into acc
a oun
nt in
n th
he ana
a lysis o
of th
he
e ity of S Lttd. On
equ
O the
e oth
her hand, the
e inttrag
grou
up p
proffit th
hat wass eliminated aga
ainsst th
he
p fit or
prof
o lo
oss of the parrentt (jo
ourn
nals 7 to 11) doe
d es not affe
a ct the ana
alys
sis of
o th
he equ
e ity of
o
S Lttd. Ho
owevver, th
hese jourrnals m
mus
st be
b takken intto acc
a coun
nt w
whe
en pre
eparring
g th
he
c soliidatted fina
con
ancial stattem
mentts. S
Spe
ecia
al attten
ntion
n must
m t be
e pa
aid to the
t reccognitio
on of
o
t
the
jou
urna
al affec
a cting th
he reta
aine
ed earrnings of the
e pa
aren
nt (J4)
(
wh
hen
n de
eterrmin
ning
g th
he
c soliidatted reta
con
aine
ed earn
e ning
gs at
a th
he begi
b nnin
ng of
o th
he repo
r ortin
ng peri
p iod..
C
Calc
cullatiion
ns
C
C1 An
naly
ysiis o
of ow
o ners’ eq
quitty of
o S Ltd
L
T al
Tota
A acq
a quis
sitiion (1//1/2
20.15))
i At
Sha
S are capita
al
Ret
R tain
ned ea
arningss
Pur
P rcha
ase
e differrence
Con
C nsid
deratio
on and
a d NCI
iii Sin
S ce acquisittion
n
• To
T beg
ginn
ning
g of
o cu
urre
ent year :
Ret
R tain
ned ea
arningss (10 000
0 – 2 30
04 (JJ1)))
• Cur
C rren
nt yea
y r:
Pro
P ofit for
f the
e ye
ear (3 600
6 0+8
800
0(J2
2) – 224
4(J3
3))
P Ltd
d7
70%
%
At
Sin
nce
e
NC
CI
10 000
0
2 000
25
0
7 000
0 0
17 500
1
5 0
3 00
00
7 50
00
3 000
35
0
–
2 500
24
5 0
–
10
0 50
00
–
3 000
35
0 R2
24 500
5 0
10
0 50
00
7 696
6
5 388
3
2 30
08
12
2 80
08
4 176
6
R4
46 872
2
2 923
9
1 25
53
R8 311
3
R 4 06
R14
61
C
C2 Prroo
of of
o c
calc
cula
atio
on of pu
urchas
se diffferren
nce
e off S Ltd
d in
n te
erm
ms of IFR
RS
S 3.32
24 50
C
Con
nsid
dera
atio
on transfferrred at ac
cquisittion
n da
ate: IF
FRS
S 3.32
3 2(a))(i)
00
10 50
A
Amo
oun
nt of
o non
n n-co
ontrrolling
g interestts: IFR
RS 3.3
32(a)(ii)
00
35 00
00
N
Net of the
e id
den
ntifia
able ass
a etss ac
cqu
uire
ed and
a d lia
abilitie
es ass
a sum
med
d
a
at acqu
uisition d
date
e: IFR
RS 3.3
3 32(b
b)
P
Purc
cha
ase
e differen
nce
e
(3
35 000)
R–
R
269
2
Chapter 5
C3 Pro forma consolidation journal entries
Dr
R
J1
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
J2
J3
J4
J7
4 000
800
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
800
224
Retained earnings – Beginning of year (P)(SCE)
(1 200 × 72%)
J6
2 304
896
800
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%)
Deferred tax (P)(SFP) (1 200 × 28%)
Cost of sales (P)(P/L) (6 000 × 25/125)
Elimination of unrealised gain in opening
inventories
J5
Cr
R
Income tax expense (P)(P/L)
Deferred tax (P)(SFP)
Tax implication of unrealised gain in opening
inventories that realises in the current year
864
336
1 200
336
336
Revenue (P)(P/L)
Cost of sales (S)(P/L)
Elimination of intragroup sales
10 000
Cost of sales (P)(P/L)
Inventories (S)(SFP)
Elimination of unrealised gain in closing inventories
1 000
10 000
1 000
(5 000 × 25/125)
J8
J9
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
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
280
24 500
10 500
continued
270
Intragroup transactions
Dr
R
J10
J11
Cr
R
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
2 308
Non-controlling interests (P/L)
Non-controlling interests (SFP)
Recognition of non-controlling interests in profit
of the subsidiary for the period
1 253
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%.
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
J2
J3
J4
5 000
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
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
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
1 400
1 000
280
271
Chapter 5
Example 5.15
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%.
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 80% of the
gain (excess over original cost price) ((25 000 – 20 000) × 80% × 28%).
The pro forma consolidation journal entries on 31 December 20.18 are as follows:
Dr
R
J1
Cr
R
Other income (Gain on sale of plant) (S)(P/L)
(25 000 – 15 000)
10 000
Plant (P)(SFP)
Elimination of unrealised intragroup profit included
in the plant of P Ltd
J2
10 000
Deferred tax (S)(SFP)
(5 000 × 28%(recoupment)) + (5 000 × (80% × 28%)(CGT))
2 520
Income tax expense (S)(P/L)
Tax implications of the elimination of unrealised
profit included in the intragroup profit of P Ltd
J3
J4
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
Income tax expense (S)(P/L)
((5 000 × 20% × 28%) + (5 000 × 20% × (80% × 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
2 520
2 000
2 000
504
504
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%.
272
Intragroup transactions
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
The pro forma consolidation journal entries on 31 December 20.18 are as follows:
Dr
R
J1
Cr
R
Other income (Gain on sale of plant) (S)(P/L)
(20 000 – 15 000)
5 000
Plant (P)(SFP)
Elimination of unrealised intragroup profit included
in the plant of P Ltd
J2
J3
J4
5 000
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
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
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
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:
273
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
274
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.
275
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
276
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
Retained
earnings
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
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
277
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
J1
J2
J3
Cr
R
Revenue (S)(P/L)
Cost of sales (P)(P/L)
Elimination of intragroup sales
30 000
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
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
30 000
2 000
560
560
(2 000 × 28%)
continued
278
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 year
Cr
R
50 000
25 000
67 500
7 500
356
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
279
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
280
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
At
Since
NCI
50 000
25 000
45 000
22 500
5 000
2 500
75 000
–
67 500
–
7 500
–
Consideration and NCI
ii Since acquisition
• To beginning of current year :
Retained earnings
75 000
R67 500
7 500
(30 000 – 25 000 – 1 440(J1))
3 560
Purchase difference
3 204
7 856
• Current year :
Profit for the year (4 000 + 2 000(J1) – 560(J2)
– 3 000(J4) + 840(J5))
356
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
Cr
R
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
2 000
continued
281
Chapter 5
Dr
R
J2
J3
J4
J5
Income tax expense (S)(P/L)
Deferred tax (S)(SFP)
Tax implications of realisation of unrealised gain
included in opening inventories of P Ltd
Cr
R
560
560
Revenue (S)(P/L)
Cost of sales (P)(P/L)
Elimination of intragroup sales
50 000
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
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
50 000
3 000
840
(3 000 × 28%)
J6
J7
J8
282
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
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 the year
356
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
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
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
283
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.
284
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
R190 500
EQUITY AND LIABILITIES
Equity attributable to owners of the parent
Share capital
Retained earnings
100 000
63 204
Non-controlling interests
163 204
7 856
Total equity
Non-current liabilities
Deferred tax (10 000(P) + 10 000(S) – 560(J3))
Total equity and liabilities
171 060
19 440
R190 500
285
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
286
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
J1
J2
Cr
R
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
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
287
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 year
Cr
R
50 000
25 000
67 500
7 500
356
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
288
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
289
Chapter 5
Calculations
C1 Analysis of owners’ equity of S Ltd
Total
i At acquisition (1/1/20.18)
Share capital
Retained earnings
P Ltd 90%
At
Since
NCI
50 000
25 000
45 000
22 500
5 000
2 500
75 000
–
67 500
–
7 500
–
Consideration and NCI
ii Since acquisition
• To beginning of current year :
Retained earnings
75 000
R67 500
7 500
(30 000 – 25 000 – 1 440(J1))
3 560
Purchase difference
3 204
7 856
• Current year:
Profit for the year (4 000 + 2 000(J1) –
560(J2) – 3 000(J3) + 840(J4))
356
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)
Purchase difference
290
(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
J3
J4
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
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
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
J6
J7
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
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 year
356
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
291
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
S Ltd
20.18
20.19
20.18
20.19
ASSETS
Investment in S Ltd: 45 000
share at fair value (cost: R67 500)
Equipment
Inventories
Trade receivables
Total assets
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
EQUITY AND LIABILITIES
Share capital (100 000/50 000 shares)
Retained earnings
Deferred tax
Total equity and liabilities
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
292
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.
293
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
R190 700
EQUITY AND LIABILITIES
Equity attributable to owners of the parent
Share capital
Retained earnings
100 000
63 334
Non-controlling interests
163 334
7 870
Total equity
Non-current liabilities
Deferred tax (10 000(P) + 10 000(S) – 560(J2) + 56(J4))
Total equity and liabilities
294
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
295
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
50 000
25 000
75 000
–
75 000
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
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
J2
J3
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
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
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
296
Intragroup transactions
Dr
R
J4
J5
J6
Cr
R
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
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
56
Non-controlling interests (P/L)
Non-controlling interests (SFP)
Recognition of non-controlling interests in profit
of the subsidiary for the period
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
R242 200
EQUITY AND LIABILITIES
Equity attributable to owners of the parent
Share capital
Retained earnings
100 000
115 314
Non-controlling interests
215 314
8 090
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
223 404
18 796
R242 200
297
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
298
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
P Ltd 90%
At
Since
NCI
50 000
25 000
45 000
22 500
5 000
2 500
75 000
–
67 500
–
7 500
–
Consideration and NCI
ii Since acquisition
• To beginning of current year :
Retained earnings
75 000
R67 500
7 500
(30 000 – 25 000 – 1 296(J1))
3 704
Purchase difference
3 334
7 870
• Current year :
Profit for the year
(4 000 + 200(J2) – 56(J3) – 15 000 +
12 000(J4) + 840(J5) + 300J6) – 120(J7))
370
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
Cr
R
1 296
504
200
2 000
continued
299
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
J4
J5
J6
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
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
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
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
J8
J9
J10
300
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
84
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
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
370
Non-controlling interests (P/L)
Non-controlling interests (SFP)
Recognition of non-controlling interests in profit
of the subsidiary for the period
220
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
301
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 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.
302
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
R190 700
EQUITY AND LIABILITIES
Equity attributable to owners of the parent
Share capital
Retained earnings
100 000
63 334
Non-controlling interests
163 334
7 870
Total equity
Non-current liabilities
Deferred tax (10 000(P) + 10 000(S) – 560(J2) + 56(J4))
Total equity and liabilities
171 204
19 496
R190 700
303
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
304
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
J1
J2
Cr
R
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
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
305
Chapter 5
Dr
R
J4
J5
J6
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%)
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
56
56
50 000
25 000
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
R242 200
EQUITY AND LIABILITIES
Equity attributable to owners of the parent
Share capital
Retained earnings
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
306
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
307
Chapter 5
Calculations
C1 Analysis of owners’ equity of S Ltd
Total
i At acquisition (1/1/20.18)
Share capital
Retained earnings
P Ltd 90%
At
Since
NCI
50 000
25 000
45 000
22 500
5 000
2 500
75 000
–
67 500
–
7 500
–
Consideration and NCI
ii Since acquisition
• To beginning of current year :
Retained earnings
75 000
R67 500
7 500
(30 000 – 25 000 – 1 296(J1))
3 704
Purchase difference
3 334
• Current year :
Profit for the year (4 000 – 3 000 + 200(J2)
– 56(J3)) + 840(J5) + 300(J6) – 84(J7)
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
2 000
200
200
(2 000 × 10%)
continued
308
Intragroup transactions
Dr
R
J3
J4
J5
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%)
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)
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
56
3 000
3 000
840
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
J8
J9
J10
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
84
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
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
370
Non-controlling interests (P/L)
Non-controlling interests (SFP)
Recognition of non-controlling interests in profit
of the subsidiary for the period
220
67 500
7 500
370
220
309
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
J1
J2
Cr
R
Revenue (P)(P/L)
Cost of sales (P)(P/L)
Property, plant and equipment (S)(SFP)
Elimination of the intragroup sales and the
unrealised gain included in plant of S Ltd
20 000
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
1 000
1 000
(5 000 × 20%)
J4
310
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%)
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
Cr
R
Accumulated depreciation (S)(SFP)
Other expenses (Depreciation) (P)(P/L)
Realisation of the unrealised gain included
in the plant of S Ltd, through depreciation
2 880
1 000
1 120
5 000
500
500
(5 000 × 20% × 6/12)
J3
J4
J5
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
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
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
311
C
Cha
apte
er 5
Com
C
mm
mentt
T e de
The
eferred taxx th
hat is crea
c ated
d w
when
n th
he prof
p fit iss ellimin
nate
ed is tthe taxx efffectt for th
he
s er that
selle
t t iss de
eferrred
d to
o be
e reco
r ogniised
d in
n fu
uturre whe
w en the
t
prrofit of the grou
g up is
r ognised
reco
d on
n diispo
osal of the
e asssett. Th
he defe
d erre
ed ta
ax is mea
m asurred with
h re
eferencce to
o th
he
t
tax
effect forr th
he selller at the
e da
ate of sa
ale. Ass the rela
r ated asssett iss cla
asssified as
a
inve
ento
oriess in
n th
he rreco
ordss off th
he sselle
er (P),
(
de
eferrred taxx iss meas
m sure
ed at the
t
cu
urrent
c mpany tax
com
t rate
e (2
28%
%).
T e follow
The
wing tab
ble ssho
ows the
e releva
ant figu
ure for the
e pro
o fo
orma
a journ
nals:
SL
Ltd’s
sep
s
para
ate
rec
cord
ds
Pro fform
P
ma
a oun
am
nt
D erre
Defe
ed
tax
xation @
28
8%
Grou
up
2
20 000
0
5 000
0 0
(1 400)
15 0
000
De
epre
ecia
ation fo
or 20.18
8
(4 000)
0 )
(1 000
0 0)
280
(3 000)
Ba
alan
nce 31//12//20..18
1
16 000
0
4 000
0 0
(1
1 12
20)
12 0
000
Trrans
sferr price from
f m P to S
3
312
De
epre
ecia
atiio
on fo
or 2
20.19
(2 000)
0 )
(5
500
0)
140
1
(1 500)
Ba
alan
nce 30//6/2
20.19
1
14 000
0
3 500
5 0
(980)
10 5
500
Se
ellin
ng price
p e to
o 3rd
d pa
artyy
1
18 000
0
–
–
18 0
000
Prrofitt
4 000
0
3 500
0
980
9
75
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
313
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
314
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
Retained
earnings
Noncontrolling
interests
(58 000(P) + 18 000(S) - 16 000(J1))
60 000
36 000
Changes in equity for 20.18
Total comprehensive income for the year:
Profit for the year
Dividend paid
63 000
(8 000)
7 000
–
R115 000
R43 000
Balance at 1 January 20.18
Balance at 31 December 20.18
(90 000(P) + 39 000(S) - 16 000(J1) + 2 000(J2))
315
C
Cha
apte
er 5
Com
C
mm
mentt
A info
As
orma
atio
on on
o P Ltd’ss eq
quityy iss un
nava
aila
able, on
nly an exttracct from the
e sttate
eme
ent of
o
c nge
cha
es in
n eq
quity iss shown
n.
T ke note of the effect of unre
Tak
u ealiised
d prrofit wh
here
e the
e pa
aren
nt or
o th
he ssubs
sidia
ary sells. If th
he
p ent is the
pare
t seller, the
e efffectt of the
e un
nrea
alise
ed proffit on
o cons
c solidated reta
aine
ed earn
e ning
gs
s uld be takken into
sho
o ac
ccou
unt sep
para
ately.
C
Calc
cullatiion
ns
C
C1 An
naly
ysiis o
of ow
o ners’ eq
quitty of
o S Ltd
L
T al
Tota
i At
A acq
a quis
sitiion (1//7/2
20.15))
Sha
S are capita
al
Ret
R tain
ned ea
arningss
P Ltd
L 75
5%
Att
S
Since
NC
CI
100
1
0 00
00
20
0 00
00
75
5 00
00
15
5 00
00
25
5 00
00
5 00
00
1 0 00
120
00
–
90
0 00
00
–
30
0 00
00
–
Con
C nsid
dera
atio
on and
a d NCI
iii Sin
S ce acquisittion
n
• To
T beg
b ginn
ning
g of
o cu
urre
ent year:
Ret
R tain
ned ea
arningss
1 0 00
120
00
R90
R 0 00
00
30
0 00
00
(5
50 000
0 –2
20 000
0 – 6 00
00(J3))
24
4 00
00
Pur
P rcha
ase
e diffferrence
18
8 00
00
36
6 00
00
• Cur
C rren
nt year
y r:
Pro
P ofit for
f the
e ye
ear
(3
30 000
0 + 6 00
00(JJ3) – 8 000
0(J4
4))
6 00
00
28
8 00
00
21
1 00
00
7 00
00
R1
172
2 00
00
R
R39
9 00
00
R 3 00
R43
00
C
C2 Prroo
of of
o c
calc
cula
atio
on of pu
urchas
se diffferren
nce
e off S Ltd
d in
n te
erm
ms of IFR
RS
S 3.32
90 00
C
Con
nsid
dera
atio
on transfferrred at ac
cquisittion
n da
ate: IF
FRS
S 3.32
3 2(a))(i)
00
30 00
A
Amo
oun
nt of
o non
n n-co
ontrrolling
g interestts: IFR
RS 3.3
32(a)(ii)
00
120 00
00
N
Net of the
e id
den
ntifia
able ass
a etss ac
cqu
uire
ed and
a d lia
abilitie
es ass
a sum
med
d
att accqu
uisittion
n da
ate
e: IF
FRS
S3
3.32
2(b)
P
Purc
cha
ase
e differen
nce
e
3
316
(12
20 000)
R–
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
Cr
R
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 year
Non-controlling interests (P/L)
Non-controlling interests (SFP)
Recognition of non-controlling interests in profit
for the year
16 000
4 000
20 000
2 000
2 000
6 000
6 000
8 000
8 000
164 000
164 000
100 000
20 000
90 000
30 000
6 000
6 000
7 000
7 000
317
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
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
R397 650
R249 750
200 000
154 650
–
10 000
33 000
100 000
98 000
8 750
15 000
28 000
R397 650
R249 750
Gross carrying amount
Accumulated depreciation
Total assets
EQUITY AND LIABILITIES
Share capital (200 000/100 000 shares)
Retained earnings
Current account: P Ltd
Dividend payable
Trade and other payables
Total equity and liabilities
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
318
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
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.
319
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
R491 196
EQUITY AND LIABILITIES
Equity attributable to owners of the parent
Share capital (P)
Retained earnings
200 000
190 176
Non-controlling interests (C1)
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
Total current liabilities
Total equity and liabilities
320
439 446
38 000
10 000
3 750
51 750
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
321
Chapter 5
Calculations
C1 Analysis of owners’ equity of S Ltd
Total
i At acquisition (30/6/20.15)
Share capital
Retained earnings
P Ltd 75%
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
–
Consideration and NCI
ii Since acquisition
• To beginning of current year:
Retained earnings
138 750
R105 000
33 750
(90 000 – 35 000 – 2 304(J9))
52 696
Equity represented by goodwill – Parent
39 522
46 924
• Current year:
Profit after tax (23 000 + 640(J10)
– 180(J11) + 1 280(J12) – 358(J13))
Dividend
13 174
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
J2
J3
Retained earnings (P)(SCE)
Property (S)(SFP)
Unrealised gain made by P Ltd from the sale
of property to S Ltd
7 000
Accumulated depreciation: Furniture (S)(SFP)
Furniture (S)(SFP)
Transfer of furniture from S Ltd to P Ltd at carrying
amount – derecognition in records of S Ltd and
recognition in records of P Ltd
2 500
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
322
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 year
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
J9
J10
Trade and other payables (S)(SFP)
Trade receivables (P)(SFP)
Elimination of intragroup debt
23 000
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
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
1 280
720
358
358
continued
323
C
Cha
apte
er 5
Drr
R
J14
4
5
J15
6
J16
7
J17
Cr
R
Sh
hare
e capital (S))(SC
CE
E)
Re
etaiined earn
e ning
gs (S)
( (SC
CE))
Go
ood
dwilll (S
SFP
P)
Invvesttme
ent in S Ltd
L (P)(SF
FP))
Non-cconttrolling
g in
nterrestts (SFP)
Elimiina
atio
on of
o own
o nerrs’ equ
e uity
y att ac
cqu
uisiitio
on of
o S Ltd
100 000
0
3
35 000
0
3 750
7
Re
etaiined earn
e ning
gs – B
Beginning
g of year (S)(SC
CE))
Non-cconttrolling
g in
nterrestts (SFP)
Re
eco
ogn
nitio
on of non-c
con
ntro
ollin
ng intere
ests
s in
n re
etaiine
ed
ea
arniing
gs of
o the su
ubsidia
ary
y fo
or th
he perriod
d sinc
s ce
ac
cqu
uisittion
n unti
u il beginn
ning
g of currrentt ye
earr
13 174
No
on-ccon
ntro
ollin
ng inte
eressts (P//L)
Non-cconttrolling
g in
nterrestts (SFP)
Re
eco
ogn
nitio
on of non-c
con
ntro
ollin
ng intere
ests
s in
n proffit
for th
he y
yea
ar
0
6 096
Divvidend
d re
ece
eive
ed (P)((P/L
L)
No
on-ccon
ntro
ollin
ng inte
eressts (SF
FP))
Divvide
end pa
aid (S)(SC
CE))
Elimiina
atio
on of
o in
ntragrrou
up div
d vide
end
d
2
11 250
3 750
7
105
1
5 00
00
33
3 75
50
13
3 17
74
6 09
96
15
5 00
00
Com
C
mmentt
J iss a com
J2
mbinatiion of the
t follo
owing jjournals:
In th
he reco
r ord
ds of
o P Ltd
d
Fu
urniture
e (S
SFP)
B
Ban
nk (S
SFP
P)
Sa
ale of furn
f nitu
ure to S Lttd
10
0 00
00
10 0
000
0
In th
he reco
r ord
ds of
o S Ltd
d:
Acccumullate
ed depr
d reciatio
on (SFP
P)
Ba
ank (SF
FP)
F
Furn
nitu
ure (SF
( FP)
De
erec
cog
gnition
n of furnitu
ure solld to
o S Ltd
d att ca
arrying am
mou
unt
C
C4 Un
nre
ealised
d pro
p fit inc
clud
ded
d in
n in
nve
enttories
s an
nd pla
antt
In
nve
enttoriies
s
G
Gro
oss
s
Un
nre
ealiised pro
p ofit
1 Ju
uly 20.17
7
R
R25
5 00
00
R5
5 000
3
30 Jun
J ne 20.
2 18
R
R28
8 00
00
R5
5 600
3
324
2 50
00
10
0 00
00
Ta
ax
R1 400
R
0
R 568
R1
8
12 5
500
0
N t
Net
R3
3 60
00
R4
4 03
32
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.
325
6
Adjustments and sundry aspects
of group statements
Introduction .....................................................................................................
330
Basic consolidation procedures .............................................................
331
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 remeasurement in records of subsidiary ...
Remeasurement at acquisition date of property, plant and equipment
not subject to depreciation .......................................................................
Example 6.2: Pro forma remeasurement of subsidiary’s land and
buildings at acquisition date ...........................................
Example 6.3: Pro forma remeasurement of subsidiary’s assets
at acquisition date ..............................................................
Subsequent sale of property, plant and equipment which had been
remeasured at acquisition date – Remeasurement not recognised
in records of subsidiary ............................................................................
Example 6.4: Subsequent sale of property, plant and equipment,
which was remeasured on acquisition ............................
Remeasurement at acquisition date of depreciable property, plant and
equipment ...............................................................................................
Example 6.5: Remeasurement of plant and detailed journal entries ....
Example 6.6: Remeasurement of plant and detailed journal entries for
subsequent periods ........................................................
Remeasurement of inventory at acquisition date ....................................
Example 6.7: Remeasurement of inventory and detailed journal entries
Example 6.8: Remeasurement of current asset (property) at acquisition
date ................................................................................
334
335
337
338
341
345
346
350
350
354
355
356
357
327
Chapter 6
Impairment of goodwill
6.6
6.7
6.8
Significance of goodwill ...........................................................................
Impairment losses ...................................................................................
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.....................................................
361
362
362
363
366
371
Losses of a subsidiary
6.9
6.10
6.11
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 ..........................................................
376
376
378
379
381
382
Insolvent subsidiaries
6.12
6.13
The legal liability of the shareholders of an insolvent subsidiary ............
Accounting for an insolvent subsidiary ....................................................
385
386
Acquisition of an insolvent subsidiary
6.14
Basic consolidation procedures ..............................................................
Example 6.15: Consolidation where shares are acquired in an
insolvent subsidiary ........................................................
388
389
Insolvency of a subsidiary after acquisition
6.15
Basic consolidation procedures ..............................................................
Example 6.16: Consolidation of a subsidiary that becomes insolvent
after acquisition date ......................................................
393
393
Preference shares
6.16
6.17
328
Characteristics ........................................................................................
Liability versus equity ..............................................................................
397
398
Adjustments and sundry aspects of group statements
Consolidation procedures where the capital of the subsidiary
includes preference shares
6.18
6.19
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 ..........................................................................
400
401
402
403
405
406
411
414
Treatment of preference dividends of subsidiaries
6.20
6.21
6.22
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 .........................................................................................
420
420
421
425
Self-assessment questions
Question 6.1 ........................................................................................................
Question 6.2 .....................................................................................................................
427
432
329
Chapter 6
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.
