Advanced FA II, Chapter Four.pdf11111111

Chapter Four
Consolidated Financial Statements
IFRS 10
1
By: Mengst D.

List of Applicable IFRS
Topic List Standards
Business Combination ( A+B=A+B) IFRS 3
Consolidation of Financial Statement IFRS 10
2

3
OBJECTIVE
● IFRS 10
 Establishes the principles for the presentation and
preparation of consolidated FS when an entity
controls one or more other entities.
 Requires an entity that is a parent to present
consolidated FSs.
 Define the principle of control as a basis for
determining which entities are consolidated in the
consolidated F/Ss.
3

Introduction to Groups*
• Many large businesses (MNCs) consist of several Co.s
controlled by one central or administrative Co.
• Together all are called a GROUP*. The controlling
Co., called the parent or holding Co., will own some
or all of the shares in the other companies, called
subsidiaries.
• Group is defined according to concept of “control”
* Parent company and all its subsidaries
4

Definition of Consolidation:
√ Is the process of combining the separate FSs of a parent
company and one or more legally separate and distinct
subsidiaries as a single economic entity for external reporting
purposes.
• Parent. An entity that controls one or more entities.
• Subsidiary. An entity that is controlled by another entity.
• Consolidated financial statements combine the financial
statements of the parent and its subsidiaries as if they were one
entity.
5

Why?
• Provide information about economic entity
– investors need information about all assets and
liabilities of a combined entity
• Definition of asset based on control
– with control, entity can dictate use or settlement
– control through an entity is indirect control
• Ex: CBE’s control Over Bole Printing Enterprise
• Do not want legal form to dictate financial
reporting (substance over form)
6

Consolidated FS: the principle
• Principle: group (the parent and all its subsidiaries)
AS single economic entity.
= Group entity Concept!!!
– subsidiary = entity that is controlled by another
entity (known as the parent)
7

Consolidated FS
• Required when the business combination is stock acquisition (
A+B= A+B).
• With stock acquisition, the transaction is with the shareholders
of the acquired company, not with the acquired company itself.
• When an investor acquires sufficient voting shares to obtain
control over the investee, a parent–subsidiary relationship is
established
• The two companies continue as separate legal entities, with
each maintaining separate accounting records and producing
separate financial statements.

Consolidated FS
• However, the two entities now operate as a family of
companies. They operate as one economic entity.
• Users of the parent’s financial statements would generally
prefer to get one financial statement for the entire family
rather than obtain separate statements for each company
in the family.
• Therefore, it is not surprising that IFRS require the
preparation of consolidated financial statements for the
family as a whole.

Exemption from Consolidated FS
• If all the following conditions are met, a parent need not present
Consolidated FS :
A. The parent is itself a wholly-owned sub. or it is a partially owned
sub. of another entity;
B. Parent’s debt or equity instruments are not traded in a public
market;
C. Parent did not file, nor is in the process of filing, financial
statements for the purpose of issuing instruments in a public
market; and
D. Parent’s ultimate or any intermediate parent produces
consolidated financial statements that comply with the IFRSs .
11

Exemptions………….
• The rules on exclusion of subsidiaries from consolidation are
necessarily strict.
– B/c, this is a common method used by entities to manipulate
their results.
OFF-B/SHEET-FINANCING!!!
– If a subsidiary which carries a large amount of debt can be
excluded, then the gearing of the group as a whole will be
improved.
• In other words, this is a way of taking debt out of the C-
SoFP. 12

Assessing Control Over an Investee
 Control:
• An investor controls an investee when the investor is
exposed, or has rights, to variable returns from its
involvement with the investee & has the ability to
affect those returns through power over the investee.
13
13

Assessing Control Over an Investee
 In assessing the existence of Control:
● Identify the activities of the investee that
significantly affect the returns (profit) of the
investee (relevant activities)
● Identify how decisions about relevant activities
are made
● Determine whether the rights of the
investor(parent) give it the ability to direct those
activities 14
14

Assessing Control…
• Control with a majority of voting rights
– An investor controls an investee when the investor holds
majority of the voting rights
• Control without a majority of voting rights
Control without a majority of voting rights can be exercised by ANY
of the following
Contractual arrangements with other vote holders
Relative size and dispersion of other vote holders (defacto
control)
Exercisable Potential voting rights held .
15

Example: Control with Majority Vote
● In the absence of evidence to the contrary, in each scenario
below, does A control Z?
i. A owns 100% of Z.
ii. A owns 51% of Z.
iii. A owns 50% of Z.
iv. A owns 50% of Z and holds currently exercisable ‘in the
money’ options to acquire another 100 shares in Z.
17
17

