GREAT ZIMBABWE UNIVERSITY

MUNHUMUTAPA SCHOOL OF COMMERCE

DEPARTMENT OF ACCOUNTING & IS
COURSE TITLE: APPLIED GROUP FINANCIAL REPORTING/ADVANCED GROUP FINANCIAL REPORTING
COURSE CODE: MAAC521/MPAC530

1 Business combinations achieved in stages

Business combinations achieved in stages (piecemeal acquisitions) can lead to a company becoming an
investment in equity instruments, an associate and then a subsidiary over time.

NB: You may sometimes see the term ‘trade investment’ or just ‘financial asset’ instead of 'investment in
equity instruments'. The main point to note is that the investment is not an associate or a subsidiary. A
parent company may acquire a controlling interest in the shares of a subsidiary as a result of several
successive share purchases, rather than by purchasing the shares all on the same day. Business
combinations achieved in stages may also be known as 'piecemeal acquisitions'.

1.1 Types of business combination achieved in stages

There are three possible types of business combinations achieved in stages:

(a) A previously held interest, say 10%, with no significant influence (accounted for under IFRS 9) is
increased to a controlling interest of 50% or more.

(b) A previously held equity interest, say 35%, accounted for as an associate under IAS 28, is increased to
a controlling interest of 50% or more.

(c) A controlling interest in a subsidiary is increased, say from 60% to 80%.

The first two transactions are treated in the same way, but the third is not. There is a reason for this.

1.2 General principle: 'Crossing an accounting boundary'

Under the revised IFRS 3 a business combination occurs only when one entity obtains control over
another, which is generally when 50% or more has been acquired. The Deloitte guide: Business
Combinations and Changes in Ownership interests calls this 'crossing an accounting boundary'.

When this happens, the original investment – whether an investment in equity instruments with no
significant influence, or an associate – is treated as if it were disposed of at fair value and re-acquired at
fair value. This previously held interest at fair value, together with any consideration transferred, is the
'cost' of the combination used in calculating the goodwill.

If the 50% boundary is not crossed, as when the interest in a subsidiary is increased, the event is treated
as a transaction between owners.

NB: Whenever you cross the 50% boundary, you revalue, and a gain or loss is reported in profit or loss
for the year. If you do not cross the 50% boundary, no gain or loss is reported; instead there is an
adjustment to the parent's equity.

Page 1 of 25
1.3 Investment or associate becomes a subsidiary: calculation of goodwill
The previously held investment is re-measured to fair value, with any gain being reported in profit or
loss, and the goodwill calculated as follows.

Consideration transferred X
Non-controlling interest (at %FV of new assets or 'full' FV) X
Fair value of acquirer's previously held equity interest X
Less net fair value of identifiable assets acquired and liabilities assumed (X)
X

NB: The gain or loss is recognised in profit or loss unless the equity interest previously held was an
investment in equity instruments and an irrevocable election was made to hold the investment at fair
value through other comprehensive income. In the latter case, in accordance with IFRS 9 (revised
October 2010), the gain on derecognition of the investment is taken to other comprehensive income, or,
in the SOFP, other components of equity.

1.3.1 Analogy: trading in a small car for a larger one

It may seem counter-intuitive that the previous investment is now part of the 'cost' for the purposes of
calculating the goodwill. One way of looking at it is to imagine that you are part-exchanging a small car
for a larger one. The value of the car you trade in is put towards the cost of the new vehicle, together
with your cash (the 'consideration transferred'). Likewise, the company making the acquisition has part-
exchanged its smaller investment – at fair value – for a larger one, and must naturally pay on top of that
to obtain the larger investment.
This analogy is not exact, but may help.

Try the following question to get the hang of the calculation of goodwill and profit on de-recognition of
the investment.

Question – Piecemeal acquisition

Good, whose year end is 30 June 20X9 has a subsidiary, Will, which it acquired in stages. The details
of the acquisition are as follows.
Holding Retained earnings Purchase
Date of acquisition acquired at acquisition consideration
% $m $m
1 July 20X7 20 270 120
1 July 20X8 60 450 480

The share capital of Will has remained unchanged since its incorporation at $300m. The fair values of the
net assets of Will were the same as their carrying amounts at the date of the acquisition. Good did not
have significant influence over Will at any time before gaining control of Will. The group policy is to
measure non-controlling interest at its proportionate share of the fair value of the subsidiary's
identifiable net assets.

Required
(a) Calculate the goodwill on the acquisition of Will that will appear in the consolidated statement of
financial position at 30 June 20X9.
(b) Calculate the profit on the derecognition of any previously held investment in Will to be reported in
group profit or loss for the year ended 30 June 20X9.

