for Accounting Professionals
CONSOLIDATION PART 3
2011
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CONSOLIDATION PART 3
IFRS WORKBOOKS
(1 million downloaded)
Welcome to IFRS Workbooks! These are the latest versions of the legendary workbooks in Russian and English produced by 3 TACIS projects, sponsored by the
European Union (2003-2009) and led by PricewaterhouseCoopers. They have also appeared on the website of the Ministry of Finance of the Russian Federation.
The workbooks cover various concepts of IFRS based accounting. They are intended to be practical self-instruction aids that professional accountants can use to upgrade
their knowledge, understanding and skills.
Each workbook is a self-standing short course designed for approximately of three hours of study. Although the workbooks are part of a series, each one is independent of
the others. Each workbook is a combination of Information, Examples, Self-Test Questions and Answers. A basic knowledge of accounting is assumed, but if any
additional knowledge is required this is mentioned at the beginning of the section.
Having written the first three editions, we want to update them and provide them to you to download. Please tell your friends and colleagues. Relating to the first
three editions and updated texts, the copyright of the material contained in each workbook belongs to the European Union and according to its policy may be used free of
charge for any non-commercial purpose. The copyright and responsibility of later books and the updates are ours. Our copyright policy is the same as that of the
European Union.
We wish to especially thank Elizabeth Appraxine (European Union) who administered these TACIS projects, Richard J. Gregson (Partner, PricewaterhouseCoopers)
who led the projects and all friends at Bankir.Ru for hosting the books.
TACIS project partners included Rosexpertiza (Russia), ACCA (UK), Agriconsulting (Italy), FBK (Russia), and European Savings Bank Group (Brussels). The help of
Philip W. Smith (editor of the third edition) and Allan Gamborg, project managers and Ekaterina Nekrasova, Director of PricewaterhouseCoopers, who managed the
production of the Russian version (2008-9) is gratefully acknowledged. Glyn R. Phillips, manager of the first two projects conceived the idea, designed the workbooks and
edited the first two versions. We are proud to realise his vision.
Robin Joyce
Professor of the Chair of
International Banking and Finance
Financial University
under the Government of the Russian Federation
Visiting Professor of the Siberian Academy of Finance and Banking
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Moscow, Russia
2011 Updated
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CONSOLIDATION PART 3
CONTENTS
1.
Consolidation Introduction .................................................................... 3
2.
Definitions................................................................................................ 4
3.
Fair Value Accounting ............................................................................ 5
4.
Disposal of a Subsidiary ...................................................................... 18
5.
The Equity Method of Accounting....................................................... 32
6.
Associates ............................................................................................. 33
7.
Cost Method .......................................................................................... 41
8.
Joint Ventures ....................................................................................... 41
9 Special Purpose Entities / Special Purpose Vehicles ................................. 45
1.
Consolidation Introduction
Aim
The aim of this workbook is to assist the individual in
understanding consolidation methodology for IFRS.
Consolidation Approach
To consolidate a business combination requires:
(i) identifying the acquirer;
(ii) determining the acquisition date;
10. Outsourcing contracts: an accidental business combination? .............. 50
11. Carve-out / combined financial statements .............................................. 53
12.
Multiple Choice Questions ................................................................... 59
13.
Self Test Questions .............................................................................. 60
14.
Suggested Solutions ............................................................................ 64
Other Workbooks
Consolidation 1 and 2 concentrate on practical consolidation.
The IFRS 3 workbook concentrates on that standard which
provides guidance on specific points, such as the purchase of
companies in stages, loss of control but retention of an associate,
and reverse takeovers.
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(iii) recognising and measuring the identifiable assets acquired,
liabilities assumed and any non-controlling interest in the
acquiree; and
(iv) recognising and measuring goodwill or a gain from a bargain
purchase.
Before commencing a consolidation, the accountant should have
the full financial statements of the parent and subsidiaries
prepared using the same accounting policies. This includes
statements for companies bought or sold.
Ideally all subsidiary year-ends should be the same as the parent
undertaking. But IFRS 10 permits a maximum difference of 3
months.
Adjustment should be made for any significant differences
created by any subsidiary having a different accounting date.
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CONSOLIDATION PART 3
The length of reporting periods, and any difference in the
reporting dates, should be consistent from period to period.
Transactions between group undertakings should be listed, and
intercompany balances reconciled.
Control
Control is the power to govern the financial and operating policies
of an undertaking to obtain benefits.
Indications of control are:
Spreadsheets are ideal for producing consolidated balance

Ownership of more than 50% of the voting rights.
sheets and income statements, although bespoke consolidated

Effective control over more than 50% of the voting rights.
software is also available.
2.
Definitions
Undertaking
An undertaking is any business, either incorporated or
unincorporated.
Parent (now called controlling interests)
A parent is an undertaking that controls another undertaking.
Subsidiary
A subsidiary is an undertaking that is controlled by another.
Group, or business combination
Two or more companies where one company controls the
other(s).
Consolidated accounts will be required if one business controls
another, whatever are the means of control.
Dissimilar business activities must be consolidated, if they
controlled by the parent undertaking.
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For example, a husband owns 30% and a wife owns 40%. As they
are connected parties, they can exercise control over the
subsidiary.

Controlling the composition of the board of directors.
Minority Interest (now called non-controlling interests)
Minority interest is the part of the results and net assets of a
subsidiary attributable to others outside the group.
Fair value 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. (IFRS 13)
Monetary assets
Monetary assets are money held, assets receivable, and
liabilities payable, in cash.
Uniting of Interests
Uniting (or pooling) of interests is an alternative method of
consolidation.
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CONSOLIDATION PART 3
It reflects the merger of two, or more, interests, where no
undertaking can be identified as the acquirer.
Consolidated financial statements should reflect these under and
overvaluations by revaluing assets and liabilities.
IFRS 3 eliminated this method as an option for acquisitions.
This process of revaluing to contemporary market prices is Fair
Value Accounting.
Associate
An undertaking in which the parent has significant influence, but
is neither its subsidiary, nor part of a joint venture of the parent.
Indications of significant influence are:

Ownership of 20-50% of the voting shares.

Representation on the Board of Directors.
Joint Venture
A joint venture is an undertaking subject to the joint control of two
or more enterprises. The joint control is usually governed by a
contract between the parties.
3.
Fair Value Accounting
When making an acquisition, you pay the market price (or an
amount close to the market price) for the undertaking being
purchased.
The basic principles of using Fair Value Accounting in
consolidated financial statements are:

All assets and liabilities acquired are brought into the
consolidated balance sheet (SFP) at fair value on
acquisition (exceptions are listed in IFRS 5, being assets
held for sale);

All changes in the values of acquired assets after
acquisition are included in the consolidated income
statement.
Establishing market prices for all assets and liabilities can have
many problems in practice and estimates may have to be made.
One problem that can arise is that any assets / liabilities
recognised on acquisition are capitalised, and included in the
balance sheet, whereas any changes in asset value postacquisition are included in the income statement.
This could provide scope for manipulation of profits.
You take into account any undervaluation of fixed assets,
For example, provisions may be set up in the balance sheet on
acquisition, and used against items that would normally be
charged in the income statement, thus inflating profit.
overvaluation of inventory or accounts receivable, and future
Example (no longer possible):
liabilities that have not been booked in the accounts.
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CONSOLIDATION PART 3
You buy a firm for its net asset value of $1 million. You plan to
merge its business with your own and to make its staff redundant,
which will cost you $0,2million.
You record a provision, in the balance sheet, for the $0,2million
by creating goodwill of the same amount.
There is no impact on the income statement.
When the redundancies occur, they are charged to the provision,
again avoiding any impact on the income statement.
IAS 37 Provisions, Contingent Liabilities and Contingent Assets
details when a provision should be recognised. In the above
example a provision is no longer allowed to be made and
The vendor of a firm wants $25million for it. You only have $22
million now.
You agree to pay the additional $3million, if the first year’s
audited profits exceed $4million. There is therefore a liability
created in the consolidated balance sheet for $3m, discounted to
a net present value to reflect that payment will be made in the
future.
from IFRS 3 (Revised): Impact on earnings − the crucial Q&A
for decision makers _PwC
Consideration
Consideration is the amount paid for the acquired business.
Some of the most significant changes are found in this section of
the revised standard. Individual changes may increase or
decrease the amount accounted for as consideration. These
affect the amount of goodwill recognised and impact the postacquisition income statement.
such costs have to be expensed when incurred.
IFRS 3 Business Combinations forbids creating liabilities for
future losses, or costs anticipated to be incurred as a result of the
acquisition, unless:
the acquiree had developed plans prior to the
acquisition, or
- an obligation comes into existence as a direct
consequence of the acquisition.
Example:
-
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Transaction costs no longer form a part of the acquisition
price; they are expensed as incurred. Consideration now
includes the fair value of all interests that the acquirer may have
held previously in the acquired business. This includes any
interest in an associate or joint venture or other equity interests of
the acquired business. If the interests in the target were not held
at fair value, they are re-measured to fair value through the
income statement.
The requirements for recognition of contingent consideration
have also been amended. Contingent consideration is now
required to be recognised at fair value, even if it is not deemed to
be probable of payment at the date of the acquisition. All
subsequent changes in debt contingent consideration are
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CONSOLIDATION PART 3
recognised in the income statement, rather than against goodwill
as today.
The selling-shareholders will receive some share options.
What effect will this have?
An acquirer may wish selling-shareholders to remain in the
business as employees. Their knowledge and contacts can help
to ensure that the acquired business performs well.
The terms of the options and employment conditions could
impact the amount of purchase consideration and also the
income statement after the business combination. Share options
have a value.
The relevant accounting question is whether this value is
recorded as part of the purchase consideration, or as
compensation for post-acquisition services provided by
employees, or some combination of the two. Is the acquirer
paying shareholders in their capacity as shareholders or in their
capacity as employees for services subsequent to the business
combination?
How share options are accounted for depends on the conditions
attached to the award and also whether or not the options are
replacing existing options held by the employee in the acquired
business.
Options are likely to be consideration for post-acquisition service
where some of the payment is conditional on the shareholders
remaining in employment after the transaction. In such
circumstances, a charge is recorded in post-acquisition earnings
for employee services. These awards are made to secure and
reward future services of employees rather than to acquire the
existing business.
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Some of the payments for the business are earn-outs. How
are these accounted for?
It is common for some of the consideration in a business
combination to be contingent on future events. Uncertainty might
exist about the value of the acquired business or some of its
significant assets. The buyer may want to make payments only if
the business is successful. Conversely, the seller wants to
receive full value for the business. Earn-outs are often payable
based on post-acquisition earnings or on the success of a
significant uncertain project.
The acquirer should fair value all of the consideration at the date
of acquisition including the earn-out. If the earn-out is a liability
(cash or shares to the value of a specific amount), any
subsequent re-measurement of the liability is recognised in the
income statement. There is no requirement for payments to be
probable, which was the case under IFRS 3.
An increase in the liability for strong performance results in an
expense in the income statement. Conversely, if the liability is
decreased, perhaps due to under-performance against targets,
the reduction in the expected payment will be recorded as a gain
in the income statement.
These changes were previously recorded against goodwill.
Acquirers will have to explain this component of performance: the
acquired business has performed well but earnings are lower
because of additional payments due to the seller.
Does it make a difference whether contingent consideration
(an earn-out) is payable in shares or in cash?
Yes, it does make a difference. An earn-out payable in cash
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CONSOLIDATION PART 3
meets the definition of a financial liability. It is re-measured at fair
value at every balance sheet date, with any changes recognised
in the income statement.
Earn-outs payable in ordinary shares may not require remeasurement through the income statement. This is dependent
on the features of the earn-out and how the number of shares to
be issued is determined.
An earn-out payable in shares where the number of shares varies
to give the recipient of the shares a fixed value would meet the
definition of a financial liability. As a result, the liability will need to
be fair valued through income.
Conversely, where a fixed number of shares either will, or will
not, be issued depending on performance, regardless of the fair
value of those shares, the earn-out probably meets the definition
of equity and so is not re-measured through the income
statement.
A business combination involves fees payable to banks,
lawyers and accountants. Can these still be capitalised?
No, they cannot. The standard says that transaction costs are not
part of what is paid to the seller of a business. They are also not
assets of the purchased business that are recognised on
acquisition.
shares used to buy the business. Do these also have to be
expensed?
No, these costs are not expensed. They are accounted for in the
same way as they were under the previous standard.
Transaction costs directly related to the issue of debt instruments
are deducted from the fair value of the debt on initial recognition
and are amortised over the life of the debt as part of the effective
interest rate.
Directly attributable transaction costs incurred issuing equity
instruments are deducted from equity.
Asset and liability recognition
The revised IFRS 3 has limited changes to the assets and
liabilities recognised in the acquisition balance sheet. The
existing requirement to recognise all of the identifiable assets and
liabilities of the acquiree is retained. Most assets are recognised
at fair value, with exceptions for certain items such as deferred
tax and pension obligations.
Have the recognition criteria changed for intangible assets?
The standard requires entities to disclose the amount of
transaction costs that have been incurred.
No, there is no change in substance. Acquirers are required to
recognise brands, licences and customer relationships, amongst
other intangible assets. The IASB has provided additional clarity
that may well result in more intangible assets being recognised,
including leases that are not at market rates and rights (such as
franchise rights) that were granted from the acquirer to the
acquiree.
What about costs incurred to borrow money or issue the
What happens to the contingent liabilities of the acquired
Transaction costs should be expensed as they are incurred and
the related services are received.
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business?
Many acquired businesses will contain contingent liabilities − for
example, pending lawsuits, warranty liabilities or future
environmental liabilities. These are liabilities where there is an
element of uncertainty; the need for payment will only be
confirmed by the occurrence, or non-occurrence,
of a specific event or outcome. The amount of any outflow and
the timing of an outflow may also be uncertain.
There is very little change to current guidance under IFRS.
Contingent assets are not recognised, and contingent liabilities
are measured at fair value. After the date of the business
combination contingent liabilities are re-measured at the higher of
the original amount and the amount under the relevant standard,
IAS 37. US GAAP has different requirements in this area.
Measurement of contingent liabilities after the date of the
business combination is an area that may be subject to change in
the future.
If consideration paid and most assets and liabilities are at
fair value, what does this mean for the post-combination
income statement?
Fair valuation of most things that are bought in a business
combination already existed under IFRS 3. The post-combination
income statement is affected because part of the ‘expected
profits’ is included in the valuation of identifiable assets at the
acquisition date and subsequently recognised as an expense in
the income statement, through amortisation, depreciation or
increased costs of goods sold.
A mobile phone company may have a churn rate of three years
for its customers. The value of its contractual relationships with
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those customers, which is likely to be high, will be amortised over
that three-year period.
There may be more charges in the post-combination income
statement due to increased guidance in IFRS 3 (Revised) on
separating payments made for the combination from those made
for something else. For example, guidance has been included on
identifying payments made for post-combination employee
services and on identifying payments made to settle pre-existing
relationships between the buyer and the acquiree.
With contingent consideration that is a financial liability, fair value
changes will be recognised in the income statement. This means
that the better the acquired business performs, the greater the
likely expense in profit or loss.
Can a provision be made for restructuring the target
company in the acquisition accounting?
The acquirer will often have plans to streamline the acquired
business. Many synergies are achieved through restructurings
such as reductions in head-office staff, or consolidation of
production facilities.
An estimate of the cost savings will have been included in the
buyer’s assessment of how much it is willing to pay for the
acquiree.
The acquirer can seldom recognise a reorganisation provision at
the date of the business combination. There is no change from
the previous guidance in the new standard: the ability of an
acquirer to recognise a liability for terminating, or reducing, the
activities of the acquiree in the accounting for a business
combination is severely restricted.
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A restructuring provision can be recognised in a business
combination only when the acquiree has, at the acquisition date,
an existing liability, for which there are detailed conditions in IAS
37, the provisions standard.