Example 2: De Facto control
● Entity A owns 45 per cent of the ordinary shares of Entity B to
which voting rights are attached.
● Entity A is the largest shareholder of Entity B.
● Entity A has the right to appoint the majority of the members of
the Board of Directors of Entity B in accordance with special
rights given to Entity A in the founding document of the entity.
• Does Entity A has control over B so that need to consolidate
the financial statement of entity B? Why?
18
18

• CBE (investor) acquired 48% of the voting shares of
Kifiya Plc (investee) on 1 march 2017.
• The remaining voting rights are held by thousands of
shareholders, none individually holding more than
1% of the voting rights.
• None of the shareholders has any arrangements to
consult any of the others or make collective decisions.
• Does CBE has control over Kifiya?
19
Example 3: Assessing Control (De Facto)

• Investor X holds 40% of the voting rights of an investee
and twelve other investors each hold 5% of the voting
rights of the investee.
• A shareholder agreement grants investor X the right to
appoint, remove, and set the remuneration of
management responsible for directing the relevant
activities.
• To change the agreement a two-thirds (66%) majority vote
of the shareholders is required.
• Does X has control? 20
Example 5: Assessing Control(De Facto)

• A parent might lose control of a subsidiary in two or more
arrangements (transactions).
• If a parent loses control of a subsidiary, it shall:
(a) derecognize:
i. the assets (including any goodwill) and liabilities of the
subsidiary at their carrying amounts at the date when control
is lost; and
ii. the carrying amount of any non-controlling interests in the
former subsidiary at the date when control is lost (including
any components of other comprehensive income attributable
to them).
21
Loss of Control

(b) recognize:
i. the fair value of the consideration received, if any, from
the transaction, event or circumstances that resulted in
the loss of control;
ii. if the transaction, event or circumstances that resulted in
the loss of control involves a distribution of shares of the
subsidiary to owners in their capacity as owners, that
distribution; and
iii. any investment retained in the former subsidiary at its
fair value at the date when control is lost.
22
Loss of Control

Accounting requirements
• Consolidation procedures
Combine assets, liabilities, equity, income, expenses and
cash flows of the parent and its subsidiary
Offset (eliminate) the parent’s investment in each subsidiary
with its portion of equity of the subsidiary
Eliminate in full all intra-group transactions and balances
• Uniform accounting policies
Parent and its subsidiaries must have and apply uniform
accounting policies. If not, appropriate adjustments are
made when preparing the consolidated financial statements
to ensure conformity.
23

• Measurement
Consolidation of a subsidiary begins from the date the
investor gains control of an investee and ceases when
the investor loses control of an investee
• Reporting date
 Parent and its subsidiaries must have the same reporting date. If
not, for consolidation purposes prepares additional financial
information as of the same date as the financial statements of the
parent unless it is impracticable to do so.
 The difference between the reporting dates shall be no more than
3 months. 24

25
Steps in Consolidating the FS

Intercompany receivable (payable) Intercompany payable (receivable)
Against
Advances to subsidiary (from subsidiary) Advances from parent (to parent)
Against
Interest revenue (interest expense) Interest expense (interest revenue)
Against
Dividend revenue (dividends declared) Dividends declared (dividend revenue)
Against
Sales to subsidiary (purchases of inventory
from subsidiary)
Purchases of inventory from parent
(sales to parent)
Against
Parent’s Accounts Subsidiary’s Accounts
Investment in subsidiary Equity accounts
Against
Intercompany Accounts to be Eliminated

Content of group accounts
 The whole of the assets and liabilities of each Co. are
included, even though some subs may be only partly
owned.
– The equity and liabilities' section of the SoFP will
indicate how much of the NA are attributable to the
group and how much to outside investors (NCI).
27

Content of group accounts
• NCI should be presented in the CSoFP within equity,
separately from the parent shareholders' equity.
• Most parent companies present their own individual
accounts (Separate FS) & their group accounts (CFS)
in a single package.
29

Consolidated SoFP
• The F/S of a parent and its subsidiaries are combined
on a line-by-line basis by adding together like items
except equity section.
• The cons. f/s should show financial information
about the group as if it was a single entity.
Basic procedure
(a) Eliminate parent's inv’t in each subsidiary & the parent's
portion of equity of each subsidiary are eliminated.
(b) NCI in the NI of subsidiaries are adjusted against group income, to
arrive at the NI attributable to the owners of the parent
(c) NCI in the NAs of consolidated subsidiaries should be presented
separately in the consolidated SoFP
30

