ACCA Paper P2 (HKG) Corporate
ReportingConsolidated Financial Statements
(Complex)
7 Sept. 2012
Gary Leung
www.garyleung.hk
ACCA P2- Dec 2012
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Contents
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Type of Structure
Status of investments
Techniques
Timing of acquisitions
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Type of Structure
• A subsidiary is a company controlled by another.
• In practice this control might be achieved
through complicated chains of control.
• Two common type of structure
– Vertical group
– Mixed group (“D” shaped groups)
ACCA P2- Dec 2012
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Vertical group
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P
70%
P controls T through
its control of S
60%
SS is the subsidiary of P
S
SS
SS can be referred to as a
sub-subsidiary or indirect
subsidiary
ACCA P2- Dec 2012
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Status of investments
• Status is always based on control
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P
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70% P owns 70% of S and
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therefore controls it.
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S
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60% S owns 60% of SS and
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therefore controls it.
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SS
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P controls SS by controlling
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S
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∴ SS is a subsidiary
ACCA P2- Dec 2012
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Status of investments
• Effective interest in the sub-subsidiary SS is
– In the above illustration P effectively owns
• Effective interest 70% × 60% = 42% of SS.
• NCI (100% - 42%) = 58%
– This is a useful tool to bring to the consolidation
but it is irrelevant in deciding the status of the
investment.
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Techniques
• 2 possible approaches (direct or indirect) to
consolidations involving sub. subsidiaries.
• Indirect approach (2 stages)
1. Consolidate SS into S to give the S group accounts.
2. Consolidate the S group into P.
− This technique is too slow for exam purposes
when it comes to dealing with sub subsidiaries.
Always use the direct method.
− But it must be used to consolidate sub
associates.
3. In practice, consolidated accounts for complex
groups are prepared in indirect approach.
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Techniques
• Direct Approach
• Carry out the consolidation using the effective rate.
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P
P
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70%
70% × 60%
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S
= 42%
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60%
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SS
SS
• In effect we have changed to
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P
P
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70%
70%
42%
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S
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60%
S
SS
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(as a subsidiary)
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SS
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Direct Approach- Technique
• Step 1 Calculate the effective holding.
• Step 2 Consolidate as normal subject to 2 important
points
– Dividends are paid to real shareholders not effective
shareholders.
– Cost of investment in the sub subsidiary [i.e. that appears
in the main subsidiary’s accounts] is split:
• P’s share is used to calculate goodwill
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Cost of investment of S in SS
Less: cost of indirect non-controlling interest in SS
Cost of parent ‘s investment in SS
# cost of investment of S in SS X % share from S by P
A
(X)#
B
• the balance (A – B= X) is reduced the non-controlling interest. (i.e.
cost of indirect non-controlling interest in SS)
• Step 3 Proceed with the consolidation as normal.
ACCA P2- Dec 2012
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Illustration
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Statements of financial position as at 31 December 2011
P
$
Cost of investment
in S
in T
Other assets
Share capital
Retained earnings
S
$
T
$
450
900
1,350
100
1,250
1,350
600
600
100
500
600
700
1,100
1,800
200
1,600
1,800
Further information
(a) P bought 70% of S two years ago when S’s retained earnings stood at $500 Later
(1 year ago) S bought 60% of T when T’s retained earnings were $200.
(b) The non-controlling interest is valued at their proportionate share of the
subsidiary’s identifiable net assets.
(c) Goodwill to the extent of $112 has been impaired in respect of the holding in S
and by $37.8 in respect of the holding in T.
Required:
Prepare the consolidated statement of financial position of the P group as at 31
December 2011.
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Illustration 1
• Consolidated statement of financial position as at 31
December 2011
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$
• Assets
• Goodwill (168 + 151.2)
319.2
• Other Assets(1,100 + 900 + 600)
2,600.0
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2,919.2
• Share capital
200
• Retained earnings
2,101.2
• Non-controlling interest
618
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2,919.2
ACCA P2- Dec 2012
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Illustration 1
(W1) Group structure
P
70%
S
60%
T
(W2) Net assets summary
S Ltd
Share capital
Retained earnings
per Q
P
42% NCI 58%
T
At
consolidation
100
At
acquisition
100
1,250
1,350
500
600
At
consolidation
100
At
acquisition
100
500
600
200
300
T Ltd
Share capital
Retained earnings
per Q
ACCA P2- Dec 2012
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Illustration 1
(W3) Goodwill
Cost
$
Investment in S
700
Investment in T
Less: indirect holding adjustments ( 450X 30%)
Share of net assets
70% × 600 (W3)
(420)
42% × 300 (W3)
------280
-------Asset (balance)
168
Impaired (given)
112
(W4) Non-controlling interest
In S 30% × 1,350 (W2)
In T 58% × 600 (W2)
S Inc’s non-controlling share of cost of
investment in T (30% × 450)
$
450
(135)
(126)
------189
------151.2
37.8
$
405
348
(135)
____
618
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ACCA P2- Dec 2012
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Illustration 1
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Consolidated retained earnings
All of P
1,600
Share of S
70% (1,250 − 500) (W2)
525
Share of T
42% (500 − 200) (W2)
126
Goodwill (112 + 37.8)(W3)
(149.8)
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2,101.2
_______
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Illustration 2 –full goodwill method
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The following are the statement of financial position at 31 December 2011
G Ltd
A Ltd
B Ltd
45,000 shares in A Ltd
65,000
30,000 shares in B Ltd
55,000
Other net assets
80,000 33,000 75,000
145,000 88,000 75,000
Share capital ($1 shares)
100,000 60,000 50,000
Retained earnings
45,000 28,000 25,000
145,000 88,000 75,000
The inter-company shareholdings were acquired on 1 Jan 2011 when the retained
earnings were 10,000 and 8,000 of A Ltd and B Ltd respectively. At that date, the fair
value of the non-controlling interest in A was $20,000. The fair value of the total noncontrolling interest (direct and indirect) in B was $50,000.