Page 2 of 25
Answer
(
a
Goodwill) (at date control obtained)
$m $m
Consideration transferred 480
NCI (20% 750) 150
Fair value of previously held equity interest ($480m × 20/60) 160
Fair value of identifiable assets acquired and liabilities
assumed
Share capital 300
Retained earnings 450
(750)
40
1.4 Comprehensive example: Acquisition of a subsidiary in stages

Oscar acquired 25% of Tigger on 1 January 20X1 for $2,020,000 and exercised significant influence over
the financial and operating policy decisions of Tigger. The fair value of Tigger's identifiable assets and
liabilities at that date was equivalent to their book value, and Tigger's reserves stood at $5,800,000.
A further 35% stake in Tigger was acquired on 30 September 20X2 for $4,200,000 (paying a premium
over Tigger's market share price to achieve control). The fair value of Tigger's identifiable assets and
liabilities at that date was $9,200,000, and Tigger's reserves stood at $7,800,000. At 30 September 20X2,
Tigger's share price was $14.50.

Summarised statements of financial position of the two companies at 31 December 20X2 show:
Oscar Tigger
$'000 $'000
Non-current assets
Property, plant and equipment 38,650 7,600
Investment in Tigger (cost) 6,220 –
44,870 7,600
Current assets 12,700 2,200
57,570 9,800
Equity
Share capital ($1 shares) 10,200 800
Reserves 39,920 7,900
50,120 8,700
Liabilities 7,450 1,100
57,570 9,800

Summarised statements of profit or loss and other comprehensive income for the year to 31 December 20X2:
Oscar Tigger
$'000 $'000
Revenue 10,200 4,000
Cost of sales and expenses (9,000) (3,600)
Profit before tax 1,200 400
Income tax expense (360) (80)
Profit for the year 840 320
Other comprehensive income:
Items that will not be reclassified to profit or loss:
Gain on property valuation, net of tax 240 80
Other comprehensive income for the year, net of tax 240 80
Total comprehensive income for the year 1,080 400
Page 3 of 25
The difference between the fair value of the identifiable assets and liabilities of Tigger and their book
value relates to Tigger's brands. The brands were estimated to have an average remaining useful life of 5
years from 30 September 20X2.
Income and expenses are assumed to accrue evenly over the year. Neither company paid dividends
during the year.
Oscar elected to measure non-controlling interests at the date of acquisition at fair value. No
impairment losses on recognised goodwill have been necessary to date.

Required
Prepare the consolidated statement of financial position as at 31 December 20X2 and the consolidated
statement of profit or loss and other comprehensive income of the Oscar Group for the year ended 31
December 20X2.

Solution

OSCAR GROUP
CONSOLIDATED STATEMENT OF FINANCIAL POSITION AS AT 31 DECEMBER 20X2
$'000
Non-current assets
Property, plant and equipment (38,650 + 7,600) 46,250
Goodwill (W2) 2,540
Other intangible assets (W6) 570
49,360
Current assets (12,700 + 2,200) 14,900
64,260
Equity attributable to owners of the parent
Share capital 10,200
Reserves (W3) 40,842
51,042
Non-controlling interests (W4) 4,668
55,710
Liabilities (7,450 + 1,100) 8,550
64,260
OSCAR GROUP
CONSOLIDATED STATEMENT OF PROFIT OR LOSS AND OTHER COMPREHENSIVE INCOME
FOR THE YEAR ENDED 31 DECEMBER 20X2
$'000
Revenue (10,200 + (4,000  3/12)) 11,200
Cost of sales and expenses (9,000 + (3,600  3/12) + (W5) 30) (9,930)
Profit on derecognition of associate (W7) 380
Share of profit of associate (320  9/12 25%) 60
Profit before tax 1,710
Income tax expense (360 + (80 3/12)) (380)
Profit for the year 1,330
Other comprehensive income:
Items that will not be reclassified to profit or loss:
Gains on property revaluation, net of tax (240 + (80  3/12)) 260
Share of gain on property revaluation of associate (80  9/12 25%) 15
Other comprehensive income for the year, net of tax 275
Total comprehensive income for the year 1,605

Profit attributable to:

Owners of parent 1,310
Non-controlling interests (W5) 20
1,330
Page 4 of 25
Total comprehensive income attributable to:
Owners of parent 1,577
Non-controlling interests (W5) 28
1,605

Workings
1 Group structure
Oscar
1.1.20X1 30.9.20X2
25% + 35% = 60%
Cost $2.02m $4.2m
Pre-acq'n reserves $5.8m $7.8m

Tigger

Timeline

1.1.20X2 30.9.20X2 31.12.20X

SPLOCI
Associate – Equity account  9/12 Consolidate
 3/12

Had 25% Acquired 35% Consol in

associate 25% + 35% SOFP with
40% NCI
= 60% Subsidiary

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2 Goodwill
$'000 $'000
Consideration transferred 4,200
Non-controlling interests (800,000  40% $14.50) 4,640
FV of P's previously held equity interest (800,000 25% $14.50) 2,900
Fair value of identifiable assets
acq'd & liabilities assumed at acq'n:
Share capital 800
Reserves (W1) 7,800
Fair value adjustments (W6) 600
(9,200)
2,540