Those conditions are unlikely to exist at the acquisition date in
most business combinations. A restructuring plan that is
conditional on the completion of the business combination is not
recognised in the accounting for the acquisition. It is recognised
post-acquisition, and the expense flows through post-acquisition
earnings.
EXAMPLE - Deferred and contingent considerations
Entity A produces and sells sporting goods and clothes. It
acquired 100% of entity B from Mr Jones in 20X4.
Entity B sells badminton clothing, shoes, equipment and
accessories and has grown rapidly since incorporation. Mr
Jones’s asking price was based on aggressive profit forecasts,
which assume continuing rapid growth and estimated the fair
value of entity B to be 200m.
Fashions in the sporting goods and clothing sector change
rapidly.
Entity A has taken a more conservative view and estimated the
fair value to be 166.5m.Entity A is only prepared to pay Mr
Jones’s price if profits reach his forecast levels.
Entity A agreed to acquire entity B for 150m plus a further
payment of 50m in four years.
This payment will comprise:
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(i) a guaranteed minimum payment of 20m with no performance
conditions; and
(ii) a further payment of 30m if actual profits for the four-year
period exceed the cumulative forecast profit.
The forecast cumulative profit over the four-year period is 80m.
Entity A’s management concludes at the acquisition date that it is
not probable that the forecast levels will be reached.
Actual profits are 15m in the first year following the acquisition.
However, cumulative actual profits are 60m by the end of the
second year.
Management conclude at the end of the second year that
payment of the additional 50m is probable. Actual profits exceed
forecast profits for the final two years.
How should the deferred and contingent amounts affect the
accounting for the purchase consideration?
The purchase consideration is 150m plus the present value of the
guaranteed minimum payment of 20m (16.5m) at the acquisition
date (IFRS 3).
The 20m represents deferred purchase consideration and is a
financing transaction. Entity A records 166.5m as its cost of
investment, together with a
provision for the deferred consideration of 16.5m.The discount of
3.5m is a finance cost and is recorded as interest expense over
the four-year period.
An additional amount is payable if entity B achieves a certain
level of performance. The 30m represents contingent
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consideration.
only.
Management concludes at the date of acquisition that payment is
not probable as the forecast profit levels are too aggressive. It
considers the fair value to be zero and does not increase the
purchase consideration. It reaches the same conclusion at the
end of year one as actual results are below forecast.
Should the fair value of the identifiable assets and liabilities of F
include any synergy values arising from the business
combination or should the synergy value be subsumed within
goodwill?
IFRS 3 allows a maximum of 1 year to change the purchase
consideration.
(Had it believed by the end of year 1 that the payment would
have to be made,
an adjustment would be made to the purchase consideration to
record the discounted present value of the 30m (IFRS3.32).The
revision to purchase consideration results in the recognition of
additional goodwill and a liability.
Management revises its estimate at the end of the second year
and concludes that payment of the contingent consideration is
probable.
It is now too late to change the purchase consideration, and
any payment will be expensed in the income statement.
EXAMPLE - Fair values in a business combination
Entity E operates two lines of business: luxury leather goods and
perfumes. It acquires entity F, which operates in leather goods
and has its own brand. E plans to sell F’s products through E’s
existing retail network. It also plans to develop the acquired brand
in its perfume business.
Many entities in the luxury business have their own retail network
but the fact that E also has the perfume business is specific to E
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Fair value is measured for each identifiable asset and liability and
is therefore an asset-specific, rather than an entity-specific
concept.
It follows that the fair value of an asset is determined based on
the separate purchase of that asset. The purchaser is assumed
to be a hypothetical market participant, and the market of
potential purchasers is made up of all potential purchasers – both
industry and financial buyers.
Synergies available to more than one market participant should
be included in the fair value of the identifiable assets. The
definition of fair value under IFRS encompasses the synergies
that could be obtained by any market participant that might buy
the asset.
As such, those synergies are reflected in the purchase price of
the individual asset. All acquirer-specific synergies would not
affect the fair value of the individual asset and should be included
in goodwill.
Synergies that result from the use of E’s retail network to sell
products under F’s brand are market synergies of the luxury
industry, as other potential acquirers of this business also have a
retail network. These should be reflected in the fair value of the
identifiable assets.
Synergies relating to the development of the acquired brand
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through one of E’s existing activities are synergies specific to E
and should be included in goodwill.
assets (including intangibles) and liabilities at their fair values
where they meet the recognition criteria of IFRS 3.
Intangible Assets (see IAS 38 workbook)
Subsequent to the acquisition, I plc has incurred costs from
external organisations in having valuations performed to
determine the fair value of the assets (particularly intangible
assets) acquired.
Intangible assets should be created as a result of business
combinations if they meet the IAS 38 criteria. Some of the
intangible assets, such as client lists, would not meet the criteria
if internally-generated, but meet the criteria if purchased in a
business combination.
IAS 38 specifies the accounting treatment of significant classes of
intangible assets, eg in business combinations acquired
trademarks, trade names, internet domain names, noncompetition agreements, customer lists and databases, customer
contracts and the related contractual and non-contractual
customer relationships, banking or other licenses, favourable
lease agreements, construction permits, patented technology,
etc.
Servicing contracts such as mortgage servicing contracts
acquired in business combinations may be intangible assets
except if mortgage loans, credit card receivables or other
financial assets are acquired in a business combination with
servicing retained, then the inherent servicing rights are not a
separate intangible asset because the fair value of those
servicing rights is included in the measurement of the fair value of
the acquired financial asset
I plc’s management argue that the costs would not have been
incurred if the business combination had not occurred and that
they are therefore directly attributable to the combination.
Can I plc capitalise these valuation costs as part of the cost of
acquisition?
IFRS 3 excludes within the cost of the business combination any
costs that
are directly-attributable to the combination such as professional
fees paid to accountants, legal advisers, valuers and other
consultants to effect the combination. These must be expensed
and reported as transaction costs.
In our view, directly attributable means that the costs have to
have been incurred to effect the combination.
Valuation costs incurred prior to the acquisition date must be
expensed and reported as transaction costs as part of the cost of
the combination.
EXAMPLE - Business combinations: valuation of assets –
transaction costs
However, costs incurred post-acquisition to determine the fair
value of the assets acquired have not been incurred to effect the
combination and must be expensed and not considered to be
transaction costs of the combination..
I plc acquired J Ltd during the year. IFRS 3 requires that I plc
must allocate the cost of the business to J Ltd’s identifiable
This would also apply to other types of valuation costs (eg, for
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tangible fixed assets and pension liabilities).
Consistent accounting policies
Consistent accounting policies must be applied and in preparing
consolidated financial statements, the accounting statements of
the acquired company may have to be adjusted to reflect the
same policies of the parent.
EXAMPLE - Different accounting policies for parent and
subsidiary
Entity A is preparing its first IFRS financial statements in
accordance with IFRS 1, First-time Adoption of IFRS. One of its
subsidiaries, entity B, already publishes IFRS financial
statements.
Entity A must therefore include B’s assets and liabilities in its
consolidated IFRS financial statements at the same values at
which they are included in B’s financial statements after
consolidation adjustments and the effects of any business
combination in which entity A acquired entity B (IFRS 1).
Entity B holds fixed interest medium-term debt securities. Entities
A and B both intend for these investments to be held until
maturity. Entity A has adopted a policy of classifying all financial
assets of this type as available for
sale. However, entity B classifies all these financial assets as
held to maturity.
Does IFRS 1 prevent entity A from accounting for the fixed
interest medium-term debt securities held by entity B as available
for sale?
No. IFRS 1 requires entity A to apply its accounting policy of
available for sale to the financial assets held by entity B because
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IAS 27 requires that uniform accounting policies are applied
when preparing consolidated financial statements.
Accounting for entity B’s financial assets as available for sale is
therefore appropriate.
EXAMPLE - Fair values calculation
Entity B operates a national chain of fashion clothing retail stores.
During 2006 it acquired entity C, which operates a rival fashion
clothing retail chain. The majority of C’s stores are in locations
where entity B does not have stores.
Entity B’s management have decided to replace C’s brand name
over a two-year period and during this time it will replace the
storefront signs with its own brand name.
The fair values of C’s brand name and the signage to be replaced
have been determined by independent valuations specialists at
€40m and €10m respectively.
The fair value of the brand name represents the value that a third
party would be willing to pay in an arm’s length transaction. The
fair value of the signage to be replaced has been calculated
based on depreciated replacement cost in accordance with IFRS
3.
Entity B’s management propose to recognise C’s brand name
and signage at only E4m and E1m respectively in its purchase
accounting under IFRS 3 as it plans to phase out the brand name
and replace the signage over the next two years.
It plans to include the remaining value within goodwill because
the benefits that B will receive from the acquisition will be derived
largely from synergy benefits of the complementary geographical
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spread of C’s stores.
c) derivatives to which DCG has applied hedge accounting.
Is the proposed accounting treatment acceptable?
Easter Bunny has early adopted IFRS 3 (Revised). How should
Easter Bunny account for these financial instruments in its
consolidated financial statements?
No. IFRS 3 requires that the acquired assets and liabilities are
recognised by the acquirer at fair value. The fair value should not
reflect the acquirer’s intentions for the use of the assets acquired.
Accordingly B should recognise C’s brand name as an intangible
asset at E40m and the signage as property, plant and equipment
at E10m. The assets should be amortised and depreciated to
their residual value over their expected useful lives in accordance
with IAS 38 Intangible Assets, and IAS 16. Property, Plant and
Equipment, respectively.
The replacement of the signs will be phased over the two years.
As each sign is replaced the cost of the new sign should be
capitalised and any undepreciated book value of the replaced
sign should be written off.
EXAMPLE - Fair values calculation – financial instruments,
insurance contracts, leases
IFRS 3 (Revised) provides more guidance on the classification or
designation of financial instruments than the current standard. It
requires Easter Bunny to treat the financial instruments in the
same way as if it had acquired them individually (rather than in a
business combination).
Accordingly, on the acquisition date:
a) Easter Bunny needs to reassess the classifications of the nonderivative investments held by DCG to reflect Easter Bunny’s
intentions and practices.
This means that some items may be measured on a different
basis in the consolidated accounts of Easter Bunny, than
previously by DCG.
Easter Bunny acquires Dark Chocolate Group (DCG) on the 24
March 2008. DCG holds a range of financial instruments
accounted for in accordance with IAS 39 + IFRS 9 including:
b) Easter Bunny needs to reassess whether any embedded
derivatives need to be separated, based on the relevant
conditions at acquisition date. As a result, embedded derivatives
that were not previously separated by DCG may need to be
separated and vice versa.
a) non-derivative investments classified by DCG as held to
maturity, available for same and at fair value through profit or
loss,
c) Easter Bunny needs to reassess the designation of derivative
instruments as hedging instruments to reflect its own risk
management policies and practices.
b) hybrid (combined) instruments containing embedded
derivatives that have been separated under the requirements in
IAS 39,and
Furthermore, hedge accounting should be restarted as from the
acquisition date. This means that some hedges in particular
cashflow hedges that previously qualified for hedge accounting
may fail the effectiveness test
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CONSOLIDATION PART 3
required by IAS 39, in which case hedge accounting cannot be
continued in the group accounts.
However, under IFRS 3 (Revised), Easter Bunny does not
reassess whether contracts are classified as insurance contracts
in accordance with IFRS 4, Insurance Contracts, nor the
classification of lease contracts as financial or
operating leases in accordance with IAS 17, Leases.
EXAMPLE - Business combinations - lease valuation
The determination of fair value should not, therefore, reflect the
acquirer’s discount rate because this would provide a value
specific to the acquirer rather than a general, nonentity-specific,
fair value.
EXAMPLE - Indemnities under IFRS 3 (Revised)
Daffodil plc buys 61% of Folly Limited from Bluebell. Per the
agreement Bluebell will indemnify Daffodil for any warranty
claims post the transaction. The warranty relates to inventory
sold by Folly before the acquisition.
Entity C acquired 100% of entity D in March 2005. C’s
management is in the process of determining the fair value of the
identifiable assets and liabilities acquired in that business
combination.
Assuming that Daffodil early adopts IFRS 3 (Revised), Business
Combinations, how should Daffodil account for the indemnity on
acquisition?
A significant liability of D is a finance lease payable. A condition
of the acquisition of D by C was that C had to provide the lessor
with a guarantee for the lease payable.
IFRS 3 (Revised) clarifies that the indemnity is recognised as an
asset of the acquiring business and therefore does not affect
goodwill.
Entity C’s management will determine the fair value of the finance
lease payable based on the present value of the estimate future
cashflows.
The indemnity is measured on the same basis as the indemnified
liability according to the terms of the contract, subject to the need
for a valuation allowance for uncollectability of the asset.
Should C’s management use a discount rate that reflects only
entity D’s credit
rating or should it use one that reflects the combined credit rating
of both entities C and D to determine the fair value?
Where the indemnified liability is not measured at fair value then
the indemnification asset is measured using assumptions
consistent with those used in measuring the indemnified item.
Entity C’s management should use a discount rate that reflects
the credit rating only of entity D.
This should result in a matched treatment for the recognition and
measurement of the liability and the related indemnity asset. The
resulting
income statement gains on the one will offset losses on the other.
IFRS 3 requires that the acquirer recognises the acquiree’s
liabilities at their fair values at acquisition date.
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EXAMPLE - Subsidiary transitioning
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CONSOLIDATION PART 3
Entity A has reported under IFRS since 1990. Entity A acquired
entity B in 2003. B will transition from its national GAAP to IFRS
in 2005, with a transition date of 1 January 2004, and will prepare
consolidated financial statements for its sub-group.
Entity B acquired a subsidiary, entity C, in 2000 and applied its
previous GAAP business combinations accounting to that
acquisition.
When B acquired C it recognised goodwill of 8,000 and an
intangible asset of 5,000 under its previous GAAP for C’s market
share. It also recognised a deferred tax liability of 1,500 in
respect of the market share intangible.
B amortises goodwill over 20 years under previous GAAP but
does not amortise the market share intangible.
The intangible asset does not qualify for recognition under IFRS
and would have been subsumed within goodwill under IAS
22(now IFRS 3), or IFRS 3.
Entity A derecognised the market share intangible when it applied
IAS 22 to the business combination in which it acquired B.
Entity B intends to use the subsidiary transition exemption in
IFRS 1which allows a subsidiary to transition to IFRS using the
IFRS results that it already reports to its parent (entity A).
How does this affect the market share intangible?
The corporate structure and key information is summarised as
follows:
-A Existing IFRS reporter
-A acquired B in 2003
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-B Transitions to IFRS in 2005
-B acquired C in 2000
-C Continuing national GAAP preparer
B should de-recognise the market share intangible at 1 January
2004 and the related deferred tax liability. B will therefore
increase the goodwill to 9,900 (6,400 + 5,000 -1,500) at 1
January 2004.
The subsidiary transition exemption is applied as:
-
the results for entity B.s sub-group at 1 January
2004, as reported to A,
less consolidation adjustments,
less the IAS 22 adjustments made by A on
acquisition of B.
The result of applying only these adjustments would be the
inclusion in B’s transition balance sheet of the previous GAAP
market share intangible asset at 5,000, and goodwill of 6,400
(8,000 less four years’ amortisation).
Application of the subsidiary transition exemption does not
override the requirement to apply the business combinations
exemption in Appendix B of IFRS 1.
B’s management must therefore apply the business combinations
exemption to the market share intangible. It will therefore derecognise the market share intangible at 1 January 2004 and the
related deferred tax liability.
The adjusted goodwill balance of 9,900 is tested for impairment
at transition date. It will also be tested annually thereafter and
whenever indicators of impairment are identified.
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CONSOLIDATION PART 3
EXAMPLE - Group reconstruction
This would be the same value as the carrying amount of the net
assets of Louise Ltd at that date.