Required:
Prepare the consolidated statement of financial position, assuming any goodwill has
been fully impaired. It is group policy to value the non-controlling interest using the full
goodwill method.
ACCA P2- Dec 2012
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Illustration 2
• Consolidated statements of financial position
as at 31 December 2011.
• Other net assets
188,000
• Share capital
100,000
• Retained earnings
39,938
• NCI
48,062
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188,000
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Illustration 2
• Working 1
• G:
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G 75%, NCI 25%
• A:
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A 60%, NCI 40%
• B:
Effective shares = 75% X 60% = 45%
• NCI effective shares = 100% - 45% = 55%
• Or 40% directly + 25% X 60% = 55% indirectly.
ACCA P2- Dec 2012
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Illustration 2
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2) Net assets working
Acquisition
A Ltd
Share capital
60,000
P&L
10,000
70,000
B Ltd
Share capital
50,000
P&L
8,000
58,000
Balance sheet date
ACCA P2- Dec 2012
60,000
28,000
88,000
50,000
25,000
75,000
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Illustration 2
3) Working Goodwill
A Ltd
Purchase consideration
NCI
Less: Net assets
Goodwill
Breakdown of Goodwill
65,000
20,000
(70,000)
15,000
– Parent (65,000 – 75% x 70,000)
– NCI ( 20,000 – 25% X 70,000)
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12,500
2,500
B Ltd
Purchase consideration
Less: indirect holding adjustment (55,000 X 25%)
NCI
Less: Net assets
Goodwill
Breakdown of Goodwill
– Parent (41,250 – 58,000 X 45%)
– NCI ( 50,000 – 58,000 X 55%)
ACCA P2- Dec
2012
55,000
(13,750)
50,000
(58,000)
33,250
15,150
18,100
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Illustration 2
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3) NCI working
A Ltd
25% X 88,000
Less: NCI of A’s investment
in B Ltd (55,000 X 25%)
B Ltd
55% X 75,000
NCI –Goodwill A
NCI – Goodwill B
Less: impairment of Goodwill
A (15,000 X 25% )
B (33,250 X 55% )
ACCA P2- Dec 2012
22,000
(13,750)
41,250
2,500
18,100
70,100
(3,750)
(18,288)
48,062
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Illustration 2
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W4) Retained Earnings
Retained Earnings of G
45,000
Group share of post-acq. Profits
A ( 18,000 X 75%)
13,500
B (17,00 X 45%)
7,650
Goodwill written off
A ( 15,000 X 75%)
(11,250)
B ( 33,250 X 45%)
(14,962)
39,938
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Mixed group structures
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A
60%
B
25%
30%
C
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Mixed group structures
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Effective interest of C as follows:
A’s direct interest in C
A’s indirect interest (via B) ( 60% X 30%)
A’s effective interest in C
NCI
ACCA P2- Dec 2012
25%
18%
43%
57%
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Illustration 3
• The statements of financial position of three companies are as
follows:
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Alpha Beta Gamma
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$000 $000 $000
• Investments
400 120
• Assets
1,000 680 350
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1,400 800 350
• Share capital ($1)
200 100
50
• Accumulated profits
800 500 200
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1,000 600 250
• Liabilities
400 300 100
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1,400 800 350
ACCA P2- Dec 2012
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Illustration
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Alpha acquired a 80% shareholding in Beta for consideration of $350,000
Beta acquired a 60% shareholding in Gamma for consideration of $120,000
Alpha acquired a 20% shareholding in Gamma for consideration of $50,000
All the investments were made at the same date.
At the date of acquisition the carrying values of the assets and liabilities were the
same as the fair values.
