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Topic 1. Simple SFP illustrations

Illustration example 1:

H S
Investment in S 200
Other Net Assets 1 400 600

Share Capital 300 100
Retained Earnings 1 300 500

H acquired 85% of S 3 years ago when Ss reserves were 80.

FV of Ss net assets at the date of acquisition were 190.

The difference is due to PPE with 5 years EUL.

Goodwill impairment at the end of year is 4.

Proportionate NCI is used.

(TIP: Other Net Assets is actually ALL of the assets less the liabilities - netted into 1 figure)

Required:

Prepare group accounts.

STEP 1: Prepare equity table

At Year End At Acquisition Post-acquisition

Share Capital
Retained Earnings
PPE

Tip: Share capital at acquisition is always the same as share capital at year end

Tip: Year end figures come straight from the question

Tip: At acquisition Ss NA are shown at their full fair value. PPE is the balancing figure

Tip: Post acquisition for PPE is the accumulated depreciation since acquisition

Tip: Year end PPE is the At acquisition - post acquisition.

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STEP 2: Calculate G/W

FV of Consideration
Proportionate NCI
FV of NA acquired
G/W @ acquisition
Impairment
G/W @ Y/E

Tip: NCI is calculated as % of FV of NA acquired (as this is the proportionate method)

STEP 3: Calculate NCI

At Acquisition
+ post acquisition
At Y/E
Impairment attributable to NCI
Net NCI at Y/E

Tip: At acquisition NCI is always the same as NCI in GW working

Tip: NCI only ever gets impairment of goodwill when we use the Fair Value of NCI method - so
here the NCI impairment is 0. (We are using the proportionate method)

STEP 4: Calculate RE

H
S
G/W Impairment

Tip: We only include Hs share of Ss post acquisition

Tip: We include all the goodwill impaired here as none went to NCI (proportionate method)

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STEP 5: Prepare Group SFP

Goodwill
Other Net Assets

Share Capital
Retained Earnings
NCI

Tip: Dont forget to add on the FV adjustment to PPE in the Year-end equity table to Ss NA

Tip: Share capital & premium is always only Hs

Tip: Add across in full H and all of Ss Net Assets

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Illustration example 2:

H S
Investment in S 800
Other Net Assets 5 600 2 400

Share Capital 500 200
Retained Earnings 5 900 2 200

H acquired 75% of S 2 years ago when Ss reserves were 520.

FV of Ss net assets at the date of acquisition were 760.

The difference is due to PPE with 10 years EUL.

Goodwill impairment at the end of year is 25.

Proportionate NCI is used.

Required:

Prepare group accounts.

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Illustration example 3:

H S
Investment in S 200
Other Net Assets 1 400 600

Share Capital 300 100
Retained Earnings 1 300 500

H acquired 60% of S 3 years ago when Ss reserves were 80.

FV of Ss net assets at the date of acquisition were 190.

The difference is due to PPE with 5 years EUL.

Goodwill impairment at the end of year is 4.

FV of NCI is 32.

Required:

Prepare group accounts.

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Illustration example 4:

H S
Investment in S 1 200
Other Net Assets 8 400 3 600

Share Capital 800 400
Retained Earnings 8 800 3 200

H acquired 90% of S 4 years ago when Ss reserves were 680.

FV of Ss net assets at the date of acquisition were 1 140.

The difference is due to non-depreciable land.

Goodwill impairment at the end of year is 17.

FV of NCI is 127.

Required:

Prepare group accounts.

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Topic 2. Definition of a subsidiary

Consolidated financial statements:
The financial statements of a group presented as those of a single economic entity.

Subsidiary:
An entity that is controlled by another entity (known as the parent).

Parent:
An entity that has one or more subsidiaries

Control:
the power to govern the financial and operating policies of an entity so as to obtain benefits from its
activities

Q1. Control is presumed when the parent has 50% or more of _______ of the entity.

A. Voting rights
B. Profit

Topic 3. Business combination basics

Business combination is defined as a transaction or other event in which an acquirer obtains

control of one or more businesses.

Q1. Which of the following is an example of business combination?

A. Parent company acquiring a subsidiary

B. Formation of joint venture

Q2. When a business combination takes place, not only does the acquirer have to prepare its own
accounts but also _______. The purpose is to show the group as a _______ economic entity.

A. Subsidiarys accounts; complex

B. Consolidated accounts; single

Q3. Net assets of acquired entity are:

A. Equity of parent
B. Assets of parent
C. Equity of subsidiary
D. Assets of subsidiary less its current liabilities

Q4. Subsidiaries NA are brought into the group accounts at first at Fair Value?

A. No
B. Yes

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Q5. When calculating goodwill, _______ of net assets is used.

A. Fair value
B. Book value

Q6. Non-controlling interest (NCI) is defined as:

A. Percentage of control over a subsidiary not owned by parent company.

B. Marginal investments of parent

Q7. Non-controlling interest (NCI) is presented in _______ in the consolidated accounts.

A. Equity
B. Investments (Assets)

Q8. Non-controlling can be measured either at (select two):

A. Fair value
B. NCI proportionate share on net assets
C. Cost

Illustration example:
H S
Investment in S 700
Other Net Assets 4 900 2 100

Share Capital 200 100
Retained Earnings 5 400 2 000

H acquired 70% of S 2 years ago when Ss reserves were 530.

FV of Ss net assets at the date of acquisition were 665.