330
Adjustments and sundry aspects of group statements
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 because of the plough-back
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)
Cr
R
xxx
xxx
xxx
331
C
Cha
apte
er 6
Comm
men
nt
a Tak
T ke note
n e th
hat the pro
o fo
orm
ma cons
c solid
datiion jou
urna
al entryy is no
ot re
ecorded in
n th
he
acccoun
nting re
ecords of eith
e her tthe parrentt or the
e su
ubsid
diarry.
b The
T e abo
a ve tre
eatm
men
nt is in acccorrdan
nce with
w
the prin
ncip
ple co
onta
ained
d in
IFR
RS 10.B
1 B86
6(a) tha
at th
he con
c soliidatted fina
anccial stattem
mentts ccom
mbine like item
ms of
o
asssetss, lia
abilities
s, equ
e ity, inccom
me, exp
penssess an
nd cas
c h fllows of
o th
he pare
p ent witth
thos
t se of
o itts subs
sidia
arie
es. The
T erefo
ore,, the
e co
onsolid
date
ed finan
ncia
al sttatements pre
esent
fina
f ancial in
nforrma
ation
n ab
bou
ut th
he group as
a th
hat o
of a sin
ngle
e en
ntityy.
c Afte
A er the
t
ab
boveme
entiione
ed pro
o fo
orm
ma con
nsollidation
n jo
ourn
nal entry ha
as b
bee
en
processsed
d, the con
nsolida
ated
d sta
atem
men
nt of
o fiinan
ncia
al posittion
n wiill only
o
refflecct th
he
sha
are cap
c pital of the
t parentt.
l
l
l
l
Th
he diff
d fere
enc
ce in
i the ca
arry
ying
g am
mountt off th
he par
p entt’s invvesttme
entt in ea
ach su
ubsidia
ary
(conssidera
atio
on for
f the
e businesss comb
bina
atio
on – costt off th
he sha
s aress in
n th
he sub
s bsid
dia
ary)
an
nd the
e p
parren
nt’s po
ortiion of equ
e uityy of
o eac
e ch su
ubsidia
ary att a
acq
quissitio
on da
ate is
recog
gnised
d pro
p forrma
a as goo
g odw
will or as a gai
g n from
m a ba
arg
gain
n purc
cha
ase. How
H wev
ver,
it is im
mportantt to
t rea
alis
se that th
he reccog
gnittion
n of
o go
ood
dwill (ba
ase
ed on
n the
t
meassurrem
men
nt of
o the
t
no
on--contro
olling inttere
estts at
a tthe
eir pro
opo
ortio
ona
ate sh
hare
e o
of the
t
accqu
uiree’ss id
dentifia
able
e n
net assse
ets) orr a ga
ain fro
om a barga
ain pu
urch
hasse only b
bea
ars
relatiion to the
e own
o nerss o
of th
he paren
nt. A
As disscu
usse
ed in cha
aptter 2, the
e non--co
ontrrolliing
inttere
ests ccan be
e mea
m asured
d att itss fa
air vvalu
ue wh
hich
h afffec
cts the
e calc
c cula
atio
on of
o goo
g odw
will.
hus
Go
ood
dwiill th
s re
eco
ogn
nise
ed also
a o bea
b rs rrela
atio
on to
t the
t no
on-ccon
ntro
ollin
ng inte
i eresstss.
Th
he like
e item
ms of
o ass
a setss and
a lia
abilitie
es of
o the pa
aren
nt are
a e co
ombin
ned with tha
at o
of the
t
su
ubssidia
aryy. The
T ob
bliga
atio
on to elim
min
nate
e in
ntra
agro
oup
p lo
oan
ns/d
deb
bts does no
ot detractt fro
om
this bas
b sic com
mbina
ation (dis
scussse
ed in
i ccha
apte
er 5).
5
Sh
hou
uld the
e pare
ent no
ot o
own
n the full isssued sha
s are cap
pita
al of
o th
he subsidia
ary, the a
abo
ove
ba
asicc com
c mbin
nation
n sttill ap
pplie
es; ho
owe
eve
er, it is necces
ssa
ary to recog
gnise an
nd sho
ow
se
epa
arattelyy th
he no
on-ccon
ntro
ollin
ng inte
ere
ests
s in
n th
he ne
et ass
a setss of
o tthe su
ubssidiaryy (ii.e.
se
epa
aratte from
m th
he inte
ere
est of the
t e pa
arent in
i the
t eq
quity of
o subssidiaryy).
Th
he follow
wing
g at-a
a acq
quissitio
on pro
o fo
orm
ma co
onso
olid
datiion jo
ourn
nal en
ntry
y iss prep
p parred to
eliiminatte tthe pa
aren
nt’ss in
nvestm
men
nt in
n th
he sub
bsid
dia
ary:
Drr
R
Sharre cap
S
c pital
R aine
Reta
ed e
earrnin
ngs
G dw
Goo
will ((refer to
t cha
c apte
er 2)
2
Invvesstmentt in S Ltd
L (pa
artial sub
s bsid
diarry of
o P Ltd
d)
No
on-ccon
ntro
ollin
ng in
nte
eresst in
n su
ubssidia
ary
l
l
3
332
Cr
R
xxx
x
xxx
x
xxx
x
xx
xx
xx
xx
Th
he carrying
g amo
oun
nt o
of the
t
assse
ets of the par
p rent are
a afffeccted
d (a
as disscu
ussed in
ch
hap
pterr 5)) by the
t
elimiination
n of
o unr
u reallise
ed pro
ofitss whe
w ere the ssub
bsid
diarry wa
was the
t
se
ellin
ng ent
e tity an
nd, sho
oulld the
t pa
aren
nt b
be the
e se
elling en
ntityy, th
hen
n th
he carrrying am
mou
unt
of the
e asse
a ets of the
e subssidiaryy will
w be
b afffectted
d.
Th
he conso
olid
date
ed sta
atem
me
ent of pro
ofitt orr lo
oss an
nd oth
her co
omp
pre
ehe
ensiive incom
me
e is
prrepa
are
ed b
by comb
bining 10
00%
% of
o th
he rev
ven
nue an
nd exp
pen
nse
es of
o tthe su
ubssidia
aryy on
na
lin
ne-ffor--line
e bas
b sis witth the
e corr
c resp
pon
nding ite
emss o
of the
t
pa
are
ent. Th
he likke item
i ms of
inccom
me an
nd exp
e pen
nse
es o
of the
t pa
arent a
are
e co
ombin
ned
d with tha
at of
o tthe su
ubssidia
aryy. The
T
divvidend
ds rec
ceivved
d fro
om
m the sub
s bsid
diarry as
a refl
r ectted
d in the
e re
eco
ordss of
o th
he parren
nt, are
a
eliiminatted
d.
Adjustments and sundry aspects of group statements
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 based on 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
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
333
C
Cha
apte
er 6
Com
mm
ment
P = Pa
aren
nt
S = Su
ubsidiary/S
Sub
bsidiiarie
es
A
Adjjus
stm
me
entts at
a ac
cqu
uis
sitiion
n dat
d te
6
6.1 R
Rec
cogn
nitio
on off th
he ide
enttifiab
ble as
sse
ets, liab
bilitties
s and
a dc
con
ntin
nge
entt
liab
biliitie
es of
o the
e sub
s bsiidia
ary
y at
a th
heir fair
f r valu
v ues
s
l
l
l
Th
he appliccatiion off th
he a
acq
quissitio
on me
ethod requiiress th
hat the acq
a quirrer reccog
gnisse on
the acq
a uissitio
on dat
d te, the
e fa
air valu
v uess off th
he identiffiab
ble asssetts acq
a quirred an
nd liab
bilities
asssume
ed of the
e sub
s bsid
diarry(a
a) at
a the
t e ac
cqu
uisiition d
date (IFR
( RS 3..10 an
nd pa
arag
gra
aph
2.6.2
2). In a
add
ditio
on, th
he a
acq
quirrer alsso rec
cognisses an
nd me
easure
es a
any
y non--co
ontrrolliing
inttere
ests in
n th
he acq
a quirree
e(b)).
Th
he goodw
willl will
w be re
ecog
gnised
d as
a the
e exce
esss of th
he co
onsiide
erattion
n paid
d fo
or the
t
accqu
uisittion
n pllus the
e amo
a oun
nt of
o non
n -co
ontrrolling
g inttere
estts reco
ogn
nise
ed ((b
b) abov
a ve)) ov
ver
the acq
a quissitio
on datte am
amountss off th
he ffairr va
alue
es of ide
entiifiable
e assse
ets acquiired
d and
a
lia
abilities a
assum
med
d off th
he sub
s bsid
diarry (((a)) ab
bovve). S
Should
d (a
a) be
b m
mo
ore tha
an the
t e su
um
of the
e co
onsside
erattion
n pa
aid a
and
d (b
b), then
t n a ga
ain from
f m a ba
arga
ain purch
hase
e will
w be
b rec
r ogn
nise
ed.
If the
e fair
f
va
alues of th
he asssetts and
a d liab
bilitiies off th
he su
ubsidia
ary differ from
m the
t
ca
arryying
g amo
oun
nts in the
t e re
ecordss off the sub
s bsid
diarry, the
ese
e ca
arryying
g amo
oun
nts mu
ust be
ad
djussted
d ffor purpo
ose
es o
of the
t e prrep
para
atio
on of
o the
e co
ons
soliidated
d fin
ncia
al sta
s atem
men
nts
nan
evveryy time
e a con
nso
olid
dation is perrforrme
ed.
Th
he con
nsideratiion pa
aid by
y th
he paren
nt for the
e sharres
s in
n th
he sub
s bsid
diary is in ma
any
ca
ase
es affe
a ecte
ed byy th
he faiir valu
v ue of th
he asssetss o
of the
t e subssidiary
y. Some
etim
mes
s it
ha
app
pen
ns ttha
at th
he faiir vvalu
ue of the a
ass
setss (e
esp
peccially lan
nd and
a d buil
b din
ngss) d
diffe
ers
mate
eria
ally at the acq
a quissitio
on da
ate fro
om the
e carr
c ryin
ng am
mou
untss, a
as reccorrded in the
t
ountting
g re
eco
ordss of
o th
he sub
s bsid
diary. In succh a case
e, th
he parren
nt ca
an follow
w on
ne o
of tw
wo
accco
po
ossible
e ap
pprroacche
es, nam
me
ely:
• to rem
me
easu
ure
e th
he ass
a sets
s in the re
eco
ords of
o th
he sub
bsid
dia
ary; or
• to rem
me
easu
ure
e th
he ass
a sets
s prro form
f ma up
pon
n co
onssolid
dattion
n.
1 Rev
R valu
uattion
ns rec
corrde
ed in the
t records
s of th
he subsidia
ary
y
T
The
e firrst ap
ppro
oac
ch is
i for
f the
e sub
s bsid
diarry tto rev
r valu
ue its as
ssett att th
he acquiisitiion da
ate in
a
acco
ord
dan
nce with the
t e va
alue
es tha
at wer
w re plac
p ced
d on
o itt in
n th
he det
d erm
min
natio
e purccha
ase
on of the
cconsidera
atio
on. This alte
a erna
ativve is pos
p ssib
ble if itt iss the grou
g ups
s’ acc
a oun
ntin
ng pollicyy to revallue
itts ass
a setss in
n te
erm
ms of
o IAS
S 16 Pro
P ope
erty
y, P
Pla
ant an
nd Eq
quip
pm
men
nt. If sso, the
en no
o sp
pec
cial
a
adju
ustm
mentss arre nee
n ede
ed on co
onso
olid
dation
n, sincce the
t re
equirem
ment tha
at the asssetts o
of the
t
ssubsidiaryy mu
ust be
e rec
r ogn
nised att the
t ir fairr valu
v uess in
n the
t e con
c sollida
ated
d fina
f anc
cial
e re
sstatem
men
nts is
i m
mett via th
he revvalu
uattion
n in the
eco
ords of
o th
he sub
bsid
dia
ary.
3
334
Adjustments and sundry aspects of group statements
Example 6.1
Recording of remeasurement 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 cost price
Trade receivables
Total assets
EQUITY AND LIABILITIES
Share capital (P Ltd: 20 000 shares/
S Ltd: 10 000 shares)
Revaluation surplus (25 000 × 77,6% (1))
Retained earnings:
On 1/3/20.18
Since acquisition
Deferred tax (25 000 × 80% × 28%)
Total equity and liabilities
(1)
S Ltd
–
34 000
36 000
50 000
–
20 000
R70 000
R70 000
20 000
10 000
–
19 400
30 000
20 000
–
7 500
27 500
5 600
R70 000
R70 000
(100% – 22,4%(80% × 28%))
On the date on which P Ltd acquired the interest in S Ltd, the 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 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 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 80% thereof.
335
Chapter 6
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
4 480
54 480
Current assets
Trade receivables (36 000(P)) + 20 000(S))
56 000
Total assets
R110 480
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
12 880
Total equity
104 880
Non-current liabilities
Deferred tax (S)
5 600
Total equity and liabilities
R110 480
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
19 400
7 500
8 000
15 520
6 000
2 000
3 880
1 500
Equity represented by goodwill – parent
36 900
4 480
29 520
4 480
7 380
–
Consideration and NCI
41 380
R34 000
7 380
ii Since acquisition
• Current year:
Profit for the year
336
27 500
22 000
5 500
R68 880
R22 000
R12 880
Ad
djusstm
men
nts and sun
s dry
y asspe
ectss off grrou
up stat
s tem
men
nts
Co
omm
men
nt
a Th
he reco
r ogn
nition o
of defe
d erre
ed tax
t
is req
quirred byy th
he provisiionss of
o th
he acccountin
ng
sta
atem
men
nt IA
AS 12 IInco
ome Taxe
T es.
b SL
Ltd reccord
ded the
e rev
valu
uatio
on of
o la
and
d ass follow
ws on 1 Ma
arch
h 20
0.18
8:
Dr
R
La
and
d (50
0 00
00 – 25
5 00
00)
De
eferrred taxx (S
SFP) (2
25 000
0 ×8
80%
% × 28%
2 %)
Re
evalluattion surplu
us (O
OCI)
Land
d re
evallued
d affterr va
alua
ation o
on 1/3/2
20.1
18
Cr
R
2
25 000
0 0
56
600
19 4
400
c Th
he fa
air valu
v ue of
o the (only) assset of S Lttd was
w s the
ereffore
e alsso take
t en into
i o co
onsid
derratio
on
byy P Ltd
d in the
e de
eterrmin
nation of the pu
urch
hase
e prrice
e of the
e sh
hare
es in the
t
sub
bsid
diary.
Ta
ake notte th
hat a p
pro rata
a po
ortio
on o
of the revvalua
atio
on surp
s pluss is app
porttioned to the
t non
nco
ontro
ollin
ng in
nterrestts.
C
C2 Prroo
of of
o c
calc
cula
atio
on of go
ood
dwiill of
o S Ltd
L in terrms
s of
o IF
FRS 3.32
3 2
C
Con
nsid
dera
atio
on transfferrred at ac
cquisittion
n da
ate: IF
FRS
S 3.32
3 2(a))(i)
A
Amo
oun
nt of
o non
n n-co
ontrrolling
g interestts: IFR
RS 3.3
32(a)(ii)
34
4 00
00
7 38
80
41 38
80
N
Net of the
e id
den
ntifia
able ass
a etss ac
cqu
uire
ed and
a d lia
abilitie
es ass
a sum
med
d att accqu
uisittion
n
d
date
e: IFR
RS 3.3
3 2(b
b)
( 6 90
(36
00)
G
Goo
odw
will
R4
4 48
80
2 Rem
R mea
asu
ure
eme
entts not
n t re
ecorde
ed in rec
corrds
s off su
ubs
sidiarry
A sec
s ond
d app
a proach
h is to
t rev
valu
ue th
he ass
setts of
o the
e sub
s bsid
diarry pro
o form
ma fo
or the
t
p
prep
parratio
on of the
e cons
c solida
ated
d finan
ncial ssta
atem
men
nts. T
This
s wou
w ld ent
e tail no
ot mak
m king
g any
a
e
entrry in th
he acccou
untting
g re
eco
ords
s of th
he sub
s bsid
diary for the
e reva
aluatio
on. If thiss app
a roa
ach
h is
fo
ollo
owe
ed, the
ea
asse
etss off the ssub
bsid
diarry at
a ccon
nso
olida
atio
on mu
ust firsst be
b a
adjustted
d prro fform
ma
to
o th
he va
alue
es tha
at wer
w re pla
aced on
o the
em fo
or the de
etermiination
n of
o tthe pu
urchasse price
(ccon
nsid
derratio
on)). This
T s must
m t be
e don
d e fo
or eve
e ery co
onso
olid
datiion un
ntil the
e in
nves
stm
men
nt iss so
old.
T
The
e incom
me an
nd exp
e pen
nse
es tthatt re
elatte to
t the ab
bovem
men
ntioned
d asse
a et w
would
d be
e base
ed on
th
he vallue
es attri
a ibutab
ble to the
e as
sse
et at
a th
he acquiisitiion da
ate. An exa
e amp
ple of thiss wou
w uld be
d
deprecciattion
n. T
The
e dep
d recciattion
n on the
t e re
eva
alue
ed asssett will be
b ba
ase
ed on
o the
e reva
r alu
ued
a
amo
oun
nt of
o th
he assett ass att th
he dat
d te of
o acq
a quis
sitio
on (i.e
e. th
he inccrea
ase
ed carrrying am
mou
untt of
th
he assset).
T
The
e disscu
usssion
n an
nd exa
am
mple
es tha
t t fo
ollow
wo
only
y re
elatte to
t tthe se
econd ap
ppro
oacch.
6
6.2 R
Rem
me
eas
surrem
ment at ac
cqu
uis
sitio
on
n da
ate
e of pro
p ope
erty
y, pla
p ant an
nd eq
quipm
men
nt
n t sub
not
bjec
ct to
t de
eprreciattion
n
T
The
e co
onsside
erattion
n paid
d byy th
he par
p rent fo
or th
he share
es in a su
ubssidiaryy iss de
eterrmiined b
by the
t
erly
vvalu
ue pla
ace
ed b
by the
e par
p rentt on
o the
t e unde
ying
g valu
v ue of th
he sub
bsid
dia
ary’ss net
n assse
ets.
S
Sho
ould
d th
he fair
f r va
alue
e att th
he a
acq
quissitio
on datte of
o land
d of
o th
he sub
bsidia
ary be hig
ghe
er tha
t an the
t
ccarrryin
ng am
amou
unt the
ere
eof, the pur
p rcha
ase
e cconsid
dera
atio
on w
nclu
ude
e a su
urpllus wh
hicch will
w
will in
re
equ
uire
e th
he adj
a justtme
entt off the carr
c ryin
ng am
mou
unt of the
e la
and to the
e fa
air value
e th
here
eoff.
337
3
Chapter 6
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 remeasurement
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 80% of the gain being taxable at the current company tax rate.
Example 6.2
Pro forma remeasurement 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 cost price
Trade receivables
Total assets
EQUITY AND LIABILITIES
Share capital (P Ltd: 20 000 shares/S Ltd: 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 567
R50 000
Land
Buildings (factory building)
The value of the land has subsequently remained unchanged.
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 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 80% thereof.
338
Adjustments and sundry aspects of group statements
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) + 17 567(J1) + 30 000(J1))
Goodwill
96 767
2 768
99 535
Current assets
Trade receivables (28 800(P) + 7 000(S))
Total assets
35 800
R135 335
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
12 335
R135 335
Calculations
C1 Analysis of owners’ equity of S Ltd
Total
i At acquisition (1/1/20.18)
Share capital
Equity at acquisition (1)(J1)
Retained earnings
P Ltd 80%
At
Since
NCI
10 000
35 232
12 000
8 000
28 186
9 600
2 000
7 046
2 400
57 232
45 786
11 446
Equity represented by goodwill
– Parent and NCI
2 768
2 214
554
Consideration and NCI
60 000
R48 000
12 000
ii Since acquisition
• Current year:
Profit for the year
10 000
8 000
2 000
R70 000
R8 000
R14 000
(1) 77,6 (2)(22 567 – 5 000) + 72%(3)(50 000 – 20 000) = 35 232
(2) 100% – (80% × 28%) = 77,6%
(3) 100% – 28% = 72%
339
C
Cha
apte
er 6
Com
C
mm
mentt
A part of the
t equ
uity at acq
quissition, w
whic
ch is derivved from the
t pro
o forrma
a remeasu
urem
men
nt,
is a
alloc
cate
ed to
t the
t
non-controlliing interests.. Th
his is in acc
a cord
dancce with
w h th
he prin
p nciple
c tain
con
ned in IFR
RS 10.B86
6(a)) th
hat the co
onso
olida
ated
d finan
ncia
al sttate
eme
entss co
omb
bine
e lik
ke
item
ms of
o asse
a ets, liab
bilities,, eq
quityy, in
ncome, exxpense
es and
a cassh flow
ws of
o th
he parrentt witth
t se of the
thos
e subssidia
ary. Th
here
eforre, the
e cons
c solid
date
ed fina
anccial sta
atem
men
nts pre
esent
f ancia
fina
al in
nforrma
ation
n ab
boutt the
e grroup
p as
s th
hat of
o a sin
ngle
e en
ntity.
C
C2 Prroo
of of
o c
calc
cula
atio
on of go
ood
dwiill in tterm
ms
s off IF
FRS
S 3..32
2
C
Con
nsid
dera
atio
on transfferrred at ac
cquisittion
n da
ate: IF
FRS
S 3.32
3 2(a))(i)
A
Amo
oun
nt of
o non
n n-co
ontrrolling
g interestts: IFR
RS 3.3
32(a)(ii)
48 00
00
00
12 00
00
60 00
N
Net of the
e id
den
ntifia
able ass
a etss ac
cqu
uire
ed and
a d lia
abilitie
es ass
a sum
med
d
att accqu
uisittion
n da
ate
e: IF
FRS
S3
3.32
2(b)
(57 23
32)
G
Goo
odw
will
R 76
R2
68
C
C3 Prro form
f ma
a co
ons
solida
atio
on jou
j urn
nal enttrie
es
D
Dr
R
1
J1
and (S)(S
SFP
P) (222 567
5 – 5 00
00)
La
Bu
uilding
gs (S
S)(SFP) (500 000 – 20 0000)
D ferrred taxx (S
Def
S)(S
SFP
P)
1
17 567
5 7
3
30 000
0 0
12
2 33
35
35
5 23
32
( 7 56
((17
67 × 80
0% × 28%
%) + (30
0 00
00 × 28
8%)))
Equ
uityy at accquisitiion (S)(S
SCE
E)
Re
eme
eas
surrem
men
nt of
o la
and
d an
nd building
gs of
o sub
s bsid
diary at
a
ac
cqu
uisittion
n date
d e
J2
2
J3
3
3
340
Crr
R
Sh
hare
e ca
apital (S))(SC
CE)
Eq
quitty a
at ac
cqu
uisition
n (S
S)(S
SCE
E)
Re
etaiined
d earn
e ning
gs (S)(
( (SC
CE))
Go
ood
dwilll (S
S)(S
SFP
P) (pa
( ren
nt and NC
CI) ((2 214
2 + 554)
5 )
Investtme
ent in S Ltd
L ((P)(SF
FP))
N n-cconttrolling
Non
g in
nterrestts (S
S)(SFP)
Ma
ain eliiminattion
n jo
ourrna
al in
n re
esp
pectt off S Ltd
d at
a
ac
cqu
uisittion
n date
d e
1
10 000
0 0
3
35 232
2 2
1
12 000
0 0
2 768
7 8
No
on-ccon
ntro
ollin
ng in
nte
eressts (S)(P//L)
N n-cconttrolling
Non
g in
nterrestts (S
S)(SFP)
Alloc
catiion
n off the non
n n-co
onttrolling in
nte
eres
sts’ po
ortion
n off
cu
urre
ent ye
ear's prof
p fit iin res
r pec
ct of
o S Ltd
L
2 000
0 0
48
8 00
00
12
2 00
00
2 00
00
Adjustments and sundry aspects of group statements
Example 6.3
Pro forma remeasurement 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
110 000
130 000
68 200
190 000
28 800
80 000
140 000
133 000
–
67 000
R527 000
R420 000
180 000
100 000
140 000
155 000
52 000
210 000
95 000
15 000
R527 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
125 000
105 000
86 000
35 000
(26 000)
R256 000
R325 000
ASSETS
Land
Buildings
Equity investments
Investment in S Ltd at cost price
Trade receivables
Total assets
EQUITY AND LIABILITIES
Share capital (P Ltd: 180 000 shares/S Ltd: 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 was 13 years.
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 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 80% thereof.
341
Chapter 6
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 (110 000(P) + 80 000(S) + 130 000(P) + 140 000(S)
516 000
221 200
5 680
742 880
+ 45 000(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) + 67 000(S))
Total assets
95 800
R838 680
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 (18 200(J1) – 2 520(J2) + 2 520(J4) – 280(J5) – 280(J8))
Current liabilities
Trade payables (52 000(P) + 15 000(S))
Total liabilities
17 640
67 000
84 640
Total equity and liabilities
R838 680
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
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
342
Total
Noncontrolling
interests
Adjustments and sundry aspects of group statements
Calculations
C1 Calculation of equity at acquisition and adjustment to retained earnings at
acquisition
Fair
value
Carrying
Difference
amount
Tax
rate
Tax
effect
After
tax
Land
Buildings
Equity investments
125 000
105 000
86 000
R316 000
80 000
92 000
66 000
R238 000
45 000
13 000
20 000
R78 000
22,4%
28%
22,4%
(10 080)
(3 640)
(4 480)
(R18 200)
34 920
9 360
15 520
R59 800
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
Equity at acquisition (C1)(Refer to J1)
Retained earnings (2)
P Ltd 60%
At
Since
NCI
100 000
59 800
149 520
60 000
35 880
89 712
40 000
23 920
59 808
Fair value of net assets (1)
Equity represented by goodwill
– Parent and NCI
309 320
185 592
123 728
5 680
4 408
1 272
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) 325 000(given) – 18 200(J1)(C1) + 2 520(J2)(C1) = 309 320(after deferred tax has been brought
into account)
(2) 309 320 – 100 000 – 59 800 = 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
343
Chapter 6
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)
(309 320)
Goodwill
R5 680
C4 Pro forma consolidation journal entries
Dr
R
J1 Land (S)(SFP) (125 000 – 80 000)
Buildings (S)(SFP) (105 000 – 92 000)
Equity investments (S)(SFP) (86 000 – 66 000)
Deferred tax (S)(SFP) ((45 000 × 80% × 28%) +
Cr
R
45 000
13 000
20 000
18 200
59 200
(13 000 × 28%) + (20 000 × 80% × 28%))
Equity at acquisition
Remeasurement 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)
Equity at acquisition (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
6 480
2 520
9 000
100 000
59 800
149 520
5 680
190 000
125 000
J4 Trade receivables
Retained earnings (at acquisition) (S)(SCE)
Deferred tax (S)(SFP) (9 000 × 28%)
Reversal of trade receivables of subsidiary after
acquisition
9 000
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
720
280
6 480
2 520
1 000
continued
344
Adjustments and sundry aspects of group statements
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
Cr
R
23 904
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
280
37 712
6.3 Subsequent sale of property, plant and equipment which had been
revalued at acquisition date – Remeasurement not recognised in
records of subsidiary
l
l
l
l
Should the parent at the acquisition date of the subsidiary, for purposes of
determining the consideration for the shares, measure the land and buildings of the
subsidiary at a higher amount than its carrying amount (and such remeasurement
is not recorded in the records of the subsidiary), such remeasurement must be
accounted for 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 measurement of the
asset at the acquisition date (being the date of the business combination).