3 Consolidated reserves
Oscar Tigger Tigger
25% 60%
$'000 $'000 $'000
Per question/at date control obtained 39,920 7,800 7,900
Fair value movement (W6) (30)
Profit on derecognition of investment (W7) 380
Reserves at acquisition (W1) (5,800) (7,800)
2,000 70
Group share of post-acquisition reserves:
Tigger – 25% (2,000  25%) 500
– 60% (70  60%) 42
40,842

4 Non-controlling interests (SOFP)

$'000
NCI at acquisition (W2) 4,640
NCI share of reserves post control:
Tigger – 40% ((W3) 70  40%) 28
4,668

5 Non-controlling interests (SPLOCI)

PFY TCI
$'000 $'000
Per question (320 3/12)/(400 3/12) 80 100
Fair value movement in year (W6) (30) (30)
50 70
40% 20 28

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6 Fair value adjustments
Measured at date control achieved (only)
At Movement At year end
acquisition
30.9.20X2 31.12.20X2
$'000 $'000 $'000
Brand (9,200 – (800 + 7,800)) 600 (30)* 570

* $600,000/5 years x 3/12 Goodwill (W2) Expenses Intangibles

/reserves (W3)

Page 7 of 25
7 Profit on derecognition of 25% associate
$'000
Fair value at date control obtained (800,000 x 25% x $14.50) 2,900
Carrying amount of associate (2,020 cost + (W3) 500) (2,520)
380

2 Acquisitions and disposals where control is retained

An increase or decrease in controlling interest where control is retained is accounted for
under the revised IFRS 3 as a transaction between owners. The difference between the
consideration and the change in non-controlling interests is shown as an adjustment to
parent’s equity.
NB: The non-controlling interest decreases with an acquisition where control is retained and
increases with a disposal where control is retained.

2.1 Increase in previously held controlling interest: adjustment to parent's

equity

An example of this would be where an investment goes from a 60% subsidiary to an 80%
subsidiary.

Where the controlling interest increases from 60% to 80%, the 50% threshold has not been
crossed, so there is no re-measurement to fair value and no gain or loss to profit or loss for
the year. The increase is treated as a transaction between owners. As with disposals,
ownership has been reallocated between parent and non-controlling shareholders.
Accordingly the parent's equity is adjusted. The required adjustment is calculated by
comparing the consideration paid with the decrease in non-controlling interest. (As the
parent's share has increased, the NCI share has decreased.)
The calculation is as follows.
$
Fair value of consideration paid (X)
Decrease in NCI in net assets at date of transaction X
Decrease in NCI in goodwill at date of transaction* X
Adjustment to parent's equity (X)

*Note. This line is only required where non-controlling interests are measured at fair value
at the date of acquisition (i.e. where there is a decrease in the non-controlling interest share
of goodwill already recognised).

The increase in shareholding is treated as a transaction between owners, because revised

IFRS 3 views the group as an economic entity, and views all providers of equity, including
non-controlling interests, as owners of the group.

Page 8 of 25
2.2 Example: Increase in previously held controlling interest: adjustment to
parent's equity

The facts are the same as in Example 1.4 above. Show the consolidated current assets, non-
controlling interests and reserves figures if Oscar acquired an additional 10% interest in
Tigger on 31 December 20X2 for $1,200,000.

Solution

$'000
Current assets (14,900 – 1,200) 13,700

Non-controlling interests
$'000
NCI at acquisition: Para 1.4 (W4) 4,640
NCI share of reserves post control:
Tigger – 40% (Para 1.4 (W3) 70  40%) 28
4,668
Decrease in NCI (W) (1,167)
3,501

Consolidated reserves
$'000
Per Paragraph 1.4 (W3) 40,842
Adjustment to parent's equity on acq'n of 10% (W) (33)
40,809

Note. No other figures in the statement of financial position are affected.

Working: adjustment to parent's equity on acquisition of additional 10% of Tigger
$'000
Fair value of consideration paid (1,200)
Decrease in NCI in net assets and goodwill* (4,668 above  10%/40%) 1,167
(33)

$'000 $'000
DEBIT Non-controlling interests 1,167
DEBIT Parent's equity (difference) 33
CREDIT Cash 1,200

*Note. An adjustment to the non-controlling interests in goodwill (i.e. a reallocation

between the group and non-controlling interests) only occurs when it is group policy to
measure NCI at fair value at the date of acquisition, which is the case here. In such cases,
the NCI share of the goodwill is automatically included in the NCI figure used for the
adjustment.

Page 9 of 25
2.3 Disposals where control is retained
Control is retained where the disposal is from subsidiary to subsidiary, e.g. going from 80%
to 60%. Again, the difference between the consideration and the change in non-controlling
interests is shown as an adjustment to parent’s equity. This is covered in Section 3 below.

