FAC2602.consolidated Companies Module - Unisa

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FAC2602/1/2020–2021
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CONTENTS
Page
1. Introduction iv
2. Lecturers and contact details iv
3. Learning unit 1 1
12. Topic B: Learning unit 1 259
iii
INTRODUCTION
Dear Student
Attached please find the following learning units:
x Learning unit 1 – Provisions in respect of companies in a group context
x Learning unit 2 – Consolidation of a wholly-owned subsidiary at date of acquisition
x Learning unit 3 – Consolidation of a partly-owned subsidiary at date of acquisition
x Learning unit 4 – Consolidation of a wholly-owned subsidiary after date of acquisition
x Learning unit 5 – Consolidation of a partly-owned subsidiary after date of acquisition
x Learning unit 6 – Acquisition of an interest in a subsidiary during the year
x Learning unit 7 – Elimination of intragroup transactions
x Learning unit 8 – Treatment of dividends during consolidation
x Learning unit 9 – Treatment of preference shares during consolidation
x Topic B: Learning unit 1 – Statement of cash flows
LECTURERS AND CONTACT DETAILS
Your FAC2602 lecturers and their offices are as follows:
Ms C Wolfaardt – AJH van der Walt Building 2-43

Ms K Nkome – AJH van der Walt Building 2-10
Ms R Grobler – AJH van der Walt Building 2-67
Ms N Mahomed – AJH van der Walt Building 2-48
Our contact details are as follows:
Telephone: 012 429 4234

Fax: 012 429 3335
E-mail: fac2602@unisa.ac.za
iv
FAC2602
LEARNING UNIT 1
PROVISIONS IN RESPECT
OF COMPANIES IN A
GROUP CONTEXT
Introduction to group
annual financial
statements
1

LEARNING OUTCOME
Students should be able to identify and define a business combination, a parent and
subsidiary company as well as simple groups in relation to International Financial Reporting
Standards (IFRS).
OVERVIEW
The learning unit is divided into the following:
1.1 INTRODUCTION ............................................................................................................ 3

1.2 BUSINESS COMBINATION, PARENT AND SUBSIDIARIES ....................................... 3
1.3 ACCOUNTING FOR GROUPS ...................................................................................... 7
1.4 GENERAL PRINCIPLES................................................................................................ 8
1.5 EXERCISES ................................................................................................................... 8
SELF-ASSESSMENT ............................................................................................................... 9
KEY CONCEPTS
x Business combination
x Acquire
x Entity
x Parent
x Subsidiary
x Sub-subsidiary
x Control
x Share capital
x Simple group
x Complex group
2
FAC2602 / Learning unit 1
ASSESSMENT CRITERIA
After studying this learning unit, you should be able to
x define a business combination

x define a parent
x define a subsidiary
x explain the difference between simple and complex groups
x describe the provisions regarding accounting and disclosure as they
relate to group financial statements of companies
1.1 INTRODUCTION
The first learning unit, which deals with group financial statements, is mainly background
knowledge. As you progress through the course, you will come to understand the purpose that
this background knowledge serves. We refer back to certain concepts and principles discussed
here in subsequent learning units, so they should become clearer to you later on in the module.
1.2 BUSINESS COMBINATION, PARENT AND SUBSIDIARIES
Over the years, the tendency in the business world has been to form bigger and bigger
enterprises. Sole proprietors combined to form partnerships, which in turn amalgamated to form
yet bigger partnerships. However, these bigger partnerships posed one problem: all the
partners were not equally involved. Some partners merely contributed capital, whereas others
were more actively involved in managing the enterprise on a daily basis. The result was the
formation of companies to limit the liability of the inactive partners.
Companies also began to combine with other companies to form larger companies and groups
of companies.
IFRS 3 Business combinations regulates business combinations. We can define a business

combination as a transaction or other event in which an acquirer obtains control of one or more
businesses.
3
EXAMPLE
The following is an example of such a group:
P Ltd
75% of the control by

means of 75% of the share
capital
S Ltd
a) P Ltd is the parent. (P Ltd holds more than half of the issued share capital and it is assumed
also more than half the voting rights in S Ltd.)
b) S Ltd is the subsidiary.
Where a parent is linked with a subsidiary to form a larger economic unit, it is customary to refer
to the entity as a group.
IFRS 10 Consolidated Financial Statements (issued May 2011) defines a group as a parent
and all its subsidiaries. In such a group, the management of the different independent parent
and subsidiary entities would coordinate their efforts on a central and unified basis to serve the
interests of the group as a whole. It is possible for management to operate on a unified basis
because of the control that the parent exercises over its subsidiaries.
IFRS 10 determines that an investor (in this case the parent) controls an investee (the
subsidiary) when the investor is exposed or has rights to variable returns from its involvement
with the investee and has the ability to affect those returns through its power over the investee.
The above is an example of a simple group. Although you will only have to deal with accounting
and disclosure for simple groups in this course, we would like to introduce you to the concept of
complex groups so that it will not be an entirely new or foreign concept to you in future.
4
EXAMPLE
The following are two examples of complex groups:

1.
P Ltd
80% of the control through 60% of the control through

80% of the share capital 60% of the share capital
S1 Ltd S2 Ltd
a) P Ltd is the parent.

b) S1 Ltd and S2 Ltd are the subsidiaries.
c) P Ltd, S1 Ltd and S2 Ltd collectively form a complex group (horizontally).
2.
P Ltd
75% of the control through

75% of the share capital
S1 Ltd
80% of the control through

80% of the share capital
S2 Ltd
a) P Ltd is the parent.

b) S1 Ltd is the subsidiary, and S2 Ltd is the sub-subsidiary.
c) P Ltd, S1 Ltd and S2 Ltd collectively form a complex group (vertically).
It should be clear to you from the above that simple groups have only one subsidiary where
complex groups have more than one subsidiary.
5
The following definitions are important in the light of the above explanation:
Business combination
A business combination is defined as a transaction or another event in which an acquirer obtains
control of one or more businesses.
Parent
A parent is an entity that controls one or more other entities (subsidiaries).
Subsidiary
A subsidiary is an entity that is controlled by another entity (the parent).
Sub-subsidiary
A sub-subsidiary is a subsidiary of another subsidiary.
Control
An investor (parent) controls an investee (subsidiary) when the investor (parent) is exposed or
has rights to variable returns from its involvement with the investee (subsidiary) and has the
ability to affect those returns through its power over the investee (subsidiary).
An investor (parent) controls an investee (subsidiary) only if all of the following is true for the
investor:
x It has power over the investee (subsidiary).

x It has exposure or rights to variable returns from its involvement with the investee.
x It has the ability to use its power over the investee (subsidiary) to affect the amount of the
investor's returns.
Please note that in FAC2602 we will assume that an investor obtains control by possessing
50% or more of the shares and voting rights of a company.
The issued share capital of a company may consist of both ordinary and preference shares.
Shares do not have a nominal or par value in terms of the Companies Act 71 of 2008. All
shares of the same class have the same rights, and each share has one voting right, except
when the company's memorandum of incorporation provides otherwise (e.g. the voting rights of
preference shares may be excluded).
It should now be clear to you that a parent can obtain control over a subsidiary when the parent
holds the majority of the shares in the subsidiary.
In the examples we use, the percentages of shareholding and voting rights usually correspond,
since each share normally carries one vote. However, it is important to know that this is not
always the case in practice and that the percentage of voting rights would determine the
percentage of equity if there are no other factors influencing control.
In learning unit 3, we will explain the calculation of the percentage interest in more detail.
6
1.3 ACCOUNTING FOR GROUPS
The essence of consolidations is that the parent is able to control the policy and management
of the subsidiary. Therefore, the group should be seen as an economic unit.
Although the parent shows investments in its subsidiaries on its statement of financial position, it
is highly probable that the value of the investments may have changed considerably since the
investments were made. The statements may therefore not be an accurate reflection of the
activities of the group.
For this reason, it is in the interest of the shareholders of the parent to have a single set of annual
financial statements drawn up for the group to give the shareholders an idea of the earnings
per share and the assets and liabilities of the group. We also call this set of statements the
consolidated statements, group annual financial statements or group statements. Briefly, these
are a combination of all the statements of the companies in the group. They indicate that the
investment represented in the parent's statements has been replaced by the assets and
liabilities of the subsidiary which represent this investment. However, we need to make certain
adjustments to represent these combined values realistically as a single economic unit, which
we will explain to you in the next learning unit.
IFRS 10 requires parent companies to consolidate their investments in subsidiaries and to

include all their subsidiaries in the consolidated financial statements. This implies that
consolidated financial statements are compulsory when a parent-subsidiary relationship exists.
Group annual financial statements may include the following consolidated financial statements:
statement of profit or loss and other comprehensive income, statement of changes in equity,
statement of financial position, statement of cash flows and notes to the consolidated financial
statements.
When are group statements not required?

IFRS 10, however, allows a parent not to present consolidated financial statements only if it
meets all of the following conditions:
x The parent itself is a wholly-owned subsidiary, or the parent is a partially-owned subsidiary

of another entity and has informed its owners, including those not otherwise entitled to vote,
that it will not present consolidated financial statements, and its owners do not object to this.
x The parent's debt or equity instruments are not traded in a public market.
x The parent did not file its financial statements with a securities commission or other
regulatory organisation for the purpose of issuing any class of instruments in a public
market, nor is it in the process of doing so.
x The ultimate or any intermediate parent of the parent produces consolidated financial
statements available for public use that comply with International Financial Reporting
Standards (IFRS).
7
A parent that elects in terms of the above-mentioned not to present consolidated financial
statements may present separate financial statements as its only financial statements.
1.4 GENERAL PRINCIPLES

x Group statements should be a fair reflection of the state of affairs of the parent and its
subsidiaries as at the accounting date.
x Eliminate profits or losses that have arisen as a result of transactions within the group and
that have not been realised outside the group.
x Eliminate all intragroup balances when determining the total assets and liabilities of the
group.
x Eliminate the carrying amount of the parent's investment in the subsidiary.
1.5 EXERCISES
We end the learning unit with a few revision questions. Your e-tutor can guide you with the
completion of these questions. For your own sake, try to answer them by referring to the notes
before you look at the proposed solutions.
QUESTION 1
Explain the following concepts:
a) Parent
b) Subsidiary
c) Wholly-owned subsidiary
QUESTION 2
Distinguish between simple and complex groups and give a schematic representation of each.
QUESTION 3
When are consolidated annual financial statements not required?
8
SOLUTIONS
Refer to the following sections of this learning unit for the answers to the questions:
QUESTION 1
a) Section 1.2
b) Section 1.2
c) Section 1.2
QUESTION 2
Section 1.2
QUESTION 3
Section 1.3
SELF-ASSESSMENT
After studying this learning unit, are you able to
x define a business combination?

x define a parent?
x define a subsidiary?
x explain the difference between simple and complex groups?
9
10
FAC2602
LEARNING UNIT 2
CONSOLIDATION OF A
WHOLLY-OWNED
SUBSIDIARY AT DATE OF
ACQUISITION
annual financial
11
statements
LEARNING OUTCOME
Students should be able to consolidate the financial statements of a group of companies at the
date of acquisition if a subsidiary is wholly-owned in accordance with International Financial
Reporting Standards (IFRS).
OVERVIEW
2.1 INTRODUCTION .......................................................................................................... 13

2.2 BASIC CONSOLIDATION TECHNIQUES ................................................................... 13
2.3 CONSOLIDATION OF THE STATEMENT OF FINANCIAL POSITION OF A WHOLLY-
OWNED SUBSIDIARY AT THE DATE OF ACQUISITION ......................................... 18
2.4 EXERCISES ................................................................................................................. 22
SELF-ASSESSMENT ............................................................................................................. 28
KEY CONCEPTS
x Net asset value
x Premium
x Discount
x Intragroup items
x Common items
x Goodwill
x Gain from a bargain purchase
12
ASSESSMENT CRITERIA
x draft the consolidated annual financial statements of a parent and its

wholly-owned subsidiary at the date of acquisition in accordance with
International Financial Reporting Standards (IFRS).
x calculate intragroup items and common items
x calculate goodwill and a gain from a bargain purchase at the acquisition
of a subsidiary
x do the pro-forma consolidation journal entries
2.1 INTRODUCTION
As we explained in learning unit 1, the consolidated statements of a group are in principle merely
the combined statements of all the companies in the group. However, we will have to make
certain adjustments to the statements before we can refer to them as consolidated statements.
We can represent consolidations schematically as follows:
A Ltds
A Ltd’s finan-
financial
cial statement
statement
Group
Groupconsolidated
consolidated
Adjustmentsto
financial
Financialstatement
statements
B Ltds
B Ltd’s financial
financial
statement
statement
A Ltd drafts its financial statements from its financial records, as does B Ltd. Once the individual
statements have been completed, the accountant uses the information from these statements
to make the necessary consolidation adjustments and only then compiles the consolidated
statements. Note that the original financial statements of A Ltd and B Ltd are never amended
during the consolidation process. This process repeats itself year after year, and the
adjustments have to be made afresh every year. You will understand this better as you study
the following learning units.
2.2 BASIC CONSOLIDATION TECHNIQUES

Please follow the following basic steps when compiling consolidated annual financial
statements:
x Eliminate common items.

x Eliminate intragroup items.
x Consolidate the remaining items.
13
2.2.1 Eliminating common items
One of the first adjustments the accountant should make to the consolidated statements is to
eliminate the investment in the parent's records and the owners' equity section in the
subsidiary's records as at the date when the investment was made. We do this because we
need to eliminate all intragroup transactions since the group is regarded as one economic entity
and cannot enter into transactions with itself.
Note:
In this module, we only deal with cases where the investment in the subsidiary is carried (in the
records of the parent) at the original cost price, which is assumed to be its fair value. For the sake
of simplicity, it is assumed that the fair value remains unchanged from the original cost price.
EXAMPLE 1
The following example illustrates the elimination of investment in the parent's books at the date
of acquisition:
STATEMENTS OF FINANCIAL POSITION AS AT 28 FEBRUARY 20.5
A Ltd B Ltd
R R
ASSETS
Investment in B Ltd - at fair value 10 000 -

Cash and cash equivalents 10 000 10 000
20 000 10 000
EQUITY AND LIABILITIES
Share capital - ordinary shares (20 000/10 000 shares) 20 000 10 000
Draft the consolidated statement of financial position for the A Ltd Group at 28 February 20.5.
Assume that A Ltd acquired its interest on that date. B Ltd was incorporated on 28 February
20.5.
14
SOLUTION 1
Pro-forma consolidated journal entry
Dr Cr
R R
Share capital of B Ltd 10 000
Investment in B Ltd 10 000
Elimination of owners' equity of B Ltd at acquisition
The group consolidated statement of financial position would now be drafted as follows:

A LTD GROUP
CONSOLIDATED STATEMENT OF FINANCIAL POSITION AS AT 28 FEBRUARY 20.5
R
ASSETS
Cash and cash equivalents (10 000 + 10 000) 20 000
Share capital 20 000
EXAMPLE 2
The following example illustrates the elimination of investment in the parent's records a few
years after acquisition:
A Ltd B Ltd
R R
ASSETS
Investment in B Ltd - at fair value (cost price: R10 000) 10 000 -
Trade and other receivables 12 000 8 000
Cash and cash equivalents 14 000 10 000
36 000 18 000
Retained earnings 16 000 8 000
36 000 18 000
15
REQUIRED
Draft the consolidated statement of financial position of the A Ltd Group at
28 February 20.9 in compliance with the requirements of International
Financial Reporting Standards (IFRS). Assume that A Ltd acquired its
interest on 28 February 20.5 when B Ltd was incorporated.
SOLUTION 2
Dr Cr
R R

Share capital of B Ltd 10 000
A LTD GROUP
Consolidated statement of financial position as at 28 February 20.9
ASSETS R

Current assets
Trade and other receivables (12 000 + 8 000) 20 000
Total assets 44 000

Total equity
Retained earnings (16 000 + 8 000) 24 000
Total equity and liabilities 44 000
With reference to the previous two examples, we can deduce the following:
x The journal entry for the elimination of the investment and the owners' equity at the date of
acquisition will remain unchanged from one year to the next.
x The share capital on the consolidated statement of financial position is always only that of
the parent.
x The profits the subsidiary made after the date of acquisition become part of the retained
earnings of the group and are shown as such in the consolidated statements. We will discuss
this principle at greater length in learning unit 4.
x The profits the subsidiary made before the date of acquisition cannot form part of the retained
earnings of the group. The parent pays for such profits. We will also take a closer look at
this principle in learning unit 4.
16
x Since the parent obtained its interest in the subsidiary at the date of incorporation (the date
on which the company was established), there could not have been any retained earnings
in the records of B Ltd.
2.2.2 Eliminating intragroup items

It is common practice for companies in the same group to sell inventories and assets to one
another.
The following schematic representation is an example of this:
A Ltd Timber to public
Sells Sells
machine timber
B Ltd Wooden wagons to the public
The actual profit the group made from the sale of goods was the profit made from sales to the
public only, since all the other sales took place within the group. Sales within a group are known
as intragroup sales and therefore have to be eliminated during consolidations.
A Ltd may lend a sum of money or sell an asset to B Ltd. We also have to eliminate these
transactions. In learning unit 7, we will study intragroup transactions in detail.
2.2.3 Consolidating remaining items