The pro forma measurement 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 measurement surplus arising from the initial
measurement 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 remeasurement surplus (equity at acquisition) is thus credited annually (using the
acquisition date as the effective date) with the increased amount created by the
original remeasurement. The corresponding pro forma debit is dealt with as
follows:
• The property, plant and equipment concerned will be debited as long as it is
owned by the parent.
345
Chapter 6
• 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
remeasured on acquisition
P Ltd purchased 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 measured the land and buildings of S Ltd, with a carrying
amount of R250 000, at R350 000. This remeasurement 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 cost price
Trade receivables
Total assets
EQUITY AND LIABILITIES
Share capital (P Ltd: 90 000 shares/S Ltd: 110 000 shares)
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
360 000
74 000
562 500
–
87 500
R547 000
R650 000
90 000
110 000
342 000
115 000
–
290 000
100 000
150 000
R547 000
R650 000
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 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 remeasured at acquisition for R400 000.
Ignore all deferred tax implications.
346
Adjustments and sundry aspects of group statements
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))
Non-controlling interests
Total equity
Total equity and liabilities
675 500
52 000
727 500
161 500
R889 000
90 000
669 000
759 000
130 000
889 000
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)
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
347
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
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
Equity at acquisition (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 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
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
348
Adjustments and sundry aspects of group statements
C3 Pro forma consolidation journal entries
31 December 20.18
Dr
R
J1
Gain on sale of land and buildings (S)(P/L)(C4)
Equity at acquisition (S)(OCI)
Adjustment of pro forma remeasurement of land
and buildings of S Ltd
Cr
R
100 000
100 000
The journal entry above could also be replaced with the following journal entries:
Dr
R
J1.1 Land and buildings (S)(SFP)(C4)
Equity at acquisition (S)(OCI)
Pro forma remeasurement of subsidiary’s land and
buildings at acquisition date (350 000 – 250 000)
100 000
J1.2 Gain on sale of land and buildings (S)(P/L)
Land and buildings (S)(SFP)
Sale of land and buildings remeasured at acquisition
date
100 000
Cr
R
100 000
100 000
31 December 20.19 and all the future years
Dr
R
J2
Retained earnings – Since acquisition (S)(SCE)(C4)
Equity at acquisition (S)(OCI)
Offsetting of the pro forma remeasurement 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
Cr
R
100 000
100 000
The journal entry above could also be replaced with the following journal entries:
Dr
R
J2.1 Land and buildings (S)(SFP)(C4)
Equity at acquisition (S)(OCI)
Pro forma remeasurement of subsidiary’s land and
buildings at acquisition date
100 000
J2.2 Retained earnings – Since acquisition (S)(SCE)
Land and buildings (S)(SFP)
Sale of land and buildings remeasured 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
Cr
R
100 000
100 000
349
Chapter 6
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 Remeasurement 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 remeasured, 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 remeasured amount of the related depreciable
asset that was recognised in the consolidated financial statements at the acquisition
date (IFRS 10.B88).
Example 6.5
Remeasurement 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, plant of S Ltd, with a cost price of R200 000 and a carrying amount of
R120 000, was remeasured 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 remeasurement was not recorded in the books of S Ltd.
As at the remeasurement date the carrying amount of the plant was equal to the tax
base thereof. The company tax rate is 28%.
350
Adjustments and sundry aspects of group statements
The plant of the subsidiary was pro forma remeasured 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
J2
J3
Plant (S)(SFP) (150 000 – 120 000)
Deferred tax (S)(SFP) (30 000 × 28%)
Equity at acquisition (S)(SCE)
Pro forma remeasurement of plant of S Ltd at
acquisition date
30 000
Depreciation (S)(P/L)
Accumulated depreciation (S)(SFP)
Additional depreciation for the current year (30 000/3)
10 000
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 depreciation for the group
Total
depreciation
for the
plant
for 20.15
Remeasurement amount
Carrying amount
150 000
(120 000)
Remeasurement surplus
Additional depreciation per year as a result
of the remeasurement valuation (30 000/3 years)
R30 000
Cost of plant
Depreciation per year in records of S Ltd
R200 000
(200 000/5 years)
R10 000
R50 000
R40 000
351
Chapter 6
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
For the group
Carrying amount at 1 July 20.14
Remeasurement (150 000 – 120 000)
Depreciation/ Tax allowance
– 20.15 (150 000/3);(200 000/5)
Deferred
tax @28%
–
–
8 400(cr)(J1)
(50 000)
(40 000)
(10 000) (2 800)(dr)(J3)
R100 000
R80 000
R20 000 R5 600(cr)
The necessary pro forma consolidation journal entries for the year ended
30 June 20.16 (the next year) are as follows:
Dr
R
J1
J2
Plant (S)(SFP)(150 000 – 120 000)
Deferred tax (S)(SFP) (30 000 × 28%)
Equity at acquisition (S)(SCE)
Pro forma remeasurement of plant of S Ltd at date
of acquisition
30 000
Retained earnings – Since acquisition (S)(SCE)
7 200
Cr
R
8 400
21 600
(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)
2 800
10 000
continued
352
Adjustments and sundry aspects of group statements
Dr
R
J3
Depreciation (S)(P/L)
Accumulated depreciation (S)(SFP)
Additional depreciation for the current year
Cr
R
10 000
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 20.17 (the following year) are as follows:
Dr
R
J1
J2
Plant (S)(SFP) (150 000 – 120 000)
Deferred tax (S)(SFP) (30 000 × 28%)
Equity at acquisition (S)(SCE)
Pro forma remeasurement of plant of S Ltd at date
of acquisition
30 000
8 400
21 600
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
Cr
R
Depreciation (S)(P/L)
Accumulated depreciation (S)(SFP)
Additional depreciation for the current year
14 400
5 600
20 000
10 000
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
J2
Plant (S)(SFP)(150 000 – 120 000)
Deferred tax (S)(SFP) (30 000 × 28%)
Equity at acquisition (S)(SCE)
Pro forma remeasurement of plant of S Ltd at date
of acquisition
30 000
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
Cr
R
8 400
21 600
30 000
353
Chapter 6
However, the above two journals may also be replaced by the following journal:
Dr
R
J1
Retained earnings – Since acquisition (S)(SCE)
Equity at acquisition (S)(SCE) (30 000 × (100% – 28%))
Pro forma remeasurement of plant of S Ltd at date
of acquisition, now fully depreciated
Example 6.6
Cr
R
21 600
21 600
Remeasurement 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
J2
J3
Plant (S)(SFP) (150 000 – 120 000)
Deferred tax (S)(SFP) (30 000 × 28%)
Equity at acquisition (S)(SCE)
Pro forma remeasurement of plant of S Ltd at date
of acquisition
30 000
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
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
354
Adjustments and sundry aspects of group statements
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
Revalued
amount
Carrying
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 Remeasurement of inventory at acquisition date
In this section, the remeasurement of two types of inventory is dealt with, namely:
l ordinary trading inventory, which is routinely purchased and sold by the subsidiary;
and
l remeasurement 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 Inventories (.9), 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.
355
C
Cha
apte
er 6
Ex
xam
mple
e 6.7
R mea
Rem
asu
ureme
ent of inv
ven
nto
ory an
nd d
dettailled
d jo
ourn
nall en
ntriies
s
O
On 1 Jan
J nua
ary 20
0.18
8, P Ltd
L purch
hassed 80
0% off the issu
ued
d ordin
narry ssha
aress of
o S Lttd. At
th
hat da
ate,, P Ltd
d plac
p ced a vallue of R5
5 00
00 les
ss tha
t n itts ccarryin
ng am
mou
unt on the
e in
nve
ento
ory
o
of S Lttd. Th
T is rrem
mea
asurem
men
nt was
w s not reccord
ded
d in
n th
he b
boo
oks of S Ltd
d. The
T co
omp
pan
ny tax
t
ra
ate
e is 28
8%.
So
oluttion
n 6..7
T
The
e ne
ece
essa
aryy prro form
f ma co
onsolid
dation
n journ
nal entrie
es ffor the
e ye
earr en
nde
ed 31 De
ece
emb
ber
2
20.1
18 are
a e ass fo
ollowss:
Dr
R
1
J1
2
J2
Crr
R
etaiined
d earn
e ning
gs – A
At ac
cqu
uisittion
n (S
S)(S
SCE
E)
Re
De
eferrred
d ta
ax (S)(
( (SF
FP) (5 000
0 0 × 28%
2 %)
C st o
Cos
of sale
s es (S)((P/L
L)
Prro form
f ma rem
me
easure
eme
entt off S Ltd
d’s inv
ven
ntory a
at
ac
cqu
uisittion
n date
d e
3 600
6
1 400
4
Inccom
me tax
x exxpe
ense
e (S
S)(P
P/L
L)
D ferrred taxx (S
Def
S)(S
SFP
P)
Ta
ax imp
plic
cation of the
e prof
p fit rea
r lisa
atio
on during the
cu
urre
ent ye
ear
1 400
4
5 00
00
1 40
00
Com
C
mmentt
J ccan be
J1
e exxpla
ained as
a fo
ollo
ows,, ass it is a co
omb
bina
atio
on of
o th
he follo
f owin
ng two
t o pro fo
orm
ma
jo
ournals
s:
A a
At
acqu
uisittion date the follo
f owin
ng pro
p forma jou
urna
al is perforrmed:
Dr
D
R
J1(1)
Reta
R
aine
ed e
earn
ning
gs – Be
egin
nnin
ng of
o ye
ear (S)(SC
CE)
D erre
Defe
ed ta
ax (S)(
( (SFP) (5
( 0
000 × 28%
2 %)
In
nven
ntorries (S))(SF
FP)
R mea
Rem
asurem
men
nt off inven
ntorry of
o subs
s sidiiary
y att
a uis
acq
sitio
on date
d e
Crr
R
3 60
00
1 40
00
5 000
0
Oncce the
O
t
invventories are
e so
old byy S Ltd
d th
he followiing pro
o fo
orm
ma jour
j rnal wo
ould
d be
b
r orde
reco
ed on
o the date
d e off sa
ale, to acco
a oun
nt fo
or th
he re
ealiisation of the
t pro
ofit:
Dr
R
J1(2)
Inve
ento
oriess (S
S)(S
SFP
P)
C
Cost
of ssale
es (P)(
( P/L
L)
R cognitiion of pro
Rec
ofit rea
alisa
atio
on
5 00
00
Inco
ome
e taxx ex
xpense
e (S
S)(P//L)
D rred
Defe
d ta
ax (S
S)(S
SFP
P) (5
5 00
00 × 28
8%))
T x im
Tax
mplic
catiion of the
e rea
alis
sation of the
t pro
ofit
d ing the
dur
e cu
urre
ent yea
ar
1 40
00
Crr
R
5 000
0
1 400
0
By the en
B
nd of
o the
t
rep
portting
g pe
eriod the pro
o-forma
a jo
ourn
nal (ass sh
how
wn abo
a ve (J1
1)) is
p cess
proc
sed
d insstea
ad.
3
356
Adjustments and sundry aspects of group statements
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 for, in the year ending
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 remeasurement of S Ltd’s inventory on
acquisition date
Example 6.8
Cr
R
3 600
3 600
Remeasurement 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
determining the purchase price, S Ltd’s inventory was valued at R600 000. The
company tax rate is 28%.
357
Chapter 6
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 cost price
Total assets
EQUITY AND LIABILITIES
Share capital (P Ltd: 60 000 shares/S Ltd: 50 000 shares)
Retained earnings
Loan from S Ltd
Total equity and liabilities
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
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
358
S Ltd
553 000
–
21 600
259 200
R574 600
R259 200
Adjustments and sundry aspects of group statements
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 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 in the acquiree at their
proportionate share of the acquiree’s identifiable net assets at the acquisition date.
Solution 6.8
The consolidated financial statements for 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 (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
359
Chapter 6
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
R43 200
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))
360
Since
21 600
21 600
R471 600
R21 600
djusstm
men
nts and sun
s dry
y asspe
ectss off grrou
up stat
s tem
men
nts
Ad
C
C2 Prroo
of of
o c
calc
cula
atio
on of go
ood
dwiill of
o S Ltd
L in terrms
s of
o IF
FRS 3.32
3 2
C
Con
nsid
dera
atio
on transfferrred at ac
cquisittion
n da
ate: IF
FRS
S 3.32
3 2(a))(i)
A
Amo
oun
nt of
o non
n n-co
ontrrolling
g interestts: IFR
RS 3.3
32(a)(ii)
4 00
450
00
–
4 00
450
00
N
Net of the
e id
den
ntifia
able ass
a etss ac
cqu
uire
ed and
a d lia
abilitie
es ass
a sum
med
d
att accqu
uisittion
n da
ate
e: IF
FRS
S3
3.32
2(b)
(446 00
00)
G
Goo
odw
will
R 00
R4
00
C
C3 Prro form
f ma
a co
ons
solida
atio
on jou
j urn
nal enttrie
es
Dr
R
J1
1
J2
2
J3
3
Invven
ntorry (S)(SF
FP) (6000 000
0 – 50 000)
Rettain
ned
d ea
arniingss – At accquiisitiion (S))(SCE
E)
D ferrred taxx (S
Def
SFP
P) ((550
0 00
00 × 28
8%))
Prro form
f ma rem
me
easure
eme
entt off S Ltd
d’s inv
ven
ntory a
at
ac
cqu
uisittion
n date
d e
550 000
0
Co
ost of ssales (S))(P//L)
Inventtory
y (S
S)(S
SFP
P)
Sa
ale of 60%
% of
o inve
enttory
y as
a rem
mea
asured
d att
ac
cqu
uisittion
n date
d e (5550 000
0 × 60%
%)
330 000
0
De
eferrred
d ta
ax (S)(
( (SF
FP)
Incom
me tax exp
pen
nse (S)(P
P/L)
Re
eve
ersa
al of
o app
a prop
pria
ate
e pa
art of defferrred
d ta
ax crea
c ate
ed
at ac
cquisittion
n (3330 0000 × 28%
%)
92 400
4
Crr
R
396
3
6 00
00
1 4 00
154
00
3 0 00
330
00
92
2 40
00
Co
omm
men
nt
S Ltd's clos
c ing invventtory
y ass pe
er th
he ssep
para
ate fina
f ancial state
s eme
entss iss R2
20 000
0 0. Howe
eve
er,
forr the
e grroup
p th
he in
nventory valu
v e iss ba
ased
d on
n th
he fa
air vvalu
ue as
a at
a the a
acqu
uisittion datte o
of th
he
bu
usine
ess
s combinattion
n.
Ass the
ere we
ere no purrcha
asess du
urin
ng the current re
eporrting
g pe
erio
od th
he inve
ento
ory on han
nd at
a
the
e en
nd of
o th
he fina
f ncia
al year
y r is the
t balanc
ce of
o th
he inve
ento
ory that
t t is unssold
d at the
e en
nd o
of th
he
rep
portting
g pe
eriod
d.
Th
here
efore
e, th
he fair
f value of the inve
i ento
ory at repo
r ortin
ng d
date
e sh
houlld be:
b
R2
240 000
0 (R
R60
00 000
0 × 40%
4 %(un
nsold portion)).
Th
his is ach
a hieved by pro
oce
essing the
e abovve-m
men
ntion
ned prro form
f ma con
nsolida
ation
n jo
ourn
nal
en
ntrie
es as fo
ollow
ws:
R2
20 0
000((S) + 550
5 000
0(J1
1) – 33
30 000(
0 (J2) = R24
R 40 000
0
Im
mp
pairm
me
entt off goo
g odw
will
6
6.6 Sig
S gnific
can
nce
e off goo
g odw
will
G
Goo
odw
will is de
efin
ned
d in
n IFR
I RS 3 Ap
ppe
end
dix A ass “an
“
asse
et rep
presen
ntin
ng the
e ffutu
ure
e
econom
micc bene
efitts aris
a sing
g frrom
m othe
o er ass
a sets
s acq
a quired in a busin
ness com
c mbinattion
n th
hat
a
are no
ot in
ndivvidu
ually ide
i ntiffied
d and se
eparate
ely
y re
ecog
gnised
d”. Th
his imp
plie
es tha
t at th
he acq
quirer
361
3
Chapter 6
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.
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
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
362
Adjustments and sundry aspects of group statements
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
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 31/12/20.18
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
Total
i At acquisition (1/1/20.18)
Identifiable net assets
Equity represented by goodwill – Parent
Consideration and NCI
Goodwill impairment
P Ltd 80%
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
363
Chapter 6
The impairment loss is calculated as follows:
Carrying amount
175 000
Identifiable net assets
Goodwill (Attributable to parent)
Notional goodwill attributable to non-controlling interests
150 000
20 000
5 000
[25 000(20 000/80%) – 20 000]
Recoverable amount
(162 500)
R12 500
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
364
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
20 000
Impairment loss (P)(P/L)(12 500 × 80%)
Accumulated impairment losses for goodwill (P)(SFP)
Impairment of goodwill as at year end
10 000
Cr
R
140 000
30 000
10 000
Adjustments and sundry aspects of group statements
(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
150 000
Consideration and NCI
Goodwill impairment
P Ltd 80%
At
120 000
NCI
30 000
30 000
20 000
10 000
180 000
(17 500)
140 000
(14 000)
40 000
(3 500)
(R14 000)
R36 500
R162 500
Goodwill impairment
Since
(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
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
J2
J3
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
Impairment loss (P)(P/L)
Accumulated impairment losses for goodwill (P)(SFP)
Impairment of goodwill as at year end
17 500
Non-controlling interests (SFP) (17 500 × 20%)
Non-controlling interests (SCI)
Recording of non-controlling interests in impairment
loss at year end
3 500
Cr
R
140 000
40 000
17 500
3 500
365
Chapter 6
Example 6.10
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 cost price
Trade receivables
Total assets
EQUITY AND LIABILITIES
Share capital (P Ltd: 200 000 shares/S Ltd: 100 000 shares)
Retained earnings
Trade payables
Total equity and liabilities
P Ltd
S Ltd
850 000
160 000
48 000
240 000
–
57 000
R1 058 000
R297 000
200 000
826 000
32 000
100 000
184 800
12 200
R1 058 000
R297 000
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
–
R216 000
–
R64 800
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 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
Balance at 30 June 20.18
366
Retained earnings
P Ltd
S Ltd
610 000
120 000
216 000
64 800
R826 000
R184 800
Adjustments and sundry aspects of group statements
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
85 000
Retained earnings
R185 000
2
3
4
5
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 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 80%
thereof.
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
367
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
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
#
Retained
earnings
Total
200 000
λ638 000
838 000
44 000
882 000
–
259 760
259 760
12 960
272 720
R200 000 #R897 760 R1 097 760
610 000(P) + 28 000(S) = 638 000
826 000(P) + 71 760 = 897 760
368
Noncontrolling
interests
Share
capital
Total
equity
R56 960 R1 154 720
Adjustments and sundry aspects of group statements
Calculations
C1 Analysis of owners’ equity of S Ltd
P Ltd 80%
Total
i At acquisition (1/7/20.16)
Share capital
Retained earnings
At
Since
NCI
100 000
85 000
80 000
68 000
20 000
17 000
185 000
148 000
37 000
Equity represented by goodwill
– Parent
12 000
12 000
–
Consideration and NCI
197 000
R160 000
37 000
ii Since acquisition
• To beginning of current year:
Retained earnings (120 000 – 85 000)
• Current year:
Profit for the year
Goodwill impairment (1)
35 000
28 000
7 000
44 000
64 800
(8 080)
51 840
(8 080)
12 960
–
R288 720
R71 760
R56 960
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
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)
Non-controlling interests (SFP)
Main elimination journal entry at acquisition date
of S Ltd
100 000
85 000
12 000
Retained earnings – Beginning of year
Non-controlling interests
Recognition of non-controlling interests in retained
earnings at beginning of year
7 000
Cr
R
160 000
37 000
7 000
continued
369
C
Cha
apte
er 6
Dr
R
3
J3
J4
4
on-ccon
ntro
ollin
ng in
nte
eressts (SC
CI)
No
N n-cconttrolling
Non
g in
nterrestts (S
SFP)
Re
eco
ogn
nitio
on of non-c
con
ntro
ollin
ng intere
ests
s in
n cu
urrrentt
ye
ear’’s p
profit
12 960
9
Im
mpairm
mentt loss (P//L)(10 1000 × 80%
8 %) ((refe
er to
o Comment)
A cum
Acc
mulate
ed im
mpairm
ment losssess for go
ood
dwill (S
SFP
P)
Im
mpa
airm
men
nt of
o goo
g odw
will as at 30 Ju
une
e 20
0.18
8
8 080
0
Crr
R
2 96
60
12
8 08
80
Com
C
mme
ent
Iff the
e su
ubsidia
ary is re
egarde
ed as
a a cassh gen
g nera
ating
g un
nit and
a goo
odw
will a
aros
se bec
b ausse o
of th
he
b nes
busi
ss com
c mbin
natio
on, the
en the
e ca
ash ge
enerratin
ng unit, i.e. the
e su
ubsidia
ary, should
d be
b
te
este
ed for
f impairm
men
nt att lea
ast ann
nua
ally.
T ttestt whet
To
w therr an
ny imp
pairrment has
s ta
aken plac
p ce, the
e re
ecovvera
able
e amo
a ountt off th
he
s sidia
subs
ary mu
ust be
b ccom
mpared to the carryin
ng amo
a oun
nt off the
e su
ubsidia
ary and
a d if the
t carrryin
ng
a ountt exxcee
amo
eds the
e recovvera
able
e am
mount, then th
here
e is an imp
pairrme
ent loss
l s. The carrryin
ng
a ountt wiill in
amo
nclu
ude
e the id
den
ntifia
able
e ne
et asse
a ets of the
e su
ubsidia
ary and
d th
he unid
u den
ntifie
ed
a ets that
asse
t t are no
ot reco
ogniised
d se
eparate
ely (i.e.
(
go
oodw
will)).
Iff th
he pare
p ent has e
elected to me
eassure
e the nonn -con
ntro
olling in
nterrestts (in
( the
t
ca
ase of a
p ially
parti
y ow
wne
ed subs
s sidia
ary)) att the
eir p
prop
porttion
nate
e sh
hare
e of the
e accquiree
e’s iden
i ntifia
able
e ne
et
a ets at the
asse
t acq
quissition date, then the go
oodw
will reccogn
nise
ed in
n th
he ccons
solid
date
ed fina
f ancial
s eme
state
entss will
w be
b a
attributtablle to
o th
he parrent an
nd tthe goo
odw
will attrributable to
t the non
nc trolling inte
cont
eresst w
will not
n havve been
b n re
ecog
gnissed.
F the
For
ere to be a ffair com
mpa
arison bettween the
e re
ecov
vera
able
e am
mou
unt and
d th
he carrryin
ng
a ountt, the carrying am
amo
mount of the
e subs
s sidia
ary sh
houlld also
a o in
nclu
ude th
he goo
g odw
will
a buta
attrib
able
e to
o the n
non--con
ntro
olling
g in
nterestss. To
T ach
a hieve
e th
his the go
oodw
will attrribu
utab
ble to
t
th
he p
parent is gro
g sse
ed up
u to
o ca
alcu
ulate th
he tota
t al go
oodwill forr the
e su
ubssidia
ary and
d this figurre
to
oge
ethe
er with
w
the
e ca
arry
ying
g am
mou
unt of the
e su
ubsidiary’s
s ne
et asse
a ets willl be
e eq
qua
al to
o th
he
n ona
notio
ally adjuste
ed carrryin
ng amo
a oun
nt of th
he sub
s sidiiary
y wh
hich
h ca
an be com
mpa
ared
d to
o th
he
re
eco
overrable amount to dete
erm
mine
e the
e im
mpa
airment losss.
T goo
The
odw
will imp
i pairm
men
nt in
n J4
4 wa
as ccalculatted as follows
s:
Impairme
ent losss given
n (to
o be
e allloca
ated
d to goo
odw
will)
(difffere
ence
e be
etween
n ca
arrying am
moun
nt and
a reccove
erab
ble amo
a oun
nt)
R10 100
0
Ass S Ltd
d is a cas
c h gene
g eratting un
nit the losss sh
hou
uld be allo
ocatted in the
pro
ofit--sha
aring ra
atio
o be
etwe
een the
e pa
aren
nt and
a the
e no
on-c
conttrollling
g inttere
ests
and only
o y th
he porrtion
n attrib
a buta
able
e to
o th
he parent is
s re
ecognissed
d. The
T
impairme
ent losss tha
at re
elattes to th
he non
n-co
ontro
ollin
ng inte
eresst is not
reccognise
ed as the go
oodw
will rela
atin
ng to
o th
he non
n -co
ontro
ollin
ng in
nterrestts was
w
no
ot re
ecog
gnissed in tthe con
nsollida
ated fina
anccial stattem
mentts (1
10 100
1 0×8
80%
%).
R 0
R8
080
0
Iff the
e to
otal imp
pairrme
ent losss exxcee
eds the
e no
otionallly a
adjusted
d ca
arryying
g am
mou
unt of
o good
g dwill,
th
hen
n th
he exc
e cesss w
will be allo
ocated to the othe
o er a
assets in the
e ccash
h gene
eratting un
nit
(ssub
bsidiaryy) on a pro
o rata basi
b is (b
bassed on the carrryin
ng amo
a oun
nts of
o th
he asse
a ets)).
3
370
Adjustments and sundry aspects of group statements
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 cost price
Trade receivables
Total assets
EQUITY AND LIABILITIES
Share capital (P Ltd: 100 000 shares/S Ltd: 200 000 shares)
Retained earnings
Trade payables
Total equity and liabilities
P Ltd
S Ltd
520 000
421 000
12 000
400 000
–
105 000
R953 000
R505 000
100 000
758 800
94 200
200 000
291 400
13 600
R953 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
–
–
R318 800
R176 400
Other comprehensive income for the year
TOTAL COMPREHENSIVE INCOME FOR THE YEAR
371
Chapter 6
EXTRACT FROM THE STATEMENTS OF CHANGES IN EQUITY
FOR THE YEAR ENDED 30 JUNE 20.18
Retained earnings
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
P Ltd
S Ltd
490 000
140 000
318 800
(50 000)
176 400
(25 000)
R758 800
R291 400
Additional information
1 P Ltd acquired 160 000 shares in S Ltd on 1 July 20.16 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 remeasured land of S Ltd, with a carrying amount of
R250 000, at R500 000. This remeasurement was not recognised in the records of
S Ltd.