3 Disposals
Disposals can drop a subsidiary holding to associate status, long-term investment status and
to zero, or a parent might still retain a subsidiary with a reduced holding. Once again, you
should be able to deal with all these situations. Remember particularly how to deal with
goodwill.

Disposals of shares in a subsidiary may or may not result in a loss of control. If control is lost,
then any remaining investment will need to be re-categorised as an associate or an
investment in equity instruments.

NB: Disposals are in many ways a mirror image of business combinations achieved in stages.
The same principles underlie both.

3.1 Types of disposal

3.1.1 Disposals where control is lost

There are three main kinds of disposals in which control is lost:

(a) Full disposal: all the holding is sold (say, 80% to nil)

(b) Subsidiary to associate (say, 80% to 30%)

(c) Subsidiary to trade investment (say, 80% to 10%)

In your exam, you are most likely to meet a partial disposal, either subsidiary to associate or
subsidiary to trade investment.

3.1.2 Disposals where control is retained

There is only one kind of disposal where control is retained: subsidiary to subsidiary, for
example an 80% holding to a 60% holding.

Disposals where control is lost are treated differently from disposals where control is
retained. There is a reason for this.

3.2 General principle: 'crossing an accounting boundary'

Under IFRS 3 (revised) a gain on disposal occurs only when one entity loses control over
another, which is generally when its holding is decreased to less than 50%. The Deloitte

Page 10 of 25
guide: Business Combinations and Changes in Ownership Interests calls this 'crossing an
accounting boundary'.

On disposal of a controlling interest, any retained interest (an associate or trade investment)
is measured at fair value on the date that control is lost. This fair value is used in the
calculation of the gain or loss on disposal, and also becomes the carrying amount for
subsequent accounting for the retained interest.

If the 50% boundary is not crossed, as when the interest in a subsidiary is reduced, the
event is treated as a transaction between owners.

Whenever you cross the 50% boundary, you revalue, and a gain or loss is reported in profit
or loss for the year. If you do not cross the 50% boundary, no gain or loss is reported;
instead there is an adjustment to the parent's equity.

3.3 Effective date of disposal

The effective date of disposal is when control passes: the date for accounting for an
undertaking ceasing to be a subsidiary undertaking is the date on which its former parent
undertaking relinquishes its control over that undertaking. The consolidated statement of
profit or loss and other comprehensive income should include the results of a subsidiary
undertaking up to the date of its disposal. IAS 37 on provisions and IFRS 5 on disclosure of
discontinued operations will have an impact.

3.4 Control lost: calculation of group gain on disposal

A pro-forma calculation is shown below. This needs to be adapted for the circumstances in
the question, in particular whether it is a full or partial disposal:

$ $
Fair value of consideration received X
Fair value of any investment retained X
Less: share of consolidated carrying value at date control lost:
net assets X
goodwill X
less non-controlling interests (X)
(X)
Group profit/(loss) X/(X)

NB: Following IAS 1, this gain may need to be disclosed separately if it is material.

3.4.1 Analogy: trading in a large car for a smaller one

It may seem counter-intuitive that the investment retained is now part of the 'proceeds' for
the purposes of calculating the gain. One way of looking at it is to imagine that you are
selling a larger car and putting part of the proceeds towards a smaller one. If the larger car
you are selling cost you less than the smaller car and cash combined, you have made a

Page 11 of 25
profit. Likewise, the company making the disposal sold a larger stake to gain, at fair value, a
smaller stake and some cash on top, which is the 'consideration received'.

This analogy is not exact, but may help.

3.5 Calculation of gain in parent's separate financial statements

This calculation is more straightforward: the proceeds are compared with the carrying value
of the investment sold. The investment will be held at cost or at fair value if held as an
investment in equity instruments:

$
Fair value of consideration received X
Less carrying value of investment disposed of (X)
Profit/(loss) on disposal X/(X)

The profit on disposal is generally taxable, and the tax based on the parent's gain rather
than the group's will also need to be recognised in the consolidated financial statements.

3.6 Disposals where control is lost: accounting treatment

For a full disposal, apply the following treatment.

(a) Statement of profit or loss and other comprehensive income

(i) Consolidate results and non-controlling interest to the date of disposal.
(ii) Show the group profit or loss on disposal.

(b) Statement of financial position

There will be no non-controlling interest and no consolidation as there is a subsidiary at thedate the
statement of financial position is being prepared.

For partial disposals, use the following treatments.

(a) Subsidiary to associate

(i) Statement of profit or loss and other comprehensive income
(1) Treat the undertaking as a subsidiary up to the date of disposal, i.e.
consolidate for the correct number of months and show the non-controlling
interest in that amount.
(2) Show the profit or loss on disposal.
(3) Treat as an associate thereafter.
(ii) Statement of financial position
(1) The investment remaining is at its fair value at the date of disposal (to
calculate the gain)
(2) Equity account (as an associate) thereafter, using the fair value as the new
'cost'.
(Post-'acquisition' retained earnings are added to this cost in future years to arrive at
the carrying value of the investment in the associate in the statement of financial
position.)