Basic Principle
32
 Two simplified procedures:
a. cancel out items w/c appear as an asset in one co.
and a liability in another
b. Add together all the uncancelled assets and liabs
• Items requiring cancellation may include:
• ‘Inv’t in subsidiary companies' of Parent against
Sub’s 'share capital‘.
• Any inter-Co. Receivable/Payable Balances

Consolidation Cases
1. Consolidated Financial statement for wholly
owned subsidiary
I. Consolidation On the date of business combination
II. Consolidation in subsequent years.
2. Consolidated Financial statement for Partially
owned subsidiary
I. Consolidation On the date of business combination
II. Consolidation in subsequent years. 33

Consolidated FS: On the date of business combination
 Only balance sheet is consolidated
 It is prepared by parent
 In consolidating the balance sheet of parent and subsidiary ,
the following are done in the elimination Column
a. Equity Accounts of subsidiary is eliminated against
Investment in subsidiary
b. Assets and liabilities of subsidiary are adjusted to at Fair
Value on the date of B.C
c. Goodwill or gain on bargain purchase related with
business combination is included 34

Example 1- Consolidated FS On the date of business
combination, Wholly owned subsidiary
• Separate balance sheets of Parent (P) Company and
Subsidiary (S) Company on May 31, 2010, together
with current fair values of S’s identifiable net assets
are as follows:
35

Example 1: Separate balance sheets of P Company and S Company on May 31,
2010, together with current fair values of S’s identifiable net assets are as follows:
36

Cont…….
• On May 31,2010, P acquired all (100%) 10,000 shares of S’s
outstanding common stock from shareholders for Br.300,000 cash and
Br. 50,000 cash was paid to finder’s and legal fees relating to the
business combination.
Required:
• Record the business combination on May 31, 2010
• Compute GW or Gain bargain purchase
• Record possible elimination entries that would appear in the
elimination column of the work sheet
• Prepare Consolidated balance sheet of P company and subsidiary on
may 31, 2010 37

Entry to record business combination:
Investment in S Company 300,000
Cash 300,000
Finder and Legal expense 50,000
Cash 50,000
Calculation of Goodwill or income on Bargain Purchase
Fair value of assets 900,000
Fair value of liabilities 520,000
Fair value of net assets 380,000
Price paid 300,000
Gain in bargain Purchase 80,000
38

Worksheet elimination journal entries in the elimination column
a. To eliminate Equity Accounts of subsidiary against Investment in
subsidiary
Common Stock 100,000
Additional Paid in Capital 40,000
Retained earnings 180,000
Investment in Company S 320,000
b. To adjust subsidiary’s assets and liabilities to FV( from BV) and to record
GW or gain on bargain purchase
Inventories 20,000
Plant Assets 80,000
Investment in Company S 20,000
Long-term debt 40,000
Gain on bargain purchase 80,000
39

P Company and Subsidiary
Working paper for Consolidated Financial Statement May 31,2010
Balance/Assets P Corporation S Company Elimination Consolidated
Cash Br. 200,000 Br.10,000 210,000
Acct. receivable 700,000 60,000 760,000
Inventories 1,400,000 120,000 20,000 1,540,000
Investment in S 300,000 (300,000)
Plant assets (net) 2,850,000 610,000 80,000 3,540,000
Total
assets
5,450,000 800,000 (200,000) 6,050,000
Current liabilities Br.500,000 Br.80,000 580,000
Long-term debt 1,000,000 400,000 40,000 1,440,000
Common Stock 1,500,000 100,000 (100,000) 1,500,000
Add. Paid-in Capital 1,200,000 40,000 40,000) 1200,000
Retained Earnings 1,250,000 180,000
80,000
(180,000)
1,330,000
Total 5,450,000 800,000 (200,000) 6,050,000

Consolidated Balance Sheet
May 31, 2010
ASSETS
Cash Br.210,000
Accounts Receivable 760,000
Inventories 1,540,000
Total current assets 2,510,000
Plant assets (net) 3,540,000
Total assets Br.6,050,000
LIABILITIES & STOCKHOLDER’S EQUITY
Current liabilities Br. 580,000
Long-term debt Br. 1,440,000
Common Stock 1,500,000
Additional Paid-in Capital 1,200,000
Retained Earnings 1,330,000 5,470,000
Total Liabilities and Stockholders’ Equity Br.6,050,000
41

• Exercise-1 : Peerless S. C acquired all of Special Foods
S.C outstanding common stock for $300,000. On the
date of combination, the fair values of Special Foods’
individual assets and liabilities are equal to their book
values shown in the next slide.
42

Required:
Record the business combination
Compute GW or Gain bargain purchase
Record possible elimination entries that would appear in the elimination column of the work
sheet
Prepare Consolidated balance sheet
43