During the year, Louise Ltd reorganises the structure of its group
by establishing a new parent. The shareholders of Louise Ltd
exchange their interests in Louise for shares issued by
Newparentco.
EXAMPLE - Use of a Newco in business combinations
There have been no changes to the assets and liabilities of the
new group when compared with the original group. Furthermore,
the owners of Louise Ltd have the same absolute and relative
interests in the net assets of the original group and the new group
immediately before and after the reorganisation.
The IASB recently issued an amendment to IAS 27, Consolidated
and Separate Financial Statements.
Assuming Newparentco can early adopt the amendment, how
would it account
for the acquisition of Louise in its separate accounts under IFRS?
In the separate accounts of Newparentco, it has the choice to
account for investments in subsidiaries at cost or fair value in
accordance with IFRS 10.
Newparentco would previously have accounted for this
transaction at the fair value of the consideration paid for the
investment in Louise − at the fair value of the equity instruments
issued.
However, the amendment specifies that if Newparentco accounts
for its investment in Louise Ltd at cost, Newparentco measures
the investment in Louise Ltd at its share (in this case, 100%) of
the equity items shown in the separate financial statements of
Louise Ltd on the date of reorganisation.
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(a) Newco used by a venture capitalist in an acquisition
A Holdco holds its businesses through a wholly-owned subsidiary
Opco. A Holdco is intending to sell Opco. Several potential
purchasers have been identified.
Management of A Holdco are conducting negotiations and
preparing Opco for sale. Venture Capital Partners (VCP) is the
winning bidder and negotiations are concluded. VCP establishes
a new company, VCP Newco.
VCP Newco raises substantial amounts of debt conditional on the
acquisition of Opco. VCP Newco buys 75% of the shares of Opco
from A Holdco for cash.
Pre-transaction Post-transaction
If VCP Newco has to prepare consolidated accounts, can VCP
Newco be identified as the acquirer of Opco in the transaction in
terms of IFRS 3?
VCP Newco also uses IFRS. IFRS 3 indicates that where a new
company (.newco.) is formed and issues shares to effect a
business combination, it cannot be regarded as the acquirer in
the transaction.
However, in certain cases, where a newco pays cash, it will be
the acquirer. This will be the case where the newco is in
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CONSOLIDATION PART 3
substance an extension of a substantive acquirer.
Therefore, in this scenario, VCP Newco has acquired Opco from
A Holdco. It records the assets and liabilities of the acquired
businesses in its consolidated financial statements at fair value. It
also records the 25% minority interest in Opco held by A Holdco.
financial statements. As a result, B’s assets and liabilities are
included in New Co’s consolidated financial statements at their
pre-combination carrying amounts without fair value uplift.
Therefore, a new company that pays cash is not necessarily the
acquirer and the substance of the transaction needs to be
evaluated to conclude on the accounting treatment.
(b) Newco with third party debt
Entity A arranges loan funding from a financial institution in a new
wholly-owned subsidiary, New Co. The loan is used to fund the
acquisition of A’s
100% shareholding in entity B, for cash consideration. A applies
IFRS 3 to account for common control transactions.
Pre-transaction structure Post-transaction structure
On the assumption that New Co has to prepare consolidated
accounts, can New Co be identified as the acquirer in a business
combination and apply purchase accounting in its consolidated
financial statements?
New Co cannot be the acquirer as A has created New Co and is
the vendor.
Impact of Minority Interests (now called non-controlling
interests) on Fair Values.
Where the parent co-owns the subsidiary with minority interests,
the impact of the fair value accounting will increase (or decrease)
the value of the minority interest.
For example if the minority owns 20% of the subsidiary, then 20%
of the net asset revaluation will be attributable to the minority
interests.
4.
Disposal of a Subsidiary
Principles
On disposal of a subsidiary, include in the consolidated financial
statements:

Therefore, substance is that New Co has been set up to issue
shares, acquire B and then to effect a return of capital from B
through the payment of cash to A for the shares in B that were
acquired by the New Co (leaving A with more cash but an
investment with more debt in it when compared with the previous
structure).
B is identified as the acquirer of New Co, as it is the combining
entity that existed before the combination. The transaction is
accounted for as a reverse acquisition in New Co.s consolidated
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
Profits / losses to date of disposal
Gains or losses on disposal
The gain /loss is calculated from:
Group share of subsidiary net assets before disposal
Less
Group share of subsidiary net assets after disposal, plus
the proceeds received
Net assets may include goodwill.
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CONSOLIDATION PART 3
Proceeds may include a performance-related element (for
example, if future profits are x then payment will be y). This will
be treated as a contingent asset (gain), and only recognised as
profit when it becomes receivable.
Note:
Cost of the investment= Net assets (90)+ goodwill (8)minority interests (18) =80
It would also be disclosed in the notes to the accounts.
A deferred payment may need to be discounted to present value.
IAS 37 has more details on accounting for contingent assets.
Example 1 Sale of Subsidiary
80% of a subsidiary cost 80 in January 2XX6, when 100% of the
net assets of the subsidiary were valued at 90.
Subsidiary 1 Balance Sheet (before consolidation)
Assets
Cash
Accounts
receivable
Investments
Fixed Assets
Liabilities
20 Accounts
payable
400
100
50 Shareholders’
Funds
570
480
90
570
In 2XX9, goodwill of 8 had a net value of 2, after an impairment
charge of 6.
Assets
Cash
Parent Balance Sheet (after acquisition)
Assets
Cash
Accounts
receivable
Investments
S1 Investment
Fixed Assets
Liabilities
220 Accounts
payable
1000
200 Accruals
80
100 Shareholders’
Funds
1600
800
300
Accounts
receivable
Investments
Fixed Assets
Goodwill
P & S1 Group Balance Sheet
Liabilities
240 Accounts
payable
1400 Accruals
300 Minority Interest
150 Shareholders’
8 Funds
2098
1280
300
18
500
2098
500
1600
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Notes:
Cash= 220+20=240
Accounts Receivable= 1000+400=1400
Investments= (280-80)+100=300
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CONSOLIDATION PART 3
Fixed Assets= 100+50=150
Accounts Payable= 800+480=1280
Parent Balance Sheet (after disposal)
The investment in the subsidiary was sold in December 2XX9 for
100 and, at that time, the net assets were valued at 115.
P 2XX9 Income Statement
Proceeds
Cost
100
80
Parent company’s Gain on sale
20
Group 2XX9 Income Statement
Proceeds
Share of assets 80% of 115
Net goodwill
8-(6)
Assets
Cash
Accounts
receivable
Investments
S1 Investment
Fixed Assets
Liabilities
320 Accounts
payable
1000
200 Accruals
0
100 Shareholders’
Funds
Profit on sale
1620
800
300
500
20
1620
100
Notes:
Cash= 220+100=320
The parent’s profit on sale =20 (100-80).
92
2
Group Gain on Sale
94
6
There is a difference between the gain made by the group and
the gain made by the parent company.
The group has been recognising the profits made by the
subsidiary in each period since its purchase.
The parent company has not been recognising any profit of the
subsidiary since its purchase, so is recognising any gain, or loss,
only on disposal of the subsidiary.
Example 2 Share Exchange
P owns 100% of S1. This cost 100.
When S1 was acquired the net assets were 90. Today the net
assets of S1 are 130.
S1 retained earnings comprise 30 pre-acquisition profits and 40
post acquisition profits.
At the date of the exchange, following an impairment charge,
goodwill of 4 remains.
P exchanges the shares of S1 for 75% of S2.
Goodwill arising on acquisition of S1 is:
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20
CONSOLIDATION PART 3
(Cost less net
assets
=
Assets
Cash
100
=10
Accounts
receivable
Investments
Fixed Assets
90
Parent Balance Sheet (after acquisition)
Assets
Cash
Accounts
receivable
Investments
S1 Investment
Fixed Assets
Liabilities
150 Accounts
payable
1000
250 Accruals
100
100 Shareholders’
Funds
1600
Liabilities
30 Accounts
payable
400
100
50 Share Capital
Retained
Earnings
Pre-acquisition
Post-acquisition
800
580
300
450
60
30
40
580
500
1600
P/ S1 Consolidated Balance Sheet
Assets
Cash
Accounts
receivable
Investments
Fixed Assets
Goodwill
Liabilities
180 Accounts
payable
1400
350 Accruals
150 Shareholders’
4 Funds
2084
1250
300
534
2084
The derivation of these figures appears on the next page.
S1 Balance Sheet (at date of exchange)
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CONSOLIDATION PART 3
Derivation of Group Figures (for example
on previous page)
Parent Parent
DR
CR
S1
S1 Adjustments Adjustments
DR
CR
DR
CR
P/S1
P/S1
DR
CR
Assets
Cash
150
30
180
1000
400
1400
Investments
250
100
350
Investment in S1
100
Accounts Receivable
100
Investment in S2
Fixed assets
100
50
150
Goodwill
4
4
Liabilities
Accounts payable
800
Accruals
300
450
1250
300
Minority Interests
Shareholders' funds
500
1600
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1600
580
130
96
580
100
534
100
2084
2084
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CONSOLIDATION PART 3
75% of the net assets of S2 are worth 75% of (120+80)=150
Parent Balance Sheet (at date of exchange)
Assets
Cash
Accounts
receivable
Investments
S2 Investment
Fixed Assets
Liabilities
150 Accounts
payable
1000
250 Accruals
130
100 Shareholders’
Funds
1630
800
75% of the net assets of S2 have cost 100% net assets of S1
(60+70)=130
300
The goodwill of 4 relating to S1 is credited in the consolidated
balance sheet, with the net assets of S1, reducing
consolidated reserves by 4.
P/ S2 Consolidated Balance Sheet
530
1630
Sh
are
holders’ funds increase by 30, reflecting the gain on disposal of
S1 (130-100 purchase price).
Assets
Cash
Accounts
receivable
Investments
S2 Balance Sheet (at date of exchange)
Assets
Cash
Accounts
receivable
Investments
Fixed Assets
80
Liabilities
Accounts
payable
Fixed Assets
Negative Goodwill
680
Liabilities
230 Accounts
payable
1500
450 Accruals
Minority Interests
200 Shareholders’
-20 Funds
2360
1480
300
50
530
2360
500
200 Share Capital
100 Retained
Earnings
880
120
80
880
The net assets of S2 are worth 200.
The effect of the exchange is:
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Notes:
Cash=150+80=230
Accounts Receivable= 1000+500=1500
Investments= 250+200=450
Fixed Assets= 100+100=200
Accounts Payable= 800+680=1480
Negative goodwill arising on consolidation is: Purchase
price-net assets 130-150=-20
Minority Interests= 25% of 200=50
Since IFRS 3, negative goodwill is immediately eliminated by
writing it off to profit.
23
CONSOLIDATION PART 3
Loss of Control
The parent may lose control of a subsidiary by disposing of
part, or all, of its holding.
Net assets (including goodwill) attributable to the parent after
disposal plus any sale proceeds.
Goodwill, relating to the subsidiary, is written off against
This loss of control may either be deliberate, or as a result of a
confiscation by a government. An apparent loss of control may
occur during a group reorganisation.
consolidated reserves on disposal.
Loss of control should be treated as a complete disposal,
Loss of Control – Retention of part of the undertaking
although it is possible that no disposal proceeds will have been
received. Any remaining share that is held is treated as a new
asset obtained at fair value.
Where the disposal is a sale, a gain or loss will arise. If the
subsidiary has been confiscated, a loss will probably be
suffered.
A new aspect of consolidation, introduced into IFRS in 2008, is
the accounting when part of the undertaking is retained,
though control is lost.
A partial disposal of an interest in a subsidiary in which the
parent company retains control does not result in a gain or
loss, but an increase or decrease in equity. (Purchase of some
or all of the non-controlling interest is treated as a treasury
share-type transaction and accounted for in equity.)
From a reorganisation, there will be no gain (nor loss), in group
terms, unless cash changes hands. In economic terms,
nothing has changed.
A partial disposal of an interest in a subsidiary in which the
parent company loses control, but retains an interest (say an
associate) triggers recognition of gain or loss on the entire
interest.
On cessation, the consolidated financial statements should
show:
 The subsidiary results up to the date of cessation
 The gain / loss on cessation.
A realised gain or loss is recognised on the portion that has
been disposed of; a holding gain is recognised on the interest
retained, calculated as the difference between the fair value
and the book value of the retained interest.
Any gain / loss is calculated from:
Net assets (including goodwill) attributable to the parent
before disposal
The accounting is to account for a complete disposal of the
undertaking and then recognise the retained part at fair value.
Less:
The impact is to eliminate the subsidiary and all goodwill from
the balance sheet, and to match it with cash received and the
fair value of the associate.
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CONSOLIDATION PART 3
the parent-company shareholders.
IAS 27 (Revised) – new proposals on minority interests
and disposals from IFRS 3 (Revised): Impact on earnings
− the crucial Q&A for decision makers _PwC
What happens if a non-controlling interest is bought or
sold?
A partial disposal of an interest in a subsidiary in which the
parent company retains control does not result in a gain or
loss, but in an increase or decrease in equity under the
economic entity approach.
Any transaction with a non-controlling interest that does not
result in a change of control is recorded directly in equity; the
difference between the amount paid or received and the noncontrolling interest is a debit or credit to equity.
Purchase of some or all of the non-controlling interest is
treated as a treasury transaction and accounted for in equity. A
partial disposal of an interest in a subsidiary in which the
parent company loses control, but retains an interest (say an
associate), triggers recognition of gain or loss on the entire
interest.
This means that an entity will not record any additional
goodwill upon purchase of a non-controlling interest nor
recognise a gain or loss upon disposal of a non-controlling
interest.
How is the partial sale of a subsidiary with a change in
control accounted for?
A gain or loss is recognised on the portion that has been
disposed of; a further holding gain is recognised on the interest
retained, being the difference between the fair value of the
interest and the book value of the interest. Both are recognised
in the income statement.
A group may decide to sell its controlling interest in a
subsidiary but retain significant influence in the form of an
associate, or retain only a financial asset.
What happened to minority interest?
If it does so, the retained interest is remeasured to fair value,
and any gain or loss compared to book value is recognised as
part of the gain or loss on disposal of the subsidiary.
All shareholders of a group − whether they are shareholders of
the parent or of a part of the group (minority interest) − are
providers of equity capital to that group.
All transactions with shareholders are treated in the same way.
What was previously the minority interest in a subsidiary is
now the non-controlling interest in a reporting entity.
There is no change in presentation of non-controlling interest
under the new standard. Additional disclosures are required to
show the effect of transactions with non-controlling interest on
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Consistent with a ‘gain’ on a business combination, the
standards take the approach that loss of control involves
exchanging a subsidiary for something else rather than
continuing to hold an interest.
How does the new standard affect transactions with
previously recognised non-controlling interests?
An entity might purchase a non-controlling interest recognised
as part of a business combination under the previous version
25
CONSOLIDATION PART 3
of IFRS 3 − that is, where only partial goodwill was recognised.
Alternatively, an entity might recognise partial goodwill under
the new IFRS 3 (Revised) and might purchase a noncontrolling interest at a later date.
In both cases, no further goodwill can be recognised when the
non-controlling interest is purchased. If the purchase price is
greater than the book value of the non-controlling interest, this
will result in a reduction in net assets and equity. This
reduction may be significant.
In the following examples, I/B refers to Income Statement
and Balance Sheet (SFP).
In the above example, the absence of trading means that the
accounting in the parent company and consolidated financial
statements are identical. The rise in the fair value is purely as
illustration, as it is unlikely to have changed between the time
of purchase and resale.
If the above example is changed (see below), so that the stake
is sold after a year, and S made a profit of 50, 40 (= 50*80%)
accruing to P, other numbers unchanged, P’s profit and
bookkeeping entries will be the same, as the subsidiary is held
at cost. It therefore does not reflect the increased value of P.
