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2007 McGraw-Hill Australia Pty Ltd
PPTs t/a Australian Financial Accounting 5e by Craig Deegan
Slides prepared by Craig Deegan
32-1

• Understand how to account for incremental investments in a subsidiary
• Understand how to account for the disposal of a subsidiary from the perspective of both the parent entity and from the perspective of the economic entity
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2007 McGraw-Hill Australia Pty Ltd
PPTs t/a Australian Financial Accounting 5e by Craig Deegan
Slides prepared by Craig Deegan
32-2

Increase in the ownership interest held in a subsidiary
• It is common for a parent entity to acquire additional shares in a subsidiary over time
• According to par. 58 of AASB 3 Business Combinations
A business combination may involve more than one exchange transaction, for example when it occurs in stages by successive share purchases. If so, each exchange transaction shall be treated separately by the acquirer, using the cost of the transaction and fair value information at the date of each exchange transaction, to determine the amount of any goodwill associated with that transaction. This results in a step-by-step comparison of the cost of the individual investments with the acquirer’s interest in the fair values of the acquiree’s identifiable assets, liabilities and contingent liabilities at each step.
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2007 McGraw-Hill Australia Pty Ltd
PPTs t/a Australian Financial Accounting 5e by Craig Deegan
Slides prepared by Craig Deegan
32-3

• Hence, AASB 3 requires
– Each individual investment in the subsidiary is accounted for separately, meaning that we will have multiple consolidation elimination entries.
– Once control of the subsidiary is established, the consolidation worksheet entries will eliminate the various investments in the subsidiary against the parent entity’s respective share of the subsidiary’s net identifiable assets as at the respective investment dates (at fair value). This will include investments made prior to gaining control of the subsidiary.
– Because eliminations of each investment are made as at the various investment dates we need to restate the subsidiary’s assets to fair value as at each exchange date. This means that we might have numerous entries to revalue the net assets to fair value.
• Refer to Worked Example 32.2
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2007 McGraw-Hill Australia Pty Ltd
PPTs t/a Australian Financial Accounting 5e by Craig Deegan
Slides prepared by Craig Deegan
32-4

• For each investment elimination we will calculate a separate amount of goodwill. This means that the total goodwill acquired for a subsidiary could be the sum of a number of individual transaction calculations as reflected in a number of investment elimination entries.
• As with all consolidations, dividends paid or declared by a subsidiary are to be treated as coming from either postinvestment or pre-investment reserves. The general principle applies that if the dividends are paid out of profits earned since investment date they are treated as post-investment dividends.
• If dividends are paid out of pre-investment profits the payment will act to reduce the amount of the investment as recorded in the accounts of the parent entity.
• Where there have been multiple investments in a subsidiary any dividend received by the parent entity could be deemed to be partly out of pre-investment profits and partly from postacquisition profits, depending upon the dates of the various investments
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2007 McGraw-Hill Australia Pty Ltd
PPTs t/a Australian Financial Accounting 5e by Craig Deegan
Slides prepared by Craig Deegan
32-5

Increase in the ownership interest held in a subsidiary (cont.)
Journal entries
• To revalue non-current assets to fair value
Dr
Cr
Property, plant and equip.
Revaluation reserve
• To eliminate investment in subsidiary and recognise goodwill (each acquisition to be accounted for separately)
Dr
Dr
Share capital
Retained earnings
Dr
Dr
Cr
Revaluation reserve
Goodwill
Investment in subsidiary
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2007 McGraw-Hill Australia Pty Ltd
PPTs t/a Australian Financial Accounting 5e by Craig Deegan
Slides prepared by Craig Deegan
32-6

Increase in the ownership interest held in a subsidiary (cont.)
Journal entries (cont.)
• To recognise impairment – if any - of goodwill
(separately for each acquisition)
Dr Impairment loss —goodwill
Cr Accumulated impairment losses — goodwill
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2007 McGraw-Hill Australia Pty Ltd
PPTs t/a Australian Financial Accounting 5e by Craig Deegan
Slides prepared by Craig Deegan
32-7

Increase in the ownership interest held in a subsidiary (cont.)
• To eliminate dividends proposed by subsidiary
Dr Dividend payable (balance sheet)
Cr Dividend proposed (statement of changes in equity)
Dr Dividend income (income statement)
Cr Dividend receivable (balance sheet)
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2007 McGraw-Hill Australia Pty Ltd
PPTs t/a Australian Financial Accounting 5e by Craig Deegan
Slides prepared by Craig Deegan
32-8

• When a parent entity sells shares in a subsidiary
– profit or loss in its own individual accounts will be different from the profit or loss required to be shown in consolidated accounts
• AASB 127 requires that in the separate financial statements of the parent entity, investments in subsidiaries etc. are to be measured at either
– cost; or
– in accordance with AASB 139, i.e. at fair value
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2007 McGraw-Hill Australia Pty Ltd
PPTs t/a Australian Financial Accounting 5e by Craig Deegan
Slides prepared by Craig Deegan
32-9

• From the parent’s perspective , profit or loss on sale of shares is the difference between
– carrying value of shares; and
– fair value of sales proceeds
• Carrying value
– is the amount shown in the financial statements for a particular asset or liability
• From group’s perspective:
– consideration to be given to economic entity’s share of post-acquisition profits and reserve movements before determining profit or loss on sale of shares
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2007 McGraw-Hill Australia Pty Ltd
PPTs t/a Australian Financial Accounting 5e by Craig Deegan
Slides prepared by Craig Deegan
32-10