Once we have eliminated all common and intragroup items, we can draw up the consolidated
statement of financial position, the consolidated statement of profit or loss and other
comprehensive income, the consolidated statement of changes in equity and the consolidated
statement of cash flows. In this module, we expect you to be able to do all relevant pro-forma
consolidation journal entries for consolidation purposes and to draft the consolidated statement
of financial position, consolidated statement of profit or loss and other comprehensive income
and consolidated statement of changes in equity.
17
2.3 CONSOLIDATION OF THE STATEMENT OF FINANCIAL POSITION OF
A WHOLLY-OWNED SUBSIDIARY AT THE DATE OF ACQUISITION
We account for all business combinations on the purchase or acquisition method, and this
method involves the following four steps:
x identifying the acquirer

x determining the acquisition date
x recognising and measuring the identifiable assets acquired, the liabilities assumed and any
non-controlling interest in the acquiree
x recognising and measuring goodwill or a gain from a bargain purchase
The following three situations may arise if a parent obtains an interest in a subsidiary:
x The price paid by the parent for the interest/investment in the subsidiary is equivalent to the
fair value of assets and liabilities acquired. An acquisition of this kind is known as an
acquisition at net asset value.
x The price paid by the parent for the interest is higher than the fair value of assets and
liabilities acquired. This is known as acquisition at a premium. This premium should be
treated as goodwill.
After initial recognition, the parent must measure the goodwill acquired in a business
combination at cost less any accumulated impairment losses. We do not amortise goodwill.
Instead, the parent must test it for impairment annually, or more frequently if events or
changes in circumstances indicate that it might be impaired in accordance with IAS 36
Impairment of Assets.
In this module, we will not be dealing with impairment losses, but will assume the initial cost
price of goodwill to be equal to current fair value.
x The price paid by the parent is lower than the fair value of assets and liabilities acquired.
This is known as the acquisition of a subsidiary at a discount, which is also referred to as a
gain from a bargain purchase and is recognised at the acquisition date in profit or loss.
For the purpose of this module, note that a gain from a bargain purchase is a possibility when
acquiring a subsidiary. However, we will deal with this in Accounting III modules.
The following examples illustrate the possible situations which could arise:
18
EXAMPLE 1
Acquisition of a subsidiary at net asset value

The following represents the abridged statements of financial position of A Ltd and its wholly-
owned subsidiary, B Ltd, at 31 December 20.5, which is the date on which A Ltd acquired its
interest in B Ltd.
STATEMENTS OF FINANCIAL POSITION AS AT 31 DECEMBER 20.5

A Ltd B Ltd
R R
ASSETS
Bank 30 000 55 000
180 000 90 000
180 000 90 000
SOLUTION 1
Calculations
1. Analysis of owners' equity of B Ltd
At Since
Total
R R
R
Share capital 50 000 50 000 –
Retained earnings 40 000 40 000 –
90 000 90 000 –
Purchase difference – –
Consideration 90 000 90 000 –
Therefore, it is clear that the price A Ltd paid for the investment in B Ltd is equal to the
nett assets acquired. (90 000 = 50 000 + 40 000)

19
2. Pro-forma consolidated journal entry
Dr Cr
R R
Share capital (B Ltd) 50 000
Retained earnings (B Ltd) 40 000
Elimination of owners' equity of B Ltd at
acquisition
The price paid by A Ltd for the investment in B Ltd is equal to the value of the net assets acquired.
(90 000 = 50 000 + 40 000)
A LTD GROUP
CONSOLIDATED STATEMENT OF FINANCIAL POSITION AS AT 31 DECEMBER 20.5
R
ASSETS
Current assets
Total assets 180 000

Equity attributable to owners of the parent
Retained earnings 80 000
Total equity 180 000
EXAMPLE 2
Acquisition of a subsidiary at a premium

The following represent the abridged statements of financial position of A Ltd and its wholly-
owned subsidiary B Ltd at 31 December 20.5. This is also the date on which A Ltd acquired its
interest in B Ltd. Note that the information is the same as in the previous example, except for
the investment, which is now R100 000 instead of R90 000.
20
A Ltd B Ltd
R R
ASSETS
Bank 20 000 55 000
180 000 90 000
180 000 90 000
SOLUTION 2
Calculations
1 Analysis of owners' equity of B Ltd Total At Since

R R R
Share capital 50 000 50 000 –
Retained earnings 40 000 40 000 –
90 000 90 000 –
Equity represented by goodwill ņ parent 10 000 10 000 –
Consideration 100 000 100 000 –
2 Pro-forma consolidated journal entry Dr Cr

R R
Goodwill 10 000
acquisition
A LTD GROUP
R
ASSETS
Non-current assets
Goodwill 10 000
10 000
Current assets
170 000

21
Equity attributable to owners of parent
COMMENTS
x In this example, the parent paid more than the net asset value for its interest in the
subsidiary, which means that a premium (goodwill) was paid at acquisition. Goodwill is
regarded as an intangible asset and should be shown as a non-current asset in the
consolidated statement of financial position. In this module, we determine the goodwill at
acquisition only. We are not concerned with future changes in the value of goodwill, which
will be dealt with on third-year level.
x According to IFRS 3, the two options for calculating goodwill are as follows:
a) The partial method (the method used in this study guide)
b) The full goodwill method (which uses the non-controlling interest at fair value to
determine goodwill). However, this method will be dealt with later on third-year level.
EXAMPLE 3
Acquisition of a subsidiary at a discount
COMMENTS
This is when the parent pays less than the net asset value for its interest in the subsidiary.
We will deal with this on third-year level.
2.4 EXERCISES
To see whether you are able to apply the content of this learning unit, answer the following
questions. Your e-tutor can guide you with the completion of these questions. It is important to
calculate the answers before looking at the suggested solutions.
22
QUESTION 1
You receive the following statements of financial position of P Ltd and S Ltd as at 30 June 20.6:
STATEMENTS OF FINANCIAL POSITION AS AT 30 JUNE 20.6
P Ltd S Ltd
R R
ASSETS
Investment in S Ltd - 100 000 shares at fair value 145 000 -

(cost price: R145 000)
Current assets 40 000 115 000
185 000 115 000

Share capital - 100 000 ordinary shares 100 000 100 000
185 000 115 000
REQUIRED
Draft the consolidated statement of financial position of the P Ltd Group as
at 30 June 20.6 in compliance with the requirements of International
Financial Reporting Standards; if P Ltd acquired its interest in S Ltd at
30 June 20.6.
23
QUESTION 2
You receive the following trial balances:

TRIAL BALANCES AT 31 MARCH 20.5
P Ltd S Ltd
Dr/(Cr) Dr/(Cr)
R R
Share capital - ordinary shares (100 000/50 000 shares) (100 000) (50 000)
Retained earnings (80 000) (20 000)
Inventories 20 000 35 000
Trade and other payables (15 000) (18 000)
Long-term borrowings (100 000) -
Loan – S Ltd 80 000 -
Investment in S Ltd – 50 000 shares at fair value 80 000 -
Loan – P Ltd - (80 000)
Bank 25 000 58 000
Property, plant and equipment 50 000 60 000
REQUIRED
at 31 March 20.5 in compliance with the requirements of International
Financial Reporting Standards; if P Ltd acquired its interest in S Ltd at
31 March 20.5.
SOLUTIONS
QUESTION 1
You should have followed the following steps:
Step 1 - determining the percentage interest

Investment in S Ltd 100 000 shares
Ordinary shares of S = 100 000 shares x 100

Ltd
= 100% (therefore wholly-owned subsidiary)
24
Note that the interest in S Ltd is determined by the amount of shares held in S Ltd and not
the rand value. You must use 100 000 shares and not R145 000.
Step 2 - drafting the analysis of owners' equity of S Ltd

Analysis of owners' equity of S Ltd
Total At Since
R R R
Share capital 100 000 100 000 -

Retained earnings 15 000 15 000 -
115 000 115 000 -
Equity represented by goodwill - parent 30 000 30 000 -
Consideration 145 000 145 000 -
Step 3 - eliminating all common items

Dr Cr
R R
Share capital – S Ltd 100 000
Retained earnings – S Ltd 15 000
Goodwill 30 000
Investment in S Ltd 145 000
Elimination of owners' equity of S Ltd at acquisition
Step 4 – drafting the consolidated statement of financial position

P LTD GROUP

CONSOLIDATED STATEMENT OF FINANCIAL POSITION AS AT 30 JUNE 20.6

ASSETS R
Non-current assets
Goodwill 30 000
Current assets (40 000 + 115 000) 155 000

25
QUESTION 2
You should have followed the following steps:
Step 1 - determining the percentage interest

Investment in S Ltd = 50 000 shares x 100
Ordinary shares of S Ltd 50 000 shares
= 100% (wholly-owned subsidiary)
Step 2 - drafting the analysis of owners' equity of S Ltd

Analysis of owners' equity of S Ltd
Total At Since
R R R
Share capital 50 000 50 000 -
70 000 70 000 -
Equity represented by goodwill - parent 10 000 10 000 -
Step 3 - eliminating all common items

Dr Cr
R R
Loan – P Ltd 80 000
Loan – S Ltd 80 000
Elimination of intragroup loans

Share capital – S Ltd 50 000
Retained earnings – S Ltd 20 000
Goodwill 10 000
26
Step 4 - drafting the consolidated statement of financial position

P LTD GROUP
CONSOLIDATED STATEMENT OF FINANCIAL POSITION AS AT 31 MARCH 20.5
ASSETS
Non-current assets
Property, plant and equipment (50 000 + 60 000) 110 000
Goodwill 10 000
120 000
Current assets
Inventories (20 000 + 35 000) 55 000
193 000


Non-current liabilities
Long-term borrowings 100 000
Current liabilities
Trade and other payables (15 000 + 18 000) 33 000
Total liabilities 133 000
27
COMMENTS
x You will note that in our proposed solutions to the assignments, we give the consolidated
statement of financial position followed by the calculations. We will not criticise the format
of your answer, but please ensure that you answer the question in full.
x It would be perfectly acceptable to give some of the easier calculations in brackets, as in
our proposed solutions.
x Note that this question included intragroup loans. We eliminated both the parent's and
subsidiary's debit and credit loans against each other.
SELF-ASSESSMENT
x draft the consolidated annual financial statements of a parent and its
wholly-owned subsidiary at date of acquisition in accordance with
International Financial Reporting Standards?
x calculate intragroup and common items?
x calculate goodwill and a gain from a bargain purchase at the acquisition of
a subsidiary?
x do the pro-forma consolidation journal entries?
28
FAC2602
LEARNING UNIT 3
CONSOLIDATION OF A
PARTLY-OWNED
SUBSIDIARY AT DATE OF
ACQUISITION
Introductiontogroup
29 annualfinancial
statements
LEARNING OUTCOME
Students should be able to consolidate the financial statements of a group of companies at the
date of acquisition if a subsidiary is partly owned in accordance with International Financial
Reporting Standards.
OVERVIEW
3.1 INTRODUCTION .......................................................................................................... 31

3.2 CONSOLIDATION OF THE STATEMENT OF FINANCIAL POSITION OF A PARTLY-
OWNED SUBSIDIARY AT T HE DATE OF ACQUISITION ........................................ 31
3.3 EXERCISES ................................................................................................................. 38
SELF-ASSESSMENT ............................................................................................................. 44
KEY CONCEPTS
x Partly-owned subsidiary
x Outside owners
x Non-controlling owners
x Non-controlling interests (NCI)
ASSESSMENT CRITERIA
x calculate the percentage applicable to non-controlling owners
x draft the consolidated annual financial statements of a group with a partly-
owned subsidiary at the date of acquisition in accordance with
International Financial Reporting Standards
30
3.1 INTRODUCTION
In learning unit 2, we dealt only with wholly-owned subsidiaries, in other words, where the parent
has acquired the entire issued share capital of the subsidiary.
However, there may be various reasons why it could be impossible for the parent to take up all
the shares in the subsidiary. Some of the owners may not be prepared to sell their shares to
the parent, or the parent may not have sufficient funds to purchase all the shares. The other
owners of the subsidiary are known as non-controlling or outside owners. Non-controlling
owners may consist of ordinary owners and preference owners. We will deal with subsidiaries
with preference shares in learning unit 9.
3.2 CONSOLIDATION OF THE STATEMENT OF FINANCIAL POSITION OF

A PARTLY-OWNED SUBSIDIARY AT THE DATE OF ACQUISITION
The same rules apply for consolidation purposes, except that we now have to make provision
for the non-controlling owners' interest in the profit of the subsidiary.
EXAMPLE
P Ltd
80% of voting rights
20% of voting rights

S Ltd Non-controlling owners
To make provision for the non-controlling owners' interest in the profit of the subsidiary, it is
important to know how to calculate the percentage interest in the subsidiary.
31
EXAMPLE 1
The following represent the condensed statements of financial position of A Ltd and its
subsidiary, B Ltd:
A Ltd B Ltd
R R
ASSETS
Investment in B Ltd
– 80 000 ordinary shares at fair value (cost price: R90 000) 90 000 -
350 000 210 000
Long-term borrowings 100 000 80 000
350 000 210 000
SOLUTION 1
We calculate the parent's interest in the subsidiary as follows:
Investment in B Ltd 80 000 shares

= x 100 = 80%
Issued shares of B Ltd 100 000 shares
Therefore, A Ltd has an 80% interest in B Ltd, and the non-controlling owners of B Ltd only
have a 20% interest in B Ltd.
32
EXAMPLE 2
The following represent the condensed statements of financial position of P Ltd and S Ltd:
STATEMENTS OF FINANCIAL POSITION AS AT 31 JULY 20.4
P Ltd S Ltd
R R
ASSETS
Investment in S Ltd
- 35 000 ordinary shares at fair value (cost price: R75 000) 75 000 -
350 000 210 000
350 000 210 000
SOLUTION 2
We calculate the parent's interest in the subsidiary as follows:
Investment in S Ltd 35 000 shares

= x 100 = 70%
Issued shares of S Ltd 50 000 shares
As for wholly-owned subsidiaries, the following three situations may occur when a parent
acquires an interest in a partly-owned subsidiary:
x Acquired at net asset value

x Acquired at a premium (goodwill)
x Acquired at a discount (gain from a bargain purchase)
Examples 3 to 5 below illustrate the three situations that may arise:
33
EXAMPLE 3
Acquisition of a partly-owned subsidiary at net asset value
The following are the abridged statements of financial position of A Ltd and its subsidiary, B Ltd,
as at 31 December 20.9, which is the date on which A Ltd acquired its interest in B Ltd.
A Ltd B Ltd
ASSETS R R
Investment in B Ltd - 56 000 ordinary shares at fair value 98 000 –
398 000 270 000
Trade and other payables 178 000 130 000
398 000 270 000
SOLUTION 3
We follow the basic consolidation procedures:
x Determine the percentage interest.

x Consolidate remaining items.
1. Determining the percentage interest
A Ltd acquired 56 000 shares
B Ltd has 80 000 shares
56 000 100
? A Ltd's interest = x = 70%
80 000 1
34
2. Analysis of owners' equity of B Ltd at 31 December 20.9
A Ltd 70 % NCI
Total
30 %
At Since
R R R R
At acquisition
Share capital 80 000 56 000 24 000
Retained earnings 60 000 42 000 18 000
140 000 98 000 42 000
Purchase difference - - -
Consideration and NCI 140 000 98 000 42 000
COMMENT
x In this question, the date of acquisition and the date of consolidation are the same, which
is why the statement of financial position does not include any of the subsidiary's other
equity components since these have been eliminated at acquisition (see pro-forma
consolidated journal entry).
x Non-controlling interests are presented as a credit in the statement of financial position,
as it reflects what is owed to the non-controlling owners in terms of their share of the
equity.
Dr Cr NCI#
R R R
Non-controlling interests (statement of financial position) 42 000 42 000
Elimination of owners' equity of B Ltd at acquisition 42 000
# Please note: We only show this column to reflect the movement of non-controlling interests
(NCI). It is not a journal entry. We will do this in all the exercises that follow.
35
A LTD GROUP
R
R
ASSETS
Non-current assets
Current assets

220 000
Non-controlling interests 42 000
Current liabilities
EXAMPLE 4
Acquisition of a partly-owned subsidiary at a premium (goodwill)

The following are the abridged statements of financial position of A Ltd and its subsidiary, B Ltd,
as at 31 December 20.9, which is the date on which A Ltd acquired its interest in B Ltd.

A Ltd B Ltd
ASSETS R R
Investment in B Ltd
398 000 270 000
Share capital – ordinary shares (100 000/80 000 shares) 100 000 80 000
398 000 270 000
36
SOLUTION 4
Once again, we follow the basic consolidation procedures:
x Determine the percentage interest.

1. Determine the percentage interest
A Ltd acquired 64 000 shares

B Ltd has 80 000 shares
64 000 100
? A Ltd's interest = x = 80%
80 000 1
2. Analysis of owners' equity of B Ltd at 31 December 20.9
A Ltd 80% NCI

Total
At Since 20%
R R R R
At acquisition
Share capital 80 000 64 000 16 000
140 000 112 000 28 000
Equity represented by goodwill – parent 28 000 28 000 –
Dr Cr NCI
R R R
Goodwill 28 000
28 000
37
A LTD GROUP
20 .9
R
ASSETS
Non-current assets
Goodwill 28 000
348 0000
Current assets

220 000
Current liabilities
EXAMPLE 5
Acquisition of a partly-owned subsidiary at a discount (gain from a

bargain purchase)
We will deal with the acquisition of a subsidiary at a discount in detail at third-year level; it does
not form part of this course.
3.3 EXERCISES
We shall now conclude this learning unit with a few revision questions. Your e-tutor can guide
you with the completion of these questions. It is in your own interest to try to answer these
questions by referring to the learning unit before you look at the proposed solutions.
38
QUESTION 1
P Ltd acquired its interest in S Ltd on 30 June 20.5. Each share carries one vote. The following
represent the condensed trial balances of P Ltd and S Ltd at 30 June 20.5:
P Ltd S Ltd
R R
Debits
Investment in S Ltd
– 75 000 shares at fair value (cost price: R90 000) 90 000 –
– 10 000 debentures at fair value (cost price: R10 000) 10 000 –
Bank 2 500 –
171 000 138 100

Credits
Debentures (20 000 debentures) – 20 000
Bank overdraft – 5 600
171 000 138 100
REQUIRED
at 30 June 20.5 in compliance with the requirements of International
Financial Reporting Standards.
39
QUESTION 2
P Ltd acquired 40 000 ordinary shares in S Ltd on 1 January 20.5, and each share carries one
vote.
The following represent the condensed statements of financial position of P Ltd and S Ltd at 1
January 20.5:
P Ltd S Ltd
ASSETS
Unsecured loan to P Ltd - 20 000
Investment in S Ltd
327 200 192 800
Revaluation of land and buildings - 50 000
Long-term borrowing from S Ltd 20 000 –
Current liabilities 11 500 2 800
327 200 192 800
REQUIRED
at 1 January 20.5 in compliance with the requirements of International
40
SOLUTIONS
QUESTION 1
1. Calculate P Ltd's percentage interest in S Ltd
P Ltd acquired 75 000 shares, each carrying one vote.