However, the consolidated financial statements will differ, as
they will revalue S to its fair value and include its contribution
of 40 in the consolidated income statement:
EXAMPLE - Loss of Control – Retention of part of the
undertaking- 1
P holds 80% of S. It was bought as part of a group of companies
and 50% is immediately resold to its management. The remaining
30% will be treated as an associate.
The cost was 880 including 80 goodwill.
The 50% stake is resold for 600.
The fair value of the remaining stake is 360.
I/B
DR
CR
Loss on disposal of subsidiary
I
280
Investment in subsidiary (including B
880
goodwill)
Cash
B
600
Sale of subsidiary and elimination of
goodwill
Investment in associate (30%)
B
360
Profit on disposal of subsidiary
I
360
Recognition of associate at fair value
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EXAMPLE - Loss of Control – Retention of part of the
undertaking - 2
P holds 80% of S. It was bought as part of a group of companies
and 50% is resold to its management after 1 year. The remaining
30% will be treated as an associate.
The cost was 880 including 80 goodwill. A profit of 50 was made
during the year, 40 attributable to P’s 80% share in the company.
The 50% stake is resold for 600.
The fair value of the remaining stake is 360.
Consolidated financial statements I/B
Loss on disposal of subsidiary
I
Investment in subsidiary (including B
goodwill)
Cash
B
DR
320
CR
920
600
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CONSOLIDATION PART 3
Sale of subsidiary and elimination of
goodwill
Investment in associate (30%)
Profit on disposal of subsidiary
Recognition of associate at fair value
B
I
360
360
The consolidated financial statements will show a different gain
(or loss) on disposal from the parent financial statements, as
the parent balance sheet shows the investment of a subsidiary
at cost, and does not reflect subsequent trading.
In the above case, the net impact on the income statement is
the same.
The smaller gain on sale (-40) will be offset by the income
(+40).
In the following case (see below), extending the example for
another year before the sale, the impact will be different:
Investment in subsidiary (including
goodwill)
Cash
Sale of subsidiary and elimination of
goodwill
Investment in associate (30%)
Profit on disposal of subsidiary
Recognition of associate at fair value
B
936
B
600
B
I
360
360
Again, the parent financial statements will be as in the first
example, recording a profit of 80.
The consolidated financial statements will show a profit of 24
(360-336), plus the trading profit of 20 for year 2. The
difference between the 2 sets of financial statements is the 40
profit recorded in the consolidated financial statements in year
1, but not reflected in the parent financial statements.
If a subsidiary or non-current assets are available (or intended)
for sale, the rules of IFRS 5 apply.
EXAMPLE - Loss of Control – Retention of part of the
undertaking - 3
EXAMPLE - IFRS 5 and partial disposals
P holds 80% of S. It was bought as part of a group of companies
and 50% is resold to its management after 2 years. The
remaining 30% will be treated as an associate.
The cost was 880 including 80 goodwill. A profit of 50 was made
during the first year, 40 attributable to P’s 80% share in the
company. A profit of 20 was made during the second year, 16
attributable to P’s 80% share in the company
The 50% stake is resold for 600.
The fair value of the remaining stake is 360.
Consolidated financial statements I/B
Loss on disposal of subsidiary
I
DR
336
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CR
Entity A has a 70% ownership stake in a subsidiary, entity B,
which represents a separate major line of business within the
group.
During the year A enters into a binding sale agreement
whereby it will dispose of 40% of its investment in the
subsidiary in the next financial year.
How should A disclose the results of B in its consolidated
financial statements at year end? In particular, should it
classify entity B as a discontinued operation under IFRS 5,
Non-current Assets Held for Sale and Discontinued
Operations?
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CONSOLIDATION PART 3
The principle for applying IFRS 5 depends on the manner in
which an entity will recover a non-current asset or disposal
group.
If an entity will recover the carrying amount of a disposal group
principally through sale rather than through use, IFRS 5 is
applicable.
The 40% disposal will result in the assets and liabilities being
principally recovered through sale and a single new asset
(associate) being recognised.
Entity A should therefore disclose all of the results and assets
of entity B in its consolidated statements as a discontinued
operation in accordance with IFRS 5 at the year end.
Once the disposal is completed, entity A accounts for the
resultant associate using the equity method in IAS 28,
Investments in Associates.
Classification under IFRS 5 for a subsidiary will be based only
on the loss of control of that subsidiary.
For example, if an entity with a 51% holding in a subsidiary
entered into a contract to dispose of only 2% of its holding and
this would result in a loss of control in the future, IFRS 5 would
apply.
The amendment also clarifies that all of the subsidiary’s assets
and results
would be accounted for as held for sale prior to the disposal
under IFRS 5 and not just the effective interest to be disposed
of.
Held for sale subsidiary with financial assets
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Entity D, a subsidiary of entity E, meets the definition of a heldfor-sale asset in accordance with IFRS 5. Financial assets within
the scope of IFRS 9, comprise the majority of the value of D.
Such assets are outside the scope of IFRS 5 for measurement
purposes (IFRS 5).
On initial classification as held for sale, E measured D at the
lower of carrying amount and fair value less costs to sell (IFRS
5).
If the value of the financial assets within D increase above the
initial value of the disposal group, can E record the increase?
IFRS 5 notes that on subsequent remeasurement of a disposal
group, the carrying amount of any assets and liabilities that are
not within the scope of the measurement requirements of IFRS 5.
They are included in a disposal group classified as held for sale,
shall be re-measured in accordance with applicable IFRSs before
the fair value less costs-to-sell of the disposal group is remeasured.
Therefore, on subsequent re-measurement, the financial assets
within the scope of IFRS 9 should be remeasured first in
accordance with IFRS 9.
The value of the E disposal group as a whole should then be
determined and recorded at the lower of carrying value (ie the
current IFRS 9 value plus the carrying amount of other out-ofscope assets and liabilities plus carrying value of IFRS 5 assets
and liabilities) and fair value less costs-to-sell of the disposal
group as a whole.
Group restructuring and treatment of currency translation
reserve
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CONSOLIDATION PART 3
IAS 21, The Effects of Changes in Foreign Exchange Rates,
requires exchange differences on net investments in a foreign
operation to be recognised as a separate component of equity
in the consolidated financial statements.
This separate component of equity is commonly referred to as
the currency translation account (CTA). Such exchange
differences are recognised in profit or loss (‘recycled’) on the
disposal or partial disposal of the net investment.
EXAMPLE - Actuarial gains and losses on disposal of a
business
Company E has disposed of its main subsidiary F in the year
to 31 December 20X6. E has a defined benefit pension
scheme and any actuarial gains and losses arising have been
recognised in line with IAS 19, Employee Benefits.
In a group restructuring, a foreign operation is transferred from
one intermediate holding company to another.
Other standards, such as IFRS 9, require recycling of gains
and losses that have previously been taken to equity. As such,
on disposal of E, should the cumulative actuarial gains and
losses previously taken to capital be recycled to the income
statement?
The group continues to hold a 100% interest in that foreign
operation. No third parties are involved with the group
restructuring. Should the CTA be recycled in the group’s
consolidated financial statements?
Actuarial gains and losses should not be recycled through the
income statement. The IASB considered the possibility of
recycling, given that most gains and losses under IFRS that
are recognised outside profit and loss are recycled.
No. The question is whether the restructuring results in an
economic change from the group’s perspective that constitutes
a partial or full disposal.
However, on balance, the IASB concluded that actuarial gains
and losses should not be recycled and IAS 19 confirms this.
EXAMPLE - Separate financial statements
In this case, the foreign operation continues to be part of the
consolidated group and the restructuring is not a disposal
event from the group’s perspective under IAS 21.
No recycling occurs for the exchange differences recognised in
equity.
However, if the intermediate holding company that disposes of
the foreign operation prepares consolidated financial
statements under IFRS, the CTA (if any) that arises at that
intermediate reporting level would be recycled on the group
restructuring.
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Parent entity C has decided to sell one of its subsidiaries,
entity D. The criteria in IFRS 5 have been met which means
that entity D will be classified as held for sale.
Entity C is preparing its separate parent company financial
statements in accordance with IFRS. IAS 27 provides a choice
of either using cost or fair value in accordance with IFRS 9,
when accounting for an investment in a subsidiary in the
parent’s separate financial statements.
Entity C has chosen to account for investments in subsidiaries
at fair value in its separate financial statements.
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CONSOLIDATION PART 3
How does entity C’s policy choice to use fair value for its
investment in entity D affect the application of IFRS 5?
EXAMPLE - Paying to sell a subsidiary
The policy choice provided in IAS 27 on measuring an
investment in a subsidiary at cost or at fair value in accordance
with IFRS 9 is available for subsidiaries that are not classified
as held for sale in accordance with
IFRS 5.
Entity A has a subsidiary that management has committed to
sell. The criteria in IFRS 5 for this subsidiary to be classified as
held for sale have been met.
The subsidiary is loss-making and entity A has written off the
subsidiary’s property, plant and equipment (PPE) under IAS
36, Impairment of Assets.
IFRS 5 requires that immediately before an asset is classified
as held for sale its carrying amount is measured in accordance
with applicable IFRSs.
The subsidiary also has some sundry working capital. Entity
A’s management considered closing the subsidiary, but this
would result in making all the staff redundant.
Consequently, the investment in a subsidiary that is accounted
for at fair value in accordance with IFRS 9 will be revalued to
current fair value at the date that the IFRS 5 criteria are met.
Management identified that a third party might be willing to
take over the subsidiary if it was able to utilise some of the
assets and workforce, thereby saving some of the jobs.
Subsequent measurement under IFRS 5 is at the lower of
carrying amount and fair value less costs to sell. Parent entity
C will therefore freeze the carrying amount of its investment in
the subsidiary held for sale at current fair value and only remeasure it if fair value less costs to sell falls below this
amount.
However, entity A will need to pay such a third party
approximately e20m to achieve the sale. The subsidiary
(disposal group) therefore has a negative fair value of e20m.
The scope restriction set out in IFRS 5, which requires that
financial assets within the scope of IFRS 9 continue to be
measured in accordance with IFRS 9, does not apply to the
investment in the subsidiary.
Should entity A record a liability for the expected payment to a
third party on disposal of the subsidiary as the disposal is
considered highly probable in accordance with IFRS 5?
This is because IAS 27 only permits the use of fair value
measurement in accordance with IFRS 9 for those subsidiaries
that are not held for sale.
IAS 27 also makes clear that subsidiaries classified as held for
sale should be accounted for in accordance with IFRS 5.
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Entity A is committed to its plan to sell the subsidiary but it
does not yet have a binding sales agreement for the disposal.
Entity A should not record a liability for the payment to a third
party in respect of the highly probable disposal.
IFRS 5 requires that a disposal group is measured at the lower
of its carrying amount and its fair value less costs to sell (IFRS
5.15). However, IFRS 5 applies only to the measurement of
the non-current assets in the disposal group.
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CONSOLIDATION PART 3
It does not affect the measurement of current assets and
current and noncurrent liabilities within the disposal group.
This is made clear in the basis
for conclusion, BC 22, which states:
The board also noted that the requirements of IAS 37establish
when a liability is incurred, whereas the requirements of the
IFRS relate to the measurement and presentation of assets
that are already recognised.
A liability would only be recognised if there was a binding sale
agreement as required by IAS 37. IFRS 5 and IAS 37 both
require that the entity is committed in order to qualify for their
respective accounting treatments.
However, the standards require commitment to different things.
IFRS 5 requires commitment to a plan to sell for the subsidiary
to be classified as a disposal group held for sale. IAS 37
requires that the entity is committed to the sale, which it
specifies can only be met if there is a binding sale agreement.
EXAMPLE - Presentation of assets and liabilities of spunoff segment
Entity D has a 31 May year-end and has adopted IFRS
5,Noncurrent Assets Held for Sale and Discontinued
Operations. It has spun-off one of its major business segments
to its existing shareholders as part of management’s decision
to focus on the remaining businesses within D’s consolidated
group.
It carried out the transaction by creating a new holding
company and distributing the shares in the new holding
company to D’s existing shareholders in proportion to their
ownership interests in D.
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The decision was taken in April 2005 and the transaction was
completed in July 2005.The disposed business segment meets
the definition of a discontinued operation under IFRS 5.
Management is considering the balance sheet presentation of
the assets and liabilities for the 31 May 2005 financial
statements and whether this should change when presented
as comparatives in the 31 May 2006 financial statements.
IFRS 5 does not permit the assets and liabilities of the
business segment to be presented on two lines. The two-line
presentation is restricted to disposal groups that are held for
sale and cannot be extended to disposal by way of a
distribution.
The assets and liabilities of the segment should therefore be
presented within their normal classifications in the balance
sheet in the 31 May 2005 financial statements.
Management should not change this presentation in the 31
May 2006 financial statements. Although the segment was
distributed to shareholders in August 2005 and therefore
qualified as a discontinued operation from that date, IFRS 5
does not permit the comparative balance sheet to be
amended.
The segment’s assets and liabilities must therefore continue to
be presented in their normal classifications in the 2005
comparative balance sheet in the 31 May 2006 financial
statements.
However, the results of the discontinued operations for the
year ending 31 May 2005, and the three months ending 31
August 2005 should be presented on a single line in the
income statement in the 31 May 2006 financial statements.
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CONSOLIDATION PART 3
5.
The Equity Method of Accounting
At the time of acquisition, the net assets of S had a value of
The equity method of accounting values the investment at
cost, and is adjusted for the investor’s share of post-acquisition
profits.
Likewise, the investor's income statement includes its share of
post-acquisition profits. The equity method is usually applied to
associates and joint ventures.
Assets
Cash
Accounts
receivable
Fixed Assets
Equity Method of Accounting
Parent Balance Sheet (before acquisition)
Accounts
receivable
Investments
Fixed Assets
Liabilities
300 Accounts
payable
1000
200 Accruals
100 Shareholders’
Funds
1600
Post-acquisition profits are 70 and the parent’s balance sheet
has not changed since the acquisition.
Subsidiary Balance Sheet (after acquisition)
The equity method can be applied in both parent and
consolidated financial statements.
Assets
Cash
200 (100 Share Capital and 100 Pre-Acquisition Profits).
800
300
500
1600
P bought 80% of S for 250.
It was bought with other undertakings, and P had determined
that S should be sold as quickly as possible, and immediately
sought a buyer.
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Liabilities
Current Liabilities
Share
Capital
360 Pre-acquisition
profits
Post-acquisition
profits
570
10
200
300
100
100
70
570
Parent Balance Sheet including S (equity method)
Assets
Cash
Accounts
receivable
Investments
S (250+56)
Fixed Assets
Liabilities
50 Accounts
payable
1000
200 Accruals
306
100 Shareholders’
Funds
Profits of S
1656
800
300
500
56
1656
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CONSOLIDATION PART 3
Other assets and liabilities are not consolidated.
Notes:
Post-Acquisition Profits attributable to are 80% of 70 = 56.
Investment in S comprises purchase price +postacquisition profits 250+56=306
Dividends received from the investee reduce the carrying
amount of the investment.
This method shows the profits of the investment only in the
lines of the investment in the subsidiary and the shareholders’
funds.
6.
Goodwill is not shown separately, as there is no breakdown of
An associate is an undertaking in which the investor has
significant influence, and which is neither a subsidiary, nor a
joint venture.
Associates
net assets.
As goodwill that forms part of the carrying amount of an
investment in an associate (see next section) is not separately
recorded, it is not tested for impairment separately by applying
the requirements for impairment testing goodwill in IAS 36
Impairment of Assets.
The investor in an associate has the opportunity to influence
the financial and operating decisions of the associate, but
without control over them.
An indication of significant influence would be the ownership of
20%-50% of the voting shares.