Page 12 of 25
(b) Subsidiary to trade investment/IEI

(i) Statement of profit or loss and other comprehensive income

(1) Treat the undertaking as a subsidiary up to the date of disposal, ie consolidate.
(2) Show profit or loss on disposal.
(3) Show dividend income only thereafter.
(ii) Statement of financial position
(1) The investment remaining is at its fair value at the date of disposal (to calculate the gain).
(2) Thereafter, treat as an investment in equity instruments under IFRS 9.

3.7 Disposals where control is retained

Control is retained where the disposal is from subsidiary to subsidiary. The accounting
treatment is as follows.

3.7.1 Statement of profit or loss and other comprehensive income

(a) The subsidiary is consolidated in full for the whole period.
(b) The non-controlling interest in the statement of profit or loss will be based on
percentage before and after disposal, i.e. time apportion.
(c) There is no profit or loss on disposal.

3.7.2 Statement of financial position

(a) The non-controlling interest in the statement of financial position is based on the year
end percentage.
(b) The change (increase) in non-controlling interests is shown as an adjustment to the
parent's equity.
(c) Goodwill on acquisition is unchanged in the consolidated statement of financial position.

3.7.3 Adjustment to the parent's equity

This reflects the fact that the non-controlling share has increased (as the parent's share has
reduced). A subsidiary to subsidiary disposal is, in effect, a transaction between owners.
Specifically, it is a reallocation of ownership between parent and non-controlling equity
holders. The goodwill is unchanged, because it is a historical figure, unaffected by the
reallocation. The adjustment to the parent's equity is calculated as follows.
$
Fair value of consideration received X
Increase in NCI in net assets at disposal (X)
Increase in NCI in goodwill at disposal * (X)
Adjustment to parent's equity X

*Note. This line is only required where non-controlling interests are measured at fair value
at the date of acquisition (i.e. where there is an increase in the non-controlling interest
share of goodwill already recognised).

Page 13 of 25
3.8 Example: Partial disposals

Chalk Co bought 100% of the voting share capital of Cheese Co on its incorporation on 1
January 20X2 for $160,000. Cheese Co earned and retained $240,000 from that date until 31
December 20X7. At that date the statements of financial position of the company and the
group were as follows.

Chalk Co Cheese Co Consolidated

$'000 $'000 $'000
Investment in Cheese 160 – –
Other assets 1,000 500 1,500
1,160 500 1,500
Share capital 400 160 400
Retained earnings 560 240 800
Current liabilities 200 100 300
1,160 500 1,500

It is the group's policy to value the non-controlling interest at its proportionate share of the
fair value of the subsidiary's identifiable net assets.
On 1 January 20X8 Chalk Co sold 40% of its shareholding in Cheese Co for $280,000. The
profit on disposal (ignoring tax) in the financial statements of the parent company is
calculated as follows.

Chalk
$'000
Fair value of consideration received 280
Carrying value of investment (40% X 160) 64
Profit on sale 216

We now move on to calculate the adjustment to equity for the group financial statements.
Because only 40% of the 100% subsidiary has been sold, leaving a 60% subsidiary, control is
retained.
This means that there is no group profit on disposal in profit or loss for the year. Instead,
there is an adjustment to the parent's equity, which affects group retained earnings.

NB: Remember that, when control is retained, the disposal is just a transaction between
owners. The non-controlling shareholders are owners of the group, just like the parent.

The adjustment to parent's equity is calculated as follows.

$'000
Fair value of consideration received 280
Increase in non-controlling interest in net
assets at the date of disposal (40% X 400) 160
Adjustment to parent's equity 120

This increases group retained earnings and does not go through group profit or loss for the
year. (Note that there is no goodwill in this example, or non-controlling interest in goodwill,
as the subsidiary was acquired on incorporation.)

Page 14 of 25
Solution: Subsidiary status
The statements of financial position immediately after the sale will appear as follows.
Chalk Co Cheese Co Consolidated
$'000 $'000 $'000
Investment in Cheese (160-64) 96
Other assets 1,280 500 1,780
1,376 500 1,780
Share capital 400 160 400
Retained earnings* 776 240 920
Current liabilities 200 100 300
1,376 500 1,620
Non-controlling interest 160
1,780

*Chalk's retained earnings are $560,000 + $216,000 profit on disposal. Group retained
earnings are increased by the adjustment above: $800,000 + $120,000 = $920,000.