S Ltd issued 100 000 shares, each carrying one vote.
75 000 100
? P Ltd's interest = x = 75%
100 000 1
2. Analysis of owners' equity of S Ltd at 30 June 20.5
P Ltd 75% NCI

Total
25%
At Since
R R R R
At acquisition
Share capital 100 000 75 000 25 000
111 300 83 475 27 825
Equity represented by goodwill – parent 6 525 6 525(b) –
Consideration and NCI 117 825 90 000 27 825(a)
Dr Cr NCI
R R R
Goodwill (b)6 525
Debentures (S Ltd) 10 000

Investment in debentures (P Ltd) 10 000
Elimination of intragroup balances
27 825(a)
41
P LTD GROUP
R
ASSETS
Non-current assets
Goodwill (b)6 525
193 125
Current assets
Inventories (15 800 + 4 200) 20 000
Cash and cash equivalents 2 500
22 500
162 200
Non-controlling interests (a)27 825

Debentures (20 000Υ10 000) 10 000
10 000
Current liabilities
Bank overdraft 5 600
15 600
COMMENT: Setting off bank balances permitted?

x IAS 32.42 states that a financial asset and liability shall be offset only when an entity has
a legally enforceable right to set off the amounts AND intends to settle on a net basis.
x According to IAS 1.32 assets and liabilities, and income and expenses, may not be offset
unless required or permitted by an IFRS. Offsetting should then reflect the substance of
the transaction or event, detracts from the ability of users to understand it and to assess
the entity’s future cash flows.
x It is in rare circumstances that these conditions for offsetting of bank balances will be met.
42
QUESTION 2
1. Calculate P Ltd's percentage interest in S Ltd
P Ltd acquired 40 000 shares, each carrying one vote.

S Ltd issued 50 000 shares, each carrying one vote.
40 000 100
? P Ltd's interest = x = 80%
50 000 1
2. Analysis of owners' equity of S Ltd at 1 January 20.5
P Ltd 80% NCI

Total
20%
At Since
R R R R
At acquisition
Share capital 100 000 80 000 20 000
Revaluation surplus 50 000 40 000 10 000
190 000 152 000 38 000
Equity represented by goodwill – parent 28 000 28 000(a) –
Consideration and NCI 218 000 180 000 38 000(b)
Dr Cr NCI
R R R
Revaluation surplus 50 000
Goodwill (a)28 000
Non-controlling interests(statement of financial position) 38 000 38 000
Long-term loan from S Ltd (P Ltd) 20 000

Unsecured loan to P Ltd (S Ltd) 20 000
38 000(b)
43
P LTD GROUP
CONSOLIDATED STATEMENT OF FINANCIAL POSITION AS AT 1 JANUARY 20.5
R
ASSETS
Non-current assets
Goodwill (a)28 000
288 500
Current assets (44 000 + 15 500) 59 500

295 700
Non-controlling interests (b)38 000

Current liabilities (11 500 + 2 800) 14 300
SELF-ASSESSMENT
x calculate the percentage applicable to non-controlling owners?

x draft the consolidated annual financial statements of a group with a
partly-owned subsidiary at the date of acquisition in accordance with
International Financial Reporting Standards?
44
FAC2602
LEARNING UNIT 4
CONSOLIDATION OF A
WHOLLY-OWNED
SUBSIDIARY AFTER DATE
OF ACQUISITION
Introductiontogroup
45 annualfinancial
statements
LEARNING OUTCOME
Students should be able to consolidate the financial statements of a group of companies if
the interest in the wholly-owned subsidiary was acquired a few years ago in accordance with
International Financial Reporting Standards.
OVERVIEW
4.1 INTRODUCTION .......................................................................................................... 47

4.2 TREATMENT OF GOODWILL ARISING ON ACQUISITION ...................................... 47
4.3 CONSOLIDATION OF A WHOLLY-OWNED SUBSIDIARY AFTER THE DATE OF
ACQUISITION ............................................................................................................. 47
4.4 EXERCISES ................................................................................................................. 57
SELF-ASSESSMENT ............................................................................................................. 70
KEY CONCEPTS
x Post-acquisition profits
ASSESSMENT CRITERIA
x draft the consolidated annual financial statements of a group if the
interest in the wholly-owned subsidiary was acquired a few years ago in
accordance with International Financial Reporting Standards
46
4.1 INTRODUCTION
In learning unit 2, we discussed the consolidation of a wholly-owned subsidiary at the date of
acquisition. In this learning unit, we deal with the compiling of consolidated annual financial
statements at any date after the acquisition of an interest in a subsidiary. We always eliminate
the owners' equity (share capital and other components) of a subsidiary that exist at the
acquisition of the subsidiary against the investment in the subsidiary. It does not form part of
the owners' equity (share capital and other components) of the group. The parent originally paid
for it. Refer to examples 1 to 3 in learning unit 2 if you need to make sure that you understand
the above statement.
Therefore, all the profits the subsidiary makes after the date of acquisition become the profits
of the group and should be included as such in the consolidated statements. All components
of equity of a subsidiary which was formed after the date of acquisition form part of the total
equity of the group.
4.2 TREATMENT OF GOODWILL ARISING ON ACQUISITION

By now, you should be familiar with the term "goodwill". A parent may pay more or less than the
net asset value of the shares acquired with the purchase of the interest in the subsidiary. This
can be attributed to the following:
x specific items which have a market value that is higher or lower than the carrying value (e.g.
property or plant)
x the value of the undertaking as a whole
The goodwill that a parent pays for when acquiring a subsidiary represents the parent's
anticipation of future economic benefits. We reflect goodwill at cost price for the purposes of this
course. We will deal with future adjustments in value on third year level.
We will also deal further with the alternative option and methods in IFRS 3 regarding the
calculation of goodwill on third-year level.
4.3 CONSOLIDATION OF A WHOLLY-OWNED SUBSIDIARY AFTER THE

DATE OF ACQUISITION
Where consolidation takes place at a date after the acquisition of the interest in the subsidiary,
we must consolidate both the statements of financial position and the statements of profit and
loss and other comprehensive income of the parent and the subsidiary.
We will still follow the same consolidation procedures:

x Eliminate intragroup items.
47
We now turn our attention to a new aspect, namely that we will have to deal with various periods
when analysing the owners' equity of the subsidiary. The following serves as an example of
this:
Suppose A Ltd acquired its 100% interest in B Ltd on 1 January 20.1, and you are required to
draft the consolidated financial statements for the year ended 31 December 20.8. You will
have to divide the analysis of owners' equity into three parts.
Analysis of owners' equity of B Ltd

Total At Since
R R R
At acquisition
1 January 20.1 XX

Since acquisition to beginning of current year
2 January 20.1 to 31 December 20.7 XX

Current year
1 January 20.8 to 31 December 20.8 XX
As in the previous learning units, we will deal with the three situations that may arise when a
parent acquire shares in a subsidiary.
48
EXAMPLE 1
Acquisition of a wholly-owned subsidiary at net asset value

The following are the abridged statements of financial position of A Ltd and its subsidiary,
B Ltd, as at 31 December 20.6:
A Ltd B Ltd
R R
ASSETS
Investment in B Ltd
398 000 270 000
398 000 270 000
A Ltd acquired its interest in B Ltd on 1 January 20.6. B Ltd's retained earnings amounted to
R44 000 at the time. Assume that the carrying amount of the assets and liabilities of B Ltd is
equal to the fair value thereof at the date of acquisition.
STATEMENTS OF PROFIT OR LOSS AND OTHER COMPREHENSIVE INCOME FOR THE

YEAR ENDED 31 DECEMBER 20.6
A Ltd B Ltd
R R
Profit before tax 35 000 23 000
Income tax expense (11 000) (7 000)
PROFIT FOR THE YEAR 24 000 16 000
Other comprehensive income for the year - -
TOTAL COMPREHENSIVE INCOME FOR THE YEAR 24 000 16 000
49
STATEMENTS OF CHANGES IN EQUITY FOR THE YEAR ENDED 31 DECEMBER 20.6
Share capital Retained Total

earnings
A Ltd B Ltd A Ltd B Ltd A Ltd B Ltd
R R R R R R
Balance at 1 January 20.6 100 000 80 000 96 000 44 000 196 000 124 000
Changes in equity for 20.6
Total comprehensive income for
the year
Profit for the year 24 000 16 000 24 000 16 000
Balance at 31 December 20.6 100 000 80 000 120 000 60 000 220 000 140 000
Suppose you have to draft the consolidated statement of profit or loss and other comprehensive
income, the consolidated statement of changes in equity and the consolidated statement of
financial position at 31 December 20.6.
SOLUTION 1
Before you draft these statements, you can do the following:
x Analyse the owners' equity in B Ltd.

x Do the pro-forma consolidation journal entries.
1. Analysis of owners' equity in B Ltd
A Ltd 1 00% NCI

Total At Since 0%
At acquisition – 1 Jan 20.6 R R R R
Share capital
80 000 80 000 -
Retained earnings
44 000 44 000 -
124 000 124 000 -

Consideration and NCI 124 000 124 000 -

Since acquisition
x Current year
Profit for the year 16 000 16 000 -
140 000 16 000 -
50
2. Pro-forma consolidated journal entries
Dr Cr
R R
Investment in B Ltd (A Ltd) 124 000
A LTD GROUP
CONSOLIDATED STATEMENT OF PROFIT OR LOSS AND OTHER COMPREHENSIVE
INCOME FOR THE YEAR ENDED 31 DECEMBER 20.6
R
Profit before tax (35 000 + 23 000) 58 000
Income tax expense (11 000 + 7 000) (18 000)
PROFIT FOR THE YEAR c40 000
Other comprehensive income for the year -
TOTAL COMPREHENSIVE INCOME FOR THE YEAR 40 000
A LTD GROUP
CONSOLIDATED STATEMENT OF CHANGES IN EQUITY FOR THE YEAR ENDED
31 DECEMBER 20.6
Share Retained
Total
capital earnings
R R R
Balance at 1 January 20.6 100 000 96 000* 196 000
Total comprehensive income for the year
Profit for the year c40 000 40 000
Balance at 31 December 20.6 100 000 d136 000 236 000
* Only parent's interest due to the fact that the interest was acquired on 1 January 20.6
51
A LTD GROUP
R
ASSETS
Non-current assets
Current assets

Retained earnings d136 000
Current liabilities
52
EXAMPLE 2
Acquisition of a wholly-owned subsidiary at a premium

The following are the abridged statements of financial position of A Ltd and its subsidiary,
B Ltd, as at 31 December 20.6:
A Ltd B Ltd
ASSETS R R
Investment in B Ltd - 80 000 ordinary shares at fair value
(cost price: R148 000) 148 000 -
398 000 270 000
398 000 270 000
A Ltd acquired its interest in B Ltd on 1 January 20.5, at which time B Ltd's retained earnings
amounted to R26 000. At the date of acquisition, consider the carrying amount of the assets
and liabilities of B Ltd to be equal to the fair value thereof.

A Ltd B Ltd
R R
Profit from operations 25 000 23 000
Dividends received from subsidiary 10 000 -
53
Share capital Retained earnings Total

R R R R R R
Dividend paid: ordinary (15 000) (10 000) (15 000) (10 000)
REQUIRED
You are required to draft the consolidated statement of profit or loss and
other comprehensive income, the consolidated statement of changes in
equity and the consolidated statement of financial position at
31 December 20.6 in compliance with the requirements of International
54
SOLUTION 2
Calculations
A Ltd 100% NCI

Total At Since 0%
R R R R
At acquisition - 1 Jan 20.5
Share capital 80 000 80 000
106 000 106 000
Equity represented by goodwill
(1)
- parent 42 000 42 000
Consideration 148 000 148 000
Since acquisition
• To beginning of current year
(2)
(54 000 31/12/20.5 -
26 000 1/1/20.5)
• Current year
Profit for the year 16 000 16 000
Dividend paid (10 000) (10 000)
182 000 148 000 34 000
Dr Cr
R R
Goodwill 42 000(1)
Investment in B Ltd (A Ltd) 148 000
Dividend received (A Ltd) 10 000(4)

Dividend paid (B Ltd) 10 000
Elimination of intragroup dividend
55
A LTD GROUP
R
Profit before tax (35 000 – 10 000 + 23 000)
(4)
48 000
Profit for the year (3)
30 000
A LTD GROUP
31 DECEMBER 20.6
Share Retained Total

capital earnings
R R R
#
Balance at 1 January 20.6 100 000 139 000 239 000
(3)30 000
Profit for the year 30 000
Dividends paid: ordinary (15 000) (15 000)
Balance at 31 December 20.6 100 000 154 000 254 000
# [111 000 + 28 000(2)]
56
A LTD GROUP
R
ASSETS
Non-current assets
Goodwill (1)42
000
382 000
Current assets

Current liabilities
COMMENT
x Note that we eliminate all intragroup transactions. Therefore, we eliminate the dividends
the subsidiary paid to the parent. Consequently, the group's profit before tax will not
include the dividends received from the subsidiary. The dividends in the statement of
changes in equity under retained income will consist of dividends paid by the parent only.
EXAMPLE 3
Acquisition of a wholly-owned subsidiary at a discount
The acquisition of a wholly-owned subsidiary at a discount does not form part of this course and
will be dealt with in detail at third-year level.
4.4 EXERCISES
We conclude this learning unit with a few revision questions. Your e-tutor can guide you with
the completion of these questions. It is important that you work through these questions carefully
while paying special attention to the comments, since by now you have progressed so far with
consolidations that it is easier to point out certain important principles to you.
57
QUESTION 1
The following are the trial balances of P Ltd and its subsidiary, S Ltd, at 31 December 20.8:
P Ltd S Ltd
Credits R R
Retained earnings - 1 January 20.8 250 000 130 000
Gross profit 410 000 360 000
Dividends received 30 000 -
Accumulated depreciation - 31 December 20.8 50 000 30 000
Bank overdraft 30 000 -
950 000 630 000
Debits
Property, plant and equipment at cost price 152 000 100 000
Investment in S Ltd
- 50 000 shares at fair value (cost price: R150 000) 150 000 -
Bank - 68 000
Auditors' remuneration 15 000 12 000
Staff cost 100 000 80 000
Depreciation 15 000 10 000
Taxation for the year 108 000 90 000
Dividends paid 40 000 30 000
950 000 630 000
Additional information
P Ltd acquired its interest in S Ltd on 2 January 20.5, at which date the retained earnings of
S Ltd was R80 000. Consider the carrying amount of the assets and liabilities of S Ltd to be
equal to the fair value thereof at the date of acquisition.
REQUIRED
Draft the consolidated statement of financial position, the consolidated
statement of profit or loss and other comprehensive income and the
consolidated statement of changes in equity of the P Ltd Group for the year
ended 31 December 20.8 in compliance with the requirements of
58
QUESTION 2
The following are the trial balances of A Ltd and its subsidiary, B Ltd, at 31 December 20.8:
A Ltd B Ltd
Credits R R
Gross profit 410 000 360 000
950 000 630 000
Debits
Investment in B Ltd
Bank - 68 000
Staff cost 100 000 80 000
950 000 630 000
A Ltd acquired its interest in B Ltd on 2 January 20.5, and at that date the retained earnings of B
Ltd was R80 000. Consider the carrying amount of the assets and liabilities of B Ltd to be equal
to the fair value thereof at the date of acquisition.
REQUIRED
Draft the consolidated statement of financial position of the A Ltd Group as
at 31 December 20.8 in compliance with the requirements of International
59
QUESTION 3
The following are the trial balances of J Ltd and its subsidiary, L Ltd, at 31 December 20.8:
J Ltd L Ltd
Credits R R
Gross profit 410 000 360 000
950 000 630 000
Debits
Investment in L Ltd
Bank - 68 000
Staff cost 100 000 80 000
950 000 630 000
J Ltd acquired its interest in L Ltd on 2 January 20.5, at which date the retained earnings of L Ltd
was R80 000. Consider the carrying amount of the assets and liabilities of L Ltd to be equal to
the fair value thereof at the date of acquisition.
REQUIRED
Draft the consolidated statement of profit or loss and other comprehensive
income and the consolidated statement of changes in equity of the J Ltd
Group for the year ended 31 December 20.8 in compliance with the
requirements of International Financial Reporting Standards.
60
SOLUTIONS
QUESTION 1
P LTD GROUP
R
ASSETS
Non-current assets
Property, plant and equipment 172 000
[(152 000 + 100 000) - (50 000 + 30 000)]
Goodwill (2)20000
192 000
Current assets
Inventories (180 000 + 160 000) 340 000
678 000