Instead, the entire carrying amount of the investment is tested
for impairment in accordance with IAS 36 as a single asset, by
comparing its recoverable amount (higher of value in use and
fair value less costs to sell) with its carrying amount, whenever
application of the IFRS 9 indicates that the investment may be
impaired.
Owning more than 50% would give control, and would normally
require full consolidation.
An impairment loss recorded in those circumstances is not
allocated to any asset, including goodwill, that forms part of the
carrying amount of the investment in the associate.
Further indications of significant influence are:
So, any reversal of that impairment loss is recorded in
accordance with IAS 36 to the extent that the recoverable
amount of the investment subsequently increases.
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If the holding is less than 20% of voting shares, it is presumed
that the investor does not have significant influence, unless
this can be demonstrated.




representation on the board of directors or governing
body;
participation in policy-making processes;
material transactions between the investor and
investee;
interchange of managerial personnel;
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CONSOLIDATION PART 3

provision of vital technical information.
Associates are accounted for using the Equity Method (see 5.
above).
If a loss has been incurred the associate, the investor must
recognise its share of that loss, both in the income statement
and as a reduction of the investment in associate,
It is important to understand that the investor includes its share
of profit, even if it has not received the money in the form of
dividends. This becomes a serious issue if the investor is
expected to pay dividends based on its earnings within the
associate.
Equity accounting: practical difficulties
IFRS News - December 2005 and February 2006
Entities applying the IAS 28 equity method to their
associates and joint ventures are finding some difficult
areas. The equity method of accounting has been around for
many years. It is thought to be straightforward and well
understood.
Equity accounting has received little attention from standardsetters in recent years, despite criticism of it by some as a
concept.
IAS 28 was part of the improvements project when various
changes pushed equity accounting closer to accounting for
business combinations and subsidiary accounting by making
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certain implied requirements explicit and removing some
impracticability exceptions.
However, problems and inconsistencies are arising in application
as more companies move to IFRS. This article examines some of
the practical issues that have arisen and some areas of
inconsistency in the accounting literature.
Notional purchase price allocation
What accounting is required when an associate is first
purchased? IAS 28 states that ‘the investment in an associate is
initially recognised at cost’. This is straightforward.
The standard goes on to say that, ‘on acquisition of the
investment any difference between the cost of the investment
and the investor’s share of the net fair value of the associate’s
identifiable assets, liabilities and contingent liabilities is
accounted for in accordance with IFRS 3.
The equity investment continues to be recognised on one line in
the balance sheet as the IFRS 3-type purchase price allocation
and calculation of goodwill is notional. The notional purchase
price allocation (PPA) should include the investor's portion of
the fair value of any intangible assets and contingent liabilities
(whether or not recognised by the associate) and the investor's
share of any fair value step ups or adjustments to recorded
assets and liabilities.
The practical challenge is that the investor will seldom have
access to proprietary information about the company.
Most public companies are prohibited from making information
available to shareholders on a selective basis - what one
shareholder knows usually needs to be made available to all
shareholders. Thus, the investor needs to calculate the notional
PPA with publicly available information and a substantial degree
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CONSOLIDATION PART 3
of estimation.
Is this notional PPA really required? The answer is yes and part
of the answer is that is explicitly required by the standard.
However it can also be crucial so that the correct share of the
associate’s results is recorded post-acquisition.
The share of results will not include the correct amortisation if
tangible and intangible assets are not recorded at their fair value.
Two other potential problems make the notional PPA important.
Purchase of an associate may be the first step in a step
acquisition. Goodwill and revised fair values are needed at each
step, so the contemporaneous information that supports the
amount of goodwill present at the date of each transaction is
crucial.
If an associate is impaired, any notional goodwill written off
cannot be reversed, thus, where the associate is a public
company, the amount of notional goodwill is crucial.
Example
Company A, a large pharmaceutical company, buys 30% of
Company B, a small company. B owns a valuable patent that
covers a specific prescription drug. The patent will expire in
seven years. Assume that there are no other fair value
adjustments to be recorded.
B earns revenue by licensing the patent to other companies in
each major market. Company A, the investor, must perform a fair
value exercise, allocate value to the patent and amortise it over
the remaining life. The charge reduces the income from the
associate and the carrying value of the associate. Therefore, as
the patent expires, the value of the associate will reduce.
associate as represented by the patent intangible asset should
have been reduced to nil, through periodic amortisation and not
an impairment charge.
Negative goodwill arising on the acquisition of an associate
The notional PPA might also result in negative goodwill
(technically - excess of the investor’s share of the net fair value of
the associate’s identifiable assets, liabilities and contingent
liabilities - as IFRS describes negative goodwill).
Negative goodwill might exist if the associate has a significant
unrecorded contingent liability, or the investor managed to secure
shares at a discount price because of the vendor's need for cash.
The negative goodwill should be credited to the investor’s income
statement in the period that the associate is required. This seems
inconsistent with the principle that the associate is recorded
initially at cost.
The associate will be recorded at an amount greater than cost
where negative goodwill exists. The standard is explicit on the
requirement to recognize negative goodwill where it exists and
this is the natural extension of the notional PPA concept
discussed above.
However, an associate with a carrying value in excess of market
value is a trigger for impairment testing. For any associate
acquired in a public market, cost was presumably market value.
The recognition of negative goodwill may trigger an impairment
test, and the adjustment may well be written off to the income
statement. The recognition of negative goodwill is expected to be
rare and any negative goodwill recognised on acquisition of an
associate therefore needs to be robustly supported or the
investor is exposed to an immediate impairment as well.
If B winds up operations on expiry of the patent, the value of the
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CONSOLIDATION PART 3
What does change in proportionate interest mean?
Reclassification of associate to ‘financial instrument’
An associate issues shares to new investors and the group’s
interest is diluted, although the entity remains an associate.
Should the ‘gain or loss’ arising from dilution be recorded in the
investing group’s income statement or directly in equity?
IAS 28 says that the carrying amount of an investment when it
stops being an associate is its cost on initial measurement as a
financial asset under IFRS 9.
IAS 28 requires that changes in an investor's proportionate
interest in an associate that do not arise from the net income of
the associate should be recognised directly in the equity of the
investor.
Many have read these words to include gains and losses arising
on a dilution of the investor's interest in the associate, with any
anti-dilutive transactions also recognized in equity.
However, the examples that follow the proportionate interest
guidance do not include dilutions, but are rather example of
transactions of the associate that might give rise to equity
movements such as fixed asset revaluations or available for sale
securities.
The associate will have debited cash and credited equity in the
associate’s financial statements: nothing has occurred in its
income statement. The text in IAS 28 seems to preclude income
statement recognition of gains and losses.
However, the lack of dilution in the examples and the fact that
IFRS 10 permits income statement treatment for dilution of
subsidiaries seems to provide some support for gains and losses
on associate dilution in the income statement.
However, companies may well be exposed to criticism and
regulatory comment if they use income statement recognition.
IFRS 9 requires such financial assets to be recognised at fair
value. How should these requirements be reconciled when the
carrying value of the associate is not equal to its fair value?
Example
Entity A held a 30% shareholding in entity B and applied equity
accounting in accordance with IAS 28. Entity A sold its shares in
B, reducing its investment from 30% to 10%.
Entity A lost its significant influence over B as a result of this
transaction. The remaining investment in B will therefore be
accounted for as an investment in accordance with IFRS 9.
The carrying amount of A’s investment in B immediately before
the transaction was 300. There was also a credit amount of 9
included in A’s equity, representing A’s share of B’s increases in
equity arising from securities held by B.
Entity A received a consideration of 320. The fair value of the
remaining 10% investment in B is 160.
What should entity A recognise in its income statement and in
equity?
Solution
Entity A should recognise a gain on disposal of 129 in the income
statement.
This gain comprises two components.
This first is 120, being the difference between the cash received
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CONSOLIDATION PART 3
of 320 less
the carrying amount of the proportion sold of 200 (20/30 x 300).
The second component is the transfer of the credit of 9 from A’s
equity to the income statement. This is the amount included in
A’s equity as a result of applying equity accounting to the 30%
interest in B.
Example: Group structure
See the diagrams below.
Group Structure
1.
A
The whole amount is transferred from equity to the income
statement because A no longer has significant influence over B.
100%
B
The remaining 10% investment in B is now classified as an AFS
asset.
60%
C
70%
IAS 28 requires the initial measurement of the AFS asset to be
the carrying amount immediately prior to losing significant
influence.
20%
D
60%
The initial measurement of the 10% interest in B is therefore 100
(10/30 x 300).
25%
E
Subsequent measurement of the asset is to fair value, with
changes in fair value recognised directly in profit and loss.
Entity A should therefore recognise a gain of 60 directly in profit
and loss to reflect the revaluation of the remaining 10% interest in
B from its initial measurement of 100 to fair value of 160.
Associates and common control transactions
What is the accounting that is required when a group reorganises
and moves its interests in associates around? IAS 28 contains no
specific guidance. It states that the concepts underlying the
procedures used when an entity acquired a subsidiary are
adopted when an investment in an associate is acquired.
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Group Structure
2
.
A
80%
60%
C
B
20%
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CONSOLIDATION PART 3
90%
D
85%
Consideration received (fair value of
share of B acquired)
Amounts disposed of 20% - (20% x
90%) x 350
25% - (20% x 85%) x 200
E
C, which also has some subsidiaries, prepares financial
statements under IFRS. It exchanges its interests in its
associates D and E in return for a participating interest in B.
The transaction has taken place under the control of A. Can C
treat it as if it was a common control business combination? Such
combinations are scoped out of IFRS 3 and an entity may choose
a policy of using predecessor values.
How should C account for the transaction?
Entity
D
E
B (before transfer)
Carrying value
Fair value
in C’s
of 100% of
consolidated FS business
350
2.500
200
1.000
650
-64
31
Carrying value of associate investment in B group in C’s
consolidated financial statements:
Fair value of 20% of B (includes 30 of
notional goodwill)
Carrying value of 18% of D
Carrying value of 18% of D
If C was able to do this, it would carry its equity investment in B at
the previous carrying values of its investments in D and E.
C cannot use the common control exemption. This applies to
business combinations only (acquisition of a subsidiary by a
parent); there is no such
exemption in IAS 28.
13
0
-35
130
315
136
581
Solution
C should recognise a gain or loss to the extent it has disposed of
part of its interests in D and E. This gain or loss will be based on
the consideration received, which is the fair value of the interest
received in B.
This means that the equity investment in B will be carried at the
fair value of C’s 20% interest in B, plus the previous carrying
values of the retained interests in D and E. C has retained an
18% (20% x 90%) interest in D and a
17% (20% x 85%) interest in E.
There can be no step-up to the fair value of those interests
because D and E are associates of C before and after the
transaction.
The fair value of B’s net assets before the transaction is 500.
EXAMPLE - Accounting for long-term loan to associate
Gain on disposal:
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CONSOLIDATION PART 3
Entity A has an associate, entity B. Entity A has made a loan to
entity B. The loan is non-interest bearing and repayable on
demand but entity A does not plan or expect to require
settlement of the loan for the foreseeable future. The loan is
not collateralised.
elimination
Entity A views the loan to the associate as part of its net
investment in the associate in accordance with IAS 28.
- sale of inventory with a cost price of £100 for £200. The stock
has not been sold by entity A at year end; and
How should entity A account for and classify the loan to entity
B?
- providing management services to entity D and invoicing
£200 for these services.
Entity A should account for the loan in accordance with the
guidance in IFRS 9, even though it is considered part of the
net investment in the associate.
How should entity C account for the revenue arising from the
sale of inventory and management services?
The loan should be initially recognised at fair value.
A loan that is repayable on demand cannot have a fair value
that is less than the amount repayable (IFRS 9).
Consequently the loan should be recognised at the amount
leant to entity B.
Subsequent measurement of the loan should be at amortised
cost, however, the loan will continue to be carried at cost. This
is because there is no effective interest rate and so no
amortisation to record under the amortised cost method.
The loan may be classified on the balance sheet either as part
of other receivables, or as part of the investment in associates.
The notes to the financial statements should provide an
adequate description of the loan balance, so that its nature is
clear to a reader of the financial statements.
EXAMPLE - Associates and extent of inter-group
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Entity C is a 20% investor in an associate, entity D.
During the year, entity C entered into the following transactions
with entity D:
Many of the procedures appropriate to the application of the
equity method are similar to the consolidation procedures.
Unrealised profits and losses arising from downstream
transactions are eliminated to the extent that the investor is
transacting with itself. While the inventory remains on the
associate’s balance sheet, the associate will not be recording
an expense in its income statement.
Therefore a consolidation entry, reducing the revenue arising
from the sale of the inventory by £40 (£200 x 20%), is required
to eliminate the unrealised portion of the gain made in entity C.
The revenue arising from the management services would not
be adjusted, as the management services cost is realised in
the associate.
As entity D is equity accounted for, £40 (£200 x 20%) representing the portion of the cost relating to entity C - will be
reflected in the consolidated financial statements of entity C;
no further elimination entry is therefore required.
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CONSOLIDATION PART 3
accounting to this investment in accordance with IAS 28. During
the year, entity A sold some of its shares in B, reducing its
investment from 30% to 10%.
In the following examples, I/B refers to Income Statement
and Balance Sheet (SFP).
EXAMPLE 1. - associates
Entity A lost its significant influence over B as a result of this
transaction. The
remaining investment in B will therefore be accounted for as an
investment in accordance with IFRS 9.
P has an associate A, of which it owns 20%. At the balance
sheet date A has inventories that it bought from P at a cost
of 100. P made a profit of 25 on the sale.
The carrying amount of A’s investment in B immediately prior to
the transaction was 300.There was also a credit amount of 9
included in A’s equity representing A’s share of B’s increases in
equity.
As the profit was earned by the parent, the parent’s share of
profit is eliminated.
Revenue (20%*100)
Cost of sales
Investment in associate (20%*25)
Reduction of group sales, cost of
sales and investment in associate
EXAMPLE 2. - associates
I/B
I
I
B
DR
CR
Entity A received cash of 320 in respect of the transaction. The
fair value of the remaining 10% investment in B is 160.
20
15
5
Entity A should recognise a gain on disposal of 129 in the income
statement. This gain comprises two components. The first is 120,
being the difference between the cash received of 320 and the
carrying amount of the proportion sold of 200 (20/30 x 300).
P has an associate A, of which it owns 20%. At the balance
sheet date P has inventories that it bought from A at a cost
of 100. A made a profit of 25 on the sale.
Share of income of associates
Investment in associate (20%*25)
Reduction of group net income, and
investment in associate
I/B
I
B
DR
CR
5
EXAMPLE - Reclassification of associate
Entity A held a 30% shareholding in entity B and applied equity
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What should entity A recognise in its income statement and in
equity in respect of this transaction?
5
The second component is the transfer of the credit of 9 from A’s
equity to the income statement. This is the amount included in
A’s equity as a result of applying equity accounting to the 30%
interest in B.
The whole amount is transferred from equity to the income
statement because A no longer has significant influence over B.
The remaining 10% investment in B is now classified as a
financial asset. IAS 28 requires that the initial measurement of
the asset is the carrying amount immediately prior to losing
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CONSOLIDATION PART 3
significant influence.
The initial measurement of the 10% interest in B is therefore 100
(10/30 x 300). Subsequent measurement of the asset is to fair
value with changes in fair value recognised in profit and loss.
Entity A should therefore recognise a gain of 60 directly in profit
and loss. This reflects the revaluation of the remaining 10%
interest in B from its initial measurement of 100 to fair value of
160.
7.
Cost Method
Where the investor has neither control, nor significant
influence over the financial and operating decisions of its
investment, income should only be recognised when received
in the form of dividends. This is the cost method.
Dividends, in excess of post acquisition profits, (“liquidating
dividends”) should be treated as reductions in the cost of the
investment.