Solution: Associate status

Using the above example, assume that Chalk Co sold 60% of its holding in Cheese Co for
$440,000.
The fair value of the 40% holding retained was $200,000. The gain or loss on disposal in the
books of the parent company would be calculated as follows.
Parent company
$'000
Fair value of consideration received 440
Carrying value of investment (60%  160) (96)
Profit on sale 344
This time control is lost, so there will be a gain in group profit or loss, calculated as follows.

$'000
Fair value of consideration received 440
Fair value of investment retained 200
Less Chalk's share of consolidated carrying
value at date control lost 100%  400 (400)
Group profit on sale 240

Note that there was no goodwill arising on the acquisition of Cheese, otherwise this too
would be deducted in the calculation.

The statements of financial position would now appear as follows.

Chalk Co Cheese Co Consolidated

$'000 $'000 $'000
Investment in Cheese (Note 1) 64 200
Other assets 1,440 500 1,440
1,504 500 1,640
Share capital 400 160 400
Retained earnings (Note 2) 904 240 1,040
Current liabilities 200 100 200
1,504 500 1,640

Page 15 of 25
Notes

1. The investment in Cheese is at fair value in the group SOFP. In fact it is equity
accounted at fair value at date control lost plus share of post-'acquisition' retained
earnings. But there are no retained earnings yet because control has only just been
lost.
2. Group retained earnings are $800,000 (per question) plus group profit on the sale of
$240,000, i.e. $1,040,000.

QUESTION

Smith Co bought 80% of the share capital of Jones Co for $324,000 on 1 October 20X5. At
that date Jones Co's retained earnings balance stood at $180,000. The statements of
financial position at 30 September 20X8 and the summarised statements of profit or loss to
that date are given below. (There is no other comprehensive income.)

Smith Co Jones Co
$'000 $'000
Non-current assets 360 270
Investment in Jones Co 324 –
Current assets 370 370
1,054 640
Equity
$1 ordinary shares 540 180
Retained earnings 414 360
Current liabilities 100 100
1,054 640
Profit before tax 153 126
Tax (45) (36)
Profit for the year 108 90

No entries have been made in the accounts for any of the following transactions.

Assume that profits accrue evenly throughout the year.

It is the group's policy to value the non-controlling interest at its proportionate share of the
fair value of the subsidiary's identifiable net assets.

Ignore taxation.

Required

Prepare the consolidated statement of financial position and statement of profit or loss at
30 September 20X8 in each of the following circumstances. (Assume no impairment of
goodwill.)

Page 16 of 25
(a) Smith Co sells its entire holding in Jones Co for $650,000 on 30 September 20X8.

(b) Smith Co sells one quarter of its holding in Jones Co for $160,000 on 30 June 20X8.

(c) Smith Co sells one half of its holding in Jones Co for $340,000 on 30 June 20X8, and the
remaining holding (fair value $250,000) is to be dealt with as an associate.

(d) Smith Co sells one half of its holding in Jones Co for $340,000 on 30 June 20X8, and the
remaining holding (fair value $250,000) is to be dealt with as an investment in equity
instruments.

Answer

(a) Complete disposal at year end (80% to 0%)

CONSOLIDATED STATEMENT OF FINANCIAL POSITION AS AT 30 SEPTEMBER 20X8

$'000
Non-current assets 360
Current assets (370 + 650) 1,020
1,380
$'000
Equity
$1 ordinary shares 540
Retained earnings (W3) 740
Current liabilities 100
1,380

CONSOLIDATED STATEMENT OF PROFIT OR LOSS FOR THE YEAR ENDED 30 SEPTEMBER 20X8
$'000
Profit before tax (153 + 126) 279
Profit on disposal (W2) 182
Tax (45 + 36) (81)
380
Profit attributable to:
Owners of the parent 362
Non-controlling interest (20%  90) 18
380

Page 17 of 25
 Workings
1 Timeline

2 Profit on disposal of Jones Co

$'000 $'000
Fair value of consideration received 650
Less share of consolidated carrying value when control lost:
net assets 540
goodwill 36
non-controlling interest: 20%  540 (108)
(468)
182
Note: goodwill
$'000
Consideration transferred 324
NCI (20% 360) 72
Acquired: (180 + 180) (360)
36
3 Retained earnings carried forward
Smith
$'000
Per question/date of disposal 414
Add group gain on disposal (W2) 182
Reserves at acquisition –

Share of post-acq'n reserves up to the disposal (80% 180) 144

740
(b) Partial disposal: subsidiary to subsidiary (80% to 60%)
CONSOLIDATED STATEMENT OF FINANCIAL POSITION AS AT 30 SEPTEMBER 20X8
$'000
Non-current assets (360 + 270) 630
Goodwill (part (a)) 36
Current assets (370 + 160 + 370) 900
1,566
Equity
$1 ordinary shares 540
Retained earnings (W2) 610
1,150
Non-controlling interest (W4) 216
Current liabilities (100 + 100) 200
1,566