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 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 80%
thereof.
372
Adjustments and sundry aspects of group statements
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 (33 000 – 10 100)
1 170 000
22 900
1 192 900
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 309 900
100 000
902 240
1 002 240
143 860
1 146 100
56 000
107 800
163 800
Total equity and liabilities
R1 309 900
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 (465 100 – 33 260)
Non-controlling interests (35 280(J6) – 2 020(J9))
–
R465 100
431 840
33 260
R465 100
373
Chapter 6
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
Dividends paid
Share
capital
Retained
earnings
Total
Noncontrolling
interests
Total
equity
100 000
λ520 400
620 400
@115 600
736 000
–
431 840
(50 000)
431 840
(50 000)
&33 260
@(5 000)
465 100
(55 000)
Balance at 30 June 20.18 R100 000 #R902 240 R1 002 240
R143 860 R1 146 100
λ 490 000(P) + 30 400(S) = 520 400
# 758 800 + 143 440 = 902 240
& 35 280(C1) – 2 020(C1) = 33 260
@ C1
Calculations
C1 Analysis of owners’ equity of S Ltd
Total
i At acquisition (1/7/20.16)
Share capital
Equity at acquisition (1)(J1)
Retained earnings
P Ltd 80%
At
Since
NCI
200 000
194 000
102 000
160 000
155 200
81 600
40 000
38 800
20 400
496 000
396 800
99 200
Equity represented by goodwill
– Parent and NCI
33 000
24 200
8 800
Consideration and NCI
529 000 R421 000
108 000
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
(1) (500 000 – 250 000) × 77,6% = 194 000
374
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
Adjustments and sundry aspects of group statements
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)
(496 000)
Goodwill
R33 000
C3 Pro forma consolidation journal entries
Dr
R
J1
J2
J3
J4
J5
J6
J7
Land (S)(SFP) (500 000 – 250 000)
Deferred tax (S)(SFP) (250 000 × 80% × 28%)
Equity at acquisition (S)(SCE)
Remeasurement of land of subsidiary at acquisition
date
250 000
Share capital (S)(SCE)
Equity at acquisition (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
194 000
102 000
33 000
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
Non-controlling interests (P/L)
Non-controlling interests (SFP)
Recording of non-controlling interests in current
year’s profit for the year
35 280
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
Impairment loss (P/L)
Accumulated impairment losses for goodwill (SFP)
Impairment of goodwill as at 30 June 20.18
10 100
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
56 000
194 000
421 000
108 000
7 600
35 280
25 000
10 100
2 020
375
Chapter 6
Losses of a subsidiary
6.9
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 considering 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 1 January 20.14, for R80 000. At
1 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
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 in the acquiree at their
proportionate share of the acquiree’s identifiable net assets at the acquisition date.
376
Adjustments and sundry aspects of group statements
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
–
R180 000
TOTAL COMPREHENSIVE INCOME FOR THE YEAR
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
#
Retained
earnings
100 000 # 320 000
–
164 000
Total
Noncontrolling
interests
Total
equity
420 000
50 000
470 000
164 000
16 000
180 000
R100 000 R484 000 R584 000
R66 000 R650 000
200 000(P) + 120 000(S) = 320 000
377
Chapter 6
Calculations
C1 Analysis of owners’ equity of S Ltd
Total
i At acquisition (1/1/20.14)
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
100 000
Net of the identifiable assets acquired and liabilities assumed
at acquisition date: IFRS 3.32(b)
Purchase difference
(100 000)
R–
6.10 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).
IAS 36 determines that an entity should assess whether there is any indication that an
asset could be impaired at each reporting date. If any such indication exists, the entity
378
Adjustments and sundry aspects of group statements
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 believe the postacquisition 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 post-acquisition 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 preparing of 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 1 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
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 cost price less impairment losses
R20 000
The impairment loss was recognised in the current year.
P Ltd elected to measure the non-controlling interests at their proportionate share of the
acquiree’s identifiable net assets at the acquisition date.
379
Chapter 6
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)
396 000
44 000
440 000
Net of the identifiable assets acquired and liabilities assumed at acquisition
date: IFRS 3.32(b)
(440 000)
Purchase difference
R–
C3 Pro forma consolidation journal entries
Dr
R
J1
J2
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
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
Cr
R
376 000
396 000
44 000
continued
380
Ad
djusstm
men
nts and sun
s dry
y asspe
ectss off grrou
up stat
s tem
men
nts
Dr
R
J3
3
J4
4
Re
etaiined
d earn
e ning
gs – B
Beginning
g of year (SC
( CE))
N n-cconttrolling
Non
g in
nterrestts (S
SFP)
Alloc
catiion
n off no
on-c
con
ntro
olliing
g intterestts in reta
r aine
ed
arniing
gs at
a beg
b ginn
ning of
o yea
y r off S Ltd
d
ea
1 000
0
No
on-ccon
ntro
ollin
ng in
nte
eressts (SF
FP)
N n-cconttrolling
Non
g in
nterrestts (P/L
L)
Alloc
catiion
n off no
on-c
con
ntro
olliing
g intterestts in the los
sse
es
he y
yea
ar of
o S Lttd
for th
20 000
0
Crr
R
1 00
00
20
0 00
00
Co
omm
men
nt
a An impairrme
ent loss
l s sh
hall be recogn
nise
ed im
mmedia
atelly in
n prrofit or losss (IA
AS 36.60).
b If the carrryin
ng amo
a ount off the
e in
nvesstment in S Ltd
L is, as in this
t
casse, R2
20 000
0 and
d th
he
orig
gina
al cons
c side
eratiion paiid fo
or th
he iinve
estm
men
nt was
w R396 000
0 0, th
hen the
e am
mou
unt that
t t ha
as
bee
en writ
w tten off (re
ecog
gnissed in prof
p fit or loss) as an imp
pairment lo
osss, is R3
376 000
0.
6
6.11
1 As
sse
ess
sed
d los
ss of
o a sub
s bsiidia
ary
y at
a acq
a quisittion dat
d te
W
Whe
en a par
p rent acqu
uire
es a ccon
ntro
ollin
ng inte
eres
st in a subssidiaryy th
hat is inc
currring
g lo
ossses
s, it
m
mus
st obv
o viou
uslyy have
e a ve
eryy go
ood
d re
easson
n fo
or ta
aking su
uch a ste
ep. Th
he posssib
bilitty e
exis
sts
th
hat the inte
eresst in
i the
t
su
ubssidia
aryy in
ncurrin
ng lossess has
h be
een
n accqu
uire
ed witth the
t
inccom
me
ta
ax possitio
on as the
e main
m n cons
c sidera
atio
on.
A defe
d erre
ed taxx ass
a et arisin
ng from
f m the
e p
pote
ential be
ene
efit of an
n in
nco
ome
e ta
ax losss ca
arry
fo
orw
ward
d (ass
( sessse
ed losss) shall be
e re
eco
ogn
nise
ed at the
e a
acq
quissitio
on datte of the
e bus
b sine
ess
ccom
mbin
nation
n to
o the exte
e ent tha
at iti iss prrob
bab
ble tha
t at th
he tem
t mpo
ora
ary difffere
enc
ce will
w l re
everse
e in
th
he forrese
eea
able futu
ure an
nd ttha
at fu
uture taxxab
ble pro
ofit willl be
b ava
a ailable
e ag
gainstt whic
w ch the
t
u
unused
d ta
ax los
l ses
s ca
an be
e ussed
d (IA
AS 12
2.44
4).
T
The
e pa
arent will ac
cco
ording
gly be pre
epa
are
ed tto pay
p y more
m e fo
or the
t e sh
harres tha
an the
e net ass
set
vvalu
uess ba
ase
ed o
on the
t e ca
arryying
g amo
oun
nts.
T
The
e po
ote
entia
al b
ben
neffit of
o the
t e ac
cqu
uire
ee’ss in
nco
ome
e ta
ax losss car
c rry forrwa
ards
s may
m y not
n ha
ave
ssatis
sfie
ed the
t e re
ecognition crite
c eria
a at th
he acq
a quis
sitio
on da
ate of the
e businesss com
mb
bina
atio
on but
b
th
he beneffit may
m y be
b sub
s bseque
enttly rea
alise
ed (IA
AS 12.68
8). D
Defferrred
d ta
ax b
ben
nefits tha
t at re
ealise
a
after th
he accqu
uisittion
n date
d e o
of the
t
bu
usin
nesss comb
bina
atio
on, bu
ut with
w hin the me
measure
eme
ent
p
period, th
hat re
esulted
d from
m a
add
ditio
ona
al info
orm
mation ab
bou
ut fac
f ts and ccirc
cum
mstanccess th
hat
e
exis
sted
d att th
he a
acq
quissitio
on datte, will be
e acco
a oun
nted fo
or as
a folllow
ws:
l a deb
bit to tthe
e de
eferred ta
ax asssett an
nd a cred
c dit to
t the
t ca
arryying
g am
mo
ount off an
ny goo
odw
will
ed to ttha
at acq
a uisitio
on; or
relate
l if the
t e ca
arryying
g amo
a oun
nt o
of goo
g dw
will is zzero
o, any
a y re
ema
aining
g de
eferred tax beneffitss sh
hall
be
e re
eco
ognise
ed in
n prof
p fit o
or lo
osss (IA
AS 12
2.68
8(a
a)).
Com
C
mm
mentt
S 10
03(2
2) of
o the
t
Inccom
me Tax
T x Acct 5
58 of
o 1962
1 2 plac
p es a liimitt on
n th
he utilis
u sation of suc
ch
a ess
ass
sed lossess.
381
3
Chapter 6
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 – at cost price
Current assets
Income tax expense
Credits
Share capital (P Ltd: 100 000 shares and S Ltd: 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 (/assessed tax 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. Before the business combination, S Ltd was unsure of
sufficient future taxable income against which the assessed tax loss could be used and
correctly did not recognise a deferred tax asset (refer to IAS 12.34) in its individual
statements.
As a result of the synergy from being part of a group of companies, it became probable
(as at the date of the business combination) that future taxable profit would be available
against which the unused tax losses could be used (refer to IAS 12.66).
S Ltd then correctly recognised a deferred tax asset of R61 600 (R220 000 × 28%) in its
individual financial statements in the period after the business combination, and
subsequently fully used the assessed tax loss against taxable income (profit) since
1 January 20.16 and before the current year (i.e., S Ltd was indeed profitable after the
date of the business combination).
382
Adjustments and sundry aspects of group statements
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
383
Chapter 6
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
407 300
29 500
436 800
5 400
126 000
120 600
R427 900 R527 900
Total
equity
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
Deferred tax asset recognised
P Ltd 75%
At
Since
NCI
80 000
60 000
(220 000) (165 000)
61 600
46 200
20 000
(55 000)
15 400
Equity represented by goodwill – Parent
(78 400)
68 800
(58 800)
68 800
(19 600)
–
Consideration and NCI
(9 600) R10 000
(19 600)
(220 000 × 28%)(J1)
ii Since acquisition
• To beginning of current year:
Retained earnings
196 400
147 300
49 100
(38 000 – (–220 000) – 61 600 (J3))
• Current year:
Profit for the year (30 000 – 8 400)
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)
10 000
(19 600)
(9 600)
Net of the identifiable assets acquired and liabilities assumed at acquisition
date: IFRS 3.32(b) (–(–78 400))
Goodwill
384
78 400
R68 800
Adjustments and sundry aspects of group statements
C3 Pro forma consolidation journal entries
Dr
R
J1
J2
J3
J4
J5
Deferred tax asset (S)(SFP) (220 000 × 28%)
Equity at acquisition (deferred tax expense)
Recognition of deferred tax asset at acquisition date
61 600
Share capital (S)(SCE)
Accumulated loss (S)(SCE)
Equity at acquisition (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
Cr
R
61 600
220 000
61 600
10 000
68 800
19 600
Accumulated loss/Retained earnings (S)(SCE)
Deferred tax asset (S)(SFP)
Reversal of entry done by subsidiary for deferred tax
also recognised within the group at the time of the
business combination
61 600
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
Non-controlling interests (P/L)
Non-controlling interests (SFP)
Recording of non-controlling interests in current
year’s profit for the year
5 400
61 600
49 100
5 400
Insolvent subsidiaries
6.12 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 fairly valued assets of the company 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.
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
385
Chapter 6
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 because 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 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.
6.13 Accounting for an insolvent subsidiary
Where a parent has an insolvent subsidiary, various situations can be discerned, each
of which must 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.
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.
continued
386
Adjustments and sundry aspects of group statements
Situation
Financial statements
of parent
Consolidated financial
statements
Financial statements
of subsidiary
(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.
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.
387
Chapter 6
Acquisition of an insolvent subsidiary
6.14 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 believes 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 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 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 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.
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.
388
Adjustments and sundry aspects of group statements
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 price less
impairment losses (Cost price – R10 000)
Trade receivables
Total assets
EQUITY AND LIABILITIES
Share capital (P Ltd: 50 000 shares/S Ltd: 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
6 000
Other comprehensive income for the year
TOTAL COMPREHENSIVE INCOME FOR THE YEAR
S Ltd
2 000
–
–
R6 000
R2 000
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.
389
Chapter 6
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 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
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))
Other comprehensive income for the year
TOTAL COMPREHENSIVE INCOME FOR THE YEAR
Total comprehensive income attributable to:
Owners of the parent (8 000 – 400)
Non-controlling interests
8 000
–
R8 000
7 600
400
R8 000
390
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
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
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)
391
C
Cha
apte
er 6
C
C2 Prroo
of of
o c
calc
cula
atio
on of go
ood
dwiill of
o S Ltd
L in terrms
s of
o IF
FRS 3.32
3 2
C
Con
nsid
dera
atio
on transfferrred at ac
cquisittion
n da
ate: IF
FRS
S 3.32
3 2(a))(i)
A
Amo
oun
nt of
o non
n n-co
ontrrolling
g interestts: IFR
RS 3.3
32(a)(ii)
10 00
00
00)
(1 60
00
8 40
N
Net of the
e id
den
ntifia
able ass
a etss ac
cqu
uire
ed and
a d lia
abilitie
es ass
a sum
med
d
att accqu
uisittion
n da
ate
e: IF
FRS
S3
3.32
2(b) (R
Reffer to com
mm
men
nt)
8 00
00
G
Goo
odw
will
R 40
R16
00
Co
omment
Th
he iiden
ntifia
able
e lia
abilities
s assu
ume
ed a
at acqu
a uisittion
n arre grea
g ater tha
an tthe assetss acqu
uired
d,
wh
hich
h re
esultts in
n a ne
egattive nett asssett sittuattion. Th
he iimp
plica
ation
ns of
o th
he abo
ove callculatio
on
arre th
hat the
e ne
et lia
abillities
s are add
a ded to the
t sum of
o th
he con
c nside
eration
n tra
ansfferrred and
d th
he
am
mou
unt of
o nonn -con
ntro
olling in
ntere
estss (e
e.g. –(–
–8 000)
0 )).
C
C3 Prro form
f ma
a co
ons
solida
atio
on jou
j urn
nal enttrie
es
D
Dr
R
J1
1
2
J2
3
J3
4
J4
J5
5
3
392
Crr
R
Invvesstmentt in S Ltd
L (P
P)(S
SFP
P)
Imp
pairrme
ent losss reve
r ersed at acq
a quissitio
on dat
d te (P/L
L)
Re
eve
ersa
al of
o imp
pairrme
ent los
ss
10 000
0
Sh
hare
e capital (S))(SC
CE
E)
A cum
Acc
mulate
ed lo
osss (S
S)(S
SCE
E)
Invvesttme
ent in S Ltd
L (P)(SF
FP))
Go
ood
dwilll (S
SFP
P)
No
on-con
ntro
ollin
ng inte
eressts (SF
FP))
Elimiina
atio
on of
o own
o nerrs’ equ
e uity
y off S Ltd
d at
a acqu
uis
sitio
on
da
ate
2
20 000
0
Re
etaiined earn
e ning
gs – B
Beginning
g of ye
ear (S)(SC
CE))
Non-cconttrollling
g in
nterrestts (SFP)
Re
eco
ording
g off no
on--contrrolling
g in
nterrests in
i reta
r ained
ea
arniing
gs at
a beg
b ginn
ning of
o yea
y r
200
2
No
on-con
ntro
ollin
ng inte
eressts (P//L)
Non-cconttrollling
g in
nterrestts (SFP)
Re
eco
ording
g off no
on--contrrolling
g in
nterrests in
i cur
c rren
nt
ye
ear’’s p
pro
ofit forr the y
year
400
4
Im
mpairm
ment off go
ood
dwill (P
P/L))
Goodw
will (SFP)
Re
eco
ording
g off go
ood
dwiill imp
pairrme
entt
10
0 00
00
28
8 00
00
10
0 00
00
16 400
4
1 600
6
20
00
40
00
16 400
4
16
6 40
00
Adjustments and sundry aspects of group statements
Insolvency of a subsidiary after acquisition
6.15 Basic consolidation procedures
If 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, 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-lineitem consolidation as determined by IFRS 5. The basic calculations remain like those
applied in example 6.16.
However, should the parent believe 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 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 price less
impairment losses
Loan to S Ltd
Trade receivables
Total assets
EQUITY AND LIABILITIES
Share capital (P Ltd: 50 000 shares/S Ltd: 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
393
Chapter 6
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
326 000
15 000
–
–
R326 000
R15 000
Other comprehensive income for the year
TOTAL COMPREHENSIVE INCOME FOR THE YEAR
S Ltd
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 fairly valued and
there were no unaccounted for contingent liabilities.
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 in the acquiree at their fair value
of R17 000 on 1 January 20.17, the acquisition date.
394
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 (341 000 – 3 000)
Non-controlling interests
341 000
–
R341 000
338 000
3 000
R341 000
395
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
65 000
52 000
13 000
Equity represented by goodwill
– Parent and NCI
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
396
Adjustments and sundry aspects of group statements
C3 Pro forma consolidation journal entries
Dr
R
J1
J2
J3
J4
Investment in S Ltd (P)(SFP)
Impairment loss reversed at acquisition (P/L)
Reversal of impairment loss
64 000
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
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
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
6.16 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, 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.
397
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).
Several 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.
6.17 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.
398
Adjustments and sundry aspects of group statements
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.
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, to simplify the classification of preference shares for
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
399
C
Cha
apte
er 6
p
proffit or
o lo
osss. S
Such
h divid
d den
ndss there
eforre also
a o ha
ave
e no
o effe
e ct on
o the
e co
onssolid
dattion
n prroce
ess
s.
In
n all
a oth
o er insstan
nce
es pre
p eferrence sh
hare
es are
e assu
a um
med to
o be
e non
n -re
edeem
mab
ble and are
a
th
herrefo
ore re
egarde
ed as eq
quitty insttrum
mentss fo
or the
t
pu
urpose
es of thiis w
worrk. Fu
urth
herm
mo
ore,
ssuch
h an
a inv
i esttme
ent in the
ep
preffere
encce sha
s ares of
o a su
ubssidiiaryy iss re
ega
arde
ed as be
eing
g part
o
of th
he net in
nve
estm
men
nt in
i the
t su
ubssidia
aryy ass a wholle, becau
use
e of th
he e
equ
uityy na
ature o
of the
t
p
preffere
ence sha
s ares
s. In
nve
estm
men
nts in pre
eferrence share
es are
a co
onso
olid
date
ed in term
t ms of IFR
RS 10
in
n th
he sam
s me ma
anner as
a ord
dina
ary sha
are
es.
Com
C
mm
mentt
T s vie
This
ew is subs
s stan
ntiated by the
e de
efinition
n of non-co
ontrolliing inte
eressts in IF
FRS
S 10
0, w
whic
ch
d erm
dete
mine
es th
hat “no
on-c
conttrollling inttere
ests is the
e eq
quity
y in
n a sub
bsid
diary
y no
ot attri
a buttable
e,
d ectly
dire
y or ind
direcctly, to a pare
p ent” (IF
FRS 10 App
pendix A).
C
Cons
solida
atiion
n pro
p oce
edu
ure
es whe
w ere
e th
he ca
apita
al of
o the
t e sub
s bsidiiarry
in
nc
clud
de
es pre
efe
ere
ence
e sh
ha
ares
6
6.18
8 Th
he trea
t atm
ment of prrefe
ere
enc
ce sha
s are
es and the
t eir pro
ofitt-s
sha
arin
ng pre
efe
ere
ential
rig
ghtt whe
en pre
p epa
aring
g co
onso
olid
date
ed fin
nan
ncial sttate
em
men
nts
s
W
Whe
en dra
awiing up
p co
onssolidatted
d fin
nan
ncia
al sstattem
men
nts, sp
pec
cificc attten
ntio
on mus
m st be
b givven to
th
he rightss atttacche
ed to
t pre
p ferenc
ce sha
are
es. If the
t sh
hare
e ccapital of a sub
bsid
dia
ary con
nsissts of
m
morre tha
t n one
o e classs of sharres
s, th
he tota
t al o
own
nerr’s equ
uityy mus
m st be
b allo
a ocatted
d be
etw
wee
en the
t
d
diffe
eren
nt clas
c sse
es of
o cap
c pita
al in
n ac
cco
orda
ancce w
with
h th
he parrticcula
ar riights atta
a ach
hed
d to
o ea
ach
h. The
T
p
purp
posse of
o suc
s ch allo
a ocattion
n iss to
o:
l ide
enttify the
e equiity of the
t e su
ubssidia
aryy atttrib
buta
able to
o th
he tota
al inve
estme
ent of the
e pa
are
ent;
an
nd
l de
eterrmiine the
e to
otal in
nterrestt off the non
n n-co
ontrolling
g in
nterrestts (wh
( here
e app
a lica
able
e).
A
At acq
a quissitio
on da
ate,, th
he accquirer sha
s all m
measu
ure
e th
he no
on-ccon
ntro
ollin
ng intere
estss in
n the
t
a
acquire
ee (thatt are
a e pres
p sen
nt ow
wne
ersh
hip in
nteressts and entittle th
heirr hold
h derrs to a
p
prop
porrtion
natte sha
are
e of
o the
t e entit
e ty’ss net
n as
sse
ets in th
he evven
nt of
o liqu
uidatio
on)) a
at the
t
p
prop
porrtion
natte ssha
are of the
e en
ntity
y’s ide
enttifia
able
e ne
et ass
a setss or att fa
air valu
v ue (IFRS
S 3..19
9).
Iff th
he non-ccon
ntro
ollin
ng inte
ere
ests
s in
n th
he accquiree
e are
a e no
ot entitle
ed on
n liq
quidattion
n o
of the
t
a
acquire
ee to a p
pro
oportio
ona
ate sha
are
e off th
he a
acq
quirree
e’s nett as
sse
ets the
en the
e non--co
ontrrolliing
in
nteressts sha
all be me
eassure
ed at the
t eir acq
a quissitio
on--datte fair
f r va
alue
es (IF
( RS
S 3.19)).
Iff th
he non
n n-co
onttrolling
g in
nteressts incclud
de pre
eferren
nce sh
hare
es the
en the
em
mea
asurem
men
nt o
of the
t
p
preffere
encce sha
s are ca
apita
al will
w be
e de
etermine
ed as
a follo
f ows:
l the acq
a quirree ha
as isssued pre
p ferencce share
es and
d the prrefe
eren
nce
e sha
s ress give
e th
heir
ho
olde
ers a right to
t a pref
p fere
enttial divvide
end
d in
n priorrityy to the pay
p yme
ent of an
ny div
d ide
end
to the
e hold
h ders of
o ordi
o narry sha
s aress and
a d the pref
p fere
encce sha
are
eholde
ers are
e onlyy en
ntitlled
to re
ece
eive
e a repa
aym
ment of th
he no
omin
nal valu
ue of the pre
eferren
nce sharre up
pon
liq
quid
datiion of the
e acqu
a uire
ee.
In this situ
s uatiion, th
he acq
quirerr meassurres the pref
p fere
enc
ce sha
are
es a
at the
t ir acq
a quissitio
onate fair va
alue,
da
l the acq
a quirree ha
as isssued pre
p ferencce share
es and
d the prrefe
eren
nce
e sha
s ress give
e th
heir
olde
ers a right to
t a pref
p fere
enttial divvide
end
d in
n priorrityy to the pay
p yme
ent of an
ny div
d ide
end
ho
to the hold
h derrs of
o ord
o dina
ary sh
hare
es and the
t prrefe
eren
nce
e shareh
hold
ders are
a en
ntitlled to
4
400
Adjustments and sundry aspects of group statements
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.
P Ltd recognised the equity investment in S Ltd in its separate records using the cost
price method.
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 must 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
P Ltd 0%
At
Since
NCI
30 000
10 000
–
–
30 000
10 000
R40 000
R–
R40 000
401
Chapter 6
Example 6.18
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.
P Ltd recognised the equity investment in S Ltd in its separate records using the cost
price method.
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.
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?
402
Adjustments and sundry aspects of group statements
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
201 040
115 200
–
–
R201 040
R115 200
Other comprehensive income for the year
TOTAL COMPREHENSIVE INCOME FOR THE YEAR
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
At the acquisition date, the assets and liabilities were 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 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 in the acquiree at their
proportionate share of the acquiree’s identifiable net assets at the acquisition date.