Cost of investment in subsidiary plus:
Parent’s share of post-acquisition movement in retained earnings
Parent’s share of post-acquisition movement in other reserves
$XXX
$XXX
$XXX less:
Accumulated goodwill impairment losses attributable to the purchased goodwill and recognised up until the date of disposal ($XXX)
$XXX less:
Proceeds from the sale of the investment in the subsidiary $XXX
Loss (gain) to the economic entity resulting from the disposal of the subsidiary
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2007 McGraw-Hill Australia Pty Ltd
PPTs t/a Australian Financial Accounting 5e by Craig Deegan
Slides prepared by Craig Deegan
$XXX
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Where a parent sells its interest in a subsidiary it is a requirement that any profit or loss generated by the subsidiary is to be recorded in the consolidated financial statements for the period of the year during which the parent entity had control of the subsidiary.
As paragraph 30 of AASB 127 states
The income and expenses of a subsidiary are included in the consolidated financial statements from the acquisition date as defined in AASB 3. The income and expenses of a subsidiary are included in the consolidated financial statements until the date on which the parent ceases to control the subsidiary.
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2007 McGraw-Hill Australia Pty Ltd
PPTs t/a Australian Financial Accounting 5e by Craig Deegan
Slides prepared by Craig Deegan
32-12

• As we know, in the consolidated financial statements the consolidated retained earnings will include the parent entity’s retained earnings plus its share of the subsidiaries’ postacquisition movements in retained earnings.
• In the period following the sale of a subsidiary the opening balance of retained earnings will be required to be equal to the closing balance as shown in the preceding period.
• To do this, and in the case of a prior period sale of a subsidiary, it will be necessary to make a consolidation adjusting journal entry that includes the parent’s share of the post-acquisition movements in retained earnings of the former subsidiary.
• Similarly, consolidation adjusting journal entries will be needed so that that the consolidated financial reports include the parent’s share of the post-acquisition movements in other reserves of the sold subsidiary.
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2007 McGraw-Hill Australia Pty Ltd
PPTs t/a Australian Financial Accounting 5e by Craig Deegan
Slides prepared by Craig Deegan
32-13

• The consolidated financial statements are to include all of the revenues and expenses of the subsidiary
(subject to adjustments for intragroup transactions) for the period that the parent controlled the subsidiary.
• Because we are including all of the revenues and expenses of the sold subsidiary for the period during which the parent entity had control, we will also be required to separately disclose the minority interests in the consolidated profit after tax.
• The assets, liabilities and equity accounts of a sold subsidiary will not be shown in the consolidated financial statements
• Consider Worked Examples 32.4 and 32. 5
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2007 McGraw-Hill Australia Pty Ltd
PPTs t/a Australian Financial Accounting 5e by Craig Deegan
Slides prepared by Craig Deegan
32-14

Journal entries
• To record sale of shares in parent’s own journal
Dr Cash
Cr
Cr
Investment in X Ltd
Profit on sale of investment
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2007 McGraw-Hill Australia Pty Ltd
PPTs t/a Australian Financial Accounting 5e by Craig Deegan
Slides prepared by Craig Deegan
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• Consolidation adjusting journal entries
Dr Profit on sale of investment
Dr Loss on sale of subsidiary
Cr Profit after tax
Cr Retained earnings
Cr Revaluation reserve
• Balance in revaluation reserve can be transferred to retained profits
Dr Revaluation reserve
Cr Retained earnings
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2007 McGraw-Hill Australia Pty Ltd
PPTs t/a Australian Financial Accounting 5e by Craig Deegan
Slides prepared by Craig Deegan
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• To account for the acquisition of additional ownership interests in an entity, it is necessary, on consolidation, to eliminate each investment acquisition separately.
• While control might not be established until some time after the initial investments in a subsidiary, the step-by-step approach requires that the parent entity recognise its share in postacquisition profits and changes in reserves in respect of each investment that ultimately culminates in control being established.
• So, for multi-stage acquisitions, we recognise the parent entity’s share of changes in retained earnings and other reserves as they relate to each investment, and not only from that point in time at which an investment is made that ultimately confers control.
• In relation to the sale of shares held in a subsidiary, the profit or loss recorded for the sale of the subsidiary in the separate accounts of the parent entity will be different from the profit or loss shown in the consolidated accounts.
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2007 McGraw-Hill Australia Pty Ltd
PPTs t/a Australian Financial Accounting 5e by Craig Deegan
Slides prepared by Craig Deegan
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• From the parent entity’s perspective, the gain or loss on the sale of a subsidiary will be the difference between the proceeds of the sale (measured at fair value), and the carrying amount of the investment (which could be measured at cost).
• From the economic entity’s perspective, the calculation of profit on sale must consider the economic entity’s share of the subsidiary’s post-acquisition profits and reserve movements.
• The economic entity’s profit or loss on sale of a subsidiary will be calculated as the difference between the sale proceeds and:
– the total of the cost of the investment,
– plus the economic entity’s share of the post-acquisition movements in retained earnings/losses and other reserves,
– less the sum of the accumulated goodwill impairment
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2007 McGraw-Hill Australia Pty Ltd
PPTs t/a Australian Financial Accounting 5e by Craig Deegan
Slides prepared by Craig Deegan
32-18