Group accounts

Substance over form- economic over legal.

Basics Group accounts

Consolidated f/s are important for investors in the parent company.
economic returns are dependent on the profits made by the subsidiaries that are then distributed to the parent. →
Control: 50% more.

Criteria:
A parent is an entity that controls another entity.
A subsidiary is an entity that is controlled.

An investor controls an investee when:

• the investor has power over the investee, and
• the investor is exposed, or has rights, to variable returns from its involvement with the investee, and
• the investor has the ability to affect those returns through its power over the investee.
Power Investee.
Majority of voting rights
contractual arrangements between investor and investee

Convertible loans (holding voting rights that are currently capable of being exercised.
the nature of the investor’s relationship with other parties that may enable that investor to exercise control over an
investee.

three principles of consolidation:

1. Parent will add up everything @ 100%
2. Eliminate intragroup transaction and balances (sale exchange between parent and subsidiary).
3. Show up to the extend that you don’t own subsidiary. NCI
parents buy something for subsidiary.

When preparing the consolidated F/S, the group is treated as one single entity, so transactions between the parent and
subsidiary are considered internal and are cancelled out.
• The parent’s “Investment in Subsidiary” is eliminated against the subsidiary’s “Share Capital.”
• The consolidated F/S only shows the combined external transactions of the group.

Working notes:
W1: Group Structure- Identify the people- very serious WN
W2: FV of net assets of the subsidiary
(NET WORTH = NET ASSETS)
(Assets - Liabilities = EQUITY)
(eqt= share cap, retained earnings, Share premium, OCI)

Record contingent liability and internally generated brand of subsidiary

worth increases by brand decrease by liability.
FVA (FV adjustment)
CA=$1000
FV= $1200
FVA= FV- CA= 200
Brand value is from subsidiary’s estimate- becz it is internally generated.
W3: Goodwill
Fair value of consideration (parent) +
Fv of consideration (NCI @Acquisition)
- Fair Value of identifiable net assets and acquisition (Worth of sub)
Goodwill at Acquisition
- Impairment to date
Goodwill to consolidated SFP

More than the worth: goodwill — IAS 38

Less than the worth: good bargain; Gain on retained earnings.

FULL GOODWILL and Proportionate goodwill

Full GW: NCI @FV = impairment is allocated to both
Proportionate GW: NCI — %OF W2 (should have paid) = just parent
The goodwill of the subsidiary is later impaired, impairment can be determined
In proportionate- do not take nci at Fv rather taken at percentage of wn2. Fv+ %of nci @wn2

The method used to calculate goodwill depends on whether the Full Goodwill or Proportionate Goodwill approach
is used.
1. Full Goodwill Method
• Goodwill is calculated on 100% of the subsidiary’s fair value, even if the parent acquires less than 100%.
• This method recognizes both the parent’s share and the non-controlling interest (NCI) in goodwill.
Goodwill= Total fair value of subsidiary − Fair value of net assets OR
Goodwill= (Consideration transferred + Fair value of NCI) − Fair value of net assets

When used?

• IFRS 3 allows Full Goodwill (but does not require it).

• It results in a higher goodwill amount and higher total assets.

Example:

• Parent buys 80% of a subsidiary for $800,000.

• NCI’s fair value is estimated at $200,000.
• Subsidiary’s net assets at fair value = $900,000.
2. Proportionate Goodwill Method
• Goodwill is calculated only on the parent’s share of the net assets.
• NCI is recorded at its share of net assets (not fair value).

Formula:

Goodwill = Net assets of the subs at acquisition X percentage owned by the NCI.

When used?

• Allowed under IFRS 3 (optional).

• Required under some GAAPs (e.g., old UK GAAP).
• Results in lower goodwill and lower total assets.

Example (Same Case as Above, Using Proportionate Goodwill):

• Parent buys 80% of a subsidiary for $800,000.

• Subsidiary’s net assets at fair value = $900,000.

WN- 4- NCI (NON-CONTROLLING INTREST)

MOVEMENT (WN 2) = difference between acquisition and reporting.
nci share in goodwill only if its full. in proportionate no goodwill shared with nci.

WN5- GROUP RESERVES AND OCE

EVERYTHING IN OCI GOES TO OCE

EVERYTHIN OF INOME STATEMENT GOES TO BAL SHEET.