403
C
Cha
apte
er 6
So
oluttion
n 6..19
T
The
e good
dwill or ga
ain fro
om a ba
arga
ain purc
cha
ase att acqu
uisiition will
w l be calc
c culate
ed as
fo
ollo
owss:
C
Calc
cullatiion
ns
C
C1 An
naly
ysiis o
of the
t e ow
wners
s’ equ
e uity
y off S Ltd
P Ltd
L 80%
%
O
Ord
dinary
y sh
harres
T al
Tota
NC
CI
Att
i At acquisittion
n (1
1/3//20.15
5)
e ca
apittal
Share
Re
etain
ned
d ea
arning
gs
40 000
80 000
32 00
00
64 00
00
8 00
00
16
6 00
00
120 000
0
6 000
0
96 00
00
6 00
00
24
4 00
00
–
R126 000
0 R102 00
00
R 4 00
R24
00
epre
ese
ente
ed by
b goo
odw
will – Pare
P entt
Equityy re
Co
onsiideratiion and NCI
N
S
Since
C
C2 Prroo
of of
o c
calc
cula
atio
on of go
ood
dwiill of
o S Ltd
L in terrms
s of
o IF
FRS 3.32
3 2:
C
Con
nsid
dera
atio
on transfferrred at ac
cquisittion
n da
ate: IF
FRS
S 3.32
3 2(a))(i)
A
Amo
oun
nt of
o non
n n-co
ontrrolling
g interestts: IFR
RS 3.3
32(a)(ii)
102
1
2 00
00
24
4 00
00
1 6 00
126
00
N
Net of the
e id
den
ntifia
able ass
a etss ac
cqu
uire
ed and
a d lia
abilitie
es ass
a sum
med
d
att accqu
uisittion
n da
ate
e: IF
FRS
S3
3.32
2(b)
(1
120
0 00
00)
G
Goo
odw
will
R6
6 00
00
Com
C
mm
mentt
a T
The
e an
naly
ysis
s of the
e ow
wne
ers’ eq
quitty of
o S Ltd
d is expan
nded
d to
o incclud
de the
t ana
alyssis of
o
tthe prefere
ence ow
wne
ers’ equityy.
b S
Sinc
ce the
t
non-co
ontrrolling inte
eressts tha
at re
elate
e to
o S Ltd
d’s pre
efere
enc
ce shar
s res do
o no
ot
q
qua
alify
y for th
he m
mea
asurrem
mentt ch
hoice in
n IF
FRS
S 3.19 beccausse theyy do not
n enti
e itle the
eir
h
hold
derss to a prop
p porttion
nate
e sh
hare
e of the
e en
ntityy’s n
net asssetss in the
e ev
ventt off liquida
atio
on
tthe prefere
ence sh
hare ca
apittal mus
m st be
e meas
m sure
ed a
at th
he acq
a uisition
n-da
ate fair vallue..
C
C3 An
naly
ysis o
of pre
p ferren
nce ow
wne
ers
s’ equ
e uity
y off S Ltd
d
P
Pre
eferren
nce sh
hare
es
S
Sha
are ca
apita
al
E
Equ
uityy atttrib
buta
able
e to
o go
ood
dwill – NC
CI
C
Con
nsid
derratio
on and
d NCI
N
4
404
To
otal
P Ltd
L 0%
%
A
At
S nce
Sin
NC
CI
10 000
0
2 000
0
10
0 00
00
2 00
00
R12 000
0
R 2 00
R12
00
Ad
djusstm
men
nts and sun
s dry
y asspe
ectss off grrou
up stat
s tem
men
nts
C
C4 Pro
ooff off ca
alc
cula
atio
on of go
ood
dwill of
o p
preferrence sh
hare
es of S Ltd
L d in
n te
erm
ms of
o
IFR
RS 3.3
32::
C
Con
nsid
dera
atio
on transfferrred at ac
cquisittion
n da
ate: IF
FRS
S 3.32
3 2(a))(i)
–
A
Amo
oun
nt of
o non
n n-co
ontrrolling
g interestts: IFR
RS 3.3
32(a)(ii)
00
12 00
12 00
00
N
Net of the
e id
den
ntifia
able ass
a etss ac
cqu
uire
ed and
a d lia
abilitie
es ass
a sum
med
d
att accqu
uisittion
n da
ate
e: IF
FRS
S3
3.32
2(b)
(10 00
00)
G
Goo
odw
will
R 00
R2
00
Com
C
mm
mentt
T e co
The
onssolid
date
ed amoun
nts can b
be obttain
ned eittherr by
b sett
s ting offf th
he pro
o fo
orm
ma
c soliidattion journal entr
con
e riess ag
gain
nst the
e co
omb
bine
ed amoun
nts of the
e pa
arent and
a d th
he
s bsidiiaryy (in
sub
n a wo
orks
sheet), or byy mere
m ely add
a ding
g ce
ertain amo
a oun
nts in resp
r pecct off th
he
s bsidiiaryy to tha
sub
at off the
e pa
aren
nt.
6
6.19
9 Th
he cal
c lcu
ulattion of
o no
on-c
con
ntrrollling
g inte
ere
ests in the
t e prof
p fit of the cur
c rre
ent
rep
portin
ng pe
erio
od
d off a su
ubs
sid
diarry with prrefe
ere
enc
ce sh
harre cap
c pita
al
W
Whe
ere
e a su
ubssidia
aryy has isssue
ed pre
eferen
nce
e sh
harres, th
hes
se pre
eferen
nce sh
harres ha
ave
e a
p
preffere
ential cla
aim
m to
o th
he pro
p ofit of the
e sub
s sid
diary for tha
at rep
r orting
g pe
erio
od. Th
his rig
ght is,
h
how
wevver, lim
mite
ed to a pre
p detterm
min
ned
d am
mo
ount per yea
ar, na
ame
ely the
ea
amo
oun
nt of
o the fix
xed
p
preffere
encce div
d ide
end. The
T inttere
estt off th
he o
ord
dina
ary ow
wne
ers in the
e prof
p fit of
o the su
ubsidia
ary
fo
or the
e currentt re
epo
ortin
ng pe
erio
od is thu
t us a
afte
er the
e prof
p fit attr
a ribu
utab
ble to
o th
he pre
eferren
nce
sshareh
hold
derrs (i.e
e. pre
eferen
nce
e divi
d den
nd)) has
h s bee
b en ac
cco
ountted
d ffor, assu
a um
ming
g the
t
p
preffere
encce sha
s ares are
a cumu
ulattive
e (a
as disc
d cus
sse
ed in 6.17
6 7(c
c)). An
n im
mpo
orta
ant aspecct w
which
m
mus
st con
c nseq
que
enttly be
b kept in min
m nd is tha
t at whe
w en the
t no
on-con
ntro
ollin
ng intere
estss hold
d bo
oth
p
preffere
encce and
a d ordi
o inary sha
are
es, the
e non
n -co
ontrrolling
g in
nterrestts in
i the
t e prrofit fo
or the
t e ye
ear
in
nclu
ude
es the
t e follow
win
ng:
l the pro
p o ra
ata po
ortion off th
he pre
eferren
nce diivid
den
nd ffor th
he cur
c rren
nt rep
portting
g p
periiod
atttrib
buta
able
e to th
he prefe
eren
nce
e sha
s areholldin
ng off th
he no
on--co
ontrrolling in
nteres
sts,
irrresp
pecctivve of wh
heth
herr such
h pre
p ferenc
ce divvide
end
d is pai
p d or
o decla
ared
d, or ev
ven
wh
herre no prrovvisio
on ha
as bee
en made
e for
f a pre
efe
eren
nce
e divid
d den
nd in the fina
f anc
cial
sta
ate
eme
entss of
o th
he sub
s bsid
diary; and
l the pro
p ra
ata share
e attrib
buttable to the
e ordin
narry sha
s areholldin
ng of the
e non--co
ontrrolliing
inttere
ests in the cu
urre
ent profitt fo
or the reportin
ng per
p riod
d whic
w ch rem
mainss affterr th
he full
f
prrefe
eren
nce
e divid
den
nd for
f the
e re
epo
ortin
ng perriod
d ha
as been takken
n in
nto acc
cou
unt..
405
4
Chapter 6
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
P Ltd
S Ltd
350 000
102 000
17 040
266 200
–
35 000
R469 040
R301 200
100 000
40 000
20 000
10 000
Retained earnings
Trade and other payables
340 040
9 000
219 200
32 000
Total equity and liabilities
R469 040
R301 200
ASSETS
Property, plant and equipment
Investment in S Ltd: 32 000 ordinary shares at cost price
Trade receivables
Total assets
EQUITY AND LIABILITIES
Share capital: Ordinary shares
(P Ltd: 100 000 shares/S Ltd: 40 000 shares)
Share capital: 10% preference shares
(P Ltd: 20 000//S Ltd: 10 000 shares)
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
201 040
115 200
–
–
R201 040
R115 200
Other comprehensive income for the year
TOTAL COMPREHENSIVE INCOME FOR THE YEAR
406
Adjustments and sundry aspects of group statements
EXTRACTS FROM THE STATEMENTS OF CHANGES IN EQUITY
FOR THE YEAR ENDED 28 FEBRUARY 20.18
Retained earnings
Balance at 1 March 20.17
Changes in equity for 20.18
Total comprehensive income for the year:
Profit for the year
Dividend paid: Ordinary (31 January 20.18)
Dividend paid: Preference (31 January 20.18)
Balance at 28 February 20.18
P Ltd
S Ltd
164 000
125 000
201 040
(25 000)
–
115 200
(20 000)
(1 000)
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
2
3
4
At the acquisition date, the assets and liabilities were 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 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 in the acquiree at their
proportionate share of the acquiree’s identifiable net assets at the acquisition date.
407
Chapter 6
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
41 000
R676 240
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
408
Adjustments and sundry aspects of group statements
P LTD GROUP
CONSOLIDATED STATEMENT OF CHANGES IN EQUITY
FOR THE YEAR ENDED 28 FEBRUARY 20.18
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
Share
Share
capital – Retained
capital –
earnings
PreOrdinary
ference
100 000
20 000 * 200 000
–
–
R100 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
Calculations
C1 Analysis of the owners’ equity of S Ltd
P Ltd 80%
Ordinary shares
Total
NCI
At
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 (125 000 – 80 000)
• Current year:
Profit for the year
Income attributable to preference
shareholders
Dividends paid
Since
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
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
409
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)
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
NCI
At
Since
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
C3 Pro forma consolidation journal entries
Dr
R
J1
J2
J3
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
Non-controlling interests (SVE)
Non-controlling interests (SFP)
Recognition of non-controlling interests in since
acquisition retained earnings
9 000
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
Cr
R
102 000
24 000
12 000
9 000
23 840
continued
410
Adjustments and sundry aspects of group statements
Dr
R
J5
J6
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
Example 6.21
Cr
R
20 000
1 000
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
411
C
Cha
apte
er 6
S LT
TD
EX
XTRA
ACT
T FR
RO
OM TH
T E STA
S ATE
EMEN
NT OF
O CH
HAN
NGES
S IN
N EQ
QUITY
Y
FO
OR TH
HE YE
EAR
R END
DED
D 31
1 DEC
D CEM
MBER
R 20
0.18
8
Rettain
ned
d
earrnin
ngs
s
B
Ballance at 1 J
Jan
nua
ary 20..18
C
Cha
ang
ges
s in
n eq
quity for
f 20
0.18
8
T
Tottal com
c mprrehe
ens
sive
e in
ncom
me forr the yea
y r:
P
Pro
ofit for
f the
e ye
ear
P
Pre
eferrencce divvide
end pa
aid
O
Ord
dina
ary divvide
end
d pa
aid
45 00
00
29 00
00
(4 000)
( 000)
(10
B
Ballance at 31 De
ece
emb
ber 20
0.18
8
R 00
R60
00
O
On 1 Jan
J nuary 20..18
8, P Lttd a
acq
quirred 80
0% of the
e ordi
o nary sha
s ares of
o S Lttd for
f R1
120
0 00
00,
a
and 50%
% of
o tthe
e prefere
encce sha
are
es of S Ltd for
f R
R25 00
00. Th
herre we
ere no
o a
arre
ear
p
preffere
encce divi
d idendss at
a th
hat da
ate.
T
The
e prrefe
erence
e sharreh
hold
derss have
e a prrefe
erentia
al righ
r ht to
o th
heirr diivid
den
nd pay
p yme
ent an
nd will
w
re
ece
eive
e a propo
ortiionate
e sh
harre of
o th
he net assse
ets avvaila
able
e fo
or dist
d trib
bution up
pon liq
quid
datiion
o
of th
he acq
a quiree
e. The
T e fair valu
v ue of
o the
t pre
efe
eren
nce
e sh
harres at acq
quiisitiion da
ate is R26 0
000
0.
A
At the accquisittion
n da
ate
e, th
he assetts and
a d lia
abilitie
es we
ere fairly va
alue
ed and
d therre we
w re no
u
unacco
oun
nted
d fo
or con
c ntin
ngent lliab
bilitiess.
P Ltd
L
eleccted
d to me
eassure
e the
t
n -co
non
ontrrolling
g in
nteres
sts in th
he ac
cqu
uire
ee at th
heir
p
prop
porrtion
natte ssha
are of the
e accqu
uire
ee’ss id
dentifia
able
e net
n asssetts at
a th
he acq
quisition da
ate.
So
oluttion
n 6..21
T
The
e non--co
ontrrolliing in
nterrestts in the
e pro
p ofit of S Lttd forr th
he rep
porrting per
p riod
d e
end
ded
3
31 Dec
D cem
mbe
er 2
20.18 will be
b ccalc
cula
ated as
a ffollo
owss:
A pro
p
ra
ata po
ortion off th
he prrefe
erence
e d
diviidend fo
or tthe
e curr
c rent rreportiing perio
od is
a
attributtab
ble to the
e prefe
ere
ence sha
s areh
hold
din
ng of
o the
t no
on-ccon
ntro
ollin
ng inte
ere
estss (irrresspe
ective
o
of whe
w ether the
e pref
p fere
encce div
vide
end
d has
h
be
een
n paid
p d, o
or de
ecla
ared
d, or evven wherre no
p
prov
vision ha
as b
bee
en ma
ade
e fo
or th
he pre
eferen
nce
e divid
dend in the financcia
al sttate
ementts o
of the
t
ssubsidiaryy):
P
Pro ratta sha
s are of pre
eferen
nce
e div
vidend
d: 50%
5 % × 4 00
00
2 00
00
P
Pro ratta sha
s are of pro
ofit atttributa
able
e to
o orrdin
narry sha
s areh
hold
derrs
buta
able to
o th
he non
n-ccontrolling in
nte
eressts:: 20
0% × 25
2 000
5 00
00
atttrib
N
Non
n-co
ontrollling
g in
nterrestts
R7
7 00
00
Com
C
mm
mentt
If P Ltd
d, in
n the exam
mple
e ab
bovve, held
h d no
o prrefe
eren
nce sha
aress in
n S Ltd, the non--con
ntro
olling
g
interestts in
i prof
p fit w
wou
uld have am
mounted
d to
o R9
R 0
000
0 (4
4 00
00(p
preference
e dividend
d) +
5 00
00(C
C1)).
In
n th
he inttere
est of cla
arityy, the
t e treattme
ent off the pre
p ferencce share
e capiital an
nd pre
eferren
nce
d
divid
den
nd in the
t e an
nalyysiss of
o th
he ow
wners’ eq
quity of
o S Lttd iis dea
d alt with
w hn
nextt. The
T e prro fform
ma
cconsolida
ation jo
ourrna
al en
ntriies are
e also
a o given
n.
4
412
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 (1/1/20.18)
Share capital
Retained earnings
100 000
45 000
80 000
36 000
20 000
9 000
145 000
116 000
29 000
4 000
4 000
–
149 000
R120 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
20 000
(8 000)
R12 000
25 000
(10 000)
R164 000
NCI
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
At
NCI
Since
4 000
(4 000)
2 000
(2 000)
2 000
(2 000)
R50 000
–
R25 000
413
Chapter 6
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
25 000
Amount of non-controlling interests: IFRS 3.32(a)(ii)
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
100 000
50 000
45 000
4 000
120 000
25 000
54 000
Non-controlling interests (P/L) (5 000 + 2 000)
Non-controlling interests (SFP)
Recognition of non-controlling interests
in the profit for the year
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
Example 6.22
Cr
R
7 000
10 000
4 000
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 and 60% of the preference
shares 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
414
Adjustments and sundry aspects of group statements
liquidation of the acquiree. The fair value of the preference shares at acquisition date is
R13 000.
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 in the acquiree at their fair value at
the acquisition date. The fair value of the ordinary non-controlling interests at acquisition
was R12 000.
At the acquisition date, the assets and liabilities of S Ltd were 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 cost price:
40 000 ordinary shares
18 000 7% preference shares
Trade receivables
Total assets
EQUITY AND LIABILITIES
Share capital: Ordinary
S Ltd
78 900
65 000
47 000
20 000
34 000
–
–
32 000
R179 900
R97 000
150 000
50 000
–
29 900
R179 900
30 000
17 000
R97 000
(P Ltd: 150 000 shares/S Ltd: 50 000 shares)
Share capital: 7% Preference (30 000 shares)
Retained earnings
Total equity and liabilities
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
21 600
11 100
–
–
R21 600
R11 100
Other comprehensive income for the year
TOTAL COMPREHENSIVE INCOME FOR THE YEAR
415
Chapter 6
EXTRACT FROM THE STATEMENTS OF CHANGES IN EQUITY
FOR THE YEAR ENDED 31 DECEMBER 20.19
Retained earnings
P Ltd
S Ltd
Balance at 1 January 20.19
Changes in equity for 20.19
Total comprehensive income for the year:
Profit for the year
Preference dividend paid
Ordinary dividend paid
21 800
12 500
21 600
–
(13 500)
11 100
(2 100)
(4 500)
Balance at 31 December 20.19
R29 900
R17 000
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
416
R212 900
Adjustments and sundry aspects of group statements
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
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
@ 12 300(ordinary) + 13 000(preference) = 25 300
#
&
900(ordinary) + 840(preference) = 1 740
13 200(ordinary) + 13 000(preference) = 26 200
417
Chapter 6
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 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
At
1 500
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
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 and NCI
ii Since acquisition
• Current year:
Profit attributable to preference
shareholders
Preference dividend
418
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
djusstm
men
nts and sun
s dry
y asspe
ectss off grrou
up stat
s tem
men
nts
Ad
C
C4 Pro
ooff off ca
alc
cula
atio
on of go
ood
dwill of
o p
preferrence sh
hare
es of S Ltd
L d in
n te
erm
ms of
o
IFR
RS 3.3
32::
C
Con
nsid
dera
atio
on transfferrred at ac
cquisittion
n da
ate: IF
FRS
S 3.32
3 2(a))(i)
0 00
00
20
A
Amo
oun
nt of
o non
n n-co
ontrrolling
g interestts: IFR
RS 3.3
32(a)(ii)
13
3 00
00
33
3 00
00
N
Net of the
e id
den
ntifia
able ass
a etss ac
cqu
uire
ed and
a d lia
abilitie
es ass
a sum
med
d
att accqu
uisittion
n da
ate
e: IF
FRS
S3
3.32
2(b)
( 0 00
(30
00)
G
Goo
odw
will
R3
3 00
00
Com
C
mm
mentt
a If the pare
p ent, as well ass th
he nonn -con
ntro
olling in
nterrests, hold
h ds prefe
p erence
e sh
hare
es o
of th
he
ssubs
sidiary, th
he a
analysis iss sttill d
done in
n th
he usu
u ual way
w y. The
T
elim
min
natio
on of
o com
c mmo
on
ittem
ms, intra
i agro
oup
p ba
alan
ncess an
nd tthe detterm
mina
ation of
o th
he nonn -con
ntro
olling
g in
ntere
estss arre
a
also
o do
one in the
t usu
ual way
w y.
b If the purc
p chasse p
pric
ce paid
p
byy the
e pa
aren
nt for suc
s h prefe
p eren
nce
e sh
hare
es diffe
d rs from
f m th
he
n
net assset valu
v ue o
of th
he sha
s res, go
oodwill or a gain
g
fro
om a ba
arga
ain purrcha
ase is crea
c ated
d,
a
as in
n th
he case
c e wiith the
t acq
quissition off ord
dina
ary sha
ares
s.
c If the parent has
h ele
ecte
ed to
o meas
m sure
e th
he nonn -con
ntro
olling
g in
ntere
estss att the
eir fair
f valu
ue at
a
the acq
quissition da
ate and
d th
he fa
air vvalu
ue of
o th
he pref
p fere
ence
e sh
hare
es is highe
er th
han
n the
e ne
et
a
asse
et valu
v e off the
e sh
hare
es then
t n go
oodwill will be
e cre
eate
ed.
C
C5 Prro form
f ma
a co
ons
solida
atio
on jou
j urn
nal enttrie
es
D
Dr
R
1
J1
J2
2
J3
3
Crr
R
Sh
hare
e capital:: Orrdin
naryy (S
S)(S
SCE)
Sh
hare
e capital:: Prrefe
eren
nce
e (S
S)(S
SCE
E)
Re
etaiined earn
e ning
gs (S)
( (SC
CE))
Go
ood
dwilll (S
SFP
P)
Ga
ain ffrom
m barg
b gain
n purc
chasse
Invvesttme
ent in S Ltd
L (P)(SF
FP))
Invvesttme
ent in S Ltd
L (P)(SF
FP))
Non-cconttrollling
g in
nterrestts (SFP) (122 000 + 13 000)
Elimiina
atio
on of
o own
o nerrs’ equ
e uity
y off S Ltd
d at
a date
d e
of ac
cqu
uisittion
n
5
50 000
0
3
30 000
0
11 000
0
3 000
0
Re
etaiined earn
e ning
gs (S)
( (SC
CE))
Non-cconttrollling
g in
nterrestts (SFP)
Re
eco
ording
g no
on--co
ontrrolling
g in
nterres
sts in sin
s ce
ac
cqu
uisittion re
eta
aine
ed e
earrnin
ngs
s off th
he sub
s bsid
dia
ary
300
3
No
on-con
ntro
ollin
ng inte
eressts (P//L) (1 800
8 + 840)
8 )
Non-cconttrollling
g in
nterrestts (SFP)
Re
eco
ording
g no
on--co
ontrrolling
g in
nterres
sts in pro
p ofit forr th
he
ye
ear
2 00
00
47
7 00
00
20
0 00
00
25
5 00
00
30
00
2 640
6
2 64
40
co tinu
cont
ued
d
419
4
Chapter 6
Dr
R
J4
J5
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
Gain from a bargain purchase
Retained earnings – Beginning of year (S)(SCE)
Recognition of gain from bargain purchase
2 000
Cr
R
6 600
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
6.20 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.
6.21 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 (like 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.
420
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 cost price:
105 000 ordinary shares
32 000 preference shares
Trade receivables
Total assets
EQUITY AND LIABILITIES
Share capital: Ordinary
(P Ltd: 200 000 shares/S Ltd:140 000 shares)
Share capital: 10% Preference (80 000 shares)
Retained earnings
Trade payables
Total equity and liabilities
P Ltd
S Ltd
436 100
456 000
127 500
58 500
44 000
–
–
14 000
R666 100
R470 000
200 000
110 000
–
452 000
14 100
80 000
261 000
19 000
R666 100
R470 000
EXTRACT FROM THE STATEMENTS OF CHANGES IN EQUITY
FOR THE YEAR ENDED 28 FEBRUARY 20.19
Retained earnings
Balance at 1 March 20.18
Changes in equity for 20.19
Total comprehensive income for the year:
Profit for the year
Balance at 28 February 20.19
P Ltd
S Ltd
212 000
145 000
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.
At that date, the preference dividends had been declared and paid, up to 28 February
20.15.
Provision must still be made for the preference dividend for the reporting period ended
28 February 20.19 that was declared on 28 February 20.19.
At the acquisition date, the assets and liabilities were fairly valued and there were no
unaccounted for contingent liabilities.
P Ltd recognised the equity investment in S Ltd in its separate records using the cost
price method.
421
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.
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 (J4)
58 000
R991 600
200 000
614 950
814 950
138 750
953 700
33 100
4 800
37 900
Total equity and liabilities
R991 600
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))
Other comprehensive income for the year
TOTAL COMPREHENSIVE INCOME FOR THE YEAR
Total comprehensive income attributable to:
Owners of the parent (356 000 – 31 800)
Non-controlling interests (27 000(ordinary) + 4 800(preference))
356 000
–
R356 000
324 200
31 800
R356 000
422
Adjustments and sundry aspects of group statements
P LTD GROUP
CONSOLIDATED STATEMENT OF CHANGES IN EQUITY
FOR THE YEAR ENDED 28 FEBRUARY 20.19
Share
capital
Retained
earnings
Total
Noncontrolling
interests
Total
equity
Balance at 1 March 20.18
200 000  290 750 490 750 @ 111 750
602 500
Changes in equity for 20.19
Total comprehensive income
for the year:
Profit for the year
– 324 200 324 200
# 31 800
356 000
Dividend payable
–
–
–
(4 800)
(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
Calculations
C1 Analysis of owners’ equity of S Ltd
P Ltd 75%
Ordinary shares
Total
NCI
At
i At acquisition (28/2/20.15)
Share capital
Retained earnings
Equity represented by goodwill
– Parent
Consideration and NCI
ii Since acquisition
• To beginning of current year :
Retained earnings (145 000 – 40 000)
Since
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
105 000
78 750
63 750
• Current year :
Profit attributable to ordinary
shareholders (1)
26 250
108 000
81 000
27 000
R378 000
R159 750
R90 750
(1) 116 000 – 8 000(80 000 × 10%)(preference dividend) = 108 000
423
C
Cha
apte
er 6
C
C2 Prroo
of of
o c
calc
cullation
n off go
ood
dwill of
o o
ord
dinary
y sharres
s off S Ltd in term
ms
off IF
FRS
S 3..32
2:
C
Con
nsid
dera
atio
on transfferrred at ac
cquisittion
n da
ate: IF
FRS
S 3.32
3 2(a))(i)
127
1
7 50
00
A
Amo
oun
nt of
o non
n n-co
ontrrolling
g interestts: IFR
RS 3.3
32(a)(ii)
37
7 50
00
1 5 00
165
00
N
Net of the
e id
den
ntifia
able ass
a etss ac
cqu
uire
ed and
a d lia
abilitie
es ass
a sum
med
d att
a
acquissitio
on date
d e: IFR
I RS 3.3
32(b
b)
(1
150
0 00
00)
G
Goo
odw
will
R 5 00
R15
00
C
C3 An
naly
ysiis o
of pre
p eferren
nce
e ow
wners
s’ equ
e uity
y off S Ltd
P Ltd
L 40%
%
P
Pre
eferren
nce sh
hare
es
To
ota
al
NC
CI
Att
i At
A acq
a quis
sitiion (28/2
2/20
0.15
5)
Sha
S are capita
al
Equ
E uityy rep
pre
esen
nted by
b goo
g odw
will
Con
C nsid
dera
atio
on and
a d NC
CI
ii Sin
S ce acquisittion
n
• Cur
C rren
nt yea
y ar
Pro
P ofit attr
a ribu
utab
ble to pre
p efere
enc
ce
sha
s areh
hold
ders
Pre
P eferencce d
diviidend payyab
ble
S
Sinc
ce
80 000
8
0 0
2 500
26
5 0
32 000
26 500
48 00
00
–
10
06 500
5 0
R58
R 500
00
48 00
8 000
0 0
((8 000
0 0)
3 200
0
2 0)
(3 200
4 80
00
00)
(4 80
R10
R 06 500
5 0
–
R 00
R48
00
C
C4 Prroo
of of
o c
calc
cullation
n off go
ood
dwill on
o prefe
erence
es
sha
ares
s of
o S Lttd in
i ter
t ms
s
off IF
FRS
S 3..32
2:
C
Con
nsid
dera
atio
on transfferrred at ac
cquisittion
n da
ate: IF
FRS
S 3.32
3 2(a))(i)
A
Amo
oun
nt of
o non
n n-co
ontrrolling
g interestts: IFR
RS 3.3
32(a)(ii)
00
58 50
48 00
00
106 50
00
N
Net of the
e id
den
ntifia
able ass
a etss ac
cqu
uire
ed and
a d lia
abilitie
es ass
a sum
med
d att
ac
cqu
uisittion
n date
e: IF
FRS
S 3.32
3 2(b
b)
(8
80 000)
G
Goo
odw
will
R26 50
00
Com
C
mm
mentt
a W
Where a subssidia
ary hass isssue
ed p
preffere
ence
e sh
hare
e capittal whi
w ich is who
w olly or parrtially
he
eld by the
e no
on-cconttrolling inte
eressts, the
e prrofit of the sub
bsid
diarry m
mustt, ass in
ndica
ated
d, be
b
alllocated to
t the orrdin
naryy an
nd pre
eferrencce sha
areh
hold
derss of
o tthe su
ubsid
diarry. This
alllocatio
on mus
m st b
be mad
m de eve
e en w
whe
en the sub
bsid
diary
y has ma
ade no pro
ovission
n for th
he
prefe
eren
nce divvidend in itts sepa
arate fin
nan
ncia
al sta
atem
men
nts.
b S
Since
e S Ltd has
h nott ye
et mad
m e p
prov
visio
on for
f the
t
pre
eferrencce divi
d den
nd and
a d P Ltd
d ha
as
co
ons
sequ
uently nott ye
et reaccted
d th
here
eto, it is,
i on con
nso
olida
ation
n, m
merrely ne
ecesssary to
t
trans
sfer the
e portion of the
e prreference divvidend which is due
e to
o th
he non
n n-co
ontro
ollin
ng
in
ntere
estss fro
om non
n-co
ontrrollin
ng inte
erests (SCE) to
t ccurre
ent liab
bilities ((SF
FP).