Retained earnings (3)600000
Current liabilities
P LTD GROUP
Note R
Gross profit (410 000 + 360 000) 770 000
Administrative expenses (15 000 + 12 000 + 15 000 + 10 000 (232 000)
+ 100 000 + 80 000)
Profit before tax 1 538 000
PROFIT FOR THE YEAR 340 000
61
P LTD GROUP
NOTES FOR THE YEAR ENDED 31 DECEMBER 20.8
1. Profit before tax
Profit before tax is arrived at after taking into account the following:
Expenses R
Auditors remuneration (15 000 + 12 000) 27 000
Depreciation (15 000 + 10 000) 25 000
Staff cost (100 000 + 80 000) 180 000
P LTD GROUP
31 DECEMBER 20.8

capital earnings
R
R R
Balance at 1 January 20.8 100 000 300 000# 400 000
Dividend paid: ordinary (40 000) (40 000)
Balance at 31 December 20.8 100 000 (3)600 000 700 000
(1)
# (250 000 + 50 000 )
62
Calculations
1. Analysis of owners' equity of S Ltd
P Ltd 100% NCI

Total
At Since 0%
R R R R
At acquisition – 2 Jan 20.5
130 000 130 000 -
Equity represented by goodwill –
parent 20 000 20 000(2)
Since acquisition
(1)
50 000
(130 000 31/12/20.7 –
80 000 2/1/20.5)
• Current year
Profit for the year (calculation 2) 168 000 168 000
Dividends paid (30 000) (30 000)
338 000 188 000 -
2. Profit for the year
R
Gross profit 360 000
Auditors' remuneration (12 000)
Staff cost (80 000)
Depreciation (10 000)
258 000
Taxation for the year (90 000)
168 000
63
Dr Cr
R R
Goodwill (2)20 000


Dividends received – P Ltd 30 000
Dividends paid – S Ltd 30 000
Elimination of intragroup dividends
COMMENT
x In this example, we divide the analysis of owners' equity into three parts (periods) because
we require the figure for retained earnings for the subsidiary at the beginning of the year
in order to draft the statement of changes in equity.
x Note that we eliminated the intragroup item, namely dividends of R30 000 paid by the
subsidiary.
x Note also that if the parent or a subsidiary has a bank overdraft, we may not deduct it from
the favourable bank balance of another company in the group. We must show both
balances separately. The deduction is permitted only if the conditions of IAS 1 and
IAS 32 mentioned in learning unit 3 are met.
64
QUESTION 2
A LTD GROUP
ASSETS R
Non-current assets
[(152 000 + 100 000) - (50 000 + 30 000)]
Goodwill (calculation 1) (2)20
000
192 000
Current assets
Inventories (180 000 + 160 000) 340 000
678 000

Retained earnings [412 000 (calculation 2) - 30 000 (dividend received) 600 000
+ 188 000(1) + 30 000 (dividend paid)]
Current liabilities
65
Calculations
A Ltd 100%
NCI
Total At Since 0%
R R R R
At acquisition ņ 2 Jan 20.5
130 000 130 000
Equity represented by
goodwill - parent 20 000 (2)20 000
Consideration 150 000 150 000
Since acquisition
• To end of current year
3 Jan 20.5 to 31 Dec
20.8
(31/12/20.8)
Profit for the year 168 000*
31/12/20.7
Retained earnings (80 000)
2/1/20.5
Dividend paid (30 000) (30 000)

(1)
338 000 188 000
* 360 000 - 90 000 - 12 000 - 80 000 - 10 000
2. Retained earnings of A Ltd – 31 December 20.8

R
Dividends received 30 000
Expenses (130 000)
Auditors' remuneration 15 000
Staff cost 100 000
Depreciation 15 000
310 000
Income tax expense (108 000)
Dividends paid (40 000)
Retained earnings 1 January 20.8 250 000
412 000
66
Dr Cr
R R
Goodwill (2)20 000


Dividends received – A Ltd 30 000
Dividends paid – B Ltd 30 000
COMMENT
x Since the question merely asked for a consolidated statement of financial position, the
analysis of owners' equity is different from that in question 1. Because we had to do neither
the consolidated statement of profit or loss and other comprehensive income nor the
consolidated statement of changes in equity, we did not require the figure for retained
earnings at the beginning of the year (see (1) in question 1). Therefore, we can combine
the "since acquisition" sections in the analysis and include all movements in retained
earnings for the period since acquisition to the end of the current year.
x Because a complete consolidated statement of changes in equity is no longer available,
we should calculate retained earnings separately, as in calculation 2 (100% holding).
QUESTION 3
J LTD GROUP
Note R
Gross profit (410 000 + 360 000) 770 000
Administrative expenses (15 000 + 12 000 + 15 000 (232 000)
+ 10 000 + 100 000 + 80 000)
PROFIT FOR THE YEAR (2)340 000

67
J LTD GROUP
Expenses R
Auditors' remuneration (15 000 + 12 000) 27 000
Depreciation (15 000 + 10 000) 25 000
Staff cost (100 000 + 80 000) 180 000
J LTD GROUP
31 DECEMBER 20.8

capital earnings
R R R
Balance at 1 January 20.8 100 000 300 000# 400 000
Profit for the year (2)340
000 340 000
Balance at 31 December 20.8 100 000 600 000 700 000
# (250 000 + 50 000(1))
68
Calculations
1. Analysis of owners' equity of L Ltd
Total J Ltd 100% NCI

At Since 0%
R R R R
At acquisition – 2 Jan 20.5 50 000 50 000 -
Equity represented by goodwill –
,,parent 20 000 (3)20
000
Since acquisition
(1)
(130 000 31/12/20.7 –
80 000 2/1/20.5)
• Current year
Profit for the year (calc 2) 168 000 168 000
Dividends paid (30 000) (30 000)
338 000 188 000 -
2. Profit for the year

Auditors' remuneration (12 000)
Staff cost (80 000)
Depreciation (10 000)
258 000
Taxation for the year (90 000)
168 000
69
Dr Cr
R R
Goodwill (3)20 000
Investment in L Ltd 150 000

Elimination of owners' equity of L Ltd at acquisition
Dividends received – J Ltd 30 000

Dividends paid – L Ltd 30 000
COMMENT
x In this question, you are merely expected to draft a consolidated statement of profit or
loss and other comprehensive income and a consolidated statement of changes in equity.
However, you will notice that the calculations for questions 1 and 3 are very similar.
SELF-ASSESSMENT
interest in the wholly-owned subsidiary was acquired a few years ago in
accordance with International Financial Reporting Standards?
70
FAC2602
LEARNING UNIT 5
CONSOLIDATION OF A
PARTLY-OWNED
SUBSIDIARY AFTER DATE
OF ACQUISITION
Introductiontogroup
71 annualfinancial
statements
LEARNING OUTCOME
Students should be able to consolidate the financial statements of a group of companies if
the interest in the partly-owned subsidiary was acquired a few years ago in accordance with
OVERVIEW

5.1 INTRODUCTION .......................................................................................................... 73
5.2 CONSOLIDATION OF A PARTLY-OWNED SUBSIDIARY AFTER THE DATE OF
ACQUISITION ............................................................................................................. 73
5.3 INTRAGROUP TRANSACTIONS................................................................................. 79
5.4 EXERCISES ................................................................................................................. 79
SELF-ASSESSMENT ............................................................................................................. 88
KEY CONCEPTS
x Intragroup transactions
ASSESSMENT CRITERIA
interest in the partly-owned subsidiary was acquired a few years ago in
accordance with International Financial Reporting Standards
x calculate, measure and disclose the goodwill which arises at acquisition
72
5.1 INTRODUCTION
In learning unit 3, we introduced you to the consolidation process for a partly-owned subsidiary
at the date of acquisition. In learning unit 4, we went a step further by explaining the
consolidation process for a wholly-owned subsidiary after the date of acquisition. In this learning
unit, you will learn about the consolidation process which takes place when a partly-owned
subsidiary is consolidated at a date after acquisition.
We will follow the same basic calculations as in learning unit 4, except that we will always need
to make provision for the non-controlling interest in the profit. You will notice that we disclose
the profit attributable to the non-controlling owners separately in the consolidated statement of
profit or loss and other comprehensive income and the consolidated statement of changes in
equity.
5.2 CONSOLIDATION OF A PARTLY-OWNED SUBSIDIARY AFTER THE

DATE OF ACQUISITION
As mentioned above, the consolidation process remains exactly the same as before, except for
the addition of a separate calculation for non-controlling owners.
73
EXAMPLE 1
The following represent the abridged financial statements of X Ltd and its subsidiary, Y Ltd:
X Ltd Y Ltd
R R
ASSETS
Investment in Y Ltd – 30 000 ordinary shares at fair value 152 500 –
Bank 27 000 45 000
430 000 345 000
430 000 345 000
X Ltd acquired its interest in Y Ltd on 1 January 20.7, on which date Y Ltd's retained earnings
amounted to R110 000. Consider the carrying amount of the assets and liabilities of Y Ltd to
be equal to the fair value thereof at the date of acquisition.

X Ltd Y Ltd
R R
Gross profit 107 000 105 000
Dividends received from subsidiary 7 500 -
74

X Ltd Y Ltd X Ltd Y Ltd X Ltd Y Ltd
R R R R R R
Total comprehensive income
for the year
To draft the consolidated financial statements of the X Ltd Group for the year ended
31 December 20.9 we would proceed as follows:
SOLUTION 1
Calculations
1. Analysis of owners' equity of Y Ltd
X Ltd 75%*
NCI
Total At Since 25%
R R R R
At acquisition
Share capital 80 000 60 000 20 000
(a)
190 000 142 500 47 500
goodwill - parent 10 000 10 000 -
Since acquisition
• To beginning of current
year
Retained earnings (2) (a)
20 000 15 000 5 000
(130 000 - 110 000)
• Current year
(1)/(b)
Profit for the year 70 000 52 500 17 500
Dividends paid (10 000) (c)
(7 500) (2 500)
280 000 60 000 67 500(3)/(d)
* 30 000 shares ÷ 40 000 shares = 75% interest
75
Dr Cr NCI
R R R
Goodwill 10 000
Investment in Y Ltd 152 500
Non-controlling interests 47 500 47 500
Elimination of owners' equity of Y Ltd at
acquisition

Recording of non-controlling interests in Y Ltd
for the period 1/1/20.7 to 31/12/20.8
52 500(a)
Non-controlling interests (SCI)* 17 500
Non-controlling interests (SFP)* 17 500 17 500(b)
Recording of non-controlling interests in profit
after tax
Dividends received – X Ltd 7 500

Non-controlling interests (SFP) 2 500 (2 500)(c)
Dividends paid – Y Ltd 10 000
Elimination of intragroup dividend and recording
of non-controlling interests in dividend
67 500(d)
* (SCI) = statement of profit or loss and other comprehensive income
(SFP) = statement of financial position
X LTD GROUP
R
Profit before tax (107 000 + 7 500 – 7 500 + 105 000) 212 000
Total comprehensive income attributable to:

Owners of the parent (142 500 – 17 500) 125 000 (4)
Non-controlling interests 17 500 (1)/(b)
142 500
76
X LTD GROUP
31 DECEMBER 20.9
Non-
Share Retained control- Total
Total
capital earnings ling equity
interests
R R R R R
Balance at 1 January 20.9 100 000 225 000# 325 000 52 500(a) 377 500
for the year
Profit for the year (4)125000 125 000 17 500(b) 142 500
Dividend paid: ordinary (20 000) (20 000) (2 500)(c) (22 500)
Balance at 31 December (5)330
100 000 000 430 000 67 500(d) 497 500
20.9
# (210 000 + 15 000(2))
X LTD GROUP
R
ASSETS
Non-current assets
Goodwill 10 000
430 000
Current assets
202 500

Retained earnings (5) 330 000
430 000
Non-controlling interests (d)(3) 67 500
Current liabilities
77
COMMENT
x Upon consolidation, all the assets, liabilities, profits and losses of a parent and its
subsidiaries are added together. However, the process does not take into account that
the non-controlling owners also have a percentage share. We credit the non-controlling
interests in the statement of financial position to show that it is the portion of equity owed
to the non-controlling owners. We reduce the retained earnings to allocate it to the non-
controlling owners by debiting the retained earnings.
Hence:
Dr Retained earnings 5 000
Cr Non-controlling interests 5 000
x Likewise, we need to allocate the non-controlling owners' portion of the current year's
profit to them. We credit the non-controlling interests in the statement of financial position
to show that it is the portion of the profit owed to them. We reduce the profit in the
statement of profit or loss and other comprehensive income to allocate it to the non-
controlling owners by debiting profit.
Hence:
Dr Non-controlling interests (SCI) 17 500
Cr Non-controlling interests (SFP) 17 500
x At the bottom of the statement of profit or loss and other comprehensive income, we can
now allocate the profit between the parent and the non-controlling owners. We include a
separate column for the non-controlling interests' share in equity in the statement of
changes in equity.
x In the previous learning unit, we eliminated the entire amount of the dividend paid by the
subsidiary against the dividend received by the parent as the subsidiary was wholly-
owned. Here, the subsidiary is partly-owned. To eliminate the dividends, we debit the
dividends received by X Ltd, amounting to R7 500, and credit the dividends paid by Y Ltd,
amounting to R10 000. The balancing figure in the journal is a debit balance of R2 500.
We debit non-controlling interests, thereby reducing the non-controlling interests balance
in the statement of financial position, as they realised a portion of their share in the profit
in the form of a dividend received.
Hence:
Dr Dividends received – X Ltd R7 500
Dr Non-controlling interests R2 500
Cr Dividends paid – Y Ltd R10 000
78
5.3 INTRAGROUP TRANSACTIONS
In a previous learning unit, we explained to you that we must exclude profit which arises from
a transaction within the group (where this profit has not been realised in respect of a transaction
with a person outside the group) when determining total group profit.
When a parent sells inventories to a subsidiary at a profit and these inventories are still in the
possession of the subsidiary at year-end, this profit has not yet been realised. It is only when
the subsidiary sells the inventories to a person outside the group that the profit is realised. We
will therefore always show inventories in the consolidated statement of financial position at the
original amount for which a member of the group manufactured or purchased the inventories.
Another frequently occurring intragroup transaction is the amounts that are due or payable
between the parent and the subsidiary within the group. We will examine this aspect more
closely in learning unit 7.
5.4 EXERCISES
Work through the following questions and ensure that you fully understand the solutions, since
we will be adding more complicated aspects in the following four learning units. Your e-tutor can
guide you with the completion of these questions.
QUESTION 1
P Ltd acquired 60 000 ordinary shares in S Ltd on 1 March 20.1, at which date the retained
earnings of S Ltd was R12 000.
Consider the carrying amount of the assets and liabilities of S Ltd to be equal to the fair value
thereof at the date of acquisition.
The following represent the statements of financial position of P Ltd and S Ltd at 28 February
20.2:
P Ltd S Ltd
R R
ASSETS
Investment in S Ltd
166 400 228 300
166 400 228 300
79
REQUIRED
at 28 February 20.2 in compliance with the requirements of International
Financial Reporting Standards if each share carries one vote.
QUESTION 2
The following are the condensed trial balances of X Ltd and Y Ltd at 31 December 20.6:
X Ltd Y Ltd
R R
Retained earnings – 1 January 20.6 120 000 35 000
Accumulated depreciation on property, plant and equipment 20 000 40 000
405 000 205 000

Investment in Y Ltd at fair value
– 16 000 ordinary shares (cost price: R33 600) 33 600 -
405 000 205 000
X Ltd acquired its interest in Y Ltd on 1 January 20.5, at which date the retained earnings of Y
Ltd amounted to R22 000. Consider the carrying amount of the assets and liabilities of Y Ltd to
be equal to the fair value thereof at the date of acquisition.
REQUIRED
Draft the consolidated statement of financial position, consolidated
statement of profit or loss and other comprehensive income and
consolidated statement of changes in equity of the X Ltd Group for the year
80
QUESTION 3
The following are the abridged statements of M Ltd and N Ltd for the year ended 30 June 20.8:

YEAR ENDED 30 JUNE 20.8
M Ltd N Ltd
R R
STATEMENTS OF CHANGES IN EQUITY FOR THE YEAR ENDED 30 JUNE 20.8

M Ltd N Ltd M Ltd N Ltd M Ltd N Ltd
R R R R R R
Balance at 1
100 000 80 000 56 000 54 000 156 000 134 000
July 20.7
Changes in
equity for 20.8
Total
comprehensive
income for the
year
Dividend paid:
(5 000) (5 000)
ordinary
Balance at 30
100 000 80 000 109 000 89 000 209 000 169 000
June 20.8
M Ltd acquired a 70% interest in N Ltd on 17 July 20.2. At that date, the retained earnings of
N Ltd were R10 000. There was no goodwill at the date of acquisition. Consider the carrying
amount of the assets and liabilities of N Ltd to be equal to the fair value thereof at the date of
acquisition.
REQUIRED
income and the consolidated statement of changes in equity of the M Ltd
Group for the year ended 30 June 20.8 in compliance with the requirements
of International Financial Reporting Standards.
81
SOLUTIONS
QUESTION 1
P LTD GROUP
R
ASSETS
Non-current assets
Current assets (8 600 + 10 100) 18 700

Retained earnings (24 500 + 5 100(1)) 29 600
129 600
Non-controlling interests(2)/(a) 88 200
Long-term borrowings (30 800 + 2 200) 33 000
82
Calculations
P Ltd 60%* NCI

Total At Since 40%
R R R R
At acquisition
Share capital 200 000 120 000 80 000
212 000 127 200 84 800
Since acquisition
x To end of the current year
(20 500 - 12 000)
(1) (2)
220 500 5 100 88 200
* 60 000 X 100 = 60%
100 000 1

Dr Cr NCI
R R R

Recording of non-controlling interests in S Ltd for the
period 1/3/20.1 to 28/2/20.2
(a) 88 200

83
QUESTION 2
X LTD GROUP
R
ASSETS
Non-current assets
Property, plant and equipment [(263 000 + 117 000) - (20 000 + 320 000
40 000)]
Current assets (66 400 + 60 000) 126 400