Consideration paid → cash/shares/contingent/deferred

differed consideration: payment is delayed so need to calculate PV.
Unwinding interest= Finance cost dr liability cr
Intragroup transactions.
1. Parent sells goods on profit. → unrealised profit
1. Mark up (cost)
2. Margin (selling price)
PURP:

(P → S) → THIRD PARTY

for s it is overstated inventory becz it is not written off

PROVISION FOR UNREALISED PROFIT IS CALCULATED AT THE GOODS WHICH IS STILL IN THE
INVENTORY. @YEAR END.
Journal
group retained earnings dr
group inventory cr
when S→P
for p it is overstated inventory becz it is not written off
W2 debited= sub profit is removed
subsidiary net assets dr
inventory cr
# Group accounts 2

Associate is more like a friend rather than subsidiary.

associate is when an entity over which an investor has s**significant influence** and which is neither a subsidiary nor
an interest in a joint venture.
Significant influence: no power to control but power to influence. (voting right from 20%-50%)
accounting done according to IAS 28. (Investment in associates and joint ventures.)

The financial statements used to equity account for the associate should be drawn up to the investor’s reporting date.
(parent’s).
if this is possible then the difference in reporting dates should be less than three months.
the associate accounting policies should be harmonised with those its investor
the investor should disclose its share of the associate’s contingencies.
not more than one line space is given to associate in parent’s f/s.

RULES TO PREPARE GROUP Statement of Pl.

Step 1 → Structure
Step 2 → Proforma
Step 3 → Complete proforma
Step 4 → NCI distribution
NCI is should be separately calculated and NOT BY CALCULATIN NCI% AT TOTAL COMPREHENSIVE
INCOME. Why? because NCI only has shares in S not P but TCI is a total of P+S. therefore it is a must to calculate
NCI separately.

Direct expense goes to pnl.

How to treat intra group transactions in SPL
deduct intra group from revenue figure
deduct it from COGS
Add PURP to COGS.
ASSOCIATE COMPANY
Associate: An entity over which an investor has significant influence, and which is neither a subsidiary nor an interest
in a joint venture.
Significant influence: - (More than 20% share but not more than 50% share)
Significant influence is the power to participate in the financial and operating policy decisions of an investee but is not
control or joint control over those policies.
The following are examples of significant influence: -
a) Representation on the board of directors of the investee
b) Participation in the policy making process
c) Material transactions between investor and investee
d) Interchange of management personnel
e) Provision of essential technical information

IAS 28 requires the use of the equity method of accounting for investments in associates.

Investment in Associate

The financial statements used to equity account for the associate should be drawn up to the investor’s reporting date.
If this is not possible, then the difference in reporting dates should be less than three months.
The associate's accounting policies should be harmonised with those of its investor.
The investor should disclose its share of the associate's contingencies.

Acquisition of a business
The acquisition method (consolidation) is applied when one entity obtains control over another entity that constitutes a
business.
→ if not business then it is known as the purchase of a financial asset.
BUSINESS MUST HAVE PROCESSES THAT ARE ABLE TO CONVERT ACQUIRED INPUTS INTO OUTPUTS.
IFRS 3- BUSINESS COMBINATION
Business anything that has some processes. input→ process→ output.
there is a potential.
1. Input out
2. business concentration test:
1. total asset- total liabilities.
2. most of the Fv of it is in asset then it is an asset
3. asset=ias16, company=ifrs 3
Acquirer
Criteria:
1. Has Control
2. transferred cash/ other kind of consideration.
3. The entity that issues Interest.
4. Dominate the combined entity
5. Largest voting rights
6. Bigger entity.
Assets n liabilities of S
• A N L should be recognised at FV @ DOA
• Recognise contingent liability even outflow is not probable
• Purchased goodwill in the s’s individual fs is not consolidated. This is becz it is not separated and it does not
arrive from legal and contractual rights.
Do not consolidate Goodwill (mostly taken from another consideration) n internally generated brand recorded by
subsidiary in their individual accounts. Means do not take old goodwill instead, calculate a new goodwill.
Acquisition Cost
AC are excluded from calculation of purchase consideration, like legal fees and so on.
Danger Items,
Contingent lia- CL is subtracted from consideration on both the dates (reporting, DO Acqui)
provision- is future losses.
internally generated brand
Goodwill: Subsidiary’s individual financial statements is not consolidated.
Provision:
ias 37- future operating loss- cannot create liability for this.
liability is an obligation, future losses cannot be avoided, that cannot be termed as liability.
Total Notional Goodwill.
Notional goodwill= Proportionate goodwill
Market participants do not consider the companies policy to measure goodwill at full or at partial price. 100% estimate
of goodwill.
so, while comparing CA and RA it is important to take calculate Notional goodwill.
Notional Goodwill = (Fair Value of Subsidiary) − (Fair Value of Net Assets)
Fair Value of Subsidiary can be calculated as:
Consideration Transferred
Parent’s Ownership %
Why is Notional Goodwill Important?
• It ensures consistency when comparing CA (Consideration Allocated) and RA (Recognized Amount of net
assets) across different companies.
• It removes the impact of whether a company uses Full Goodwill or Proportionate Goodwill.
• It provides a better market-based estimate of goodwill for valuation purposes.