CONSOLIDATED STATEMENT OF PROFIT OR LOSS FOR THE YEAR ENDED 30 SEPTEMBER 20X8
$'000 $'000
Profit before tax (153 +126) 279
Tax (45 + 36) (81)
Profit for the period 198
Profit attributable to:

Page 18 of 25
Owners of the parent 175.5
Non-controlling interest
20% x 90 x 9/12 13.5
40% x 90 x 3/12 9.0
22.5
198.0

Workings
1 Timeline

2 Adjustment to parent’s equity on disposal of 20% of Jones

$'000 $'000
Fair value of consideration received 160.0
Less increase in NCI in net assets at disposal
20%  (540 – (3/1290)) (103.5)
56.5

3 Group retained earnings

Smith Jones Jones
80% 60% retained
$'000 $'000 $'000
Per question/at date of disposal
(360 – (90 3/12)) 414.0 337.5 360.0
Adjustment to parent's equity on disposal (W2) 56.5
Retained earnings at acquisition (180.0) (337.5)
157.5 22.5
Jones: share of post acq'n. earnings
(157.5 80%) 126.0
Jones: share of post acq'n. earnings
(22.5  60%) 13.5
610.0

4 Non-controlling interests (SOFP)

$'000 $'000
NCI at acquisition (part (a) – goodwill) 72.0
NCI share of post acq'n reserves (W3) (157.5 20%) 31.5
103.5
(22.5  40%) 9.0
112.5
Increase in NCI (W3) 103.5
216.0

(c) Partial disposal: subsidiary to associate (80% to 40%)

CONSOLIDATED STATEMENT OF FINANCIAL POSITION AS AT 30 SEPTEMBER 20X8

$'000
Non-current assets 360
Investment in associate (W4) 259
Current assets (370 + 340) 710
1,329
Equity

Page 19 of 25
$1 ordinary shares 540
Retained earnings (W3) 689
Current liabilities 100
1,329

CONSOLIDATED STATEMENT OF PROFIT OR LOSS FOR THE YEAR ENDED 30 SEPTEMBER 20X8
$'000
Profit before tax (153 + 9/12  126) 247.5
Profit on disposal (W2) 140.0
Share of profit of associate (90 3/12  40%) 9.0
Tax 45 + (9/12 36) (72.0)
Profit for the period 324.5
Profit attributable to:
Owners of the parent 311.0
Non-controlling interest (20%  90 9/12) 13.5
324.5
Workings
1 Timeline

2 Profit on disposal in Smith Co

$'000 $'000
Fair value of consideration received 340
Fair value of 40% investment retained 250

Less share of consolidated carrying value when control lost

540 – (90  3/12) 517.5
Goodwill (part (a)) 36.0
Less NCI 20%  ((540 – (90 3/12)) (103.5)
(450)
140

3 Group retained earnings

Smith Jones Jones
80%(sub) 40% retained
(assoc.)
$'000 $'000 $'000
Per question/at date of disposal
(360 – (90  3/12)) 414 337.5 360
Group profit on disposal (W2) 140
Retained earnings at acquisition/date control lost (180) (337.5)
157.5 22.5
Jones: share of post acqn. earnings
(157.5 80%) 126
Jones: share of post acqn. earnings
(22.5  40%) 9
689

4 Investment in associate
$'000
Fair value at date control lost (new ‘cost’) 250
Share of post ‘acq'n’ retained reserves (90  3/12 40%) (or from W3) 9
259

Page 20 of 25
(d) Partial disposal: subsidiary to investment in equity instruments (80% to
40%)
CONSOLIDATED STATEMENT OF FINANCIAL POSITION AS AT 30 SEPTEMBER 20X8

$'000
Non-current assets 360
Investment 250
Current assets (370 + 340) 710
1,320
Equity
$1 ordinary shares 540
Retained earnings (W2) 680
Current liabilities 100
1,320
CONSOLIDATED STATEMENT OF PROFIT OR LOSS FOR THE YEAR ENDED 30 SEPTEMBER 20X8

$'000
Profit before tax (153 + (9/12  126) 247.5
Profit on disposal (See (c) above) 140.0
Tax (45 + (9/12  36)) (72.0)
Profit for the period 315.5
Profit attributable to:
Owners of the parent 302.0
Non-controlling interest 13.5
315.5
Workings

1 Timeline

2 Retained earnings
Smith Jones
$'000 $'000
Per question/at date of disposal (360 – (90  3/12)) 414 337.5
Group profit on disposal (see (c) above) 140
Retained earnings at acquisition (180.0)
157.5
Jones: share of post acq'n. earnings (157.5  80%) 126
680

4 Changes in direct ownership

Changes in direct ownership (ie internal group reorganisations) can take many forms. Apart
from divisionalisation, all other internal reorganisations will not affect the consolidated
financial statements, but they will affect the accounts of individual companies within the
group.

Groups will reorganise on occasions for a variety of reasons.