Retained earnings (4) 250 000
350 000
Non-controlling interests (3)/(c) 21 400
X LTD GROUP
R
Owners of the parent (130 000 - 10 400) 119 600
Non-controlling interests (1)/(b) 10 400
130 000
84
X LTD GROUP
31 DECEMBER 20.6
Non-
Share Retained Total Total
controlli
capital earnings equity
ng
interests
R R R R
R
Balance at 1 January 20.6 100 000 130 400# 230 400 11 000(a) 241 400
for the year
Profit for the year 119 600 119 600 10 400(b) 130 000
Balance at 31 December 20.6 100 000 250 000(4) 350 000 21 400(c) 371 400
# 120 000 + 10 400(2)
Calculations
X Ltd 80 %* NCI
Total At Since 20 %
R R R R
At acquisition
20 000 16 000 4 000
Share capital
22 000 17 600 4 400
Retained earnings
42 000 33 600 8 400
Purchase difference - -
Consideration and NCI 42 000 33 600
Since acquisition
• To beginning of
current year
(2)
(35 000 - 22 000)
• Current year
(1)
Profit before tax 80 000
107 000 52 000 21 400(3)/(c)
* ( 16 000 X 100 ) = 80%

20 000 1
85
Dr Cr NCI
R R R
Elimination of owners' equity of Y Ltd at acquisition

Recording of non-controlling interests in Y Ltd for the
period 1/1/20.5 to 31/12/20.5
(a) 11 000
Non-controlling interests (SCI)* 10 400
10 400 (b) 10 400
Non-controlling interests (SFP)*
Recording of non-controlling interests in profit after tax
(c) 21 400
* (SCI) = consolidated statement of profit or loss and other comprehensive income

(SFP) = statement of financial position
QUESTION 3
M LTD GROUP
INCOME FOR THE YEAR ENDED 30 JUNE 20.8
R

Non-controlling interests (b) 10 500
93 000
86
M LTD GROUP
30 JUNE 20.8
Non-
Total controlling
interests
R R R R R
Balance at 1 July 20.7 100 000 86 800# 186 800 40 200(a) 227 000
Changes in equity for
20.8
Total comprehensive
income for the year
Dividend paid: ordinary (5 000) (5 000) - (5 000)
Balance at 30 June 20.8 100 000 164 300 264 300 50 700(c) 315 000
# (56 000 + 30 800(d))
Calculations
1. Analysis of owners' equity of N Ltd
M Ltd 70 % NCI
Total At Since 30 %
R R R R
At acquisition
Share capital 80 000 56 000 24 000
(a)
90 000 63 000 27 000
Since acquisition
(d) (a)
13 200
(54 000 - 10 000)
• Current year
Profit for the year 35 000 24 500 10 500(b)
169 000 55 300 50 700(c)
87
Dr Cr NCI
R R R
Investment in N Ltd 63 000
Elimination of owners' equity of N Ltd at acquisition

Recording of non-controlling interests in N Ltd for the
period 17/7/20.2 to 30/6/20.7
(a) 40 200
Non-controlling interests (SCI) 10 500
10 500 (b) 10 500
Non-controlling interests (SFP)
Recording of non-controlling interests in profit for the
year
50 700
SELF-ASSESSMENT
interest in the partly-owned subsidiary was acquired a few years ago in
accordance with International Financial Reporting Standards?
x calculate, measure and disclose the goodwill which arises at acquisition?
88
FAC2602
LEARNING UNIT 6
ACQUISITION OF AN
INTEREST IN A
SUBSIDIARY DURING THE
YEAR
89 annual financial
statements
LEARNING OUTCOME
Students should be able to consolidate the financial statements of a group of companies
where the interest in a subsidiary was acquired on a date other than at the end of the financial
year in accordance with International Financial Reporting Standards.
OVERVIEW
6.1 INTRODUCTION ......................................................................................................... 91

6.2 APPORTIONMENT OF ITEMS IN THE STATEMENT OF PROFIT OR LOSS AND
OTHER COMPREHENSIVE INCOME ..................................................................... 91
6.3 APPORTIONMENT OF ITEMS IN THE STATEMENT OF CHANGES IN EQUITY .... 91
6.4 PRESENTATION OF THE CONSOLIDATED STATEMENT OF PROFIT OR LOSS
AND OTHER COMPREHENSIVE INCOME AND THE CONSOLIDATED
STATEMENT OF CHANGES IN EQUITY ................................................................ 92
6.5 EFFECTIVE DATE OF ACQUISITION ........................................................................ 97
6.6 EXERCISE ................................................................................................................... 98
SELF-ASSESSMENT .......................................................................................................... 104
KEY CONCEPTS
x Effective date
x Apportion
x Pre-acquisition period
x Post-acquisition period
90
ASSESSMENT CRITERIA
x allocate the profit of the subsidiary in the year of acquisition between pre-
and post-acquisition
x draft the consolidated financial statements where the interest in a
subsidiary was acquired on a date other than at the end of the financial
year in accordance with International Financial Reporting Standards
6.1 INTRODUCTION
In the preceding learning units, the date of acquisition of an interest in a subsidiary has always
been the first day of the subsidiary's accounting period. In practice, the effective date on which
the delivery of shares takes place very rarely coincides with the end of a financial year. The
purchase of an interest in a subsidiary at a date other than the accounting date is known as the
interim acquisition of a subsidiary. We therefore need to allocate items in the statement of profit
or loss and other comprehensive income (to pre- and post-acquisition date periods) to
determine the amount of retained earnings at the effective date of acquisition, which is a
prerequisite for determining the goodwill at the date of acquisition.
6.2 APPORTIONMENT OF ITEMS IN THE STATEMENT OF PROFIT OR

LOSS AND OTHER COMPREHENSIVE INCOME
If it is not practicable to apportion the profit or loss of the subsidiary for any financial year with
reference to the facts, we may treat it as if it accrued evenly from day to day during the year and
apportion it accordingly.
We must examine income and expenditure items individually to determine the basis on which
we should apportion each item between the period before acquisition and the period since
acquisition.
6.3 APPORTIONMENT OF ITEMS IN THE STATEMENT OF CHANGES IN

EQUITY
We must account for preference dividends in respect of issued preference shares of the
subsidiary on a time basis, even if it has not been declared.
Declared ordinary dividends are year-end items by nature and fall in the post-acquisition
period.
91
6.4 PRESENTATION OF THE CONSOLIDATED STATEMENT OF PROFIT
OR LOSS AND OTHER COMPREHENSIVE INCOME AND THE
CONSOLIDATED STATEMENT OF CHANGES IN EQUITY
The first step in preparing the consolidated statement of profit or loss and other comprehensive
during the current financial year is to apportion the income and expenditure of the current year
between pre- and post-acquisition periods. Once we have done this, we can draw up the
consolidated statement of profit or loss and other comprehensive income and the consolidated
statement of changes in equity using one of two methods.
In this module, we will only deal with the first method, where only the post-acquisition profits
are included in the operating profit.
EXAMPLE 1
The following are the trial balances of Sandy Ltd and South Ltd for the year ended
31 December 20.2:
Sandy South
Ltd Ltd
R R
Share capital - ordinary shares (800 000/355 000 shares) (800 000) (355 000)
Retained earnings - 1 January 20.2 (480 000) (120 000)
Gross profit (422 700) (166 200)
Dividends received - 31 December 20.2 (23 800) -
Staff costs 95 000 35 000
Interest paid on bank overdraft 3 800 -
Income tax expense 12 000 4 200
Dividends declared and paid - 31 December 20.2 80 000 34 000
Property, plant and equipment at carrying amount 861 600 426 200
Investment in South Ltd at fair value
- 248 500 shares purchased on 1 July 20.2 364 700 -
Cash at bank 126 700 51 800
Inventory 72 200 43 000
South Ltd became a subsidiary of Sandy Ltd on 1 July 20.2. The profit of South Ltd was earned
evenly throughout the year. Consider the carrying amount of the assets and liabilities of South
Ltd to be equal to the fair value thereof at the date of acquisition, with the exception of land and
building. The excess of the purchase price over the net carrying amount of the assets at the
92
date of acquisition was due to the difference between the carrying amount and the fair value of
the land and buildings.
REQUIRED
income and the consolidated statement of changes in equity of the Sandy
Ltd Group for the year ended 31 December 20.2 in compliance with the
requirements of International Financial Reporting Standards. Do all
calculations to the nearest rand.
SOLUTION 1
SANDY LTD GROUP

Notes R
[422 700 + (166 200/12 x 6)]
Administrative expenses (246 500)
[102 000 + (42 000/12 x 6)] + [95 000 +
(35 000/12 x 6)] + [8 500 + (5 000/12 x 6)]
Finance costs (3 800)
Income tax expense [12 000 + (4 200/12 x 6)] (14 100)

Owners of the parent (241 400 í 12 000) 229 400
Non-controlling interests (b)12000
241 400
93
SANDY LTD GROUP
Profit before tax is arrived at after taking into account the following: R
Expenses
Depreciation (102 000 + 21 000) 123 000
Staff costs (95 000 + 17 500) 112 500
SANDY LTD GROUP

31 DECEMBER 20.2
Non-
Total controlling
interests
R R R R R
Balance at 1 January 20.2 800 000 480 000 1 280 000 – 1 280 000
Equity on date of
156 300(a) 156 300
acquisition
Total comprehensive
income for the year
Balance at 31 December
800 000 629 400 1 429 400 158 100(d) 1 587 500
20.2
94
Calculations
1. Analysis of owners' equity of South Ltd
(1)
Sandy Ltd 70 % NCI
Total At Since
30%
R R R R
At acquisition
Share capital 355 000 248 500 106 500
(1/1/20.2)
(2)
(1/1/20.2 – 1/7/20.2)
(4) (3)
Revaluation of land and 6 000 4 200 1 800
buildings
(a)
521 000 364 700 156 300

Since acquisition
Current year
(5) (b)
(c)
Dividends (34 000) (23 800) (10 200)
527 000 4 200 (d)

158 100
(1) 248 500/355 000 x 100 = 70%

(2) Refer to calculation 2.
(3) 364 700 - 248 500 - 84 000 - 28 000 = 4 200 (balancing figure)
(4) 4 200/70% = 6 000
(2) Refer to calculation 3.
95
2. Allocation of items in the statement of profit or loss and other comprehensive
kjlkjlkjincome
1/1/20.2 1/7/20.2
Total
to to
30/6/20.2 31/12/20.2
R R R
Gross profit 166 200 83 100 83 100
Auditors' remuneration (5 000) (2 500) (2 500)
Depreciation (42 000) (21 000) (21 000)
Staff costs (35 000) (17 500) (17 500)
Income tax (4 200) (2 100) (2 100)
Profit earned throughout the year 80 000 40 000(2) 40 000(5)
Dr Cr NCI
R R R
Investment in South Ltd 364 700
156 300 (a) 156 300
Non-controlling interests
Elimination of owners' equity of South Ltd
at acquisition

12 000 (b) 12 000
Recording of non-controlling interests in
profit after tax
Dividends received – Sandy Ltd 23 800

Non-controlling interests (SFP) 10 200 (c) (10 200)

Dividends paid – South Ltd 34 000
Elimination of intragroup dividend and
recording of non-controlling interests in
dividend
(d) 158 100
According to the alternative method, we include both the pre- and post-acquisition profits after
tax of the subsidiary in the profit after tax for the year. Thereafter, we deduct the profit earned
by the subsidiary before acquisition of the controlling interest in order to determine the profit of
the group for the year. You will not be tested on this method in FAC2602.
96
6.5 EFFECTIVE DATE OF ACQUISITION
The date of acquisition is the date on which control over the net assets and operations of the
subsidiary is effectively transferred to the parent. In practice, there must be certainty as to the
date of acquisition as this is the date from which the results of the subsidiary must be included
in the group annual financial statements. The following are possible dates to consider for the
date of acquisition:
x the date on which substantial agreement is reached

x the date on which control over the net assets and activities of the subsidiary is transferred
to the parent
x the date of signing of the agreement
x the date specified in the agreement
x the date of payment of the purchase consideration
97
6.6 EXERCISE
Your e-tutor can guide you with the completion of these questions.
QUESTION 1
West Ltd became a subsidiary of East Ltd on 1 January 20.2. Consider the carrying amount of
the assets and liabilities of West Ltd to be equal to the fair value thereof at the date of
acquisition.
The following are the trial balances of East Ltd and West Ltd for the year ended
30 September 20.2:
East West
Ltd Ltd
R R
Credits
–12% preference shares (20 000 shares) 20 000 –
6% Debentures 100 000 45 000
Retained earnings – 1 October 20.1 800 000 305 000
Sales 607 000 428 250
Interest received – 2 400
Dividends received 3 750 –
Dividends payable 10 000 –
Bank 4 000 –
Accumulated depreciation 53 500 22 950
Long-term borrowing – Bank Ltd – 105 000
1 681 550 1 081 440
Debits
Cost of sales 390 000 285 500
Administrative expenses 65 000 47 000
Interest paid – debentures 4 500 2 700
Income tax at 28% 36 960 20 202
Bank – 18 000
Dividends declared – 30 September 20.2 10 000 –
Investment in West Ltd (75% equity) at fair value 349 453 –
Investment in South Ltd – 6% debentures at fair value – 40 000
1 681 550 1 081 440
98
1. West Ltd applied for a loan at Bank Ltd on 1 July 20.1. Bank Ltd granted the loan at an
interest rate of 20% per annum for a period of five years. The interest for the year ended
30 September 20.2 has not been recorded yet and is payable on 1 October 20.2. Capital
repayment will only start in 20.4.
2. The sales of West Ltd are seasonal. 60% of the sales occurred during the first six months of
the financial year. The remaining amount of the sales figure was earned evenly spread over
the rest of the financial year. West Ltd maintains a gross profit percentage of 50% on the
cost price. All other income and expenditure were received and spent evenly throughout
the year. Income tax must be apportioned according to the profit before tax for that period.
REQUIRED
Draft the consolidated annual financial statements of the East Ltd Group for
the year ended 30 September 20.2 in compliance with the requirements of
International Financial Reporting Standards (IFRS). Do all calculations to
the nearest rand.
99
SOLUTION 1
QUESTION 1
EAST LTD GROUP

CONSOLIDATED STATEMENT OF FINANCIAL POSITION AS AT 30 SEPTEMBER 20.2
R
ASSETS
Non-current assets
(481 100 + 452 000 – 53 500 – 22 950)
Goodwill 13 358
Investment in South Ltd – 6% debentures at fair value 40 000
910 008
Current assets
540 775
Total assets 1 450 783

Share capital (75 000 + 20 000) 95 000
Retained earnings(e) 893 907
988 907
Non-controlling interests(d) 119 236
Total equity 1 108 143
6% Debentures (100 000 + 45 000) 145 000
Long-term borrowing 105 000
250 000
Current liabilities
Trade and other payables (8 300 + 47 840 + 21 000(f) + 1 500(g)) 78 640
Dividends payable 10 000
92 640
Total equity and liabilities 1 450 783
(f) R105 000 loan x 20% = R21 000

(g) R100 000 debentures x 6% = R6 000
.In trial balance = R4 500
.Additional provision = R6 000 - R4 500 = R1 500
100
EAST LTD GROUP
INCOME FOR THE YEAR ENDED 30 SEPTEMBER 20.2
Notes R
Revenue (607 000 + 299 775(2)) 906 775
Cost of sales (390 000 + 199 850) (589 850)
Other income(7) 1 800
Administrative expenses (15 500 + 1 725(5) + 65 000 + 35 250(4)) (117 475)
Finance cost (4 500(g) + 1 500(g) + 17 775(6)) (23 775)
Income tax expense (36 960 + 13 153(8)) (50 113)
– Owners of the parent (127 362 - 8 455) 118 907
– Non-controlling interests b)8 455

127 362
EAST LTD GROUP

NOTES FOR THE YEAR ENDED 30 SEPTEMBER 20.2
R
Income
Income from investment(7) 1 800
Expenses
Depreciation (15 500 + 1 725(5)) 17 225
101
EAST LTD GROUP
30 SEPTEMBER 20.2
12%
Ordi- Non-
prefe-
nary Retained control- Total
rence Total
share earnings ling equity
share
capital interests
capital
R R R R R R
Balance at 895 000
75 000 20 000 800 000 – 895 000
1 October 20.1
Equity on date of acquisition 112 031(a) 112 031
for the year
Dividend declared: ordinary (10 000) (10 000) – (10 000)
Balance at
75 000 20 000 893 907(e) 988 907 119 236(d) 1 108 143
30 September 20.2
Calculations
1. Analysis of owners' equity of West Ltd
East Ltd 75%(1)
NCI
Total At Since 25%
R R R R
At acquisition
Share capital 125 000 93 750 31 250
Retained earnings 1/10/20.1 305 000 228 750 76 250
(9)
(a)
448 126 336 095 112 031
Equity represented by goodwill
jjj- parent 13 358 13 358 -
Since acquisition to end of
the current year
(10) (b)
(c)
Dividends (5 000) (3 750) (1 250)
(d)
490 306 21 617 119 236
102
2. Allocation of items in the statement of profit or loss and other comprehensive
hjhkjhincome
Total 1/10/20.1 1/1/20.2

to to
31/12/20.1 30/9/20.2
R R R
Sales 428 250 (2) 128 475 (2) 299 775
Cost of sales (285 500) (85 650) (199 850)
Gross profit 33,3% (50/150) 142 750 (3) 42 825 (3) 99 925
Administrative expenses (47 000) (4) (11 750) (4) (35 250)
Depreciation (2 300) (5) (575) (5) (1 725)
Profit from operations 93 450 30 500 62 950
Finance costs (2 700 + 21 000 (f)) (23 700) (6) (5 925) (6) (17 775)
Income from investments 2 400 (7) 600 (7) 1 800
Profit before tax 72 150 25 175 46 975
Income tax expense (20 202) (8) (7 049) (8) (13 153)
PROFIT FOR THE YEAR 51 948 (9) 18 126 (10) 33 822
(1)
75% equity (given)
(2)
Sales
R428 250 x 60% = R256 950 for the first six months
? for the first three months = R256 950/2 = R128 475
? for the remaining nine months = R428 250 - R128 475 = R299 775
(3)
Gross profit
R128 475 x 50/150 = R42 825
R299 775 x 50/150 = R99 925
(4)
Administrative expenses
R47 000 x 3/12 = R11 750
R47 000 x 9/12 = R35 250
(5)
Depreciation
R2 300 x 3/12 = R575
R2 300 x 9/12 = R1 725
(6)
Finance costs
(R21 000 + R2 700) x 3/12 = R5 925
(R21 000 + R2 700) x 9/12 = R17 775
(7)
Income from investments
R2 400 x 3/12 = R600
R2 400 x 9/12 = R1 800
(8)
Income tax expense
R25 175 x 28% = R7 049
R46 975 x 28% = R13 153
103
3. Entry in the financial records of West Ltd
Dr Cr NCI
R R R
Interest paid on long-term borrowings 21 000
Trade and other payables 21 000