Consolidated Financial Statement: On the date
of business combination ,
Partially Owned Subsidiary
44

Consolidated FS On the date of business
combination , Partially Owned Subsidiary
 This a situations where the parent acquires less than 100% of the
shares of subsidiary
 The part of the subsidiary not owned by the parent called non
controlling interest(NCI)
 A parent shall present non-controlling interests in the consolidated
statement of financial position within equity, separately from the
equity of the owners of the parent
45

Accounting for Non Controlling Interest (NCI)
• Are equity items and must be shown separately from
the equity of the owners of the parent.
• IFRS allows non controlling interests in the subsidiary
at acquisition date to be measured at either:
1. Proportional ( Partial goodwill) method
2. Fair value( Full goodwill) method
46

Proportional ( Partial GW) Method
Non-controlling interests comprise only its share of
fair value of net assets of the subsidiary.
Non-controlling interests’ goodwill is not recognized
under this method
Goodwill to be recognized is the goodwill attributable
to parent company only.
47

Example: Proportional ( Partial GW) Method
• On May 31, 2010, P Company issued 100,000 common
shares, no par, current fair vale Br.12 per share of its own
for 18,800(out of 20,000) outstanding share of S Company.
This gives P a 94% ownership interest in S.
• Br.150,000 out-of pocket costs of business combination was
also paid. Of which, 60% is direct cost of business
combination and 40 % to the stock registration fee of P’s
common stock issued in the business combination. The
following balance sheets are given:
48

49
P Company S Company
BV (Before BC) BV (Post BC) Book Value Fair MV
ASSETS
Cash Br. 200,000 Br. 50,000 Br.100,000 Br.100,000
Accounts Receivable (net) 400,000 400,000 200,000 200,000
Inventories 600,000 600,000 300,000 340,000
Investment in S Company 1,200,000
Plant assets (net) 1,300,000 1,300,000 1,000,000 1,100,000
Total assets 2,500,000 3,550,000 1,600,000 1,740,000
LIABILITIES & STOCKHOLDERS’ EQUITY
Current liabilities Br.800,000 Br.800,000 Br.400,000 Br.400,000
Long-term debt 100,000 90,000
Common Stock 1,200,000 2,340,000
Common Stock, Br.20 par 400,000
Retained Earnings 500,000 410,000 700,000
Total Liabilities & SE Br.2,500,000 Br.3,550,000 Br.1,600,000

Required:
a. Record the business combination on May 31,
2010
b. Compute GW or Gain bargain purchase
c. Prepare Consolidated balance sheet of P
company and subsidiary on may 31, 2010
50

51
a. Journal entry for parent co. to record the business combination
on May 31, 2010.
Direct Expenses 90,000
Cash 90,000
Common Stock 60,000
Cash 60,000
Post B.C the separate b/sheet of P will change on the following
accounts :
• Investment will be included by ,200,000
• Common stock will increase by 1,140,000
•Cash will decrease by 150,000
• Retained earning( expense) decrease by 90,000

b. Goodwill or income on Bargain Purchase
Price paid 1,200,000
Less: FV of net asset
Fair value of assets 1,740,000
Fair value of liabilities (490,000)
Fair value of net assets 1,250,000
Fair value of net assets acquired by P (1,175,000)
(94%*1,250,000)
Goodwill 25,000
NCI ( 6 % X 1,250,000 ) 75,000

53
Working paper elimination entry for consolidation
Inventories 40,000
Plant Assets 100,000
Goodwill 25,000
Investment in Company S 1,200,000
NCI 75,000

54
Balance/Assets P
Corporation
(Post B.C)
S
Company
Elimination Consolidated
Cash Br. 50,000 Br.100,000 150,000
Acct. receivable 400,000 200,000 600,000
Inventories 600,000 300,000 40,000 940,000
Investment in S 1,200,000 (1,200,000)
Plant assets (net) 1,300,000 1,000,000 100,000 2,400,000
Goodwill 25,000 25,000
Total assets 3,550,000 1,600,000 (1,035,000) 4,115,000
Current liabilities Br.800,000 Br.400,000 1,200,000
NCI 75,000 75,000
Long-term debt 100,000 (10,000) 90,000
Common Stock 2,340,000 400,000) (400,000) 2,340,000
Retained Earnings 410,000 700,000 (700,000) 410,000
Total
3,550,000 1,600,000 (1,035,000) 4,115,000