Q9. Book value of Ss net assets at year end is:

A. 2 100
B. 2 000

Q10. Fair value of Ss net assets at the date of acquisition is:

A. 530
B. 665

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Topic 4. Equity table

As you will see when we get on to doing bigger questions, this is always our first working. This is
because it helps all the other workings.

Remember that Equity = Net assets

Q1. When preparing equity table, it is the table of _______.

A. H company
B. S company

Q2. Equity table working is used for:

A. Calculation of figures useful for other workings as consolidated Retained Earnings or NCI
B. Calculation of consolidated Share capital

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Q3. Which of the following items go to equity table? Select one or more.

A. Share Capital
B. Share Premium
C. Retained Earnings
D. Revaluation Reserve
E. Long-term provision
F. Any other reserve

Q4. Equity = Net assets. True or false?

A. True
B. False

Topic 5. Simple goodwill and NCI

Goodwill
When a company buys another - it is not often that it does so at the fair value of the net assets
only.

This is because most businesses are more than just the sum total of their net assets on the SFP.

Customer base, reputation, workforce etc. are all part of the value of the company that is not
reflected in the accounts.

This is called goodwill.

Goodwill only occurs on a business combination.

Individual companies cannot show their individual goodwill on their SFPs.

This is because they cannot get a reliable measure, this is because nobody has purchased the
company to value the goodwill appropriately.

On a business combination the acquirer (Parent) purchases the subsidiary - normally at an amount
higher than the FV of the net assets on the SFP.

Goodwill workings:

FV of Consideration (What you paid) X

NCI X
FV of Net Assets @ Acquisition (X)
Goodwill X

Q1. Can Individual companies show their individual goodwill on their SFPs.?

A. Yes, it is if it is valued by valuation expert

B. No, it cannot be valued reliably
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Q2a. Goodwill is calculated as a difference between:

A. A consideration transferred plus NCI; and book value of net assets

B. A consideration transferred plus NCI, and fair value of net assets

Q2b. Company A acquired 100% of Company B.

The Fair Value of the net assets was 1,000.
However Company A bought the company B for 1.200.

So, Goodwill will be ____.

A. 200
B. 1,000

Q3. If goodwill is negative, it is

A. Recognised through Profit and loss statement immediately as a bargain purchase

B. Recognised in SFP and impaired to zero immediately

Q4. Goodwill is tested for impairment:

A. Annually
B. Only if there are any impairment indicators

Q5. NCI in goodwill calculation can be stated in (select one or more):

A. Proportion of FV of Ss Net Assets

B. Cost value of a subsidiary (investment)
C. FV of NCI itself

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Proportionate Method

This is very straight forward. All we do is give the NCI their share of FV of Ss Net Assets.

Q6. Company A acquired 70% of a subsidiary B for 1,500. Fair value of Bs net assets is 1,600,
proportionate NCI is used. Calculate goodwill at acquisition date.

A. 100
B. 380

Q7. At the end of year, company A has realised that goodwill should be impaired of 50. Calculate
goodwill at the end of year.

A. 150
B. 330

Q8. Under proportionate method, NCI is:

A. Not given any goodwill

B. Given proportionate goodwill

NCI was just given their share of Ss Net assets.

They were not given any of their reputation etc.

In other words, NCI were not given any goodwill.

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Q9. NCI is 20% of S and it is valued by proportionate method. At the end of 20X5 parent company
has calculated an impairment of goodwill of 10. The impairment is:

A. Fully attributable to parent (Dr: Income statement / R.E. 10; Cr: Goodwill 10)
B. Proportionally attributable also to NCI (Dr: Income statement / R.E. 8, Dr: NCI 2; Cr:
Goodwill 10)

Whereas, when using the FV method, NCI at acquisition is given a share of Ss NA and a
share of the goodwill

Q10. NCI is 20% of S and it is valued by fair value method. At the end of 20X5 parent company
has calculated an impairment of goodwill of 10. The impairment is:

A. Fully attributable to parent (Dr: Income statement /R.E. 10; Cr: Goodwill 10)
B. Proportionally attributable also to NCI (Dr: Income statement /R.E. 8, Dr: NCI 2; Cr:
Goodwill 10)

Topic 6. Reserves calculation

There could be many reserves (e.g. Retained Earnings, Revaluation Reserve etc.), however they
are all calculated the same way.

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Q1. Group reserves are in general calculated as:

A. Parent reserves (Holding company (H) + any reserves of subsidiary

B. Parent reserves (Holding company (H) + post-acquisition share on any gains or losses of
subsidiary

Q2. P acquired 80% S when Ps Retained earnings were 1,000 and Ss were 600. Now, Ps RE
are 1,400 and Ss RE are 700. What is the RE on group SFP now?

A. 1,480

B. 1,500

Q3. Impairment of goodwill _______ retained earnings.

A. Decreases

B. Increases

Q4. Effect of goodwill impairment to retained earnings depends on NCI valuation method. True or
false?

A. True

B. False

Effect of goodwill impairment to retained earnings:

1) Proportionate NCI method - this means that NCI has zero goodwill, so any goodwill impaired
all belongs to the parent and so 100% is taken to RE

2) FV method - Here NCI is given a share of NCI, so also takes a share of the impairment.
Therefore the group only gets its share of the impairment in RE (eg 80%) and NCI gets 20%

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Extract from past exam question (Q1 note i) - June 2009)

Required:

Prepare Equity table, Calculate G/W, NCI and Retained Earnings and OCE for the Group. (Ignore
Mixted)

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