4
424
Adjustments and sundry aspects of group statements
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 (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
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
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
Non-controlling interests (SFP)
Preference dividend payable (S)(SFP)
Transfer of portion of preference dividend owing
to non-controlling interests
4 800
Cr
R
186 000
85 500
26 250
31 800
4 800
6.22 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
425
Chapter 6
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 price 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 price of the investment (IFRS 9.B5.7.1). The parent will
make the following entries in its records:
Dr
R
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
426
Cr
R
104 000
104 000
6 000
4 000
2 000
Adjustments and sundry aspects of group statements
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 (P Ltd: 200 000 shares/S Ltd:100 000 shares)
Retained earnings – 1 January 20.17
Equity investments:
Investment in S Ltd at cost price
Investment in Z Ltd at cost price
Loan granted – P Ltd
Revenue
Dividends received
Interest received
Gain on sale of land (capital gains tax paid)
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)
410 000
–
–
(800 000)
(32 000)
–
–
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
(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
–
–
–
–
P Ltd purchased 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 fairly valued except for the assets detailed below:
Fair
Carrying
value
amount
Land
R210 000
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 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.
427
Chapter 6
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 price 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.
P Ltd recognised the equity investment in S Ltd in its separate records using the cost
price method.
The company tax rate is 28% and capital gains tax (CGT) is calculated at 80% thereof.
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
48 144
27 000
1 680
964 824
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(J7))
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 385 868
200 000
952 432
Non-controlling interest
1 152 432
153 436
Total equity
1 305 868
Non-current liabilities
Long-term loan (300 000(P) + 80 000(P) – 300 000(S(J10))
Total equity and liabilities
˜
Ȝ
80 000
R1 385 868
688 000(P) + 270 000(S) + 60 000(J1) + 8 000(J1) – 44 000(P) – 30 000(S) – 60 000(J4) –
2 000(J5) – 2 000(J6) = 888 000
13 440(J4) – 15 680(J1) + 560(J5) + 560(J6) + 2 800(J7) = 1 680
428
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(J8)(intragroup sales))
Cost of sales (400 000(P) + 350 000(S) – 110 000(J8) + 10 000(J7))
1 390 000
(650 000)
Gross profit
Other income ȍ
Other expenses (156 000(P) + 150 000(S) + 2 000(J6))
Finance costs (33 800(P) – 30 000(J9))
740 000
12 000
(308 000)
(3 800)
Profit before tax
Income tax expense &
440 200
(116 256)
PROFIT FOR THE YEAR
323 944
Other comprehensive income for the year
–
TOTAL COMPREHENSIVE INCOME FOR THE YEAR
R323 944
Total comprehensive income attributable to:
Owners of the parent (323 944 – 34 520(J11))
Non-controlling interests d
289 424
34 520
R323 944
ȍ 32 000(P) + 2 000(S) + 30 000(S) + 70 000(S) – 60 000(J4) – 30 000(J9) – 32 000(J12) = 12 000
& 58 856(P) + 74 200(S) – 13 440(J4) – 560(J6) – 2 800(J7) = 116 256
P LTD GROUP
CONSOLIDATED STATEMENT OF CHANGES IN EQUITY
FOR THE YEAR ENDED 31 DECEMBER 20.17
Balance at 1 January 20.17
Noncontrolling
interests
Total
equity
885 008
126 916c
1 011 924
289 424
(22 000)
34 520d
(8 000)e
323 944
(30 000)
Share
capital
Retained
earnings
Total
200 000
ȍ 685 008
289 424
(22 000)
Changes in equity for 20.17
Total comprehensive
income for the year:
Profit for the year
Dividend paid
Balance at 31 December 20.17 R200 000
R952 432 R1 152 432
R153 436 R1 305 868
ȍ 539 200(P) + 145 808a = 685 008
429
Chapter 6
Calculations
C1 Analysis of owners’ equity of S Ltd
P Ltd 80%
Total
i At acquisition 1/1/20.16
Share capital
Equity at acquisition
Retained earnings
Equity represented by goodwill
– Parent
Consideration and NCI
ii Since acquisition
• To beginning of current year:
Retained earnings
(483 700 – 300 000 – 1 440(J5))
• Current year:
Profit for the year (1)
Dividends paid
At
Since
NCI
100 000
52 320
300 000
80 000
41 856
240 000
20 000
10 464
60 000
452 320
361 856
90 464
48 144
48 144
–
500 464
R410 000
90 464
182 260
145 808 a
36 452
126 916 c
172 600
(40 000)
138 080
(32 000)b
R815 324
R251 888
34 520 d
(8 000)e
R153 436 f
(1) Calculation of profit for the year of S Ltd
Revenue
Cost of sales
700 000
(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 remeasurement of land (J4)
Deferred tax on reversed remeasurement of land (J4)
Depreciation on remeasurement at acquisition (J6)
Tax on depreciation on remeasurement at acquisition (J6)
Unrealised profit in inventory (J7)
Tax on unrealised profit in inventory (J7)
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)
227 800
(60 000)
13 440
(2 000)
560
(10 000)
2 800
R172 600
410 000
90 464
500 464
Net of the identifiable assets acquired and liabilities assumed
at acquisition date: IFRS 3.32(b)
Goodwill
430
(452 320)
R48 144
Adjustments and sundry aspects of group statements
C3 Pro forma consolidation journal entries
Dr
R
J1
Land (S)(SFP) (210 000 – 150 000)
Plant (S)(SFP) (48 000 – 40 000)
Equity at acquisition (S)(SCE)
Deferred tax (S)(SFP)
Cr
R
60 000
8 000
52 320
15 680
((60 000 × 80% × 28%) + (8 000 × 28%))
Remeasurement of assets at acquisition of
investment in S Ltd
J2
J3
J4
J5
J6
J7
J8
Share capital (S)(SCE)
Retained earnings (S)(SCE)
Goodwill (SFP)
Equity at acquisition (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
48 144
52 320
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) (J1)
Deferred tax (S)(SFP)
Land (S)(SFP)
Income tax expense (S)(P/L) (60 000 × 80% × 28%)
Sale in current reporting period of land remeasured
at acquisition date
60 000
13 440
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
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
Revenue (S)(P/L)
Cost of sales (P)(P/L)
Elimination of intragroup sales
110 000
410 000
90 464
36 452
60 000
13 440
2 000
2 000
560
10 000
2 800
110 000
continued
431
Chapter 6
Dr
R
J9
Interest received (S)(P/L)
Interest paid (P) (P/L)
Elimination of intragroup interest paid on intragroup
loan
Cr
R
30 000
30 000
J10 Long-term loan (P)(SFP)
Loan granted (S)(SFP)
Elimination of intragroup loans
300 000
J11 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
34 520
J12 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
300 000
34 520
40 000
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 cost price
152 000
–
45 000 Ordinary shares
39 000 8% Preference shares
110 000
42 000
–
–
ASSETS
Land
Machinery
Trade receivables
Total assets
EQUITY AND LIABILITIES
Share capital: Ordinary
(P Ltd: 100 000 shares/S Ltd: 60 000 shares)
Share capital: 8% Preference (130 000 shares)
Retained earnings
Total equity and liabilities
432
79 000
96 100
R560 000
R482 100
100 000
60 000
–
460 000
130 000
292 100
R560 000
R482 100
Adjustments and sundry aspects of group statements
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
215 000
112 500
–
–
R215 000
R112 500
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 20.17
Retained earnings
Balance at 1 January 20.17
Changes in equity for 20.17
Total comprehensive income for the year:
Profit for the year
Ordinary dividend paid
Preference dividend paid
Balance at 31 December 20.17
P Ltd
S Ltd
300 000
250 000
215 000
(55 000)
–
112 500
(60 000)
(10 400)
R460 000
R292 100
Additional information
1 P Ltd purchased the shares on 1 January 20.13, when the retained earnings of
S Ltd were R66 000.
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 recognised the equity investment in S Ltd in its separate records using the
cost price method.
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 80%
thereof.
433
Chapter 6
Required
Prepare the consolidated financial statements of the P Ltd Group for the reporting
period ended 31 December 20.17.
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(J2) + 10 000(J3))
Deferred tax (14 000(J2) – 2 800(J3))
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
434
R879 800
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 (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(J3))
666 004
(308 750)
Profit before tax
Income tax expense (74 124(P) + 43 750(S) – 14 000(J2) + 2 800(J3))
357 254
(106 674)
PROFIT FOR THE YEAR
250 580
Other comprehensive income for the year
–
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
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(J2) + 14 000(J2) + 10 000(J3) – 2 800(J3) = 600 775
15 000(S)(ordinary) + 7 280(S)(preference) = 22 280
435
C
Cha
apte
er 6
Co
omme
ent
In thiis exam
e mple P Lttd sold
s
ma
ach
hinery to
t S Lttd. The
e prrofitt on
n th
he transacction
n ha
as b
bee
en
re
ecog
gnis
sed in the
t acccou
untin
ng reco
r ordss off P Ltd. Th
he p
pro forma con
nso
olida
ation
n jo
ourn
nal e
entry
J5
5 eliimin
nate
es the unrrealised
d prrofitt on
n the
e mach
hine
ery. The
e no
on-ccon
ntrollling
g inttere
estss are
e no
ot
afffectted by J5.
Th
he iintra
agro
oup
p profit is in
i th
he mea
anw
while
e re
ecognissed
d by
y the
e group (rrealised
d) by
b redu
r ucin
ng
the d
deprrecia
atio
on char
c rge (usse of
o th
he m
mac
chin
ne). The
e profitt ca
an also
a o be
e rea
alised by the sale
off the
e mach
m hine
e to
o a tthird
d partyy. The
T red
ducttion of the
e de
epre
ecia
ation
n ch
harg
ge as
a per
p J6 als
so
do
oes no
ot affec
a ct the
t
non-controlliing interests ass P Ltd
d origi
o nally m
mad
de the prrofit an
nd
there
efore
e th
he re
ealisatiion of the
t pro
ofit m
mus
st allso be allo
ocatted to P Lttd.
C
Calc
cullatiion
ns
C
C1 An
naly
ysis o
of own
o nerrs’ eq
quitty of
o S Ltd
L
P Ltd
d 75
5%
%
O
Ord
dina
ary
y sh
harres
To
ota
al
i At
A acq
a quis
sitiion (1//1/2
20.13))
Sha
S are capita
al
Ret
R tain
ned ea
arningss
60
6 000
0 0
66
6 000
0 0
45 000
0
5
49 500
15 00
00
00
16 50
12
26 000
0 0
5
94 500
00
31 50
Equ
E uity rep
pre
esen
nted by
b goo
g odw
will
(P
Parrentt)
Con
C nsid
deratio
on and
a d NCI
ii Sinc
S ce acq
quissitio
on
T beg
b ginn
ning
g of
o cu
urre
ent year:
• To
Ret
R tain
ned ea
arningss (1)
At
A
Sinc
ce
15
1 500
5 0
15 500
5
–
14
41 500
5 0
R
R110 000
0
31 50
00
18
84 000
0 0
13
38 000
0 0
46 00
00
00
77 50
C rren
nt yea
y r:
• Cur
Pro
P ofit for
f the
e ye
ear after pre
p eferencce
divid
dend (22)
Ord
O dina
ary divvide
end
NC
CI
10
02 100
1 0
(6
60 000
0 0)
7
76 575
5 5
(4
45 000
0 0)
25 52
25
((15 00
00)
R
R36
67 600
6 0
R 69 575
R16
5 5
R 02
R88
25
(1
1) 250
0 00
00 – 66
6 00
00 = 18
84 000
0
(2
2) 112
2 50
00 – 10
0 40
00 = 10
02 100
1
C
C2 P
Proo
of of
o c
callcu
ulattion
no
of goo
g odw
will of ordin
narry sha
s ares of
o S Lttd in ter
t rms
s
o IF
of
FRS
S3
3.32
2:
110 00
C
Con
nsid
dera
atio
on transfferrred at ac
cquisittion
n da
ate: IF
FRS
S 3.32
3 2(a))(i)
00
31 50
A
Amo
oun
nt of
o non
n n-co
ontrrolling
g interestts: IFR
RS 3.3
32(a)(ii)
00
141 50
00
N
Net am
mou
untss o
of th
he ide
i ntiffiab
ble assetts acq
a quirred an
nd liab
bilitiies asssume
ed
att accqu
uisittion
n da
ate
e: IF
FRS
S3
3.32
2(b)
(126 00
00)
G
Goo
odw
will
00
R15 50
4
436
Adjustments and sundry aspects of group statements
C3 Analysis of preference owners’ equity of S Ltd
P Ltd 30%
Preference shares
Total
NCI
At
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
Since
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
91 000
Amount of non-controlling interests: IFRS 3.32(a)(ii)
133 000
Net amounts of the identifiable assets acquired and liabilities assumed
at acquisition date: IFRS 3.32(b)
Goodwill
(130 000)
R3 000
C5 Pro forma consolidation journal entries
Dr
R
J1
J2
J3
Ordinary share capital (S)(SCE)
Preference share capital (S)(SCE)
Retained earnings (S)(SCE)
Goodwill (SFP) (15 500(ordinary) + 3 000(preference))
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
Cr
R
122 500
110 000
42 000
50 000
14 000
10 000
2 800
continued
437
Chapter 6
Dr
R
J4
J5
J6
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
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
Dividends received (P)(P/L)
48 120
(45 000(ordinary) + 3 120 (preference))
Non-controlling interests (SFP) (15 000 + 7 280)
22 280
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
438
Cr
R
46 000
32 805
10 400
60 000
7
Consolidation of complex groups
Composition of a group of companies
7.1
7.2
7.3
Introduction ..............................................................................................
Horizontal groups .....................................................................................
Vertical groups .........................................................................................
440
440
440
Consolidation of a horizontal group
7.4
Basic consolidation procedures ...............................................................
Example 7.1: Horizontal group ................................................................
441
441
Consolidation of a vertical group
7.5
7.6
Introduction ..............................................................................................
Basic consolidation procedures ...............................................................
Example 7.2: Vertical group – P Ltd acquired an interest in S Ltd
on the same date that S Ltd acquired an interest
in SS Ltd ...........................................................................
Example 7.3: Vertical group – P Ltd acquired the interest in S Ltd
after S Ltd acquired an interest in SS Ltd. .........................
Example 7.4: Vertical group – P Ltd acquired the interest in S Ltd
before S Ltd acquired the interest in SS Ltd ......................
447
447
448
454
460
Self-assessment questions
Question 7.1 ........................................................................................................
Question 7.2 ........................................................................................................
466
473
439
Chapter 7
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
80%
90%
75%
S1 Ltd
S1 Ltd
80%
SS1 Ltd
Figure 2
440
S2 Ltd
60%
75%
SS1 Ltd
SS2 Ltd
Figure 3
Consolidation of complex groups
Consolidation of a horizontal group
7.4 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 like 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 cost price: 70 000 shares
Investment in S2 Ltd at cost price: 80 000 shares
P Ltd
S1 Ltd
S2 Ltd
322 600
161 200
92 000
116 000
115 000
233 000
–
–
365 000
145 000
–
–
Total assets
R691 800 R348 000 R510 000
EQUITY AND LIABILITIES
Share capital (P Ltd: 250 000 shares/S1 Ltd: 100 000 shares/ 250 000
–
–
S1 Ltd: 100 000 shares)
– 100 000 100 000
Retained earnings
373 880 238 800 387 000
Trade payables
67 920
9 200
23 000
Total equity and liabilities
R691 800 R348 000 R510 000
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
192 880
100 800
198 000
–
–
–
TOTAL COMPREHENSIVE INCOME FOR THE YEAR R192 880 R100 800
R198 000
Other comprehensive income for the year
441
Chapter 7
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
S1 Ltd
S2 Ltd
206 000
150 000
200 000
192 880
(25 000)
100 800
(12 000)
198 000
(11 000)
R373 880 R238 800
R387 000
P Ltd purchased 70 000 shares in S1 Ltd on 1 January 20.14. At this date, the retained
earnings of S1 Ltd amounted to R28 000. The fair value of the non-controlling interests
of S1 Ltd on 1 January 20.14 was determined to be R39 000.
P Ltd purchased 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 fairly
valued and there were no unaccounted for contingent liabilities.
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 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%.
442
Consolidation of complex groups
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
443
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
#
&
ȍ
˜
Noncontrolling
interests
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)
Total
equity
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
3 600f + 2 200l = 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 and NCI
ii Since acquisition
• To beginning of current year:
Retained earnings (150 000 – 28 000)
• Current year:
Profit for the year
Dividend
444
At
Since
NCI
100 000
28 000
70 000
19 600
30 000
8 400
128 000
89 600
38 400
2 400
600
R92 000
39 000
3 000
a
131 000
122 000
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
C
Con
nso
olidatio
on of com
mp
plexx grroups
C
C2 Prroo
of of
o c
calc
cula
atio
on of go
ood
dwiill of
o S
S1 Ltd
d in
n te
erm
ms of IFR
RS 3.3
32
C
Con
nsid
dera
atio
on transfferrred at ac
cquisittion
n da
ate: IF
FRS
S 3.32
3 2(a))(i)
A
Amo
oun
nt of
o non
n n-co
ontrrolling
g interestts: IFR
RS 3.3
32(a)(ii)
92 00
00
00
39 00
131 00
00
N
Net of the
e id
den
ntifia
able ass
a etss ac
cqu
uire
ed and
a d lia
abilitie
es ass
a sum
med
d
att accqu
uisittion
n da
ate
e: IF
FRS
S3
3.32
2(b)
(12
28 000)
G
Goo
odw
will
R 00
R3
00
C
C3 An
naly
ysiis o
of ow
o ners’ eq
quitty of
o S2
S Ltd
d
P Ltd
d 80%
8 %
Tot
T al
i At
A acq
a quis
sitiion (1//1/2
20.17))
Sha
S are capita
al
Ret
R tain
ned ea
arningss
Equ
E uity rep
pre
esen
nted by
b goo
g odw
will
– Pa
aren
nt a
and
d NC
CI
Con
C nsid
deratio
on and
a d NCI
iii Sin
S ce acquisittion
n
• To
T beg
b ginn
ning
g of
o cu
urre
ent year:
Ret
R tain
ned ea
arningss (2200 0000 – 40 0000)
• Cur
C rren
nt yea
y r:
Pro
P ofit for
f the
e ye
ear
Div
D idend
At
A
NC
CI
Siinc
ce
100 00
00
00
40 00
80
8 000
0 0
32
3 000
0 0
20 00
00
00
8 00
140 00
00
112 000
0 0
00
28 00
g
4 000
0 0
1 00
00
R
R116 000
0 0
00
29 00
5 00
00
145 000
0
160 000
0
12
28 000
0 0
h
32 00
00
j
61 000
0
198 000
0)
(11 000
15
58 400
4 0
(8 800
0)
39 600
l
(2 200)
R492 000
0
R 77 600
R27
0
C
C4 Prroo
of of
o c
calc
cula
atio
on of go
ood
dwiill of
o S
S2 Ltd
d in
n te
erm
ms of IFR
RS 3.3
32
C
Con
nsid
dera
atio
on transfferrred at ac
cquisittion
n da
ate: IF
FRS
S 3.32
3 2(a))(i)
A
Amo
oun
nt of
o non
n n-co
ontrrolling
g interestts: IFR
RS 3.3
32(a)(ii)
i
k
400
R9
98 4
0
116 00
00
29 00
00
145 00
00
N
Net of the
e id
den
ntifia
able ass
a etss ac
cqu
uire
ed and
a d lia
abilitie
es ass
a sum
med
d
att accqu
uisittion
n da
ate
e: IF
FRS
S3
3.32
2(b)
G
Goo
odw
will
(14
40 000)
R 00
R5
00
Com
C
mm
mentt
T e ca
The
alculatio
on C4 abo
ove
e is pro
ovide
ed as proof of
o th
he calc
c cula
ation
n off go
oodw
will or the gain
o barrgaiin purc
on
p cha
ase an
nd is only
o y proviided
d fo
or ccom
mple
eten
nesss p
purp
pose
es. Eittherr th
he
a alysis appr
ana
a roacch o
or the abo
a ove calcula
atio
on can
c be use
ed to
t calcu
c ulatte th
he goo
g odw
will o
or th
he
g n on
gain
n ba
arga
ain purrcha
ase on acq
quissitio
on of
o a sub
bsid
diary
y.
A othe
Ano
er poin
p nt to
o re
eme
emb
ber is that
t t prro form
ma jour
j rnalls are
a pre
eparred forr co
onso
olid
datio
on
p pos
purp
ses onlly and
a
are
e no
ot re
eco
ogniised
d in the
e in
ndivvidual reco
r ordss off eittherr the pare
p ent or
o
t sub
the
bsid
diaryy. The
T pro
o forma
a jou
urna
als elim
mina
ate com
mmon bala
ancces..
445
4
Chapter 7
C5 Pro forma consolidation journal entries
Dr
R
J1
J2
J3
J4
J5
J6
J7
J8
446
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
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
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
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
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
Cr
R
39 000
92 000
29 000
116 000
32 000
36 600
30 240
39 600
12 000
11 000
C
Con
nso
olidatio
on of com
mp
plexx grroups
Com
C
mm
mentt
a T
The
e co
onso
olida
ated
d fin
nan
ncial sta
atem
men
nts can
n be
e prrepa
ared
d byy ussing
g on
ne of
o th
he follo
owin
ng
ttwo pro
oced
dure
es:
l Pro
o forma
a co
onso
olidatio
on jo
ournal enttriess ca
an b
be prep
p pare
ed from
f m th
he abo
a ve ana
alys
sis
and
d th
hen sett offf ag
gain
nst the
t com
mbined
d fin
nanciall sta
atem
men
nts of P Lttd, S1 Ltd
d an
nd
S2 Ltd
d (in
naw
worrksh
heett), re
esu
ulting in
n the
e co
onssolid
date
ed amo
a ountts.
l The
e co
onsolid
date
ed fiinan
ncia
al sttate
eme
entss are
e prepared direcctly from the ana
alyssis by
b
add
ding
g the
e ap
ppliicab
ble amo
a oun
nts for
f the
t sub
bsid
diariies to thosse o
of th
he pare
p ent.
b T
The
e direcct prep
p para
atio
on of
o con
nsolida
ated fin
nan
ncial state
eme
entss (d
dire
ectlyy frrom
m th
he
indiv
vidu
ual fina
anciial stat
s eme
entss off the
e en
ntities in th
he gro
g up and
a d the
e analyysiss of ow
wnerrs’
e
equity of the sub
bsid
diaries) can b
be fo
orm
mallyy repre
esen
nted
d in a wor
w ksh
heett forrma
at. W
Whe
en
a
answerring
g more
m e com
c mple
ex que
q estio
ons, th
he pre
epa
aration of co
onso
olid
date
ed fina
f ancial
sstatementss in
naw
worrksh
heett forrma
at is the
e most suitable as
a an
a exam
e minatio
on te
echnique.
c T
The
e lattter pro
oced
dure (p
prep
pariing of the
t conso
olida
ated
d statements directlly) is
i gene
g erallly
u
used in
n the
e re
ema
aind
der of
o th
his texttboo
ok.
C
Cons
solida
atiion
n of
o a ver
v rtic
call group
p
7
7.5 Intrrod
duc
ction
n
A su
ubssidiiaryy p
partially own
o ned
d by a pa
are
ent,, ca
an, in turn, ha
ave
e su
ubssidia
arie
es of its ow
wn. In
ssuch
h cas
c es tw
wo sets
s s of
o con
c sollida
ated
d fiinancial sta
atem
ments
s must
m t be p
preparred
d – on
ne set
s
th
fo
or the
t e partiallyy-o
own
ned
d su
ubssidiiaryy and
a
he sub
s b-subssidiariies, and
a
a furrthe
er sett fo
or the
t
g
grou
up ass a wholle. In the llattter insstance
e, the
t ere wiill b
be at leastt tw
wo group
ps of no
oncconttrollling
g sha
s areh
holders: those
e of
o the
t e su
ub--subsidia
ary((ies
s) and
a d th
hosse of the par
p rtiallyo
own
ned
d su
ubssidia
ary
y who will in
ndirrecctly share
e in
n th
he pro
p ofit o
or loss and
a d th
he net
n asssetts o
of the
t
ssub-su
ubsidia
arie
es.