Retained earnings (305 000 + 18 126 (a)) 323 126
Goodwill 13 358
Investment in West Ltd 349 453
Non-controlling interests 112 031 (a) 112 031
Elimination of owners' equity of West Ltd at
acquisition

Non-controlling interests (SFP) 8 455 (b) 8 455
Recording of non-controlling interests in profit after
tax
Dividends received – East Ltd 3 750

Non-controlling interests (SFP) 1 250 (c) (1 250)
Dividends paid – West Ltd 5 000
Elimination of intragroup dividend and recording of
non-controlling interests in dividends
(d) 119 236
SELF-ASSESSMENT
x allocate the profit of the subsidiary in the year of acquisition between, at
and since acquisition?
x draft the consolidated annual financial statements where the interest in
a subsidiary was acquired on a date other than at the end of the financial
year in accordance with International Financial Reporting Standards?
104
FAC2602
LEARNING UNIT 7
ELIMINATION OF
INTRAGROUP
TRANSACTIONS
Introductiontogroup
105 annualfinancial
statements
LEARNING OUTCOME
Students should be able to eliminate intragroup transactions in consolidated financial
statements of companies according to International Financial Reporting Standards.
OVERVIEW
The study unit is divided into the following:
7.1 INTRODUCTION ....................................................................................................... 107

7.2 INTRAGROUP BILLS OF EXCHANGE AND BANK OVERDRAFTS ....................... 107
7.3 REVALUATION OF PROPERTY, PLANT AND EQUIPMENT .................................. 108
7.4 UNREALISED PROFIT IN TRADING INVENTORIES ............................................... 115
7.5 PROPERTY, PLANT AND EQUIPMENT HELD BY COMPANIES IN THE GROUP 126
7.6 EXERCISES .............................................................................................................. 149
SELF-ASSESSMENT .......................................................................................................... 159
KEY CONCEPTS
x Intragroup bills of exchange
x Discounting of bills of exchange
x Property, plant and equipment
106
ASSESSMENT CRITERIA
x record intragroup bills of exchange and bank overdrafts correctly in the
consolidated annual financial statements of companies
x determine the surplus when revaluing property in respect of an interest
in a subsidiary at acquisition
x calculate the unrealised profit effect in trading inventories in both the
parent and the subsidiary
x draft the consolidated annual financial statements of a group if the sale of
property, plant and equipment or inventory have taken place between
companies in the group in accordance with International Financial
Reporting Standards
7.1 INTRODUCTION
In the preceding learning units, we introduced you to the basic consolidation process for wholly
and partly-owned subsidiaries.
In this learning unit, we deal mainly with other intragroup transactions that take place in groups
and therefore have to be eliminated for consolidation purposes. We will deal with trading
inventories as well as the property, plant and equipment held in a group.
We would like to emphasise that we do not deal with taxation on unrealised intragroup
profits or losses in this module.
7.2 INTRAGROUP BILLS OF EXCHANGE AND BANK OVERDRAFTS

A bill of exchange is a negotiable document. It is a written instruction directed by one person to
another instructing that person to pay, upon demand, a certain sum of money to the person
nominated in the bill of exchange.
For example:
Bill no. 111 30/10/20.8
To: P Ltd Amount: R2 000
Pay the amount of R2 000 to S Ltd on 30/11/20.8.
S Ltd would treat it as a bill receivable in its records, while P Ltd would show it as a bill payable.
Upon consolidation, the subsidiary's bill receivable would be offset against the bill payable in
P Ltd's records. From a group perspective, the group cannot enter into a transaction with itself.
107
S Ltd could have converted the bill into cash before 30/11/20.8 by selling it to a financial
institution. This type of transaction is known as discounting.
On consolidation, we may only offset the bank overdraft of one company in the group against
the favourable bank balance of another company if
x both companies have their accounts at the same bank; and

x the company with the favourable balance has guaranteed the overdraft of the other
company; or
x the bank itself would offset the two amounts against each other in terms of an agreement
between the two companies and the bank.
7.3 REVALUATION OF PROPERTY, PLANT AND EQUIPMENT

The assets of a subsidiary could be revalued at the date of acquisition of the interest if the
carrying amounts and market values of the assets differ.
The following two situations may arise:
x The subsidiary's assets may be revalued merely for the purposes of determining the
purchase price, without a journal entry being made in the subsidiary's financial records.
x The assets of the subsidiary may be revalued in order to determine the purchase price, and
an adjustment is subsequently made in the subsidiary's financial records.
The revaluation of assets may lead to capital gains tax, which is ignored for the purposes of
this module.
We will use the following two questions as examples to explain the two situations to you:
108
QUESTION 1
A Ltd acquired 80 000 shares in B Ltd on 1 July 20.1. Each share carries one vote. At that date,
the land belonging to B Ltd were valued at R200 000. No adjustment was made in the financial
records of B Ltd.
The retained earnings were R46 000. At 30 June 20.4, the trial balances of A Ltd and B Ltd were
as follows:
A Ltd B Ltd
R R
Credits
Long-term borrowings – C Ltd 140 000 –
– A Ltd – 80 000
576 000 338 000
Debits
Land at cost price 250 000 140 000
Investment in B Ltd at fair value (cost price: R164 800) 164 800 –
Loan – B Ltd 80 000 –
576 000 338 000
1. Consider the carrying amount of all the other assets and liabilities of B Ltd to be equal to
the fair value thereof at the date of acquisition.
REQUIRED
Draft the consolidated statement of financial position of the A Ltd Group as at
30 June 20.4 in compliance with the requirements of International Financial
Reporting Standards.
109
SOLUTION 1
A LTD GROUP
R
ASSETS
Non-current assets
Current assets (81 200 + 198 000) 279 200

Retained earnings (121 000 + 36 800(b)) 157 800
457 800
Non-controlling interests(a) 50 400
Long-term borrowings 140 000
110
Calculations
A Ltd 80 %*
Total At Since NCI 20 %
R R R R
At acquisition
Share capital 100 000 80 000 20 000
60 000 48 000 12 000
Revaluation surplus
(200 000 - 140 000)
206 000 164 800 41 200
Since acquisition
to end of the current year
Retained earnings
(92 000 - 46 000) 46 000 36 800 9 200
(b) (a)
252 000 36 800 50 400
* 80 000/100 000 shares x 100% = 80%
2. Entry in the separate financial records of B Ltd
Per the information, B Ltd has not yet included this in its financial records:
Dr Cr
R R
Land 60 000
Revaluation of land and buildings
111
Dr Cr NCI
R R R
Goodwill NIL
Non-controlling interests (SFP) 41 200 41 200

B Ltd for the period 1 July 20.1 to 30 June 20.4

Loan – A Ltd 80 000
Loan – B Ltd 80 000
50 400(a)
112
QUESTION 2
P Ltd acquired a 70% interest in S Ltd at 1 May 20.2. Each share carries one vote. At the
date of acquisition, P Ltd valued the land and buildings belonging to S Ltd with the carrying
amount of R200 000 at R300 000. It is company policy to value the land and buildings
belonging to S Ltd every second year at 31 August. At the date of acquisition, the retained
earnings of S Ltd were R20 000.
The following represent the condensed trial balances of P Ltd and S Ltd at 31 December 20.6:
P Ltd S Ltd
R R
Credits
Long-term borrowing – P Ltd – 100 000
Revaluation of land and buildings 100 000 150 000
500 000 390 000
Debits
Land at valuation 200 000 350 000
Investment in S Ltd at fair value (cost price: R140 000) 140 000 –
Unsecured loan – S Ltd 100 000 –
500 000 390 000
Consider the carrying amount of all the other assets and liabilities of S Ltd to be equal to the
fair value thereof at the date of acquisition.
REQUIRED
at 31 December 20.6 in compliance with the requirements of International
113
SOLUTION 2
P LTD GROUP
ASSETS
Non-current assets
Current assets (60 000 + 40 000) 100 000

Other components of equity (100 000 + 35 000(1)) 135 000
409 000
Non-controlling interests(3)/(a) 81 000
Calculations
P Ltd 70%
NCI
Total At Since 30%
R R R R
At acquisition
Share capital 80 000 56 000 24 000
(300 000 - 200 000)
200 000 140 000 60 000
Purchase difference
- - -
Consideration and NCI
200 000 140 000 60 000
Since acquisition
To end of the current year
Retained earnings
(40 000 - 20 000) 20 000 14 000 RE 6 000
Revaluation surplus
(150 000 - 100 000) 50 000 35 000 OCE 15 000
(2)
270 000 14 000 RE 81 000(3)
35 000(1) OCE
RE = retained earnings
OCE = other components of equity
114
Dr Cr NCI
R R R
Goodwill NIL

Recording of non-controlling interests in S Ltd for the
period 1 May 20.2 to 31 December 20.6

Recording of non-controlling interests in the
revaluation surplus of S Ltd for the period
1 May 20.2 to 31 December 20.6
Loan – P Ltd 100 000

Loan – S Ltd 100 000
Elimination of intragroup loans 81 000(a)
7.4 UNREALISED PROFIT IN TRADING INVENTORIES

As mentioned previously, the purpose of consolidated annual financial statements is to offer
annual financial statements after the elimination of all intragroup transactions.
We should eliminate those profits or losses on transactions within the group, as the group is
regarded as one economic entity and will not enter into transactions with itself.
P Ltd o S Ltd o X Ltd
Suppose P Ltd sells inventories to S Ltd at a cost price of R1 000 plus 20% profit. S Ltd packs
the inventories and sells them to X Ltd, a company outside the group, at R1 500.
The following situation may arise from this scenario:
x All the inventories have been sold to X Ltd by the end of the year. There will be no change
to the consolidated annual statements as the profit is actually realised by selling it to a
company outside the group.
x If no inventories have been sold to X Ltd, we should eliminate the unrealised profit
of R200 (20% x R1 000) as the profit has not yet realised outside the group. The inventory
of S Ltd and P Ltd's profit include this amount. To eliminate the unrealised profit, S Ltd has
115
to subtract the R200 from its closing inventory (i.e. inventory should be credited), while P
Ltd has to decrease its profit by debiting cost of sales with R200.
x If half the inventories have been sold outside the group, R100 should be eliminated.
A very important aspect of consolidations is that we must start by determining which company
is selling the inventories and which company is buying them.
P Ltd
sells to
S Ltd
If P Ltd sells inventories to S Ltd, P Ltd is making the profit, and no adjustment to non-
controlling interest is necessary.
P Ltd
sells to
S Ltd
If S Ltd sells inventories to P Ltd, S Ltd is making the profit, and the non-controlling interest
must be adjusted by its percentage interest in profit or loss. (This adjustment is made in the
analysis of the owners' equity.)
Note: Unrealised profits and losses have income tax implications, but we ignore these
for the purposes of this module. We will deal with this on third-year level.
116
EXAMPLE 1
Parent sells inventories to subsidiary

The following are the trial balances of A Ltd and its subsidiary, B Ltd, at 31 December 20.8:
A Ltd B Ltd
R R
Share capital – ordinary shares (200 000/100 000 shares) (200 000) (100 000)
Retained earnings – 1 January 20.8 (120 000) (80 000)
Profit before tax (80 000) (60 000)
Investment in B Ltd – 80 000 ordinary shares
at fair value (cost price: R80 000) 80 000 -
1. A Ltd acquired its interest in B Ltd at the time of the incorporation of B Ltd.
2. B Ltd purchases all its inventories from A Ltd at cost price plus 25%. The inventories on
B Ltd's financial records amounted to R20 000 at 1 January 20.8.
3. A Ltd's total sales to B Ltd during 20.8 amounted to R100 000.
REQUIRED
Draft the consolidated annual financial statements of the A Ltd Group for the
year ended 31 December 20.8 in compliance with the requirements of
117
SOLUTION 1
A LTD GROUP
ASSETS R
Non-current assets
400 000
Current assets
25 )]
Inventories [50 000 + 30 000 - (30 000 x 125 74 000
194 000

Retained earnings(4) 260 000
460 000
Non-controlling interests(2)/(c) 44 000
Current liabilities
A LTD GROUP
R
[80 000 + 60 000 - 100 000 (sales) + 100 000 (purchases) -
25 ) + (20 000 x 25 )]
(30 000 x 125 125

Non-controlling interests(3)/(b) 8 000
88 000
118
A LTD GROUP
31 DECEMBER 20.8
Non-
Total
interests
R R R R R
Balance at
1 January 20.8 200 000 180 000* 380 000 36 000(a) 416 000
20.8
Total comprehensive
income for the year
Balance at (4)260
200 000 000 460 000 44 000(c) 504 000
31 December 20.8
* [120 000 - (20 000 x 25

125) + 64 000(1) ]
Calculations
A Ltd 80 %* NCI
Total At Since 20 %
R R R R
At acquisition
Share capital 100 000 80 000 20 000
Since acquisition
(1)
• Current year (3)
Profit for the year (60 000 - 40 000 32 000 8 000
20 000)
(2)
220 000 96 000 44 00
* 80 000/100 000 share x 100% = 80%
119
Dr Cr NCI
R R R
Goodwill NIL

Recording of non-controlling interests in B Ltd for
the period ended 31 December 20.7 (a) 36 000
8 000 (b) 8 000
tax
Income – sales (A Ltd) 100 000

Cost of sales (B Ltd) 100 000
Elimination of intragroup sales
Cost of sales (A Ltd) 6 000

Inventory (B Ltd) 6 000
Elimination of unrealised intragroup profit included
in closing inventory of
B Ltd (30 000 x 125
25 )
Retained earnings (A Ltd) 4 000

Cost of sales (A Ltd) 4 000
in opening inventory of
25)
B Ltd (20 000 x 125 (c) 44 000
COMMENT
x Note that in this example, the parent sold inventories to the subsidiary. The unrealised
profit was therefore included in the profit of A Ltd, and there were consequently no
adjustments in the analysis of owners' equity of B Ltd, but only in the consolidated
statement of profit or loss and other comprehensive income.
x Also note that sales and cost of sales are not always given in questions. You will then
have to make all adjustments against profit before tax.
120
x It is very important to understand the journal entries. When you know which accounts
need to be debited or credited, you will know where the amounts should be added or
subtracted in the statements.
x We need to eliminate all intragroup transactions. When a shareholder or outsider

evaluates the group's statements, the group is regarded as one economic entity. As the
single entity will not enter into transactions with itself, we should eliminate any sales
between companies in the group. Therefore, we need to eliminate the intragroup sales
of R100 000 mentioned in point 3 of the additional information. When these sales took
place, A Ltd credited sales as it sold these goods. B Ltd debited its inventory with the
purchase. We assume B Ltd sold this inventory and hence had already affected cost of
sales. To eliminate the intragroup sales, we will debit the sales of A Ltd with R100 000,
hence subtracting the amount from sales. We will credit the cost of sales of B Ltd, hence
decreasing cost of sales.
x A Ltd sells inventory to B Ltd at a profit of 25%. Both B Ltd's inventory left at year-end,
and A Ltd's profit includes this intragroup profit. Since we evaluate the companies as a
single entity, we need to eliminate the intragroup profit (unrealised profit) as it was profit
earned from within the group but had not yet been realised outside the group.
x At year end, B Ltd has inventory obtained from A Ltd in its financial records amounting to
R30 000. A Ltd made a profit of 25%. To calculate the unrealised profit portion, we have
to recognise that the R30 000 already includes 25% profit, which makes it 125%. We
calculate the profit of 25% as follows: R30 000 x 25 /125 = R6 000
x To eliminate the unrealised profit, B Ltd has to subtract the R6 000 from its closing
inventory in the statement of financial position. We therefore credit inventory to decrease
it. We should also decrease A Ltd's profit by debiting cost of sales. Profit decreases when
we debit cost of sales, but the R6 000 is added to cost of sales. Refer to the journal
entries.
x In the previous year, the journal entry for eliminating the unrealised profit of R4 000 was
performed similar to what is described above. On consolidation, we have to repeat all the
entries annually because we combine the individual companies' financial records
annually and these current record does not contain the consolidation entries of the
previous year. If profit was affected in the previous year, we need to adjust the retained
earnings in the current year. Therefore, the cost of sales of R4 000 that would have been
debited in the previous year, will be debited against the retained earnings in the current
year. Due to the general view that the operating cycle of entities is normally a year, we
assume that B Ltd actually sold this inventory to outside parties within a year, hence the
profit is realised. Therefore, we credit cost of sales in A Ltd to increase the profit again.
Crediting the cost of sales implies that the cost of sales decreases, so the R 4 000 is
subtracted from cost of sales in the statements.
121
EXAMPLE 2
Subsidiary sells inventories to parent