Losses incurred by the undertaking in which the investment
has been made may create an impairment charge. This would
arise if the fair value of the investment falls below the cost of
the investment (see IAS 36 workbook).
8.
Joint Ventures (see IFRS 11 workbook)
This text applies IAS 31 that will be valid until 2013.
A joint venture is a contractual arrangement, whereby 2, or
more, parties undertake an economic activity, which is subject
to joint control.
No single venturer alone can control the activity, though one
party may be designated as the manager of the activity.
Unanimous consent on all financial and operating decisions is
not necessary for an arrangement to satisfy the definition of a
joint venture—unanimous consent on only strategic decisions
is
sufficient.
Joint ventures have many forms including jointly-controlled:



operations
assets
entities.
Jointly-controlled operations (example: aircraft
manufacture)
Here the venturers use there own assets and resources, rather
than forming a separate entity.
Each venturer bears its own costs and takes a share of the
revenue, as determined by the contract.
As the net assets, income and expenses are recognised in the
accounts of the venturer, no further information is required to
be recorded.
Jointly-controlled assets (example: oil pipelines)
Here the venturers have joint control, and sometimes joint
ownership, of assets provided to the joint venture.
Revenues and costs are shared according to the contract.
Each venturer should account for its share in the jointlycontrolled assets, any liabilities incurred (including those jointly
These parties are known as the venturers.
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CONSOLIDATION PART 3
with other venturers), income, gains and expenses of the joint
venture.
EXAMPLE - Revenue recognition for a pipeline
Entity B has won a contract to construct and operate a gas
pipeline. B will construct the pipeline and the associated
infrastructure necessary to operate it. It will then operate it for
20 years.
B will receive fees under the contract over the 20-year period.
It will receive a reimbursement of construction costs over the
five years following construction plus an annual fee over the
20-year operating period.
Consequently the profit that B will earn for the construction of
the pipeline is
included within the annual fee it will receive.
How should B recognise the revenue it receives for
constructing and operating the pipeline?
The two components of the contract, being the construction of
the pipeline and the operation, should be separated and
accounted for individually. IAS 11, Construction Contracts,
should be applied to the construction element and IAS 18,
Revenue, applied to the operating element.
The present value of the total fees receivable under the
contract should be allocated to the two components based on
relative fair value.
The revenue on both components should be recognised on a
percentage-of-completion basis. The construction component
will be recognised on the basis of costs incurred to costs to
complete under IAS 11.
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The operation includes transporting of the gas, tracking use of
the pipeline by customers, invoicing customers, maintenance,
etc. The operation of the pipeline is therefore provided using
an indeterminate number of acts.
The revenue for the operation should therefore be recognised
on a straight-line basis under IAS 18. The revenue recognised
under both standards in advance of the cash received gives
rise to a financial receivable. IAS 11, IAS 18 and IFRS 9
require the receivable to be recognised initially at fair value.
Consequently the difference between the gross fees receivable
under the contract and the present value of the revenue
recognised should be recorded as interest income using the
effective interest method as required by IAS 18.
Jointly-controlled entities (example: foreign sales
operations)
Here there is a legal structure to house the joint venture.
Each venturer usually contributes cash or other resources,
accounted for as an investment in the jointly-controlled entity.
The entity keeps its own accounting records.
The venturers should account for their share of the entity
through the Equity Method of Accounting (see 5. above). IAS
31 currently recommends the use of Proportionate
Consolidation as an alternative.
However, the IASB has said that Proportionate Consolidation
will disappear as part of the convergence with USGAAP and
has issued an exposure draft to that effect. Given its limited
future life, it is recommended that Proportionate Consolidation
not be used by practitioners.
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CONSOLIDATION PART 3
EXAMPLE - Contribution of assets to a joint venture
the goods received, unless that fair value cannot be estimated
reliably.
Entity A and entity B have formed an incorporated joint
venture, JV Ltd. JV Ltd prepares its accounts under IFRS.
IFRS 2 clarifies that there is a rebuttable presumption that the
fair value of the goods received can be estimated reliably.
On formation, entity A contributed property, plant and
equipment, and entity B contributed intangible assets to the
joint venture in exchange for their equity interests.
In the rare situation where the fair value of the goods cannot
be reliably measured, an entity should measure their value,
and the corresponding increase in equity, indirectly, by
reference to the fair value of the equity instruments granted.
On formation, how should JV Ltd record the assets
contributed?
JV Ltd should recognise the assets initially at cost in
accordance with the respective standards governing the
assets; in this case, PPE under IAS 16, Property, Plant and
Equipment, and intangible assets under IAS 38, Intangible
Assets.
Cost is defined in the IAS 16 and IAS 38 as ‘the amount of
cash or cash equivalents paid or the fair value of the other
consideration given to acquire an asset at the time of its
acquisition or construction or,where applicable, the amount
attributed to that asset when initially recognised, in accordance
with the specific requirements of other IFRSs, eg, IFRS 2,
Share-based Payment.’
The asset contribution by the venturers upon JV Ltd’s
formation is an equity-settled share-based payment transaction
within the scope of IFRS 2. The scope exclusion of IFRS 2
does not apply, as the formation of a joint venture does not
meet the definition of a business combination.
For equity-settled share-based payment transactions, IFRS 2
requires an entity to measure the goods received, and the
corresponding increase in equity, directly, at the fair value of
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As JV Ltd is a newly incorporated company, the fair value of
the assets contributed is more determinable than the fair value
of the equity instruments granted. JV Ltd should therefore
measure the assets received and the corresponding increase
in equity at the fair value of the assets received.
The previous practice of recording assets at their predecessor
carrying values is no longer permissible in the light of IFRS 2.
EXAMPLE - Contribution of non-monetary assets to a joint
venture in exchange for an equity interest
Issue
In applying IAS 31 to non-monetary contributions to a jointly
controlled entity in exchange for an equity interest in the jointly
controlled entity, a venturer shall recognise in profit or loss for
the period the portion of a gain or loss attributable to the equity
interests of other venturers, except when [SIC-13.5]:
a) the significant risks and rewards of ownership of the
contributed non-monetary assets have not been transferred to
the joint venture;
b) the gain or loss on the non-monetary contribution cannot be
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CONSOLIDATION PART 3
measured reliably; or
contributed by the other venturer (entity B contributed shares).
c) the non-monetary assets contributed are similar to those
contributed by the other venturers.
50% of fair value of the shares of C received
200
less: 50% of book value of entity A’s assets contributed
(50)
150
How should management recognise the gain that results from
the transfer of non-monetary assets in exchange for an equity
interest in a joint venture?
Background
Entity D, a joint venture, was established by two venturers as
follows:
a) entity A contributes its non-monetary assets. The fair value
of the assets contributed is 400, and their book value is 100.
The entries recorded in it’s A's single-entity financial
statements are as follows:
Dr
Investment
400
Cr
Non-monetary assets
100
Dr
Gain on disposal
300
b) entity B contributes 50% of its shares in one of its
subsidiaries, entity C. The fair value of 50% of the shares in
entity C is 400 and the book value is 76.
Entity A recognises the following further entry in its
consolidated financial statements, to eliminate the portion of
the gain that relates to the share of the non-monetary assets
that it still owns and jointly controls:
Dr
Gain
150
Cr
Investment
150
Entity A and entity B each own 50% of entity D and exercise
joint control.
EXAMPLE - Joint venture with a non-coterminous yearend
Solution
Entity A should recognise a gain of 150 for the following
reasons:
Investor F has an overseas joint venture (JV). F prepares
financial statements to the year ending 30 April and the JV
prepares financial statements to the year ending 31 December.
a) the significant risks and rewards of ownership of the
contributed non-monetary assets have been transferred to
entity D;
Can investor F use the JV.s December financial statements in
preparing its own financial statements in April?
b) the gain on the non-monetary contribution can be measured
reliably. Information on both book values and fair values are
available; and
IAS 31 does not specifically deal with the treatment of noncoterminous yearends. However, IAS 28 is explicit. IAS 28
requires the use of financial statements drawn up to the same
date as the investor unless it is impractical to do so.
c) the non-monetary assets contributed are not similar to those
In particular IAS 28 prohibits a difference of more than three
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CONSOLIDATION PART 3
months between the year-end of the investor and of the
associate.
Therefore, investor F should request the JV to prepare specialpurpose financial statements drawn up to the year ending 30
April.
The sponsor frequently transfers assets to the SPE, obtains
the right to use assets held by the SPE or performs services
for the SPE, while other parties (‘capital providers’) may
provide the funding to the SPE.
An entity that engages in transactions with an SPE may in
practice control the SPE.
9 Special Purpose Entities / Special Purpose Vehicles (see
IFRS 10+12 workbooks)
Special Purpose Entities - SPE’s (also called Special
Purpose Vehicles - SPV’s) are formed to house assets and/or
liabilities that groups wish to eliminate from their balance
sheets. These may be assets such as loans which are being
securitised – the bank wants to raise money on the loans
without losing the relationship with the clients.
A beneficial interest in an SPE may, for example, take the form
of a debt instrument, an equity instrument, a participation right,
a residual interest or a lease.
Some beneficial interests may simply provide the holder with a
fixed or stated rate of return, while others give the holder rights
or access to other future benefits of the SPE’s activities.
In the USA, Enron (which subsequently collapsed) used SPE’s
to hide large amounts of group loans and to manipulate profits.
In most cases, the creator or sponsor retains a significant
beneficial interest in the SPE’s activities, even though it may
own little or none of the SPE’s equity.
SPE’s may be set up in tax havens for insurance and leasing
operations to charge group profits for policies and leases,
whilst minimising tax.
The following circumstances may indicate a relationship in
which an entity controls an SPE and consequently should
consolidate the SPE:
Such a SPE may take the form of a corporation, trust,
partnership or unincorporated entity. SPEs often are created
with legal arrangements that impose strict and sometimes
permanent limits on the decision-making powers of their
governing board, trustee or management over the operations
of the SPE.
Frequently, these provisions specify that the policy guiding the
ongoing activities of the SPE cannot be modified, other than
perhaps by its creator or sponsor (they operate on so-called
‘autopilot’).
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(i)
the activities of the SPE are being conducted on
behalf of the entity according to its specific business
needs so that the entity obtains benefits from the
SPE’s operation;
(ii)
the entity has the decision-making powers to obtain
the majority of the benefits of the activities of the
SPE or, by setting up an ‘autopilot’ mechanism, the
entity has delegated these decision-making powers;
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CONSOLIDATION PART 3
(iii)
the entity has rights to obtain the majority of the
benefits of the SPE and therefore may be exposed
to risks incident to the activities of the SPE; or
(iv) the entity retains the majority of the residual or
ownership risks related to the SPE or its assets in
order to obtain benefits from its activities.
Indicators of control over an SPE
(a)
Activities
The activities of the SPE, in substance, are being conducted
on behalf of the reporting entity, which directly or indirectly
created the SPE according to its specific business needs.
Examples are:
In general, an SPE is an extension of the group and its
functional currency (see IAS 21 workbook) will be the same of
that of its parent.
the SPE is principally engaged in providing a source of
long-term capital to an entity or funding to support an
entity’s ongoing major or central operations; or
The question for consolidation is whether the group controls
the SPE or not. If so, it must consolidate it. (If not, not.) IFRS
10 governs this.
Control over another entity requires having the ability to direct
or dominate its decision-making, regardless of whether this
power is actually exercised.
Control may exist even in cases where an entity owns little or
none of the SPE’s equity.
the SPE provides a supply of goods or services that is
consistent with an entity’s ongoing major or central
operations which, without the existence of the SPE, would
have to be provided by the entity itself.
Economic dependence of an entity on the reporting entity
(such as relations of suppliers to a significant customer) does
not, by itself, lead to control.
(b)
The question of control may be obscured by setting up the
SPE to work on pre-determined instructions, after which the
group can suggest that it has no control of the SPE, as the
SPE is working on autopilot.
It is then a test of whether the group has the risks and rewards
of the SPE. If so, it must consolidate it.
Decision-making
The reporting entity, in substance, has the decision-making
powers to control or to obtain control of the SPE or its assets,
including certain decision-making powers coming into
existence after the formation of the SPE. Such decisionmaking powers may have been delegated by establishing an
‘autopilot’ mechanism.
Examples are:
power to unilaterally dissolve an SPE;
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CONSOLIDATION PART 3
power to change the SPE’s charter or bylaws; or
power to veto proposed changes of the SPE’s charter or
bylaws.
(c)
Benefits
The reporting entity, in substance, has rights to obtain a
majority of the benefits of the SPE’s activities through a
statute, contract, agreement, or trust deed, or any other
scheme, arrangement or device.
Such rights to benefits in the SPE may be indicators of control
when they are specified in favour of an entity that is engaged
in transactions with an SPE and that entity stands to gain
those benefits from the financial performance of the SPE.
ownership risks and the investors are, in substance, only
lenders because their exposure to gains and losses is limited.
Examples are:
the capital providers do not have a significant interest in the
underlying net assets of the SPE;
the capital providers do not have rights to the future
economic benefits of the SPE;
the capital providers are not substantively exposed to the
inherent risks of the underlying net assets or operations of
the SPE; or
in substance, the capital providers receive mainly
consideration equivalent to a lender’s return through a debt or
equity interest.
Examples are:
rights to a majority of any economic benefits distributed by
an entity in the form of future net cash flows, earnings, net
assets, or other economic benefits; or
rights to majority residual interests in scheduled residual
distributions or in a liquidation of the SPE.
(d)
Implications for special purpose entities (SPEs) - PwC
Inform Jan 2006
So when would this result in an SPE being classed as a
subsidiary? Take the following example, where a parent
gained the majority of the benefits arising from an SPE and its
operating and financial policies were predetermined.
Risks
An indication of control may be obtained by evaluating the
risks of each party engaging in transactions with an SPE.
Frequently, the reporting entity guarantees a return, or credit
protection directly or indirectly, through the SPE to outside
investors who provide substantially all of the capital to the
SPE.
As a result of the guarantee, the entity retains residual or
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Under IFRS10, such an SPE would be treated as a full
subsidiary. .
Who’s in control?
The definition of a parent may give rise to an anomaly in that in
certain situations it may seem that there are two parents. For
example, one company may appear to be exercising dominant
influence, yet another may have the power to do so.
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CONSOLIDATION PART 3
the power to exercise the call options and reverse the decision.
This situation is likely to arise when the shareholder with the
power to exercise
dominant influence chooses to be passive and does not
prevent the other shareholder from actually exercising
dominant influence.
Where more than one undertaking appears to be the parent,
only one can have control. Control is defined as the ability to
direct the financial and operating policies of another with a
view to gaining economic benefits from its activities.
The shareholder with the power to exercise dominant influence
has control under the revised definitions despite choosing to
be passive.
EXAMPLE - Loans to customers
Entity A is a parent company that prepares consolidated
financial statements. Some of A’s subsidiaries are in the
business of providing loans to customers.
These loans are sold to trusts set up as special purpose
entities (SPEs) under a securitisation arrangement to achieve
lower financing costs.
Entity A holds a beneficial residual interest in the SPE trusts
and consolidates the SPEs under IFRS 10, in its consolidated
financial statements.
Practical example
An example of the ability to exercise control would be call
options that give a shareholder the power to exercise dominant
influence. For example, say company A owns five per cent of
company B, but in addition has call options exercisable at any
time that would give it all the voting rights in company B.
Although company A's management does not intend to
exercise the call options, the existence of the options and
company A's ability to exercise them at any time to gain control
of company B gives company A the power to exercise
dominant influence.
The presence of the options means that the operating and
financial policies are set in accordance with company A's
wishes and for its benefit as the other shareholders of
company B are mindful of the options in voting on operating
and financial policies, as should company B make a decision
not in accordance with company A's wishes, company A has
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A is preparing its separate financial statements in accordance
with IAS 27, Separate Financial Statements,and would like to
account for its investments in its subsidiaries at fair value in
accordance with IFRS 9.