Details of the accumulated profits and the fair value of the effective NCI at
acquisition are as follows:
$000
Beta
Gamma
Beta
Gamma
Acc. Profits
200
75
Fair value of
the effective
NCI
90
50
Alpha has a policy of always calculating goodwill at Full, the impairment reviews
reveal no impairment losses are to be recorded. No shares have been issued since
the date of acquisition.
Required
Prepare the consolidated statement of financial position of the Alpha Group.
ACCA P2- Dec 2012
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Illustration 3
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W1) Group structure
Alpha 80% Beta NCI 20%
Alpha 68% Gamma NCI 32%
Alpha’s effective interest in Gamma
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Alpha’s direct interest in Gamma
Alpha’s indirect interest in Gamma ( 80% X 60%)
Alpha’s effective interest in Gamma
Effective NCI in Gamma
ACCA P2- Dec 2012
20%
48%
68%
32%
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Illustration 3
• W2) indirect holding adjustment
• There will be an indirect holding adjustment in
respect of Beta’s investment in Gamma
• The NCI in Beta Beta’s cost of investment
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in Gamma
• 20%
X
$120,000
ACCA P2- Dec 2012
= $24,000
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Illustration 3
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W3) Net assets
Beta
Gamma
DOA Y.E. DOA Y.E.
$000 $000 $000 $000
Share capital
100 100 50
50
Acc. Profits
200 500 75
200
300 600 125 250
The post acquisition profit of Beta is $300,000
($600,000 - $300,000)
• The post acquisition profits of Gamma is $125,000
($250,000 – 125,000)
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Illustration 3
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Beta’s gross goodwill
Cost of the investment
Fair value of the NCI at DOA
Less: net assets at DOA
Goodwill
Gamma’s gross goodwill
Cost of the investment by Alpha
Cost of the investment by Beta
Less: the indirect holding adjustment
Fair value of the NCI at DOA
Less: net assets at DOA
Goodwill
ACCA P2- Dec 2012
$000
350
90
(300)
140
50
120
(24)
50
125
71
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Illustration 3
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W4) NCI
$000
Fair value of Beta at acquisition
90
Fair value of Gamma at acquisition
50
Less: the indirect holdings adjustments
(24)
Plus: the NCI% of Beta’s post acq. Profits ( 20% X 300) 60
Plus: the NCI% of Gamma’s post acq. Profits ( 32% X 125) 40
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216
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Illustration 3
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W5) Accumulated profits
$000
Parent’s accumulated profits
800
Plus the parent’s % of Beta’s post acquisition profits (80% X 300) 240
Plus the parent’s % of Gamma’s post acquisition profits (68% X 125)85
1,125
ACCA P2- Dec 2012
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Illustration 3
• Alpha Group statement of financial position
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$000
• Goodwill
211
• Assets (1,000+ 680+ 350)
2,030
2,241
• Share capital ($1)
200
• Accumulated profits
1,125
• NCI
216
• Equity
1,541
• Liabilities (400+ 200+ 100)
700
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2,241
ACCA P2- Dec 2012
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Timing of acquisitions
• What is the date of acquisition of the sub subsidiary?
• This is important for deciding reserves of the
date of acquisition.
• For the calculation of pre- and postacquisition profits of SS Ltd. The date the SS
Ltd comes under the control of the P Ltd is
either:
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1) The date P acquired S if S already holds
shares in SS, or
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2) If S acquires shares in SS later, then that
later date.
ACCA P2- Dec 2012
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Illustration 4
• P bought 80% of S at 31 March 2010. S bought
60% of T on 14 July 2011
• Date of acquisition of T = 14 July 2011.
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Illustration 5
• P bought 80% of S at 31 March 2010. S already
owned 60% of T at 31 March 2009.
• Date of acquisition of T = 31 March 2010.
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Consolidated Statement of profit or loss and
other comprehensive income
• These present no real problem. Calculate the
effective rate and consolidate as normal.
• There is one complication.
– If the sub subsidiary has declared a dividend and
the main subsidiary has accounted for its share
through profit or loss this will be part of the
subsidiary’s profit before tax.
– It must be eliminated (as a consolidation
adjustment) during the non-controlling interest
calculation.
ACCA P2- Dec 2012
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Illustration 6
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Operating profit
Dividend receivable
from T
Taxation
PAT
Non-controlling interest (W)
Extract from SOCIE
Dividends
P
1,200
S
600
T
500
Consolidated
2,300
−
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1,200
(400)
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800
120*
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720
(250)
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470
−
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500
(100)
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400
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800
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470
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400
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−
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2,300
(750)
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1,550
(278)
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1,272
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(300)
(200)
*(200) (300)
ACCA P2- Dec 2012
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Illustration 6
P
P
80%
S
48%
60%
NCI = 52%
T
T
Non-controlling interest
In S 20% × (470 − 120)
In T 52% ×400
70
208
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278
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ACCA P2- Dec 2012
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