The following are the trial balances of D Ltd and its subsidiary, E Ltd, at 31 December 20.8:
D Ltd E Ltd
R R
Share capital – ordinary shares (200 000/100 000 shares) (200 000) (100 000)
Retained earnings – 1 January 20.8 (120 000) (80 000)
Profit before tax (80 000) (60 000)
Investment in E Ltd – 80 000 ordinary shares
1. D Ltd acquired its interests in E Ltd at the time of the incorporation of E Ltd.
2. D Ltd purchased all its inventories from E Ltd at cost price plus 25%. The inventories on
D Ltd's books amounted to R40 000 at 1 January 20.8.
2. Total sales of E Ltd to D Ltd amounted to R100 000 during 20.8.
REQUIRED
Draft the consolidated annual financial statements of the D Ltd Group for the
122
SOLUTION 2
D LTD GROUP
ASSETS R
Non-current assets
400 000
Current assets
Inventories [50 000 + 30 000 í (50 000 x 25
125
)] 70 000
190 000

458 000
Current liabilities
D LTD GROUP
R
[80 000 + 60 000 í 100 000 (sales) + 100 000 (purchases) –
25 ) + (40 000 x 25 )]
(50 000 x 125 125

Owners of the parent (88 000 – 7 600) 80 400
88 000
123
D LTD GROUP
31 DECEMBER 20.8
Non-
Total
interests
R R R R R
Balance at
200 000 177 600* 377 600 34 400(a) 412 000
1 January 20.8
20.8
Total comprehensive
income for the year
Balance at
200 000 258 000 458 000 42 000(c) 500 000
31 December 20.8
* [120 000 + 57 600(1))

(a) (20 000(4) + 14 400(5))
Calculations
1. Analysis of owners' equity of E Ltd
D Ltd 80 %* NCI
Total At Since 20%
At acquisition R R R R
Share capital 100 000 80 000 20 000
(4)
Since acquisition
(1) (5)
[80 000 – (40 000 x125 25 )
• Current year
(3)
Profit for the year [(60 000 - 38 000 30 400 7 600
20 000 + (40 000 x125 25 ) –
(50 000 x12525 )]
(2)
210 000 88 000 42 000
* 80 000/100 000 shares x 100% = 80%
124
Dr Cr NCI
R R R
Goodwill NIL
Investment in E Ltd 80 000
Elimination of owners' equity of E Ltd at
acquisition

Recording of non-controlling interests in E Ltd for
the period ended 31 December 20.7
(a) 34 400

7 600 (b) 7 600
after tax

Income – sales (E Ltd) 100 000
Cost of sales (D Ltd) 100 000
Cost of sales (E Ltd) 10 000

Inventory (D Ltd) 10 000
in closing inventory of D Ltd
(50 000 x 125
25 )

Retained earnings (E Ltd) 8 000
Cost of sales (E Ltd) 8 000
in opening inventory of D Ltd
(40 000 x 25 ) (c) 42 000
125
125
COMMENT
x Since the subsidiary in this example has sold the inventories and made the profit, we
should also bring into account the adjustments in respect of unrealised profit in the
analysis of owners' equity.
x You have probably realised that we can quickly test whether the analysis of owners' equity
balances.
– To see whether the columns have been correctly added up, we can say:
80 000 (at acquisition)

88 000 (since acquisition)
42 000 (non-controlling interests)
R210 000 (total)
– To see whether the non-controlling interest column has been correctly calculated, we
can say:
Total = R210 000
Non-controlling interests = 20%
Therefore, the non-controlling interests column must be equal to
R210 000 x 20% = R42 000.
7.5 PROPERTY, PLANT AND EQUIPMENT HELD BY COMPANIES IN THE

GROUP
We should eliminate any profit realised when an asset belonging to one company in the group
is sold to another company in the group. However, the company that purchased the asset is
still providing for too much depreciation because the profit is included in the cost price of the
asset in its books. We should write back this portion of the depreciation for consolidation
purposes.
The unrealised profit on assets is realised either through the sale of the asset to an outsider
or the use of the asset at the rate of depreciation.
The following four situations may arise where assets are sold within a group:
x The parent sells non-depreciable assets to the subsidiary.

x The subsidiary sells non-depreciable assets to the parent.
x The parent sells depreciable assets to the subsidiary.
x The subsidiary sells depreciable assets to the parent.
Note: Unrealised profits and losses have income tax implications, which we ignore for
the purposes of this module. We will deal with this section on third-year level.
126
Study the following examples carefully as they provide a detailed explanation of the sale of
assets within a group:
EXAMPLE 1
Parent sells non-depreciable asset to subsidiary

The following represent the abridged statements of D Ltd and its subsidiary, E Ltd, at
31 December 20.9:
D Ltd E Ltd
R R
ASSETS
Investment in E Ltd
௅ 70 000 ordinary shares at fair value 77 000 -
277 000 182 000
Share capital – ordinary shares 200 000 100 000
(200 000/100 000 shares)
277 000 182 000

D Ltd E Ltd
R R

127

D Ltd E Ltd D Ltd E Ltd D Ltd E Ltd
R R R R R R
the year
Balance at
31 December 20.9 200 000 100 000 29 000 37 000 229 000 137 000
1. D Ltd acquired its interest in E Ltd on 1 January 20.7, on which date E Ltd's retained
earnings amounted to R10 000. Consider the carrying amount of the assets and liabilities
of E Ltd to be equal to the fair value thereof at the date of acquisition.
2. On 1 January 20.9, E Ltd bought property with a carrying amount of R40 000 from D Ltd.
D Ltd made a profit of R10 000.
REQUIRED
Draft the consolidated financial statements of the D Ltd Group for the year
128
SOLUTION 1
D LTD GROUP
ASSETS R
Non-current assets
Property, plant and equipment (180 000 + 150 000 ௅ 10 000 profit) 320 000
Current assets (20 000 + 32 000) 52 000

237 900
D LTD GROUP
R
Profit before tax (20 000 + 30 000 - 10 000 profit) 40 000
25 000
129
D LTD GROUP
31 DECEMBER 20.9
Non-
control-
Total ling
interest
s
R R R R R
Balance at
200 000 19 200* 219 200 34 800(a) 254 000
1 January 20.9
20.9
Total comprehensive
income for the year
Balance at
200 000 37 900 237 900 41 100(c) 279 000
31 December 20.9
(2)
* (15 000 + 4 200 )
(4) (5)
(a) (33 000 + 1 800 )
Calculations
1. Analysis of owners' equity of E Ltd
D Ltd 70 %* NCI
Total At Since 30 %
R R R R
At acquisition
Share capital 100 000 70 000 30 000
110 000 77 000 33 000
(4)
Since acquisition
• To beginning of current year (5)
(2)
(16 000 - 10 000 at acquisition)
(3)
137 000 18 900 41 100
* 70 000/100 000 shares x 100% = 70%
130
Dr Cr NCI
R R R
Goodwill NIL
Investment in E Ltd 77 000
Elimination of owners' equity of E Ltd at acquisition

Recording of non-controlling interests in E Ltd for the
period ended 31 December 20.8
34 800(a)
Non-controlling interests (SFP) 6 300 6 300(b)
Profit from sale of property (D Ltd) 10 000

Property (E Ltd) 10 000
Elimination of unrealised intragroup profit included in E
Ltd's property
41 100(c)
131
EXAMPLE 2
Subsidiary sells non-depreciable asset to parent

The following represent the abridged statements of Q Ltd and its subsidiary, R Ltd, at 31
December 20.9:
Q Ltd R Ltd
R R
ASSETS
Investment in R Ltd – 70 000 ordinary shares at fair value (cost 77 000 -
price: R77 000)
277 000 182 000
277 000 182 000

Q Ltd R Ltd
R R
132

Q Ltd R Ltd Q Ltd R Ltd Q Ltd R Ltd
R R R R R R
for the year
200 000 100 000 29 000 37 000 229 000 137 000
20.9
1. Q Ltd acquired its interest in R Ltd on 1 January 20.7, on which date R Ltd's retained
earnings amounted to R10 000. Consider the carrying amount of the assets and liabilities
of R Ltd to be equal to the fair value thereof at the date of acquisition.
2. On 1 January 20.8, Q Ltd bought property with a carrying amount of R40 000 from R Ltd.
R Ltd made a profit of R10 000.
REQUIRED
Draft the consolidated financial statements of the Q Ltd Group for the year
133
SOLUTION 2
Q LTD GROUP
R
ASSETS
Non-current assets
Property, plant and equipment (180 000 + 150 000 ௅ 10 000 profit) 320 000
Current assets (20 000 + 32 000) 52 000

240 900
Q LTD GROUP
R

35 000
134
Q LTD GROUP
31 DECEMBER 20.9
Non-
Total
interests
R R R R R
Balance at
200 000 12 200* 212 200 31 800(a) 244 000
1 January 20.9
20.9
Total comprehensive
income for the year
Balance at
200 000 40 900 240 900 38 100(c) 279 000
31 December 20.9
(2)
* (15 000 - 2 800 )
(4) (5)
(a) (33 000 - 1 200 )
Calculations
1. Analysis of owners' equity of R Ltd
Q Ltd 70 %* NCI
Total At Since 30 %
R R R R
At acquisition
Share capital 100 000 70 000 30 000
110 000 77 000 33 000
(4)
Since acquisition
year (2) (5)
Retained earnings (4 000) (2 800) (1 200)
(16 000 - 10 000 at
h.acquisition - 10 000 profit)
• Current year
(1)
(3)
127 000 11 900 38 100
* 70 000/100 000 shares x 100% = 70%
135
Dr Cr NCI
R R R
Goodwill NIL
Investment in R Ltd 77 000
Elimination of owners' equity of R Ltd at acquisition

Non-controlling interests 1 200 (1 200)
Recording of non-controlling interests in R Ltd for the
period ended 31 December 20.8
31 800(a)

Retained earnings - beginning of year (R Ltd) 10 000
Property (Q Ltd) 10 000
Elimination of unrealised intragroup profit included in Q
Ltd's property
38 100(c)
COMMENT
Note that R Ltd sold the property in a previous financial year, and the transaction therefore
has no effect on the current year's statement of profit or loss and other comprehensive
income. However, it does have an effect on the opening balance of retained earnings in the
statement of changes in equity. As the subsidiary made the profit, we take the R4 000 into
account in the analysis of owners' equity under the "since acquisition to beginning of current
year" section (R2 800), and this affects the opening balance of retained earnings.
136
EXAMPLE 3
Parent sells depreciable asset to subsidiary

The following represent the condensed statements of A Ltd and its subsidiary, B Ltd, at
31 December 20.9:
A Ltd B Ltd
ASSETS R R
Investment in B Ltd – 16 000 ordinary shares 20 000 –
at fair value (cost price: R20 000)
Machinery 24 000 16 000
Cost price 30 000 20 000
Accumulated depreciation (6 000) (4 000)
80 000 35 000
80 000 35 000

A Ltd B Ltd
R R
Gross profit 20 000 10 000
Depreciation (3 000) (2 000)
137

Q Ltd R Ltd Q Ltd R Ltd Q Ltd R Ltd
R R R R R R
for the year
1. A Ltd acquired its interest in B Ltd on 1 January 20.7, on which date B Ltd's retained
earnings amounted to R5 000. Consider the carrying amount of the assets and liabilities of
B Ltd to be equal to the fair value thereof at the date of acquisition.
2. On 1 January 20.8 B, Ltd purchased all its machinery from A Ltd at cost price plus 33,3%.
3. Both companies write off depreciation on machinery at 10% per annum according to the
straight-line method.
REQUIRED
Draft the consolidated financial statements of the A Ltd Group for the year
138
SOLUTION 3
A LTD GROUP
R
ASSETS
Non-current assets
Machinery [(30 000 + 20 000 í 5 000) í (6 000 + 4 000 í 500 í 500)] 36 000
Current assets (36 000 + 19 000) 55 000
Total assets 91 000

84 000
A LTD GROUP
Notes R
Gross profit (20 000 + 10 000) 30 000
Administrative expenses (3 000 + 2 000 í 500) (4 500)
18 500
139
A LTD GROUP
R
Expenses
Depreciation (3 000 + 2 000 - 500) 4 500
A LTD GROUP
31 DECEMBER 20.9
Non-
control-
Total ling
interests
R R R R R
Balance at 1 January 20.9 50 000 16 700(calc3) 66 700 5 800(a) 72 500
Total comprehensive income for the
year
Balance at 31 December 20.9 50 000 34 000 84 000 7 000(c) 91 000
(4) (3)
(a) (5 000 - 800 )
Calculations
A Ltd 80 %* NCI
Total At Since 20 %
R R R R
At acquisition
Share capital 20 000 16 000 4 000
25 000 20 000 5 000
(4)
Since acquisition
(2) (3)
Retained earnings 4 000 3 200 800
(9 000 - 5 000)
• Current year
(1)
(5)
35 000 8 000 7 000
*16 000/20 000 shares x 100% = 80%
140
2. Depreciation
R
Profit from sale of machinery (20 000 x 33,3/133,3) 5 000
Depreciation – 20.8 (5 000 x 10%) 500
– 20.9 (5 000 x 10%) 500
Depreciation up to 31 December 20.9 which has to be adjusted 1 000
3. Retained earnings at the beginning of year
Retained earnings of B Ltd(2) 3 200

Retained earnings of A Ltd 13 500
Given 18 000
Profit from sale of machinery (5 000)
Depreciation realised in respect of 20.8 500
16 700
141
Dr Cr NCI
R R R
Goodwill NIL
Retained earnings 800

B Ltd for the period ended 31 December 20.8
(a) 5 800
1 200 (b) 1 200
Recording of non-controlling interests in profit for the year
Retained earnings ௅ A Ltd 5 000

Machinery ௅ B Ltd 5 000
Elimination of unrealised intragroup profit included in
B Ltd's assets
Accumulated depreciation ௅ B Ltd 1 000

Depreciation ௅ A Ltd 500
Retained earnings ௅ A Ltd 500
Elimination of depreciation associated with the sale of the
asset
(c) 7 000

142
COMMENT
x As B Ltd purchased all of its machinery from A Ltd at the beginning of the previous
year, we should debit retained earnings to eliminate the unrealised profit. A Ltd sold
the machinery and made the profit, therefore A Ltd's retained earnings need to
decrease (be debited) to eliminate the unrealised profit. B Ltd bought the machinery;
therefore, B Ltd's machinery needs to be credited to decrease it, as it contains the
profit amount that needs to be eliminated.
x Therefore:
Dr Cr
R R
Retained earnings – A Ltd 5 000
Machinery – B Ltd 5 000
x In B Ltd's individual financial records, B Ltd depreciates machinery that still includes
the unrealised profit of R5 000. Therefore, excessive provision is made for
depreciation. To eliminate this, we debit accumulated depreciation. (We normally
credit accumulated depreciation when depreciation occurs.) The amount is calculated
as follows:
R5 000 (unrealised profit) x 10% (depreciation rate)
x As A Ltd made the profit, and the profit was eliminated in A Ltd's records, everything
that affects profit or retained earnings will occur in A Ltd's records. As this machine is
used, the profit that was first unrealised, now becomes realised each year through
use of the asset, over the remaining useful life of the machine at the rate of
depreciation. Therefore, we should credit the retained earnings or profit again since
the profit is being realised gradually through the use of the asset. In the current year,
we credit A Ltd's depreciation and we credit the retained earnings of A Ltd for the
previous years.
x Therefore:
Dr Cr
R R
Accumulated depreciation – B Ltd 1 000
Depreciation – A Ltd 500
Retained earnings – A Ltd 500
143
EXAMPLE 4
Subsidiary sells depreciable asset to parent

The following represent the condensed statements of X Ltd and its subsidiary, Y Ltd, at
30 June 20.9:
X Ltd Y Ltd
R R
ASSETS
Investment in Y Ltd ௅ 15 000 ordinary shares 19 500 -
at fair value (cost price: R19 500)
Machinery 8 000 16 000
Cost price 14 000 20 000
Accumulated depreciation (6 000) (4 000)
80 000 35 000
80 000 35 000

X Ltd Y Ltd
R R
Depreciation (3 000) (2 000)
144
R R R R R R
Balance at 1 July 20.8 50 000 20 000 18 000 9 000 68 000 29 000
for the year
Balance at 30 June 20.9 50 000 20 000 30 000 15 000 80 000 35 000
1. X Ltd acquired its interest in Y Ltd on 1 January 20.6, on which date Y Ltd's retained
earnings amounted to R6 000. Consider the carrying amount of the assets and liabilities of
Y Ltd to be equal to the fair value thereof at the date of acquisition.
2. On 1 January 20.8, X Ltd purchased all its machinery from Y Ltd at cost price plus 25%.
3. Both companies write off depreciation on machinery at 20% per annum according to the
straight-line method.
REQUIRED
Draft the consolidated financial statements of the X Ltd Group for the year
ended 30 June 20.9 in compliance with the requirements of International
145
SOLUTION 4
X LTD GROUP
ASSETS R
Non-current assets
Machinery [(14 000 + 20 000 í 2 800) í (6 000 + 4 000 í 840)] 22 040
Current assets (52 500 + 19 000) 71 500
Total assets 93 540

85 280
X LTD GROUP
Notes R
Gross profit (20 000 + 10 000) 30 000
Administrative expenses (3 000 + 2 000 í 560) (4 440)
1

18 560
X LTD GROUP
NOTES FOR THE YEAR ENDED 30 JUNE 20.9
R
Expenses
Depreciation (3 000 + 2 000 - 560) 4 440
146
X LTD GROUP
30 JUNE 20.9
Non-
Total
interests
R R R R R
(a)
Balance at 1 July 20.8 50 000 18 360* 68 360 6 620 74 980
year
(b)
(c)
Balance at 30 June 20.9 50 000 35 280 85 280 8 260 93 540
* (18 000 + 360(2))