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(a) A group may want to float a business to reduce the gearing of the group. The holding
company will initially transfer the business into a separate company.

(b) Companies may be transferred to another business during a divisionalisation process.

(c) The group may 'reverse' into another company to obtain a stock exchange quotation.

(d) Internal reorganisations may create efficiencies of group structure for tax purposes.

Such reorganisations involve a restructuring of the relationships within a group. Companies

may be transferred to another business during a divisionalisation process. There is generally
no effect on the consolidated financial statements, provided that no non-controlling
interests are affected, because such reorganisations are only internal. The impact on the
individual companies within the group, however, can be substantial. A variety of different
transactions are described here, only involving 100% subsidiaries.

4.1 New top parent company

A new top holding company might be needed as a vehicle for flotation or to improve the co-
ordination of a diverse business. The new company, P, will issue its own shares to the
holders of the shares in S.

Before shareholders After shareholders

P

S H

4.2 Subsidiary moved up

This transaction is shown in the diagram below. It might be carried out to allow S1 to be sold
while S2 is retained, or to split diverse businesses.

Before After P

P P

S1 S1 S2

S2

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S1 could transfer its investment in S2 to P as a dividend in specie or by P paying cash. A
share for share exchange is not possible because an allotment by P to S1 is void. A dividend
in specie is simply a dividend paid other than in cash.

S1 must have sufficient distributable profits for a dividend in specie. If the investment in S2
has been revalued then that can be treated as a realised profit for the purposes of
determining the legality of the distribution. For example, suppose the statement of financial
position of S1 is as follows.

$m
Investment in S2 (cost $100m) 900
Other net assets 100
1,000

Share capital 100

Revaluation surplus 800
Retained earnings 100
1,000
It appears that S1 cannot make a distribution of more than $100m. If, however, S1 makes a
distribution in kind of its investment in S2, then the revaluation surplus can be treated as
realised.

It is not clear how P should account for the transaction. The carrying value to S2 might be
used, but there may be no legal rule. P will need to write down its investment in S1 at the
same time. A transfer for cash is probably easiest, but there are still legal pitfalls as to what
is distributable, depending on how the transfer is recorded.

There will be no effect on the group financial statements as the group has stayed the same:
it has made no acquisitions or disposals.

4.3 Subsidiary moved along

This is a transaction which is treated in a very similar manner to that described above.

Before After

P P

S1 S2 S1 S2

S3 S3

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The problem of an effective distribution does not arise here because the holding company
did not buy the subsidiary. There may be problems with financial assistance if S2 pays less
than the fair value to purchase S3 as a prelude to S1 leaving the group.

4.4 Subsidiary moved down

This situation could arise if H is in one country and S1 and S2 are in another. A tax group can
be formed out of such a restructuring.

Before After
P P

S1 S2 S1

S2
If S1 paid cash for S2, the transaction would be straightforward (as described above). It is
unclear whether H should recognise a gain or loss on the sale if S2 is sold for more or less
than carrying value. S1 would only be deemed to have made a distribution (avoiding any
advance tax payable) only if the price was excessive.
A share for share exchange accounted for as a uniting of interests may obtain partial relief
against the need to create a share premium account. A share premium account must be set
up with a 'minimum premium value'. This is the amount by which the book value of the
shares (or lower cost) exceeds the nominal value of the shares issued. This preserves the
book value of the investment.

4.5 Example: Minimum premium value

Hop Co has two 100% subsidiaries, Skip and Jump. The statements of financial position at 31
December 20X5 are as follows.

Hop Co Skip Co Jump Co Group

$'000 $'000 $'000 $'000
Investment in Skip Co 1,000
Investment in Jump Co 500
Net assets 1,500 1,375 1,500 4,375
3,000 1,375 1,500 4,375
Share capital 2,500 1,000 500 2,500
Retained earnings 500 375 1,000 1,875
3,000 1,375 1,500 4,375
Hop Co wants to transfer Jump Co to Skip Co.

Page 24 of 25
Solution
Skip Co issues 250,000 $1 shares in exchange for Hop Co's investment in Jump Co.
The minimum premium value is $500,000 (carrying value)  $250,000 = $250,000. The
statements of financial position are now as follows.
Hop Co Skip Co Jump Co Group
$'000 $'000 $'000 $'000
Investment in Skip 1,500
Investment in Jump 500
Net assets 1,500 1,375 1,500 4,375
3,000 1,875 1,500 4,375
Share capital 2,500 1,250 500 2,500
Share premium 250
Retained earnings 500 375 1,000 1,875
3,000 1,875 1,500 4,375
4.6 Divisionalisation
This type of transaction involves the transfer of businesses from subsidiaries into just one
company. The businesses will all be similar and this is a means of rationalising and
streamlining. The savings in administration costs can be quite substantial. The remaining
shell company will leave the cash it was paid on an intragroup balance as it is no longer
trading. The accounting treatment is generally straightforward.

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