55
May 31, 2010
ASSETS
Cash Br.150,000
Inventories 940,000
Plant assets (net) Br. 2,400,000
Goodwill 25,000 2,515,000
Total assets Br.4,115,000
Current liabilities 1,200,000
Minority Interest in Net Assets of Subsidiary 75,000
Total Liabilities Br.1,365,000
Common Stock Br. 2,340,000
Retained Earnings 500,000 2,840,000
Total Liabilities and Stockholders’ Equity Br.4,115,000

Fair value (Full) Method
• Goodwill attributable to non-controlling interests will
be recognized in the consolidated financial statements
• Under the fair value, non-controlling interests balance
is the sum of :
a. NCI Share of fair value of net assets of the subsidiary
b. Goodwill attributable to NCI
56

Fair value (Full) Method
• NCI fair value are determined with reference to either active
market prices of shares of the subsidiary or other valuation
techniques( implied value from parent price)
• Goodwill under Fair value method is computed by:
GW attributable to parent = Total GW * Parent ownership rate
GW attributable to NCI = Total GW * NCI ownership rate
57
GW = Consideration transferred + FV of NCI
- FV of S net asset
or
= Implied total price(value ) of the subsidiary - FV of net asset

Example: Assume the previous data for P and S
company
• On May31, 2010, P Company issued 100,000 common
shares, no par, current fair vale Br.12 per share of its own
for 18,800( out of 20,000) shares of the outstanding of S
Company. This gives P a 94% ownership interest in S.
• Br.150,000 out-of pocket costs of business combination
was also paid . Of which, 60% is direct cost of business
combination and 40 % to the stock registration fee of P’s
common stock issued in the business combination.
58

Computing Price of full company(S)
• If 18,800 shares are exchanged for a share worth
Br.1,200,000, Implied share price of S will be :
Br 1,200,000/18,800 shares, which is equal to Br 63.83 per
share.
• Therefore, the price of whole company will be :
20,000 shares x 63.83 = 1,276,600 ( rounded)
• Fair Value of NCI = 1200 shares x 63.83 = 76,596
59

Goodwill
Price paid by Parent for 94% 1,200,000
Add: Implied FV of NCI of 6% 76,596
Implied value (price ) of whole company(100%) 1,276,596
Total Fair value of net assets(1,740,000-490,000) 1,250,000
Goodwill 26,596
GW attributable to parent = 26,596 *.94 = 25,000
GW attributable to NCI = 26,596 *.06 = 1,596
60

61
Journal entry for parent co. to record the business combination on May 31, 2010.
Direct Expenses 90,000
Cash 90,000
Common Stock 60,000
Cash 60,000
Post B.C the separate b/sheet of P will change on the following
accounts :
• Investment will be included by ,200,000
• Common stock will increase by 1,140,000
•Cash will decrease by 150,000
• Retained earning( expense) decrease by 90,000

NCI Balance
NCI Share of fair value of net assets of the
subsidiary at acquisition date
+
 Goodwill attributable to non-controlling
interests at acquisition date.
NCI= 1,250,000 X .06 + 1,596 = 76,596
62

63
Working paper elimination in journal entry form:
Inventories 40,000
Plant Assets 100,000
Goodwill 26,596
Investment in Company S 1,200,000
NCI 76,596

64
Balance/Assets P
Corporation
S
Company
Elimination Consolidated
Cash Br. 50,000 Br.100,000 150,000
Acct. receivable 400,000 200,000 600,000
Inventories 600,000 300,000 40,000 940,000
Investment in S 1,200,000 (1,200,000)
Plant assets (net) 1,300,000 1,000,000 100,000 2,400,000
Goodwill 26,596 26,596
Total assets 3,550,000 1,600,000 (1,033,404) 4,116,659
Current liabilities Br.800,000 Br.400,000 1,200,000
NCI 76,596 76,596
Long-term debt 100,000 (10,000) 90,000
Common Stock 2,340,000 400,000) (400,000) 2,340,000
Retained Earnings 410,000 700,000 (700,000) 410,000
Total
3,550,000
1,600,000 (1,033,404) 4,116,659

65
May 31, 2010
ASSETS
Cash Br.150,000
Inventories 940,000
Plant assets (net) Br. 2,400,000
Goodwill 26,569 2,426,569
Total assets Br. 4,116,569
Current liabilities 1,200,000
Minority Interest in Net Assets of Subsidiary 76,569
Common Stock Br. 2,340,000
Retained Earnings 500,000 2,840,000
Total Liabilities and Stockholders’ Equity Br. 4,116,569

Consolidated Financial Statements:
Subsequent to Date of Business
Combination
Next chapter
67

Consolidated Financial Statements:
Subsequent to Date of Business
Combination
Reading assignment
68

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