T
The
e efffecctive in
nte
eresst of
o th
he pa
aren
nt in
n th
he sub-ssub
bsid
diarries
s ca
an be lesss tha
an 50%
5 %. If, for
e
examp
ple, the p
parttially-o
own
ned
d subssidiaryy S Lttd is 60%
6 %o
own
ned
d byy th
he p
parrent and if S Ltd,
L
in
n tu
urn, ho
old
ds a 75
5%
% interrestt in
n the equ
e uity sh
hare
e capiital of a sub
s b-subssidiaryy, SS
S Ltd
d, the
t
e
effectivve inte
ere
est of the
e pa
are
ent in the
e sub--subsiidia
ary is only 45%
4 % (60
( 0% × 75%
7 %). He
enc
ce,
th
he non
n-ccontrolling in
nte
eressts can be
b a mate
m eria
al amo
a oun
nt.
7
7.6 Bas
B sic
c con
nso
olid
dattion
n pro
p oce
edu
ure
es
A ve
erticall grrou
up in itts sim
s mple
est form co
onsists
s of a pa
arent wit
w h a co
onttrolling
g in
nterresst in
na
p
parttiallly-o
own
ned
d su
ubssidiiaryy, w
which,, in
n turn, ha
as a cont
c trolling in
nte
eresst in
n a su
ub-sub
bsid
dia
ary.
T
The
e ba
asicc app
a proa
ach
h to
o co
onssolida
ating
g the fin
nancia
al stat
s em
men
nts of a vverrtica
al gro
g oup
p is to
first co
onsolid
date the fin
nancia
al sttate
ementts o
of the
t su
ubssidia
ary
y an
nd the
e su
ub--sub
bsidia
ary,, affter
w
whic
ch th
he fin
nancia
al sta
s atem
men
nts of
o the
e par
p rentt and
a d sub
s bsid
diarriess (su
ubsidia
ary and
a
ssub-su
ubsidia
aryy) are con
c nso
olidate
ed.
W
Whe
ere
e a verticcal gro
oup
p co
onssistts of
o a pa
are
ent,, P Ltd
d, a p
parttiallly-o
own
ned
d subssidiaryy, S Ltd,
L
a
and a su
ub-ssub
bsid
diarry, SS
S L
Ltd, tw
wo setts o
of con
nso
olid
date
ed fina
ancciall sttate
ementts mu
must be
p
prep
parred: on
ne sett fo
or S Lttd a
and
d itss subs
s sidiary
y SS
S Ltd
d an
nd a furtherr se
et for P Ltd
L an
nd the
t
tw
wo su
ubsidia
arie
es S Ltd
L and S
SS Ltd
d. In pra
p ctic
ce, the
e con
c sollida
ated
d financial sta
s atem
men
nts
s of
th
he S Ltd
d Gro
G oup
p an
nd the
e ffina
ancial sta
ate
eme
entss of
o P L
Ltd will be
b ussed
d to
o prep
pare the
t
cconsolida
ated
d ffina
ancial state
eme
ents of
o the
e P Lttd Grroup. It is the
ere
eforre neccesssa
ary to
a
analysse the conso
olid
date
ed own
o nerrs’ equ
e uityy off the S Lttd Gro
G oup
p.
W
Whe
en a que
q estiion re
equiress th
he conso
olid
date
ed financcial sttate
ementts of
o tthe
e P Ltd
d Gro
G oup to
b
be pre
p epa
ared
d, o
only the
t
fin
nan
ncia
al stat
s tem
men
nts of the individ
dua
al enti
e tiess in
n the grroup are
a
u
usuallyy giiven. In suc
s ch cas
c sess, it is unn
neccesssa
ary to
t firs
f st prep
pare
e th
he con
nso
olid
date
ed fina
f anc
cial
447
4
Chapter 7
statements of S Ltd Group (S Ltd and its subsidiary SS Ltd). All that must 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.
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.
Example 7.2
Vertical group – P Ltd acquired an interest in S Ltd on the
same date that S Ltd acquired an interest in SS Ltd
The abridged financial statements of P Ltd and its subsidiaries S Ltd and SS Ltd as at
31 December 20.18 were as follows:
STATEMENTS OF FINANCIAL POSITION AS AT 31 DECEMBER 20.18
ASSETS
Property, plant and equipment
Bank and trade receivables
Investment in S Ltd at cost price: 60 000 shares
Investment in SS Ltd at cost price: 270 000 shares
Total assets
P Ltd
S Ltd
SS Ltd
990 000
200 000
174 000
–
334 000
66 000
–
467 000
908 000
150 000
–
–
R1 364 000
R867 000 R1 058 000
EQUITY AND LIABILITIES
Share capital (P Ltd: 500 000 shares/S Ltd: 100 000
shares/SS Ltd: 300 000 shares)
Retained earnings
Trade and other payables
Total equity and liabilities
448
500 000
725 000
139 000
R1 364 000
100 000
687 000
80 000
300 000
586 000
172 000
R867 000 R1 058 000
Consolidation of complex groups
EXTRACT FROM THE STATEMENTS OF PROFIT OR LOSS AND OTHER
COMPREHENSIVE INCOME FOR THE YEAR ENDED 31 DECEMBER 20.18
PROFIT FOR THE YEAR
P Ltd
S Ltd
SS Ltd
380 000
362 000
136 000
–
–
–
R380 000
R362 000
R136 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 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
SS Ltd
345 000
325 000
470 000
380 000
–
362 000
–
136 000
(20 000)
R725 000
R687 000
R586 000
P Ltd acquired a 60% interest in S Ltd on 1 January 20.16 for R174 000. At this date,
the retained earnings of S Ltd amounted to R149 500. 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 R467 000 for a 90% interest in SS Ltd on 1 January 20.16. At this date, the
retained earnings of SS Ltd amounted to R200 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 fairly valued
and there were no unaccounted for contingent liabilities.
P Ltd elected to measure the non-controlling interests of the acquiree at their fair value
at the acquisition date. At 1 January 20.16 the fair values of the non-controlling
interests were as follows:
Non-controlling interest of SS Ltd – R50 000
Non-controlling interest of S Ltd – R114 500
A dividend of R18 000 received from SS Ltd is included in the profit for the year of
S Ltd.
P Ltd recognised the equity investment in S Ltd in its separate records using the cost
price method.
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%.
449
Chapter 7
Solution 7.2
The consolidated financial statements for 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 (990 000(P) + 334 000(S) + 908 000(S))
Goodwill (39 300(C3) + 17 000(C1)
2 232 000
56 300
2 288 300
Current assets
Bank and trade receivables (200 000(P) + 66 000(S) + 150 000(SS))
Total assets
EQUITY AND LIABILITIES
Equity attributable to owners of the parent
Share capital
Retained earnings
Non-controlling interests (88 600(C1) + 468 760(C3))
Total equity
Current liabilities
Trade and other payables (139 000(P) + 80 000(S) + 172 000(SS))
Total equity and liabilities
416 000
R2 704 300
500 000
1 255 940
1 755 940
557 360
2 313 300
391 000
R2 704 300
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
860 000
(380 000(P) + 362 000(S) – 18 000(dividend received) + 136 000(SS))
Other comprehensive income for the year
TOTAL COMPREHENSIVE INCOME FOR THE YEAR
Total comprehensive income attributable to:
Owners of the parent (860 000 – 200 160)
Non-controlling interests (13 600(C1) + 137 600(C3) + 48 960(C3))
–
R860 000
659 840
200 160
R860 000
450
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
˜
&
#
ɛ
Retained
earnings
Total
Noncontrolling
interests
Total
equity
500 000
˜ 596 100
1 096 100
&359 200
1 455 300
–
–
659 840
–
659 840
–
200 160
(2 000)
860 000
(2 000)
R500 000 ɛR1 255 940 R1 755 940 # R557 360 R2 313 300
345 000(P) + 251 100(S) = 596 100
77 000 + 282 200 = 359 200
88 600 + 468 760 = 557 360
725 000(P) + 530 940(S) = 1 255 940
Calculations
C1 Analysis of owners’ equity of SS Ltd
Total
i At acquisition (1/1/20.16)
Share capital
Retained earnings
P Ltd 90%
At
Since
NCI
300 000
200 000
270 000
180 000
30 000
20 000
500 000
450 000
50 000
Equity represented by goodwill
– Parent
17 000
17 000
–
Consideration and NCI
517 000 R467 000
50 000
ii Since acquisition
To beginning of current year:
Retained earnings (1)
• Current year:
Profit for the year
Dividend
270 000
243 000
27 000
77 000
136 000
(20 000)
122 400
(18 000)
13 600
(2 000)
R903 000
R347 400
R88 600
(1) 470 000 – 200 000 = 270 000
451
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)
467 000
50 000
517 000
Net of the identifiable assets acquired and liabilities assumed
at acquisition date: IFRS 3.32(b)
(500 000)
Goodwill
R17 000
C3 Analysis of 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
149 500
60 000
89 700
40 000
59 800
249 500
149 700
99 800
Equity represented by goodwill
– Parent
39 300
24 300
15 000
Consideration and NCI
288 800
174 000
114 800
ii Since acquisition
To beginning of current year:
Retained earnings (1)
Retained earnings – SS Ltd
• Current year:
Profit for the year (362 000 – 18 000)
Profit for the year – SS Ltd
175 500
243 000
105 300
145 800
70 200
97 200
282 200
344 000
122 400
R1 173 700
206 400
73 440
137 600
48 960
R530 940 R468 760
(1) 325 000 – 149 500 = 175 500
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)
174 000
114 800
288 800
Net of the identifiable assets acquired and liabilities assumed
at acquisition date: IFRS 3.32(b)
(249 500)
Goodwill
R39 300
452
Consolidation of complex groups
C5 Pro forma consolidation journal entries
Dr
R
J1
J2
J3
J4
J5
J6
J7
Share capital (SS)(OCI)
Retained earnings (SS)(SCE)
Goodwilll
Non-controlling interests (SFP)
Investment in SS Ltd (S)(SFP)
Elimination of owners’ interest of SS Ltd at date of
acquisition
300 000
200 000
17 000
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 date of
acquisition
100 000
149 500
39 300
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
27 000
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
70 200
97 200
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
13 600
Dividend received (P)(P/L)
Non-controlling interests (SFP)
Dividend paid (S)(SCE)
Elimination of intragroup dividends from SS Ltd and
recording of non-controlling interests in the dividend
Cr
R
50 000
467 000
114 800
174 000
27 000
167 400
13 600
137 600
48 960
186 560
18 000
2 000
20 000
453
Chapter 7
Example 7.3
Vertical group – P Ltd acquired the interest in S Ltd after S Ltd
acquired an interest in SS Ltd
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 R155 000 and paid R217 000 for the
investment. The retained earnings of SS Ltd amounted to R205 000 on 1 January 20.16.
At the acquisition date, the assets and liabilities of both subsidiaries were fairly valued
and there were no unaccounted for contingent liabilities.
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 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%.
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 cost price: 270 000 shares
Investment in SS Ltd at cost price: 96 000 shares
Total assets
P Ltd
S Ltd
SS Ltd
403 000
172 000
495 000
–
571 000
90 000
–
217 000
702 000
60 000
–
–
R1 070 000
R878 000
R762 000
500 000
431 000
139 000
300 000
460 000
118 000
120 000
588 000
54 000
R1 070 000
R878 000
R762 000
EQUITY AND LIABILITIES
Share capital (P Ltd: 500 000 shares/S Ltd: 300 000
shares/SS Ltd: 120 000 shares)
Retained earnings
Trade and other payables
Total equity and liabilities
454
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
PROFIT FOR THE YEAR
SS Ltd
136 000
130 000
335 000
–
–
–
Other comprehensive income for the year
TOTAL COMPREHENSIVE INCOME FOR THE YEAR
S Ltd
R136 000 R130 000 R335 000
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
SS Ltd
325 000
350 000
298 000
136 000
130 000 335 000
(30 000)
(20 000) (45 000)
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.
455
Chapter 7
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 (172 000(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
6 300
1 682 300
322 000
R2 004 300
500 000
940 760
1 440 760
252 540
1 693 300
311 000
R2 004 300
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(J8) + 130 000(S) – 18 000(J7) + 335 000(SS)) = 547 000
456
Consolidation of complex groups
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 526 960
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 ’R940 760 R1 440 760 &R252 540 R1 734 340
ȍ
˜
’
&
c
325 000(P) + 201 960(S) = 526 960
h
i
83 600(SS) + 76 740(S) = 160 340
431 000(P) + 509 760(S)k = 940 760
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 gain from
bargain purchase – Parent
Consideration and NCI
ii Since acquisition
• To beginning of current year:
Retained earnings
Till 1 January 20.16 (1)
Till 1 January 20.18 (2)
• Current year:
Profit for the year
Dividends paid
S Ltd 80%
At
Since
NCI
120 000
155 000
96 000
124 000
24 000
31 000
275 000
220 000
55 000
3 000
3 000
–
272 000
R217 000
55 000
50 000
93 000
40 000
74 400
10 000
18 600
83 600h
335 000
(45 000)
268 000
(36 000)j
67 000a
(9 000)
R705 000
R346 400
R141 600b
(1) 205 000 – 155 000 = 50 000
(2) 298 000 – 205 000 = 93 000
457
C
Cha
apte
er 7
C
C2 Prroo
of of
o c
calc
cula
atio
on of pu
urchas
se diffferren
nce
e off SS
S Ltd
L in terrms of
o IFR
RS 3.3
3 2
C
Con
nsid
dera
atio
on transfferrred at ac
cquisittion
n da
ate: IF
FRS
S 3.32
3 2(a))(i)
217 00
00
A
Amo
oun
nt of
o non
n n-co
ontrrolling
g interestts: IFR
RS 3.3
32(a)(ii)
00
55 00
00
272 00
N
Net of the
e id
den
ntifia
able ass
a etss ac
cqu
uire
ed and
a d lia
abilitie
es ass
a sum
med
d
att accqu
uisittion
n da
ate
e: IF
FRS
S3
3.32
2(b)
(27
75 000)
G
Gain
n frrom
m barg
gain
n purccha
ase
R 00
R3
00
Com
C
mm
mentt
B using the
By
e ab
bove
e anal
a ysiss off SS Ltd,
L
the
e co
onssolid
date
ed fina
f ancia
al stat
s ementss o
of th
he
S Lttd Gro
G up can
n be
e prrepa
ared
d. As
A tthe que
estion onlly re
equ
uiress th
he ccons
solid
date
ed fina
f ancial
s tementts of th
stat
he P Ltd Grou
G up, cerrtain
n inform
mation from the
t abo
ove
e an
nalyssis of equ
e uity is
u ed to
use
o an
nalyyse S L
Ltd’s
s co
onso
olid
date
ed owne
ers’’ eq
quityy.
C
C3 An
naly
ysiis o
of con
c nso
olid
dated ow
wne
ers
s’ e
equ
uity
y off S Ltd
d
To
otall
i At
A acq
a quis
sitiion (1//1/2
20.16))
Sha
S are capita
al
Ret
R tain
ned ea
arningss
Equ
E uity rep
pre
esen
nted by
b gain
g n fro
om
barg
b gain purc
p cha
ase
Ret
R tain
ned ea
arningss off SS
SL
Ltd:
Till
T 1 Jan
J uarry 20.1
2 16
Equ
E uity rep
pre
esen
nted by
b goo
g odw
will
– Pa
aren
nt
Con
C nsid
dera
atio
on and
a d NCI
P Ltd
L 90
0%
At
NCI
NC
S nce
Sin
e
3
300
0 00
00
2
200
0 00
00
27
70 000
0 0
18
80 000
0 0
30 0
3
000
0
2 0
20
000
0
3 00
00
2 700
7 0
3
300
0
40 000
0
3
36 000
0 0
40
000
0
5
543
3 00
00
48
88 700
7 0
5 3
54
300
0
6 30
00
6 300
3 0
–
5
549
9 30
00
R 95 000
R49
0 0
5 3
54
300
0
iii Sin
S ce acquisittion
n
• To
T beg
b ginn
ning
g of
o cu
urre
ent year:
2
224
4 40
00
2 96
201
60
c
2 4
22
440
0
Ret
R tain
ned ea
arningss – SS
S Lttd
Ret
R tain
ned ea
arningss – S Ltd
L (1)
74
4 40
00
1
150
0 00
00
6 96
60
66
135
1
5 00
00
74
440
0
15 0
1
000
0
i
• Cur
C rren
nt year
y r:
Pro
P fit for
f the
e ye
ear::
7 7
76
740
0
3
362
2 00
00
3 80
325
00
3 2
36
200
0
d
S Ltd
L
SS Ltd
1
130
0 00
00
2
232
2 00
00
117
7 00
00
208
2
8 80
00
13 0
000
0e
2 2
23
200
0f
Divi
D idend paid
(20
0 00
00)
( 8 00
(18
00)d
(2 0
000
0)
R 115
R1
5 70
00
(1
1) 350
0 00
00 – 20
00 000
0 = 150
1 000
0
4
458
R5
509 76
60
k
R 10 9
R11
940
0g
Consolidation of complex groups
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)
495 000
54 300
549 300
Net of the identifiable assets acquired and liabilities assumed
at acquisition date: IFRS 3.32(b)
(543 000)
Goodwill
R6 300
C5 Pro forma consolidation journal entries
Dr
R
J1
J2
J3
J4
J5
Share capital (SS)(OCI)
Retained earnings (SS)(SCE)
Gain from bargain purchase
Non-controlling interests (SFP)
Investment in SS Ltd (S)(SFP)
Elimination of owners’ interest of SS Ltd at date of
acquisition
120 000
155 000
Share capital (S)(SCE)
Retained earnings (S)(SCE)
Retained earnings (SS)(SCE)
Equity represented by gain from bargain purchase
Goodwill (SFP)
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
40 000
3 000
6 300
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
18 600
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
15 000
7 440
Non-controlling interests (P/L)
Non-controlling interests (SFP)
Recognition of the non-controlling interests in the
profit for the year of SS Ltd
67 000
Cr
R
3 000
55 000
217 000
54 300
495 000
18 600
22 440
67 000
continued
459
Chapter 7
Dr
R
J6
J7
J8
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
13 000
23 200
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
Example 7.4
Cr
R
36 200
20 000
45 000
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 cost price:
24 000 shares in S Ltd
16 000 shares in SS Ltd
Trade receivables
Total assets
EQUITY AND LIABILITIES
Share capital (P Ltd: 50 000 shares/ S Ltd: 30 000
shares/SS Ltd: 20 000 shares)
Retained earnings
Trade and other payables
Total equity and liabilities
460
P Ltd
S Ltd
SS Ltd
426 400
237 800
674 000
129 600
–
109 000
–
285 200
50 000
–
–
40 000
R665 000 R573 000 R714 000
100 000
540 000
25 000
110 000
433 000
30 000
140 000
539 000
35 000
R665 000 R573 000 R714 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
PROFIT FOR THE YEAR
SS Ltd
210 000
188 000
115 000
–
–
–
Other comprehensive income for the year
TOTAL COMPREHENSIVE INCOME FOR THE YEAR
S Ltd
R210 000 R188 000 R115 000
EXTRACT FROM THE STATEMENTS OF CHANGES IN EQUITY
FOR THE YEAR ENDED 31 DECEMBER 20.18
Retained earnings
P Ltd
S Ltd
SS Ltd
Balance at 1 January 20.18
Changes in equity for 20.18
Total comprehensive income for the year:
Profit for the year
Dividend paid
380 000
270 000
440 000
210 000
(50 000)
188 000
(25 000)
115 000
(16 000)
Balance at 31 December 20.18
R540 000 R433 000 R539 000
P Ltd purchased an interest in S Ltd on 1 January 20.15, when the retained earnings of
S Ltd amounted to R62 000. S Ltd purchased an interest in SS Ltd on 1 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 fairly valued and there
were no unaccounted for contingent liabilities.
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 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.
461
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
1 338 200
5 200
1 343 400
Current assets
Trade receivables (109 000(P) + 50 000(S) + 40 000(SS))
Total assets
199 000
R1 542 400
EQUITY AND LIABILITIES
Equity attributable to owners of the parent
Share capital
Retained earnings
100 000
1 055 360
Non-controlling interests (135 800i + 161 240j)
1 155 360
297 040
Total equity
Current liabilities
Trade and other payables (25 000(P) + 30 000(S) + 35 000(SS))
Total equity and liabilities
1 452 400
90 000
R1 542 400
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)
480 200
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)
–
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
462
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 # 228 800
–
403 760
(50 000)
403 760
(50 000)
R100 000 ȍR1 055 360
76 440
(8 200)
Total
equity
1 030 400
480 200
(58 200)
R1 155 360 R297 040 R1 452 400
˜ 380 000(P) + 313 600g + 8 000(gain from bargain purchase/J9) = 701 600
# 116 000(S) + 112 800(SS) = 228 800
ȍ 540 000(P) + 507 360(S) + 8 000(J9) = 1 055 360
Calculations
C1 Analysis of owners’ equity of SS Ltd
Total
i At acquisition (1/1/20.17)
Share capital
Retained earnings
Equity represented by goodwill
– Parent
Consideration 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
463
C
Cha
apte
er 7
C
C2 Prroo
of of
o c
calc
cula
atio
on of go
ood
dwiill of
o S
SS Ltd
d in
n te
erm
ms of IFR
RS
S 3.32
C
Con
nsid
dera
atio
on transfferrred at ac
cquisittion
n da
ate: IF
FRS
S 3.32
3 2(a))(i)
A
Amo
oun
nt of
o non
n n-co
ontrrolling
g interestts: IFR
RS 3.3
32(a)(ii)
285 20
00
70 00
00
00
355 20
N
Net of the
e id
den
ntifia
able ass
a etss ac
cqu
uire
ed and
a d lia
abilitie
es ass
a sum
med
d
att accqu
uisittion
n da
ate
e: IF
FRS
S3
3.32
2(b)
(3
350 00
00)
G
Goo
odw
will
R 20
R5
00
Com
C
mm
mentt
I tthe con
In
nso
olida
ated
d sttate
ements of S Ltd an
nd sub
s bsidiaryy SS
S Ltd,
L
the
ere is goo
odw
will of
R 200
R5
0. This
T s am
mou
unt rep
pressentts, iin esse
e encce, a ccorre
ection of the
e eq
quityy off S Ltd
d, as
a
S Lttd paid R28
R 85 2
200 for an
a inve
i estm
men
nt of
o whic
w ch the
e un
nde
erlying ne
et asse
a et vvalu
ue
a oun
amo
nted
d to R28
80 0
000
0.
T
The
e co
onssoliidatted
d own
nerss’ e
equ
uityy off S Lttd can
n now
n w b
be detterm
min
ned
d and
a
an
nalyyse
ed by
a
adding
g th
he am
mou
untts in the
e abo
a ove
e “S
Since”” colu
c umn
n ((18
84 000
0c and 92 00
00d) to
o the
t
re
ese
erve
es of S L
Ltd forr th
he corr
c res
spondiing pe
erio
ods.
C
C3 An
naly
ysiis o
of con
c nso
olid
dated ow
wne
ers
s’ e
equ
uity
y off S Ltd
d
To
ota
al
i At
A acq
a quis
sitiion (1//1/2
20.15))
Sha
S are capita
al
Ret
R tain
ned ea
arnin
ngss
Equ
E uity rep
pre
esen
nted by
b gain
g n fro
om
ba
arg
gain
n pu
urch
hasse – Pare
ent
Con
C nsid
dera
atio
on and
a d NCI
S ce
Sin
N I
NC
88
8 000
49
9 600
22 0
2
000
0
1 4
12
400
0
1 2 00
172
00
137
7 600
3 4
34
400
0
(8
8 00
00)
(8
8 000))
–
1 4 00
164
00
R 9 600
R129
3 4
34
400
0
3 2 00
392
00
S Lttd (270
( 0 00
00 – 62
2 00
00)
S Ltd
SS
d
208
2
8 00
00
1 4 00
184
00c
4
464
A
At
110
1
0 00
00
62
2 00
00
iii Sin
S ce acquisittion
n
• To
T beg
b ginn
ning
g of cu
urre
ent year:
Ret
R tain
ned ea
arnin
ngss:
• Cur
C rren
nt year
y r:
Pro
P fit for
f the
e ye
ear::
S Lttd (188
( 8 00
00 – 12
2 80
00)
S Ltd
SS
d
Divi
D idend paid
P Lttd 80%
8 %
3 3 60
313
00g
7 4
78
400
0
11
12 800
0
267
2
7 20
00
1 5 20
175
00
92
2 00
00d
( 5 00
(25
00)
R7
798
8 20
00
2 3 76
213
60
53 440f
(20
0 00
00)
R5
507
7 36
60
(5 000
0)
R161 240j
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
J6
Share capital (SS)(SCE)
Retained earnings (SS)(SCE)
Goodwill (SFP)
Non-controlling interests (SFP)
Investment in SS Ltd (S)(SFP)
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)
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
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
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
23 000
Cr
R
70 000
285 200
8 000
34 400
129 600
46 000
78 400
23 000
53 440
53 440
continued
465
Chapter 7
Dr
R
J7
J8
J9
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
25 000
16 000
8 000
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:
P Ltd
Dr/(Cr)
R
S1 Ltd
Dr/(Cr)
R
S3 Ltd
Dr/(Cr)
R
300 000
467 100
222 000
30 000
8 000
90 000
80 200
200 000
189 800
178 000
–
–
40 000
24 000
150 000
115 000
110 000
20 000
–
42 000
77 000
1 197 300
631 800
514 000
339 000
481 200
200 500
256 000
220 000
–
81 400
118 200
66 000
5 600
61 100
50 000
–
–
–
36 000
19 900
17 000
2 700
35 000
40 000
–
–
110 000
77 000
30 000
75 000
1 500
20 000
–
1 197 300
631 800
514 000
Credits
Share capital (P Ltd: 150 000 shares/
S1 Ltd: 200 000 shares/S3 Ltd: 150 000 shares)
Retained earnings – 1 January 20.18
Gross profit
Dividends received
Interest received
Long-term loan
Trade payables
Debits
Property plant and equipment
Equity investments at cost price:
Investment in S1 Ltd
Investment in S3 Ltd
Sundry investments
Inventory and trade receivables
Cash and cash equivalents
Other expenses
Finance costs
Income tax expense
Dividends paid – 31 December 20.18
466
Consolidation of complex groups
Additional information
1
2
3
4
5
Investment in S1 Ltd
P Ltd acquired 150 000 shares in S1 Ltd 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
R47 000 more than its carrying amount.
Investment in S3 Ltd
P Ltd acquired 90 000 shares in S3 Ltd on 1 January 20.18. 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 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 in the acquiree at their
proportionate share of the acquiree’s identifiable net assets at the acquisition date.