Change in Group Structure → Step Acquisition n step disposal

• 0%-20% → IFRS 9 (Normal investment)
• 20%-50%- IAS 28 (associate)
• 51 %- 100%- IFRS 10 (Parent)

0%→ 51% = No control → control

51% → 100%= Control → control
No control → control = IAS 28 → IFRS 10
Tip: Deal with old standard and then go to new.

Goodbye rules
1. FV of our investment in associate → Derecognise the investment.
1. Gain n loss= expense= SPL.
2. Start consolidation- Prepare 5 working notes.
1. Goodwill
FV consideration of parent (% new)
FV of associate (had before %)
FV of NCI
Journal entry

W2 (FV of net assets). Journal Entry Step Disposal

Goodwill Dr NCI Dr 500 C→C
Investment in association Cr. OCE Dr 1000 (loss) IFRS 3 → IFRS 10
Control → Control Bank Cr 1500 Bank Dr
60% → 80% OCE Cr
 Already In IFRS 10. NCI cr

Accounting treatment ⇒ decrease in OCE CR

NCI.
Control → No control
IFRS 10 → IAS 28

Goodbye consolidation

Stop Consolidation.

Gain/Loss → Disposal

Types of Gains/losses
1. Individual Accounts
1. Proceeds vs Carrying amount
2. Bal fig (Gains/losses) → SPL

2. Group Accounts (Happy sad rule)

1. → FV of previously held interest

2. → NCI @ Date of disposal

3. → Losing Goodwill

4. → FV of Net asset

5. More = profit/ More = Loss

When NCI figure is not given then do a work around.

GROUP Foreign Exchange

IAS 21- Individual foreign exchange.
Balance sheet: divided into two categories. → Monetary n non-monetary.
Point: → Inventory is not monetary
Only assets n liabilities have subsequent treatment.
Monetary→ Closing rate
Non- monetary → Historic cost
Point: →Exchange different= Payable or receivable increased or decreased due to Fluctuations in the currency Value.
Point: → All monetary at the year-end is taken at closing rate.
Point: →Exchange difference goes to pnl.
Point: →Gain or loss from it is gone via pnl.
Group Concept:
Foreign Subsidiary
• If Autonomous
-Sub’ Functional currency - Primary economic
-Primary Factors:
Quote price
Direct cost
Competitive forces
-Secondary
Loans taken
Indirect cost

Point: → If Parent FC ≠ Subs FC ⇒ Convert (retranslation)

Assets | Liabilities ⇒ Closing rates.

Income | expense ⇒ Over the year. ⇒ Average Rate.

Working of Net Assets- Retranslate

Opening Net assets (Dinar) Opening Rate USD

Profit Average Rate USD

Closing net assets Closing Rate USD

Gain → Retranslation reserve → OCI

Retranslation reserve should be divided between Parent and NCI.

Goodwill:

Opening Goodwill Opening Rate USD

Impairment Average Rate USD

Closing Goodwill Closing Rate USD

Goodwill be divided?
If goodwill is calculated with

Fair value method

If proportionate
Consolidation→ Cash Flow Statements.
Two Methods:
• Direct Method (Small business)
• Indirect Method (Large)
INDIRECT METHOD
• Operating activities
• Investing activities
• Financing Activities.
• Cash FLOW Statement
If parent bought s and subs brought cash, then there is net cash out flow.
In disposal, s is leaving with cash, then there is net cash in-flow.

In case of acquisition of subsidiary, the opening balance does not have subsidiary’s working capital but closing
balance has subsidiary’s working capital. Therefore, to make opening balance and closing balance comparable, I will
adjust my opening balance.

Opening balance 200

Sub 125

Adjusted opening Bal 325

Actual cash outflow= Closing Bal - Adjusted Opening balance.

= 350-325= 25
Inventory 300 400
Disposed → 50
actual cash flow= 150
Because here the disposed is added to closing balance becz its already there in opening balance.

Cash Paid to NCI ⇒ Financing Activities

When a subsidiary that is not wholly owned pays a dividend, some of that dividend is paid outside of the group to
NCI.
Dividends paid to NCI is disclosed separately in the statement of cashflows.
NCI
DR CR

To G/W Impairment ↓ Bal B/D ↑

Dividend (Bal) share of profit in Subsidiary

To subs disposal. By forex retranslation reserve

To Bal c/d By subs Purchased

Associate

To Bal b/d to impairment of invest

To share of profit to sale of associate

to purchase of associate Dividend received

By Bal c/d