Should entity A’s beneficial interest in its SPEs be accounted
for in the same way as its conventional subsidiaries in its
separate financial statements?
Yes. The SPEs that qualify for consolidation in consolidated
financial statements are subsidiaries in the context of IAS
27.Consequently if A elects to account for its subsidiaries in
accordance with IFRS 9 in its separate financial statements,
this election applies equally to its SPEs.
Entity A may choose to account for its subsidiaries including its
interest in its SPEs as financial assets, provided it meets the
conditions in IFRS 9 for that classification.
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CONSOLIDATION PART 3
Entity A should apply its accounting policy choice consistently
to all of its subsidiaries including SPEs.
Examples of transactions, relationships and structures
that may be impacted by SIC-12 (now in IFRS 10)
Leasing/property
 Sale-leasebacks of property or equipment;
 Built-to-suit property or equipment subject to an
operating lease (for example, office buildings,
manufacturing plants, aeroplanes);
 Synthetic leases (lease structures that are treated as
operating leases for accounting purposes, even though
the lessee is considered the owner for tax purposes);
and
 Certain partnerships in property investments.
Financial assets
 Transactions involving the sale/transfer of financial
assets such as receivables to an SPE (for example,
factoring arrangements or securitisations);
 Transactions involving a commercial paper conduit,
such as sponsoring a conduit to purchase and securitise
assets from third parties;
 Securitisation transactions involving commercial-debt
obligations, collateralized bond obligations and
commercial-loan obligations; and
 Entities used to hedge off-balance sheet positions.
Start-ups, research and development
 Funding arrangements for research and development;
 Newly formed entities that are designed to manage or
fund the start-up of a new product or business;
 Entities sponsored/funded by venture capital, private
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
equity or financial entities; and
Entities in the developmental stage.
Vendor financing
 Structures designed to help customers finance the
purchase of products and services (ie, vendor
financing), often in collaboration with a financial
institution.
Insurance
 Insurance associations (reciprocals); and
 Reinsurance securitisations.
Transactions involving management, officers and
employees
 The transfer or sale of assets to an entity owned by a
single employee or by members of an entity’s
management;
 Management of an unconsolidated asset or business by
an entity or its officers; and
 The funding of an entity’s independent equity by another
entity’s managing members.
Obligations associated with other entities
 Certain captive arrangements operated on behalf of an
investor;
 An entity’s guarantee of:
(i) an unconsolidated entity’s performance or debt, or
(ii) the value of an asset held by the unconsolidated
entity (including explicit and implicit guarantees);
 An entity’s contingent liability should an unconsolidated
entity default;
 A transaction with an embedded ‘put’ option that
enables the entity or an outside party to sell the assets
and/or operations back to an entity;
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CONSOLIDATION PART 3



A transaction with an embedded call option and/or
operations that were previously sold to another entity;
An entity’s enhancement of another entity’s credit (for
example, via escrow funds, collateral agreements,
discounts on transferred assets and take-or-pay
arrangements); and
An agreement requiring an enterprise to make a
payment if its credit is downgraded.

Rights to assets
 Rights to use an ‘under construction’ asset not recorded
in the entity’s balance sheet (the debt used to fund the
construction being recourse only to that specific asset);
 Leasing assets from an entity that financed these assets
with debt that is recourse to the individual asset rather
than to all of the lessor entity’s assets;
 The transfer of financial assets to an entity subject to
debt that is recourse only to those financial assets
rather than to all of the entity’s assets;
 Variable lease payments, variable license-fee payments
or other variable payments for the right to use an asset
(for example, the payments change with fluctuations in
market interest rates); and
 Ownership of an asset that an entity holds for tax
purposes but does not record on its balance sheet.
Other
 Outsourcing arrangement – particularly when an entity’s
own employees/assets are sold prior to any entity and
will continue to provide services to the seller;
 Sale of assets or operations where the seller retains
some governance rights and/or an economic interest;
 The purchase of businesses or assets by a third party or
a newly formed entity on behalf of another company (ie,
an off-balance-sheet acquisition vehicle);
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






Investments made through intermediaries in entities that
generate losses from a financial reporting perspective;
Tolling arrangements with project finance companies;
Transactions in which an entity’s primary counterparties
are financial institutions (for example, banks, private
equity funds and insurance companies);
Arrangements with an entity whose capital structure
(often the equity) is partially owned (or provided) by a
charitable trust;
An unconsolidated entity whose name is included in the
entity’s name;
When an entity provides administrative or other services
on behalf of an unconsolidated entity or services its
assets; and
When an unconsolidated entity provides financing or
other services exclusively to an entity, its vendors or
customers.
Source ;SIC-12 and FIN 46R -The substance of control
(PwC)
10. Outsourcing contracts: an accidental business
combination?
IFRS News - March 2006
Outsourcing contracts are common. Many companies use
outsourcing contracts to reduce costs, increase efficiency and
focus on the core business. There are many different types of
outsourcing arrangements, and the financial reporting of them
can be complex.
The expected outcome is generally that the outsourcing
arrangement will be treated as a service arrangement, but an
outsourcing contract may be classified as a business
combination, lease or service concession.
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CONSOLIDATION PART 3
Whether it is a business combination, a lease, a construction
contract or a service arrangement will depend on the contract
with the customer; but the assessment requires management’s
judgment.
Some factors such as a limited contract life can refute the
business combination conclusion. The transaction will give rise
to a business combination if full control is transferred to the
outsourcer for the expected useful life of the assets.
Companies may outsource any or all functions they consider
can be done more efficiently by a third party. This can be a
function as peripheral as catering for a large head office, or IT
management for a law firm.
A business combination is more likely where the ‘outsourcee’
is assembling similar contracts to extract synergies and asset
efficiency. A business combination results in the outsourcer
recording assets and liabilities at fair value and goodwill.
Other less obvious outsourcing contracts might be private
finance initiatives, contract drug manufacturing, prison
management and waste management services.
Accidental business combinations are seldom welcomed by
senior management or the investor community. It is difficult to
assess whether or not a contract results in a business
combination, particularly when existing customer processes
are combined with the existing processes of the outsourcer.
Financial reporting of these contracts raises several questions:
is there a business combination? How should upfront
payments by the outsourcer be treated? How should revenue
and costs be recognised?
What are the potential implications of IFRIC 4? IFRIC debated
some of these questions as part of the Service Concession
Arrangements exposure draft; however, none have been
definitively answered, and the completion of an interpretation is
not expected soon.
Have you acquired a business?
The first step in analysing an outsourcing transaction is to
determine whether a business combination has taken place. A
large outsourcing contract usually includes some of a
company’s significant processes.
The company transfers assets, staff and processes to the
outsourcer. These three in combination should be able to
provide output on their own, which is a business as defined by
IFRS 3.
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The outsourcer should therefore carefully assess agreements
as they are being structured to avoid unintended financial
reporting effects.
Build and run components
A contract may require the outsourcer to build a platform to
deliver the service (for example, an IT platform, plant or large
equipment). This is often referred to as the ‘build’ phase of the
contract, to be followed by the ‘run’ phase.
Management should assess whether the build and run phases
should be accounted for separately. Factors to consider are
whether the asset and the service are to be delivered
separately, the customer can use the asset separately from the
service and whether a reliable measure of revenue for the
asset and the service can be obtained.
The build element, when separable, is generally recognised in
accordance with IAS 11, Construction Contracts, as the item is
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CONSOLIDATION PART 3
being built to the specifications of the customer as a result of a
negotiated contract.
contract because of the necessary start-up activities are often
front-loaded.
The run element is generally recognised as a service contract
in accordance with IAS 18, Revenue.
Outsourcing is a developing industry, with an increasing
number of processes being transferred to outsourcers and
requiring start-up activities with significant front-loaded
expenses. New contracts may be signed at the same time as
the outsourcer is adapting its structure to offer new services.
Run revenues and costs
Activities to be delivered under a run component of a bundled
outsourcing contract are usually services, either discrete or
continuous. Revenue should be recorded on a percentage-ofcompletion basis.
However, the measurement of completion, given the nature of
the services delivered, is usually based on ‘output’ indicators
(volumes of transactions, survey of interventions and similar
measures).
Measures of completion based on input measures such as
costs (cost-to-cost method) is not appropriate for such
contracts, as it is unlikely that cost incurred represents the
progress of the service to date.
Revenue is generally recorded on a straight-line basis if
services to be delivered are performed by an ‘indeterminate
number of acts’.
Certain contracts include the payment of an upfront amount by
the outsourcer to the customer. When services received for
such a payment are not identifiable, the payment usually
represents the granting of a discount. This is recognised as a
reduction of revenue over the service period of the contract.
Recognition of costs may be even more challenging than
recognition of revenue. Contract revenue and expenses ‘are
recognised respectively by reference to the stage of
completion of the contract activity’. Expenses in an outsourcing
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The outsourcer should determine which of these up-front
expenses relate to the implementation of a specific contract, as
opposed to costs incurred at its discretion to modify or
transform its own business. This may depend on the maturity
of the outsourcer’s business.
Some historical outsourcers are developing their structures to
face this demand; other corporations are setting up new
outsourcing businesses, often starting with their existing IT
functions, while many existing IT companies are expanding
into outsourcing.
For expenses that relate to the services to be delivered, work
in progress is recognised if the costs are recoverable. There
will also be numerous other costs (employee restructuring,
transfer to a new location, development of new processes) that
are normal operating costs of the business that should be
expensed as incurred or that may give rise to intangible or
tangible fixed assets.
Implications of IFRIC 4
IFRIC 4, Determining whether an Arrangement contains a
Lease, is effective from 1 January 2006. Most outsourcing
contracts include assets; these outsourcers will need to
determine whether their outsourcing contracts include a lease.
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CONSOLIDATION PART 3
The challenge is to assess whether specific assets exist in the
arrangement. This determination should be made on an assetby-asset analysis. This includes obtaining a precise
understanding of the use of the asset: is the service based on
that specific asset, or could it be delivered, in accordance with
the terms of the contract by other means?
For example, a catering outsourcer may provide meals for a
customer from its central facilities, which are also used for
other customers; conversely, it may use a dedicated facility
constructed solely for the purpose of that customer’s contract.
If the asset is used solely for the company, it would be a lease
of the specific asset by the customer.
The asset is not deemed specific to the customer if the
outsourcer uses the asset for a number of customers, and no
lease would exist.
11. Carve-out / combined financial statements
IFRS News - March 2008
IFRSs provide very limited guidance on the preparation of
carve-out/combined financial statements. The answers to the
questions may be different in different countries. Consultation
with the relevant experts and lawyers is crucial.
What are ‘carve-out’ and ‘combined’ financial statements?
The terms ‘carve-out’ and ’combined’ financial statements
have a similar meaning. Combined financial statements are the
aggregate of the financial statements of segments, separate
entities or groups, which fail to meet the definition of a ‘group’
under IFRS10.
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Carve-out financial statements are the separate financial
statements of a division or lesser business component(s) of a
consolidated or larger entity.
The term used varies by country and regulator. For example,
the UK commonly refers to ‘combined’ financial statements
and the US refers to ‘carve-out’ financial statements.
When can carve-out/combined financial statements be
prepared?
Preparation of carve-out/combined financial statements is
seldom straightforward. Common issues include:
• whether carve-out/combined financial statements can be
presented;
• determining what the reporting entity is;
• how to measure assets and liabilities; and
• how to allocate different types of costs, income, taxes etc.
Participants agreed that carve-out/combined financial
information should be prepared only when all of the entities
concerned have been under common control during the track
record period and form a ‘reporting entity’.
“Carve-out/combined financial statements are usually
prepared in contemplation of a capital market transaction and
might be required by the local regulator.” David Smailes
What are the regulatory requirements and market practice
regarding the preparation of carve-out/combined financial
statements?
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CONSOLIDATION PART 3
Most territories have no specific regulatory requirements for
the preparation of combined financial statements. The most
detailed and structured guidance available is that issued by the
SEC with respect to US GAAP, and the UK Annexure to the
Standard for Investment Reporting (SIR) 2000 for the
presentation of financial information in an investment circular.
Many territories find this guidance useful. However, since most
carve-out or combined financial information is prepared with a
view to a capital market transaction, experts recommend
entities clear potential issues with the local regulator in
advance, as different regulators may take different views.
Making the distinction is important because an audit opinion
cannot be issued for pro forma financial statements.
The same principle is applied consistently in all respondents’
territories:
• carve-out/combined financial statements present historical
financial information prepared by aggregating the financial
information of entities under common management and
control, which did not form a legal group.
“The general principles governing preparation of carve-out
financial statements have been developed over the last two
decades and captured through SEC speeches, comment
letters and past examples of carve-out financial statements.”
Neil Dhar
• Pro forma financial statements present hypothetical financial
information created to present an illustration of how a capital
market transaction might have affected an “issuer” of
securities, had a specific transaction or series of
transactions been undertaken at the commencement of the
period being presented, or at the balance sheet date
presented.
Conscious about the need to define a framework which
provides guidance to EU preparers, the European Commission
is currently working on a project to issue the equivalent of
SIRs. The first part of the project looks at pro formas.
The meaning and interpretation of the term ‘pro forma’ might
differ from territory to territory, and there might be some
differences in the preparation of pro forma financial
statements.
“Under French GAAP, aggregating financial statements of
separate legal structures is allowed in certain circumstances.
“In some territories carve-out/combined financial statements
have been referred to as ‘pro forma’ and presented as audited
historical financial information.
This practice has evolved while transitioning to IFRS to a
model which looks beyond the legal structures and considers
the business of the reporting entity.” Thierry Charron
What is the difference between carve-out/combined
financial statements and pro forma financial statements?
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This use of the same term for dissimilar financial information
should not be confused with the concept of illustrative pro
forma financial information on which a compilation opinion
rather than an audit opinion is given, as contemplated by the
European Prospectus Regulation and associated guidance.”
David Smailes
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CONSOLIDATION PART 3
“Germany has issued a standard governing the preparation of
pro forma financial information (as has the SEC in its
Regulation S-X). In all cases, there should be some basis or
framework to support the compilation of pro forma financial
information.” Nadja Picard
What is a ‘reporting entity’, and what are the general
indicators that a reporting entity exists for which IFRS
financial statements can be prepared?
The IFRS Framework defines reporting entity as “an entity for
which there are users who rely on the financial statements as
their major source of financial information about the entity”.
Capital market specialists look at all the facts to assess
whether a reporting entity exists. These include:
• Whether the assets and liabilities included in the carve-out
are legally bound together through:
– a legal reorganisation of a group/groups that has occurred
after the reporting date, but prior to the publication of the
financial statements;
– a reorganisation that will happen simultaneously with a
proposed IPO, disposal or similar transaction; or
– an agreement that was signed and in place throughout the
historical financial period. The written agreement cannot be put
in place retrospectively; or
• Whether the assets and liabilities are all owned by the same
party, and whether there is evidence that they have been
managed together as a single economic entity during the track
record period?
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All the owner’s assets and liabilities managed in this way
should be included.
“A material level of transactions between the businesses or
with common customers/suppliers would make it more difficult
to present meaningful carve-out/combined financial statements
for one of the businesses.” David Smailes
‘Managed together’ is not usually interpreted as meaning that a
group with two business segments can
not present carve-out/ combined financial statements for one
of the two segments.
However, presentation of carve-out/combined financial
statements would require further analysis of the relationships
between the two segments to determine whether the business
segments are related or interdependent, or if there are any
material inter-business relationships.
Example
An acquisition company, Newco, has been created. The
directors of Newco prepare an IPO prospectus which includes
a commitment to use the proceeds of the IPO to acquire a
segment of an existing third party company, Opbus.
Opbus did not previously report separate financial information
and is a mix of legal entities and divisions.
The issuer is Newco. The prospectus must include an audited
track record for the business of Newco but this is not
represented by Newco’s legal financial information.