The company tax rate is 28%.
Required
Prepare the consolidated financial statements of the P Ltd Group for the year ended
31 December 20.18.
467
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 (339 000(P) + 481 200(S1) + 200 500(S3))
Equity investments
Goodwill (13 120(S1 analysis) + 61 000(S3 analysis))
1 020 700
110 000
74 120
1 204 820
Current assets
Inventories and trade receivables (81 400(P) + 36 000(S1) + 77 000(S3))
Cash and cash equivalents (118 200(P) + 19 900(S1) + 30 000(S3))
194 400
168 100
362 500
Total assets
R1 567 320
EQUITY AND LIABILITIES
Equity attributable to owners of the parent
Share capital
Retained earnings
300 000
674 445
Non-controlling interests (120 275(S1) + 119 400(S3))
974 445
239 675
Total equity
Non-current liabilities
Long-term borrowings (90 000(P) + 40 000(S1) + 42 000(S3))
1 214 120
172 000
172 000
Current liabilities
Trade and other payables (80 200(P) + 24 000(S1) + 77 000(S3))
Total liabilities
Total equity and liabilities
468
181 200
181 200
353 200
R1 567 320
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 (222 000(P) + 178 000(S1) + 110 000(S3))
Other income (30 000(P) + 20 000(S3) + 8 000(P) – 30 000(J8))
Other expenses (66 000(P) + 17 000(S1) + 75 000(S3))
Finance costs (5 600(P) + 2 700(S1) + 1 500(S3))
510 000
28 000
(158 000)
(9 800)
Profit before tax
Income tax expense (61 100(P) + 35 000(S1) + 20 000(S3))
370 200
(116 100)
PROFIT FOR THE YEAR
Other comprehensive income for the year
254 100
–
TOTAL COMPREHENSIVE INCOME FOR THE YEAR
R254 100
Total comprehensive income attributable to:
Owners of the parent (254 100 – 46 225)
Non-controlling interests (13 400(J7) + 32 825(J6))
207 875
46 225
R254 100
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 ’516 570
Noncontrolling
interests
Total
Total
equity
816 570
97 450
914 020
–
–
–
106 000
106 000
–
–
207 875
(50 000)
207 875
(50 000)
46 225
(10 000)
254 100
(60 000)
R300 000 §R674 445 R974 445 ȍR239 675 R1 274 120
’ 467 100(P) + 49 470(S1) = 516 570
ȍ 120 275(S1) + 119 400(S3) = 239 675
§ 467 100(P Opening RE) + 222 000(P GP) + 30 000(P Div rec) – 66 000 (P other exp) – 5 600
(P Finance costs) – 61 100(P Income tax expense) – 50 000(P div paid) + 117 945(S1) +
20 100(S2) = 674 445
469
Chapter 7
Calculations
C1 Schematic diagram of group structure
P Ltd
75%
80%
1 January 20.17
1 January 20.18
S1 Ltd
S3 Ltd
C2 Analysis of owners’ equity of S1 Ltd
i At acquisition (1/1/20.17)
Share capital
Equity at acquisition (1)(J1)
Retained earnings
75%
100%
Total
At
200 000
33 840
90 000
150 000
25 380
67 500
50 000
8 460
22 500
Since
25%
NCI
323 840
242 880
80 960
Equity represented by goodwill
– Parent
13 120
13 120
–
Consideration and NCI
336 960
R256 000
80 960
ii Since acquisition
• To beginning of current year:
Retained earnings (2)
65 960
• Current year
Profit for the year (3)
131 300
98 475
32 825
(40 000)
(30 000)
(10 000)
R494 220
R117 945
R120 275
Dividend paid
49 470
16 490
97 450
(1) 47 000 × 72% = 33 840
(2) 189 800 – 90 000 – 33 840(J4) = 65 960
(3) 178 000 + 8 000(other income) – 17 000 – 2 700 – 35 000 = 131 300
C3 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)
256 000
80 960
336 960
Net of the identifiable assets acquired and liabilities assumed
at acquisition date: IFRS 3.32(b)
Goodwill
470
(323 840)
13 120
C
Con
nso
olidatio
on of com
mp
plexx grroups
Com
C
mm
mentt
I ento
Inve
orie
es are curr
c rentt asssets and are expeccted
d to rea
alise
e within
n 12
2 mont
m ths.. Th
here
efore,
t rea
the
alisa
ation of the curre
ent asssetss is pro
ocesssed in
n the next
n
pe
eriod
d – “sin
nce acq
quissitio
on
t b
to
begiinning of curr
c rent yea
ar”. Th
he in
ncre
ease
e in
n va
alue (re
eme
easu
urem
men
nt) of
o th
he inve
i ento
ory at
t acq
the
quissitio
on date
d e is only acco
a oun
nted forr, fo
or grou
g up purp
p pose
es in
i o
orde
er to
o ca
alcu
ulate
e th
he
g odwill/g
goo
gain on
n b
barg
gain pu
urch
hase at
a the
t
accquisitio
on datte corr
c recttly (IFR
RS 3). Th
he
r meas
rem
sure
eme
ent of tthe inventory is n
not acccounted fo
or in
n the se
epa
arate
e ac
cco
ountting reccord
ds
o S
of
S1 Ltd.
L As a resu
r ult of
o th
he remeassure
eme
ent at
a th
he a
acq
quisition
n da
ate,, the
e ca
arryying am
mount
o inve
of
ento
ory from
m th
he gro
oupss’ pers
p spec
ctive
e iss more
m e than tha
at re
efleccted
d in
n th
he sepa
s arate
a coun
acc
nting
g re
ecorrds of S1
S Ltd. When
W n th
he asse
a et re
ealisses, du
ue to itss ca
arry
ying
g am
mount b
bein
ng
m re, the
mor
e group
ps’ profit will
w be lesss than
t n th
hat reccogn
nise
ed in th
he sep
para
ate acccou
untin
ng
r ords
reco
s off S1 Ltd
d.
C
C4 An
naly
ysiis o
of ow
o ners’ eq
quitty of
o S3
S Ltd
d
60
0%
100
1
0%
T tal
Tot
A
At
150
1
0 00
00
1 5 00
115
00
90 000
9
0 0
6 000
69
0 0
60 00
00
00
46 00
Equ
E uity rep
pre
esen
nted
d by
b goo
g dwill – Pa
are
ent
341 00
3
00
61 00
00
20
04 600
6 0
6 000
61
0 0
106 00
00
–
Con
C nsid
dera
atio
on and
a d NCI
3 6 00
326
00
R22
R 20 000
0 0
106 00
00
A acq
a quis
sition (1//1/2
20.1
18))
i At
Sha
S are cap
pita
al
Ret
R ained ea
arnin
ngss
iii Sin
S ce acq
quiisittion
n
• Cur
C rren
nt year
y r
Prof
P fit for
f the
t e ye
ear (1)
33
3 50
00
R3
359
9 50
00
Sin
nce
e
20
0 10
00
40%
%
NC
CI
13 40
00
R
R20
0 10
00 R1
119
9 40
00
(1
1) 110
1 0 00
00 + 20
0 00
00 – 75 000 – 150
00 – 20
0 00
00 = 33
3 50
00
C
C5 Prroo
of of
o c
calc
cula
atio
on of go
ood
dwiill of
o S
S3 Ltd
d in
n te
erm
ms of IFR
RS 3.3
32
C
Con
nsid
dera
atio
on transfferrred at ac
cquisittion
n da
ate: IF
FRS
S 3.32
3 2(a))(i)
A
Amo
oun
nt of
o non
n n-co
ontrrolling
g interestts: IFR
RS 3.3
32(a)(ii)
220 00
00
106 00
00
326 00
00
N
Net of the
e id
den
ntifia
able ass
a etss ac
cqu
uire
ed and
a d lia
abilitie
es ass
a sum
med
d att
ac
cqu
uisittion
n date
e: IF
FRS
S 3.32
3 2(b
b)
(3
341 00
00)
G
Goo
odw
will
R61 00
00
C
C6 Prro form
f ma
a co
ons
solida
atio
on jou
j urn
nal enttrie
es
D
Dr
R
J1
1
Invven
ntorry (S1)(SFP
P)
Equ
uityy att accquisition
Defferrred
d taxx (S
S1)(SF
FP)) (477 0000 × 288%)
Re
emeas
surrem
men
nt of
o in
nve
ento
ory
y att ac
cqu
uisition date
d e of
o
S1
1 Lttd
Crr
R
4
47 000
0
33
3 84
40
13
3 16
60
co tinu
cont
ued
d
471
4
Chapter 7
Dr
R
J2
J3
J4
J5
J6
J7
J8
472
Share capital (S1)(SCE)
Retained earnings (S1)(SCE)
Equity at acquisition
Goodwill (SFP)
Non-controlling interests (SFP)
Investment in S1 Ltd (P)(SFP)
Elimination of owners’ interest of S1 Ltd at
acquisition date
200 000
90 000
33 840
13 120
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
115 000
61 000
Retained earnings (S1)(SCE)
Deferred tax (S1)(SFP)
Inventory (S)(SFP)
Inventory of S1 Ltd remeasured at acquisition
realised after acquisition
33 840
13 160
Retained earnings (S1)(SCE)
Non-controlling interests (SFP)
Recognition of the non-controlling interests in the
since acquisition retained earnings of S1 Ltd
16 490
Non-controlling interests (P/L)
Non-controlling interests (SFP)
Recognition of the non-controlling interests in the
profit for the year of S1 Ltd
32 825
Non-controlling interests (P/L)
Non-controlling interests (SFP)
Recognition of the non-controlling interests in the
profit for the year of S3 Ltd
13 400
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
Cr
R
80 960
256 000
106 000
220 000
47 000
16 490
32 825
13 400
40 000
Consolidation of complex groups
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:
P Ltd
Dr/(Cr)
R
S Ltd
Dr/(Cr)
R
SS Ltd
Dr/(Cr)
R
Property, plant and equipment
Investment in S Ltd at cost price
Investment in SS Ltd at cost price
Loan to P Ltd
Trade receivables
Inventories
Cash and cash equivalents
Share capital (P Ltd: 100 000 shares/
534 200
190 000
–
–
165 000
142 500
102 500
358 900
–
153 000
200 000
20 000
40 000
23 000
283 100
–
–
–
9 000
15 000
13 000
S Ltd: 100 000 shares/SS Ltd: 90 000 shares)
(100 000)
(474 000)
(352 400)
(60 000)
44 500
98 000
15 300
25 000
(298 000)
(32 600)
(100 000)
(359 000)
(410 000)
(25 000)
88 000
73 000
–
15 000
–
(76 900)
(90 000)
(114 000)
(148 000)
(40 000)
24 000
45 900
–
30 000
–
(28 000)
R–
R–
R–
Retained earnings – 1 January 20.18
Gross profit
Other income
Other expenses
Income tax expense
Finance costs
Dividend paid
Long-term borrowings
Trade and other payables
Additional information
1 P Ltd acquired 80 000 shares in S Ltd on 1 October 20.17 when the retained
earnings amounted to R68 000. The assets and liabilities were considered to be
fairly valued and there were no unaccounted for contingent liabilities.
2 S Ltd acquired 63 000 shares in SS Ltd on 1 January 20.18. For the acquisition of
the interest in SS Ltd there were no unidentified assets, liabilities or contingent
liabilities, and the assets and liabilities were considered to be fairly valued.
3 P Ltd recognised the equity investment in S Ltd in its separate records using the
cost price method.
4 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.
5 Goodwill was not considered to be impaired from the time that the investments were
acquired to the end of the current reporting period.
6 The following intragroup transactions took place within the group during the year
ended 31 December 20.18:
6.1 S 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. S Ltd charges 10% interest on the
473
Chapter 7
7
loan per annum. Included in finance costs of P Ltd is interest paid of R10 000
to S Ltd for the period 1 July 20.18 to 31 December 20.18.
6.2 P Ltd charges its subsidiary, S Ltd, a management fee of R4 000 per month.
The company tax rate is 28%.
Required
Prepare the consolidated financial statements of the P Ltd Group for the year ended
31 December 20.18.
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 (534 200(P) + 358 900(S) + 283 100(SS))
Goodwill (55 600(S) + 10 200(SS))
1 176 200
65 800
1 242 000
Current assets
Trade receivables (165 000(P) + 20 000(S) + 9 000(SS))
Inventories (142 500(P) + 40 000(S) + 15 000(SS))
Cash and cash equivalents (102 500(P) + 23 000(S) + 13 000(SS))
194 000
197 500
138 500
530 000
Total assets
R1 772 000
EQUITY AND LIABILITIES
Equity attributable to owners of the parent
Share capital
Retained earnings
100 000
1 192 936
Non-controlling interests (155 934(S) + 87 630(SS))
1 292 936
243 564
Total equity
Long-term liabilities
Long-term borrowings (298 000(P) – 200 000(J5))
Current liabilities
Trade and other payables (32 600(P) + 76 900(S) + 28 000(SS))
Total liabilities
Total equity and liabilities
474
1 536 500
98 000
137 500
235 500
R1 772 000
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 (352 400(P) + 410 000(S) + 148 000(SS))
Other income (60 000(P) + 25 000(SS) + 40 000(S) – 10 000(J6) – 12 000(J4)
910 400
34 000
– 21 000(J3) – 48 000(J7))
Other expenses (44 500(P) + 88 000(S) + 24 000(SS) – 48 000(J7))
Finance charges (15 300(P) – 10 000(J6))
(108 500)
(5 300)
Profit before tax
Income tax expense (98 000(P) + 73 000(S) + 45 900(SS))
830 600
(216 900)
PROFIT FOR THE YEAR
613 700
Other comprehensive income for the year
–
TOTAL COMPREHENSIVE INCOME FOR THE YEAR
R613 700
Total comprehensive income attributable to:
Owners of the parent (613 700 – 102 564)
Non-controlling interests (35 430(J10) + 67 134(J9))
511 136
102 564
R613 700
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
Non-controlling interests
arising from acquisition of
subsidiary
Total comprehensive
income for the year:
Profit for the year
Dividend paid
Balance at
31 December 20.18
Share
capital
Retained
earnings
Total
100 000
Ÿ 706 800
806 800
–
–
511 136
(25 000)
Noncontrolling
interests
Total
equity
91 800
898 600
61 200
61 200
511 136
102 564
(25 000) @(12 000)
613 700
(37 000)
R100 000 R1 192 936 R1 292 936 ũR243 564 R1 536 500
Ÿ 474 000(P) + 232 800(S) = 706 800
ũ 155 934(S) + 87 630(SS) = 243 564
@ 9 000(SS) + 3 000(S) = 12 000
475
Chapter 7
Calculations
C1 Schematic diagram of group structure
P Ltd
80%
1 Oct 20.17
S Ltd
70%
1 Jan 20.18
SS Ltd
C2 Analysis of owners’ equity of SS Ltd
Total
i At acquisition (1/1/20.18)
Share capital
Retained earnings
S Ltd 70%
At
Since
NCI
90 000
114 000
63 000
79 800
27 000
34 200
204 000
142 800
61 200
Equity represented by goodwill –
Parent
10 200
10 200
–
Consideration and NCI
214 200
R153 000
61 200
ii Since acquisition
• Current year:
Profit for the year (1)
Dividend paid
118 100
(30 000)
82 670
(21 000)
35 430
(9 000)
R302 300
R61 670
R87 630
(1) 148 000 + 40 000 – 24 000 – 45 900 = 118 100
C3 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)
153 000
61 200
214 200
Net of the identifiable assets acquired and liabilities assumed at
acquisition date: IFRS 3.32(b)
(204 000)
Goodwill
R10 200
476
Consolidation of complex groups
C4 Analysis of owners’ equity of S Ltd
i At acquisition (1/10/20.17)
Share capital
Retained earnings
80%
20%
NCI
100%
Total
At
100 000
68 000
80 000
54 400
20 000
13 600
168 000
134 400
33 600
Since
Equity represented by goodwill –
Parent
55 600
55 600
–
Consideration and NCI
223 600
190 000
33 600
ii Since acquisition
• To beginning of current year:
Retained earnings (359 000 – 68 000)
• Current year
Profit for the year
Profit for the year – S Ltd (1)
Profit for the year – SS Ltd (2)
291 000
232 800
58 200
91 800
335 670
268 536
67 134
274 000
61 670
219 200
49 336
54 800
12 334
Dividends paid
(15 000)
(12 000)
(3 000)
R835 270
R489 336
R155 934
(1) 410 000 + 25 000 – 88 000 – 73 000 = 274 000
(2) 82 670 – 21 000 = 61 670
C5 Proof of calculation of gain on bargain purchase 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)
190 000
33 600
223 600
Net of the identifiable assets acquired and liabilities assumed at
acquisition date: IFRS 3.32(b)
(168 000)
Goodwill
R55 600
C6 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 (S)(SFP)
Elimination of owners’ interest of SS Ltd at
acquisition date
Cr
R
90 000
114 000
10 200
61 200
153 000
continued
477
Chapter 7
Dr
R
J2
J3
J4
J5
J6
J7
J8
J9
J10
478
Share capital (S)(SCE)
Retained earnings (S)(SCE)
Goodwill (SFP)
Non-controlling interests (SFP)
Investment in S Ltd (P)(SCE)
Elimination of owners’ interest of S Ltd at acquisition
date
100 000
68 000
55 600
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
21 000
9 000
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 interests
12 000
3 000
Long-term borrowings (P)(SFP)
Loan to P Ltd (S)(SFP)
Elimination of intragroup long-term loan accounts
200 000
Interest received (SS)(P/L)
Interest paid (P)(P/L)
Elimination of interest charged on intragroup longterm loan accounts
10 000
Management fees received (P)(P/L)
Management fees paid (S)(P/L)
Elimination of intragroup management fees
48 000
Retained earnings (S)(SCE)
Non-controlling interests (SFP)
Recognition of the non-controlling interests
in the since-acquisition retained earnings of S Ltd
58 200
Non-controlling interests (P/L)
Non-controlling interests (SFP)
Recognition of the non-controlling interests in the
profit for the year of S Ltd and SS Ltd
67 134
Non-controlling interests (P/L)
Non-controlling interests (SFP)
Recognition of the non-controlling interests in the
profit for the year of SS Ltd
35 430
Cr
R
33 600
190 000
30 000
15 000
200 000
10 000
48 000
58 200
67 134
35 430
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 ............................................
481
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 ........................
481
481
482
482
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 ...........................................
483
483
484
485
Disclosure requirements for a subsidiary acquired
in the current reporting period ................................................................
492
Disclosure requirements for subsidiaries
(IFRS 12 Disclosing Interests in Other Entities) ..............................
493
Self-assessment question
Question 8.1
.....................................................................................................
497
479
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.
l Interest paid may change because new loans are raised or existing loans have
been paid off.
481
Chapter 8
l
l
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.
482
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.
483
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
(46 700)
(40 444)
(6 256)
122 000
105 656
16 344
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
175 000
280 656
484
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
Share capital (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
S Ltd
Cr
Dr
Cr
100 000
350 150
28 640
–
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
485
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 80% thereof.
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 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 investment was
acquired to the end of the reporting period.
486
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
752 500
(338 000(P) + 572 500(S) – 112 000(P) – 46 000(S))
Goodwill
3 944
756 444
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)
Total equity
Non-current liabilities
Long-term liability
R994 880
100 000
485 952
585 952
74 312
660 264
266 680
Current liabilities
Trade and other payables (28 640(P) + 39 296(S))
67 936
Total liabilities
334 616
Total equity and liabilities
R994 880
487
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))
975 000
(509 000)
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)
–
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.
488
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
˜ 71 352
71 352
165 802
(30 000)
Ȝ 6 710
ĭ (3 750)
172 512
(33 750)
R100 000 &R485 952 R585 952
R74 312
R660 264
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
&
489
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
490
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
80 000
205 408
Retained earnings 1/7/20.17
Profit 1/7/20.17−28/2/20.18 ($)
145 000
60 408
285 408
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
*
P Ltd 75%
At
Since
NCI
60 000
154 056
20 000
51 352
214 056
71 352
3 944
3 944
−
289 352
R218 000
˜ 71 352
33 552
(15 000)
26 842
(11 250)
Ȝ 6 710
ĭ (3 750)
*R307 904
R15 592
R74 312
218 000 + 15 592 + 74 312 = 307 904
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)
218 000
71 352
289 352
Net of the identifiable assets acquired and liabilities assumed
at acquisition date: IFRS 3.32(b)
(285 408)
Goodwill
R3 944
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
Cr
R
80 000
145 000
240 000
3 944
96 000
55 500
4 600
23 492
71 352
218 000
continued
491
Chapter 8
Dr
R
J2
J3
Non-controlling interests (P/L)
Non-controlling interests (SFP)
Recognition of non-controlling interests in profit
since acquisition
6 710
Dividend received (P)(P/L)
Non-controlling interests (SFP)
Dividend paid (S)(SCE)
Elimination of intragroup dividend
11 250
3 750
Cr
R
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.
l Details of contingent consideration arrangements and indemnification assets,
including amounts, descriptions and estimated outcomes.
l 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.
l The amounts recognised at acquisition date for each major class of assets
acquired and liabilities assumed.
l 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.
492
Interim acquisition of an interest in a subsidiary
l
l
l
l
l
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.
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.
continued
493
Chapter 8
IFRS
Disclosure requirements
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;
• 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(a)
.12(b)
.12(c)
.12(d)
.12(e)
.12(f)
.12(g)
continued
494
Interim acquisition of an interest in a subsidiary
IFRS
Disclosure requirements
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.
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.
continued
495
Chapter 8
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
12.10(a)(i)
12.10(a)(ii)
(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.
12.12(g)
12.B11
continued
496
Interim acquisition of an interest in a subsidiary
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
R148 093
R167 656
1 500 000
273 365
–
1 200 000
304 532
–
R273 365
R304 532
264 772
8 593
292 089
12 443
R273 365
R304 532
R2 500
R8 000
Net assets
Accumulated non-controlling interests
Abridged statement of comprehensive income and
profit and loss
Revenue
Profit for the period
Other comprehensive income
Total comprehensive income
Total comprehensive income attributable to:
Owners of the parent
Non-controlling interests
Dividends paid to non-controlling interests
12.10(a)(i)
12.10(a)(ii)
12.B10.(b)
12.12(f)
12.12(e)
12.B10(a)
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 purchased 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.
497
Chapter 8
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 (P Ltd: 160 000 shares/S Ltd: 150 000 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 cost price
Other investments
Loan to S Ltd
Inventory
Trade receivables
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
Other comprehensive income for the year
TOTAL COMPREHENSIVE INCOME FOR THE YEAR
498
–
–
R237 900
R241 380
Interim acquisition of an interest in a subsidiary
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.
3 P Ltd elected to measure the non-controlling interests of the acquiree at its fair
value of R142 000 on the acquisition date.
4 Goodwill has not been subject to any impairment.
5 The company tax rate is 28% and CGT is calculated at 80% 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.
499
Chapter 8
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
49 065
188 000
1 774 065
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 035 215
EQUITY AND LIABILITIES
Equity attributable to owners of the parent
Share capital – Ordinary shares
– Preference shares
Retained earnings
160 000
100 000
1 014 624
Non-controlling interests (C3)
1 274 624
150 241
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
21 280
491 280
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
500
610 350
R2 035 215
Interim acquisition of an interest in a subsidiary
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 (273 365 – 10 741)
Non-controlling interests
R273 365
262 624
10 741
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
262 624
(8 000)
(50 000)
10 741
–
(2 500)
R1 014 624
R150 241
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.
501
Chapter 8
The goodwill of R49 065 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
(21 280)
Total identifiable net assets
Non-controlling interests in S Ltd
Goodwill
522 935
(142 000)
49 065
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
Total
1/1–30/9
9 months
1/10–31/12
3 months
Revenue
Cost of sales
820 000
(400 000)
615 000
(300 000)
205 000
(100 000)
Gross profit
Other expenses
Interest paid
P Ltd
Other
Management fee (arose only after acquisition)
420 000
(72 000)
315 000
(54 000)
105 000
(18 000)
(750)
(12 000)
(35 000)
–
(9 000)
–
(750)
(3 000)
(35 000)
Profit before tax
Income tax expense
Income tax expense (35 000 × 28%)
300 250
(93 870)
9 800
252 000
(78 785)
–
48 250
(15 085)
9 800
R216 180
R173 215
R42 965
Profit for the year
#
&
252 000/300 250 × 93 870 = 78 785
48 250/300 250 × 93 870 = 15 085
502
Interim acquisition of an interest in a subsidiary
C2 Analysis of owners’ interest of S Ltd
Total
i At acquisition (1/10/20.18)
Share capital
Retained earnings (1)
Equity at acquisition (J1)
(2)
At
Since
NCI
150 000
299 215
73 720
112 500
224 411
55 290
37 500
74 804
18 430
522 935
392 201
130 734
49 065
37 799
11 266
572 000 R430 000
142 000
Equity represented by goodwill
– Parent and NCI
Consideration and NCI
ii Since acquisition
• Current year:
Profit after tax (C1)
Dividend
P Ltd 75%
42 965
(10 000)
32 224
(7 500)
10 741
(2 500)
R604 965
R24 724
R150 241
(1) 126 000 + 173 215(C1) = 299 215
(2) 150 241 + 24 724 + 430 000 = 604 965
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)
(522 935)
Goodwill
R49 065
C4 Pro forma consolidation journal entries
Dr
R
J1
Property, plant and equipment (S)(SFP)
Cr
R
95 000
(247 500 – 152 500)
Equity at acquisition (S)(SCE)
Deferred tax (S)(SFP) (95 000 × 80% × 28%)
Remeasurement of land at acquisition date
73 720
21 280
continued
503
Chapter 8
Dr
R
J2
J3
J4
J5
J6
J7
504
Cr
R
Share capital (S)(SFP)
Retained earnings (S)(SCE)
Equity at acquisition (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
73 720
49 065
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
Interest received (P)(P/L)
Interest paid (S)(P/L)
Elimination of intragroup interest
300 000
54 000
9 000
78 785
142 000
430 000
35 000
9 800
750
750
Long-term loans (S)(SFP)
Loan to S Ltd (P)(SFP)
Elimination of intragroup loan
30 000
Non-controlling interests (P/L)
Non-controlling interests (SFP)
Recognition of non-controlling interests in profit
since acquisition
10 741
Dividend received (P)(P/L)
Non-controlling interests (SFP)
Dividend paid (S)(SCE)
Elimination of intragroup dividend
7 500
2 500
30 000
10 741
10 000