Typically the prospectus would therefore include:
• Carve-out/combined historical financial information on Opbus;
and
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CONSOLIDATION PART 3
• Pro forma information for the enlarged Newco group,
illustrating how Newco’s financial information would have
looked if Newco had already acquired Opbus.
Example
When one entity, which is managed together with others as
part of the same business segment, will not be subject to the
legal reorganisation, should the entity be included in the
reporting entity?
It is important not to present misleading information: A high
level of transactions between the business excluded and the
carve-out group could lead to misleading carve-out financial
statements.
For example if the excluded business was a loss-making entity
as a result of transactions with the carve-out group which were
not performed at arm’s length.
This is a complex issue when regulatory approval is sought. It
requires judgement and should be addressed upfront when
planning for carve-out/combined financial statements. Neil
Dhar
What are the allocation principles for assets, liabilities,
income and expenses?
The most common areas where allocations have to be made
are headquarters costs, income taxes, debt and interests.
Each situation is unique and requires consideration based on
the facts available.
“Factors usually considered when doing the allocation include:
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– Will the assets and liabilities be transferred to the carved-out
group?
– Was there any intra group recharge between the parent and
the carved-out group, eg legal, accounting, finance expenses?
and
– Have the recharges been made on an arm’s length basis?”
Gabriele Matrone
Allocations can only be made to the extent of the costs actually
incurred by the larger group. That is, no allocation can be
made on a “what if” basis.
For example, allocation would not be made on the basis of
estimating what the expenses of the carved-out business
would have been if it had had its own legal department. Such
an approach would be more akin to proforma financial
information.
Quality of the information is a pre-requisite for the allocations.
These must be performed to a standard that allows
presentation within IFRS financial statements and, in most
cases must be auditable.
If quality information does not exist, a preparer should provide
sufficient disclosure in the notes to enable readers of the
carve-out/combined financial statements to understand how
the future financial position, performance and cash flows of a
stand-alone business may differ.
Whichever method is used to allocate assets, liabilities, income
and expenses, clear and meaningful explanations in the notes
are essential for a good understanding of the financial
statements.
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CONSOLIDATION PART 3
The UK and SEC material referred to above provides useful
guidance in respect of allocation.
Kennedy Liu shares some recent comments from the Hong
Kong Stock Exchange
“Please disclose the basis of allocation in the basis of
preparation”
“Has management disclosed its judgement that the carveout is
appropriate in the critical accounting policies?”
“Has management disclosed details of the carve-out business
in the basis of preparation?”
“Advise and disclose the basis on how “common control” is
established.”
“Is it appropriate to use the carve-out approach, or the
discontinued operation approach in preparing the financial
statements?”
“Does the carve-out satisfy the criteria under UK Standard for
Investment Reporting 2000?”
“Do the carve-out financial statements comply with
HKFRS/IFRS?”
How are income taxes dealt with?
Respondents identified the following examples:
Tax position
The entities that comprise the
carved-out business filed
separate tax returns
Treatment of tax
Tax expenses, assets and
liabilities are accounted for in
accordance with the tax
returns.
The entities that comprise the a) Separate tax return
carved-out business were part approach:
of a consolidated tax group.
under this method, income tax
is
recalculated and accounted
for
as if the entity had always filed
tax returns separately.
Particular
attention should be paid to tax
losses when the tax asset has
already been used by another
entity in the group that is not
part of the carved-out
business.
Or
b) Actual tax incurred: this
method would be possible if
the parent recharged taxes to
the entities that comprise the
carve-out/combined business.
How should debt and interest expense be allocated?
Respondents agreed that intercompany debt between the
carved-out business and the parent should be reinstated in the
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CONSOLIDATION PART 3
carve-out/combined financial statements, along with the
associated interest expense incurred.
Example
Financing of 100 was provided in the past. 150 of group debt
will be allocated in the restructuring:
100 should be allocated to the carved-out business as it
reflects the amount attributable to the carved-out business.
However, in certain circumstances, it might also be acceptable
to allocate 150, rolled back to the balance sheet of the earliest
year presented along with the related interest expense, as long
as the additional 50 does not represent a pro forma type
adjustment.
An analysis of the final capital structure (pre transaction)
should also be performed.
“A practical difficulty, arising when interest free loans were
granted by the parent to the entities that comprise the carvedout
business, is that the allocation of the actual interest expense
requires an analysis of the capital and debt structure of the
wider group. For example, if the interest free loans were
backed
by interest-bearing loans that are external to the group, the
interest paid on these loans could be used.”
Gabriele Matrone
How much assurance can auditors give on carveout/
combined financial statements?
There is accepted practice of giving some kind of assurance
on
carve-out/combined financial statements when the financial
statements are those of a reporting entity and can be
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satisfactorily audited.
An audit opinion might refer to “true and fair” or “fair
presentation
in accordance with IFRS”. However, in certain circumstances,
it
might be more appropriate to refer to the basis of preparation.
The greater the number of adjustments and allocations that
have
to be made to achieve a carve-out/combined presentation, the
less likely it is that an IFRS opinion can be issued.
”Referring to the basis of preparation is widely accepted in the
UK for an opinion given on historical financial information
presented in an investment circular under SIR 2000.” David
Smailes
An ‘emphasis of matter’ paragraph is also commonly used in
the auditors’ opinion. This explains that the carved-out
business
has not operated as a separate entity, and that the financial
statements are not necessarily indicative of results that would
have occurred if the business had been a separate standalone
entity during the period presented, nor is it indicative of future
results of the business.
“It is common practice in Hong Kong to issue an unqualified
audit opinion without an ‘emphasis of matter’ paragraph. Even
so, it would usually be appropriate to include such disclosures
in
the notes to the carve-out/combined financial statements.”
Kenny Liu
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CONSOLIDATION PART 3
What are the practical challenges faced in the preparation
of carve-out/combined financial statements?
The practical challenges vary depending on circumstances.
Respondents highlighted three key areas:
1. The structure of the carved-out business:
Financial statements are easier to prepare when they are an
aggregation of separate legal entities each of which has their
own stand-alone financial statements. Preparation of
financial statements is more complex when it entails carving
out portions of legal entities.
2. The interactions between the carve-out/combined business
and the rest of the group:
The extent of those interactions determines the complexity
of identifying and reinstating inter-company transactions and
allocating income, expenses, assets and liabilities.
3. The quality of the accounting records, internal controls,
processes and systems:
The financial statements must be prepared reliably and must
be auditable.
“One practical difficulty we face is segregating working capital
balances, such as accounts receivable, accounts payable and
inventory.” Neil Dhar
12.
Multiple Choice Questions
Choose the answer that is closest to what you feel best
answers the question:
1. IFRS 3 Business Combinations forbids:
1) Using fair values.
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2) Creating liabilities for future losses.
3) Including fair values and historic cost in the same
balance sheet.
2. If fair values differ from historic cost, minority interests
will:
1) Benefit from any increase in valuations.
2) Not benefit from any increase in valuations.
3) Be ignored.
3. In a sale of a subsidiary, deferred payments:
1) Are prohibited.
2) May be discounted to present value.
3) Should be excluded from financial statements.
4. On a sale of a subsidiary, remaining goodwill:
1)
2)
3)
4)
Should be transferred to the Parent’s balance sheet.
Should be amortised over 5 years.
Should be written off in full against group reserves.
Should remain unchanged in the consolidated balance
sheet.
5. Loss of control of a subsidiary:
1) Should be treated as a disposal.
2) Should be treated as a disposal, but neither gain, nor
loss should be recognised.
3) Should be re-valued every year, using an inflation index.
6. The equity method of accounting values the investment:
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CONSOLIDATION PART 3
1)
2)
3)
4)
1) By measuring the dividend stream, discounted to
present value.
2) At cost, plus for the investor’s share of post-acquisition
profits.
3) At fair value, less cost of disposal.
All assets are pooled.
Venturers use their own assets and resources.
All assets must be leased.
Separate accounts are mandatory.
7. In the equity method of accounting, Goodwill:
1) Must be shown separately from goodwill derived from
subsidiaries.
2) Is not calculated.
3) Should be amortised over no more than 20 years.
11. In jointly-controlled assets:
1) Revenues and costs are shared according to the
contract.
2) Venturers use their own assets and resources.
3) All assets must be leased.
4) All profits must be shared equally.
8. An associate is an undertaking in which the investor
has:
1) Control that is only temporary.
2) Significant influence, and which is neither a subsidiary,
nor a joint venture.
3) Control of financial decisions, but not operating
decisions.
4) Control, but no board membership.
9. A joint venture is:
1) More than one investor owns shares in a company.
2) A contractual arrangement, whereby parties undertake
an economic activity, which is subject to joint control.
3) Firms of different nationalities sell assets to an
economic activity.
10. In a jointly-controlled operation:
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12. In jointly-controlled entities:
1)
2)
3)
4)
13.
All assets must be leased.
All profits must be shared equally.
A legal structure houses the joint venture.
No accounts are required.
Self-Test Questions
1. Sale of Subsidiary
75% of a subsidiary cost 65 in January 2XX6, when 100% of
the net assets of the subsidiary were valued at 80.
Required: Prepare the P & S1 Group Balance Sheet on
acquisition and the Parent Balance Sheet after disposal.
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CONSOLIDATION PART 3
Fixed Assets
Parent Balance Sheet (January 2XX6)
Shareholders’
Funds
Goodwill
Assets
Cash
Accounts
receivable
Investments
S1 Investment
Fixed Assets
Liabilities
1040 Accounts
payable
180
200 Accruals
65
115 Shareholders’
Funds
1600
800
300
500
1600
Subsidiary 1 Balance Sheet (January 2XX6)
Assets
Cash
Accounts
receivable
Investments
Fixed Assets
Liabilities
400 Accounts
payable
20
100
50 Shareholders’
Funds
570
490
Accounts
receivable
Investments
Parent Balance Sheet (after disposal)
Assets
Cash
Accounts
receivable
Investments
S1 Investment
Fixed Assets
Liabilities
Accounts
payable
Accruals
Shareholders’
Funds
Profit on sale
80
570
P & S1 Group Balance Sheet on acquistion
Assets
Cash
The investment in the subsidiary was sold in December 2XX6
for 100. The Parent Balance Sheet had remained unchanged
prior to the sale.
Liabilities
Accounts
payable
Accruals
2. Share Exchange
P owns 100% of S1. This cost 100. When S1 was acquired the
net assets were 70.
Today the net assets of S1 are 150.
S1 retained earnings comprise 10 pre-acquisition profits and
80 post acquisition profits.
Minority Interest
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CONSOLIDATION PART 3
At the date of the exchange Goodwill of 6 remains to be written
off.
Prepare the P/S1 and the P/S2 Consolidated Balance Sheets.
Parent Balance Sheet
Accounts
receivable
Investments
S1 Investment
Fixed Assets
Liabilities
1050 Accounts
payable
100 Accruals
250
100
100 Shareholders’
Funds
1600
580
P/ S1 Consolidated Balance Sheet
P exchanges the shares of S1 for 60% of S2.
Assets
Cash
580
800
300
Assets
Cash
Accounts
receivable
Investments
Fixed Assets
Goodwill
Liabilities
Accounts
payable
Accruals
Shareholders’
Funds
500
1600
Parent Balance Sheet (at date of exchange)
S1 Balance Sheet (at date of exchange)
Assets
Cash
Accounts
receivable
Investments
Fixed Assets
Liabilities
400 Accounts
payable
30 Share Capital
100
Retained
Earnings
50 Pre-acquisition
Profit
Post-acquisition
Profit
Assets
Cash
430
60
10
80
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Accounts
receivable
Investments
S2 Investment
Fixed Assets
Liabilities
1050 Accounts
payable
100
250
150 Accruals
100 Shareholders’
Funds
1650
800
300
550
1650
Shareholder’s funds = 500 + 50 Profit on sale of S1
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CONSOLIDATION PART 3
payable
S2 Balance Sheet (at date of exchange)
Assets
Cash
Accounts
receivable
Investments
Fixed Assets
Liabilities
220 Accounts
payable
80
200
100
Share Capital
Retained
Earnings
600
480
Accounts
receivable
Investments
Fixed Assets
500
200 Accruals
100 Shareholders’
Funds
1600
300
800
1600
120
0
600
P bought 75% of S for 250. It was purchased with other
undertakings, and P had determined that S should be sold as
quickly as possible, and immediately sought a buyer.
At the time of acquisition, the net assets of S had a value of
170 (100 Share Capital and 70 Pre-Acquisition Profits).
Now, post-acquisition profits are 100.
The parent’s balance sheet has not changed since the
acquisition.
P/ S2 Consolidated Balance Sheet
Assets
Cash
Accounts
receivable
Investments
Fixed Assets
Liabilities
Accounts
payable
Accruals
Required: Prepare the Parent Balance Sheet including S
using the Equity Method.
Minority Interests
Shareholders’
Funds
Negative Goodwill
Subsidiary Balance Sheet
3. Equity Method of Accounting
Parent Balance Sheet (before acquisition)
Assets
Cash
Liabilities
800 Accounts
500
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Assets
Cash
Accounts
receivable
10
200
Liabilities
Current Liabilities
Share
Capital
300
100
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CONSOLIDATION PART 3
Pre-acquisition
profits
360 Post-acquisition
profits
570
Fixed Assets
70
100
570
Parent Balance Sheet including S (equity method)
Assets
Cash
Accounts
receivable
Investments
Fixed Assets
Goodwill
Liabilities
Accounts
payable
Accruals
Accounts
receivable
Investments S
Assets
Cash
Accounts
receivable
Investments
S1 Investment
Fixed Assets
Suggested Solutions
Answers to Multiple Choice Questions:
1.
2.
3.
4.
2)
1)
2)
3)
5.
6.
7.
8.
1)
2)
2)
2)
9.
10.
11.
2)
2)
1)
12.
1440 Accounts
payable
200 Accruals
300 Minority Interest
165 Shareholders’
Funds
5
2110
1290
300
20
500
2110
Parent Balance Sheet (after disposal)
Shareholders’
Funds
Profits of S
Fixed Assets
14.
Cash
2)
Liabilities
1140 Accounts
payable
180
200 Accruals
0
115 Shareholders’
Funds
Profit on sale
1620
800
300
500
35
1620
2.
Answers to Self-test Questions:
P/ S1 Consolidated Balance Sheet
1.
P & S1 Group Balance Sheet (January 2XX6)
Assets
Liabilities
http://bankir.ru/technology/vestnik/uchebnye-posobiya-po-msfoeng
Assets
Cash
Liabilities
1450 Accounts
1230
64
CONSOLIDATION PART 3
payable
Accounts
receivable
Investments
Fixed Assets
Goodwill
Assets
130
Cash
350 Accruals
150
6 Shareholders’
Funds
2086
300
556
2086
Accounts
receivable
Investments
S (250+75)
Fixed Assets
Notes:
Shareholder’s funds l= 500+80-goodwill (30-6)= 556
Liabilities
550 Accounts
payable
500 Accruals
500
300
200 Shareholders’ Funds 500
325
100 Profits of S(75% of
75
100)
1675
167
5
P/ S2 Consolidated Balance Sheet
Assets
Cash
Accounts
receivable
Investments
Fixed Assets
Goodwill
Liabilities
1270 Accounts
payable
180 Accruals
450 Minority Interests
200 Shareholders’
Funds
78
2178
Note: Material from the following PricewaterhouseCoopers
publications has been used in this workbook:
1280
300
-Applying IFRS
-IFRS News
-Accounting Solutions
48
550
2178
Notes:
Goodwill= 150-72=78
Minority Interests= 40% of 120
Shareholder’s Funds= 556-(goodwill) 6
3.
Parent Balance Sheet including S (equity method)
http://bankir.ru/technology/vestnik/uchebnye-posobiya-po-msfoeng
65