(a)(6 500(4) + 120(5))
Calculations
X Ltd 75%* NCI

Total At Since 25%
R R R R
At acquisition
Share capital 20 000 15 000 5 000
26 000 19 500 6 500
(4)
Since acquisition
(2) (5)
Retained earnings 480 360 120
[9 000 - 6 000 - 2 800 (profit)
+ 280 (depreciation)]
(6 000 + 560 depreciation)
(3)
33 040 5 280 8 260
* 15 000/20 000 shares x 100% = 75%
147
2. Depreciation
R
Profit from the sale of machinery (14 000 x12525 ) 2 800
Depreciation – 1/1/20.8 to 30/6/20.8 (6 months)
2 800 x 20% x126 280
– 1/7/20.8 to 30/6/20.9 (12 months)
2 800 x 20% 560
Depreciation for 18 months up to 30 June 20.9 for which an
adjustment has to be made 840
Dr Cr NCI
R R R
Goodwill NIL

Retained earnings ௅ Y Ltd 2 800
Machinery ௅ X Ltd 2 800
Elimination of unrealised intragroup profit from sale of
machinery

Accumulated depreciation ௅ X Ltd 840
Depreciation ௅ Y Ltd 560
Retained earnings ௅ Y Ltd 280
Elimination of depreciation associated with the sale of the
machinery

Retained earnings 120
Y Ltd for the period ended 30 June 20.8
6 620(a)
Recording of non-controlling interest in profit after tax
8 260(c)
148
7.6 EXERCISES
You should have mastered all the different aspects of consolidated annual financial statements
by now. You will find that the individual questions in the exercises are becoming more
integrated in the sense that they include more and more sections of the work we have
covered. It is therefore very important for you to work through each question before comparing
your own solution with our proposed solution.
QUESTION 1
You receive the following trial balances of A Ltd and B Ltd at 30 June 20.8:
A Ltd B Ltd
R R
Debits
Property, plant and equipment
– Land and buildings 574 000 408 200
– Motor vehicles 155 000 97 000
Investment in B Ltd
– 70 000 ordinary shares at fair value 290 000 -
– Unsecured loan at fair value 40 000 -
Bank - 10 600
Bills receivable 8 000 -
1 198 200 607 200
Credits
Revaluation of land and buildings - 100 000
Long-term borrowing from A Ltd - 35 000
Accumulated depreciation – motor vehicles 130 000 64 000
Bills payable - 10 000
1 198 200 607 200
1. A Ltd acquired its interest in B Ltd on 1 July 20.5, on which date B Ltd's retained earnings
was R72 000.
2. At the date of acquisition, A Ltd valued the land and buildings belonging to B Ltd, which had
a carrying amount of R308 200, at R368 200. It is company policy to revalue B Ltd's land
and buildings every two years at 30 June. B Ltd has not purchased or sold any land or
buildings since 1 July 20.5. Consider the carrying amount of all the other assets and
liabilities of B Ltd to be equal to the fair value thereof at the date of acquisition.
149
3. A Ltd discounted R2 000 of the bills receivable from B Ltd at the bank before the expiry
date of 6 July 20.8.
4. Since A Ltd acquired its interest in B Ltd, A Ltd purchased all its inventories from B Ltd. B
Ltd supplied the inventories at cost price plus 25% profit. The inventories on hand of A Ltd
and B Ltd amounted to R36 000 and R48 000 respectively on 1 July 20.7.
5. On 29 June 20.8, B Ltd repaid R5 000 of the existing loan from A Ltd. A Ltd received this
repayment on 3 July 20.8.
REQUIRED
Draft the consolidated statement of financial position of the A Ltd Group as at
30 June 20.8 in accordance with the requirements of International Financial
Reporting Standards. (Ignore taxation on unrealised profits and/or losses.
Comparative figures and notes are not required.)
QUESTION 2
The following represent the condensed statements of profit or loss and other comprehensive
income and the statements of changes in equity of G Ltd and its subsidiary, L Ltd, for the year
ended 28 February 20.8:

YEAR ENDED 28 FEBRUARY 20.8
G Ltd L Ltd
R R
Gross profit 484 680 326 300
Other income 59 750 24 500
- Interest received 35 750 12 500
- Administration fees received 24 000 12 000
Expenses (270 900) (221 650)

- Depreciation 158 000 134 400
- Staff costs 60 000 48 000
- Interest paid 28 500 24 650
- Auditors' remuneration 12 400 8 600
- Administration fees paid 12 000 6 000
150
STATEMENTS OF CHANGES IN EQUITY FOR THE YEAR ENDED 28 FEBRUARY 20.8
Share capital Revaluation surplus Retained earnings Total
G Ltd L Ltd G Ltd L Ltd G Ltd L Ltd G Ltd L Ltd
R R R R R R R R
Balance at
200 000 100 000 80 000 120 000 224 690 44 000 504 690 264 000
1 March 20.7
Changes in equity
for 20.8
Total comprehensive
income for the year
Balance at
200 000 100 000 80 000 120 000 356 808 108 690 636 808 328 690
28 February 20.8
1. G Ltd acquired 80% of the voting rights in L Ltd on 1 March 20.5 for R250 000, at which
point L Ltd's owners' interest consisted of the following:
R
Consider the carrying amount of the assets and liabilities of L Ltd to be equal to the fair value
thereof at the date of acquisition.
2. On 1 December 20.6, L Ltd sold a machine with a carrying amount of R200 000 to G Ltd at a
profit of R50 000. It is the policy of the group to depreciate plant and machinery at 20% per
annum on the straight-line method.
3. G Ltd sold some of its inventories to L Ltd at a profit of 50% on cost price. L Ltd had the
following inventories on hand, which they purchased from G Ltd:
R
28 February 20.7 210 000
28 February 20.8 315 000
3. G Ltd lent the sum of R150 000 to L Ltd at an interest rate of 18% per annum, payable
annually in arrears, on 1 August 20.7. G Ltd received and banked the cheque for interest for
the month of February on 28 February 20.8. The interest did not qualify for capitalisation and
was accounted for by both companies.
151
REQUIRED
income and the consolidated statement of changes in equity for the G Ltd
Group for the year ended 28 February 20.8 in accordance with the
requirements of International Financial Reporting Standards. (Ignore
taxation on unrealised profits and/or losses. Do all calculations to the
nearest rand.)
SOLUTIONS
QUESTION 1
A LTD GROUP
R
ASSETS
Non-current assets
Property, plant and equipment [(574 000 + 408 200) +
(155 000 + 97 000) í (130 000 + 64 000)] 1 040 200
Goodwill 57 600
1 097 800
Current assets
Inventories (45 000 + 72 000 í 9 000) 108 000
224 200

Other components of equity 28 000
Retained earnings (213 000 + 39 620) 252 620
1 080 620
Non-controlling interests(a) 128 580
Current liabilities
Trade and other payables [41 000 + 60 600 + (10 000 í 8 000)] 103 600
Bank overdraft (14 200 í 5 000) 9 200
152
Calculations
A Ltd 70 %* NCI
Total At Since 30 %
R R R R
At acquisition
Share capital 200 000 140 000 60 000
Revaluation surplus
(368 200 - 308 200) 60 000 42 000 18 000
332 000 232 400 99 600
57 600 57 600 -
goodwill - parent
389 600 290 000 99 600
Since acquisition
To end of current year
Revaluation surplus 40 000 28 000 OCE 12 000
(408 200 – 368 200)
Retained earnings 56 600 39 620 RE 16 980

End of the year 137 600
At acquisition (72 000)
Unrealised profit – (9000)
closing inventories
Unrealised profit osin
௅ opening inventories
(7 200)
௅ realised current
year 7200
28 000 OCE
486 200 39 620 RE 128 580(a)
*70 000/100 000 shares x 100% = 70%
153
2. Journal in A Ltd's financial records
Dr Cr NCI
R R R
Cash in transit 5 000
Unsecured loan to B Ltd 5 000
Recording of cash in transit

Goodwill 57 600
Revaluation surplus – B Ltd 12 000

Recording of non-controlling interests in revaluation surplus

B Ltd for the period ended 30 June 20.8
Bills payable – B Ltd 8 000
Bills receivable – A Ltd 8 000
Elimination of intragroup bills
Gross profit – B Ltd 9 000

Inventories – A Ltd (45 000 x12525) 9 000
Elimination of unrealised profits in closing inventory
Retained earnings – B Ltd (36 000 x 25/125) 7 200

Gross profit/Cost of sales – B Ltd 7 200
Elimination of unrealised profits in opening inventory
(This journal is included for the sake of completeness. It
has no effect, as only the statement of financial position is
required and the net effect on retained earnings is nil.)
Long-term borrowing from A Ltd - B Ltd 35 000

Unsecured loan to B Ltd - A Ltd 35 000
128 580(a)
154
COMMENT
x A Ltd holds 70 000 shares in B Ltd.
70 000 shares = 70%

100 000 shares
R
Current value of land and buildings 408 200
Valuation value at 1 July 20.5 (368 200)
Valuation of land and buildings since acquisition 40 000
x In additional information 4, you were given A Ltd and B Ltd's inventories on hand at 1
July 20.7. This information is irrelevant, however, since we did not ask you to draft a
statement of profit or loss and other comprehensive income. We included both the
journal for opening inventory and the calculation for R7 200 in the analysis for illustrative
purposes only.
QUESTION 2
G LTD GROUP
INCOME FOR THE YEAR ENDED 28 FEBRUARY 20.8
Note R
Gross profit (calculation 1) 775 980
Other income [35 750 + 12 500 í (150 000 x 127 x 18%) 68 500
+ 24 000 + 12 000]
Administrative expenses [158 000 + 134 400 í (50 000 x 20%) (429 400)
+ 60 000 + 48 000 + 12 400 + 8 600 + 12 000 + 6 000]
7 x 18%)]
Finance cost [28 500 + 24 650 í (150 000 x 12 (37 400)

Owners of the parent (171 808 í 14 938(b)) 156 870
Non-controlling interests (calculation 2) 14 938(b)

171 808
155
G LTD GROUP
NOTES FOR THE YEAR ENDED 28 FEBRUARY 20.8
R
Income
Interest received [35 750 + 12 500 í (150 000 x 12 7 x 18%)] 32 500

Administration fees received (24 000 + 12 000) 36 000

Expenses
Depreciation [158 000 + 134 400 í (50 000 x 20%)] 282 400
Staff cost (60 000 + 48 000) 108 000
Administration fees paid (12 000 + 6 000) 18 000
G LTD GROUP
28 FEBRUARY 20.8
Non-
Revalua
-tion Total
surplus
interests
R R R R R R
Balance at 1 March 20.7 200 000 80 000 100 690(2) 380 690 43 300(a) 423 990
the year
Balance at 28 February 20.8 200 000 80 000 257 560 537 560 58 238(c) 595 798
(2) 224 690 – 54 000(d) – 70 000(1)
(a) 56 800(3) - 13 500(4)
Calculations
1. Gross profit
R
G Ltd 484 680
50 x 210 000)
Unrealised profit in opening inventories (150 70 000(1)
50
Unrealised profit in closing inventories (150 x 315 000) (105 000)
L Ltd 326 300
775 980
156
G Ltd 80 %
NCI
Total At Since 20 %
R R R R
At acquisition
Share capital 100 000 80 000 20 000
284 000 227 200 56 800
Equity represented by goodwill -
parent 22 800 22 800 -
(3)
Since acquisition
(d) (4)
Retained earnings (67 500) (54 000) (13 500)
Given (44 000 - 64 000) (20 000)
Unrealised profit from machinery (50 000)
Depreciation adjustment 2 500
3
(50 000 x 20% x 12 )
• Current year
Profit for the year 74 690 59 752 (b)
14 938
Given 64 690
Excess depreciation 10 000
(50 000 x 20%)
(c)
313 990 5 752 58 238
157
Dr Cr NCI
R R R
Goodwill 22 800
Retained earnings – L Ltd 50 000

Machinery – G Ltd 50 000
Elimination of intragroup profit from sale of machinery
Accumulated depreciation – G Ltd 2 500

Retained earnings – L Ltd 2 500
Elimination of depreciation associated with sale of
machinery for the period ended 28 February 20.7
Accumulated depreciation – G Ltd 10 000

Depreciation – L Ltd 10 000
machinery for the current year
Cost of sales – G Ltd 105 000

Inventory – L Ltd 105 000
Elimination of unrealised profits in closing inventories
Retained earnings – G Ltd 70 000

Cost of sales – G Ltd 70 000
Elimination of unrealised profits in opening inventories
Non-controlling interests 13 500 (13 500)

Recording of non-controlling interests in L Ltd for the period
ended 28 February 20.7
43 300(a)
Recording of non-controlling interests in L Ltd for the current
year
Loan from G Ltd – L Ltd 150 000
Loan to L Ltd – G Ltd 150 000
Interest received – G Ltd 15 750

Interest paid – L Ltd 15 750
Elimination of intragroup interest on loan
58 238(c)
158
COMMENT
x When we write off depreciation over five years on the straight-line method, it actually
means that depreciation rate is 20%.
100% ÷ 5 = 20% per annum
x With intragroup transactions, it is important to identify which entity made the profit. When
the subsidiary sells inventory or machinery to the parent, we account for the unrealised
profit by means of the calculation in the analysis of owners' equity, which will affect
retained earnings. (Remember, the analysis is a calculation to show the allocation of
the subsidiary's equity between the parent and non-controlling shareholders.) However,
in this question, the parent sold inventory to the subsidiary, hence we will adjust the
unrealised profit of R70 000 in opening inventories separately in the opening balance of
retained earnings in the statement of changes in equity.
SELF-ASSESSMENT
After studying this study unit, are you able to
x record intragroup bills of exchange and bank overdrafts correctly in the
consolidated annual financial statements of companies?
x determine the surplus when revaluing property at the acquisition of an
interest in a subsidiary?
x calculate the unrealised profit effect in trading inventories in both the
parent and subsidiary?
x draft the consolidated annual financial statements of a group, in
accordance with International Financial Reporting Standards, if a sale of
property, plant and equipment has taken place between companies in
the group?
159
160
FAC2602
LEARNING UNIT 8
TREATMENT OF
DIVIDENDS DURING
CONSOLIDATION
Introductiontogroup
161 annualfinancial
statements
LEARNING OUTCOME
Students should be able to account for any ordinary dividend declared or paid by a subsidiary
in the consolidated financial statements of companies in accordance with International
OVERVIEW
8.1 INTRODUCTION ....................................................................................................... 162

8.2 DIVIDENDS PAID OR DECLARED BY T H E SUBSIDIARY .................................... 163
8.3 EXERCISES .............................................................................................................. 188
SOLUTIONS ........................................................................................................................ 192
SELF-ASSESSMENT .......................................................................................................... 200
KEY CONCEPTS
x Dividends paid or declared
ASSESSMENT CRITERIA
x calculate any ordinary dividend declared or paid by a subsidiary in the
x record any ordinary dividend declared or paid by a subsidiary in the
8.1 INTRODUCTION
Dividends paid and/or declared in the consolidated statement of changes in equity will always
be merely the dividends payable by the owners of the parent. We eliminate all dividends paid
and/or declared by the subsidiary. This principle is in accordance with the basic consolidation
principle, namely that we need to eliminate all intragroup transactions before we compile the
consolidated annual financial statements.
162
Non-controlling shareholders share in the subsidiary's profit before the payment of dividends.
Therefore, if a subsidiary pays a dividend, it means that the non-controlling owners have
realised part of their interest in the profit in the form of a dividend. This will reduce the credit
balance of the non-controlling interests in the consolidated statement of financial position, as
the subsidiary now owes the non-controlling owners less.
8.2 DIVIDENDS PAID OR DECLARED BY THE SUBSIDIARY
The following are the five situations that most frequently occur with regard to dividends in the
consolidated annual financial statements:
x The subsidiary has made no provision and does not wish to make any provision for
dividends.
x The subsidiary has paid a dividend to its owner.
x The subsidiary has made provision for the dividend declared, and the parent has made
provision for the appropriate dividend receivable.
x The subsidiary has made provision for the dividend declared, but the parent has made no
provision for the appropriate dividend receivable.
x The subsidiary must make provision for a dividend declared.
Work carefully through the following five examples that will explain the five situations in more
detail:
163
EXAMPLE 1
The subsidiary paid or declared no dividends
The following represent the abridged financial statements of A Ltd and its subsidiary, B Ltd:
A Ltd B Ltd
R R
ASSETS
Investment in B Ltd – 80 000 shares at fair value 88 000 -
Current account with B Ltd 10 000 -
456 000 206 000
Current account with A Ltd - 10 000
456 000 206 000

A Ltd B Ltd
R R
164

R R R R R R
Balance at 1 January 20 .9 200 000 100 000 84 000 15 000 284 000 115 000
for the year
A Ltd acquired its interest in B Ltd on 1 January 20.7, on which date the retained earnings of
B Ltd amounted to R10 000. Consider the carrying amount of the assets and liabilities of B Ltd
to be equal to the fair value thereof on the date of acquisition.
SOLUTION 1
We will draft the consolidated financial statements as follows:

Calculations
A Ltd 80 %* NCI
Total At Since 20 %
R R R R
At acquisition
Share capital 100 000 80 000 20 000
110 000 88 000 22 000
Since acquisition
(2)
(15 000 - 10 000)
• Current year
Profit for the year (1)
23 000 18 400 4 600
(3)
138 000 22 400 27 600
* 80 000/100 000 shares x 100% = 80%
165
Dr Cr NCI
R R R
Goodwill NIL
acquisition

Recording of non-controlling interests in B Ltd
for the period ended 31 December 20.8
23 000(a)
B Ltd for the current year
Current account with A Ltd - B Ltd 10 000

Current account with B Ltd - A Ltd 10 000
Elimination of common items
27 600(c)
166
A LTD GROUP
R
ASSETS
Non-current assets
Current assets

342 400
Current liabilities
A LTD GROUP
R

Non-controlling interests (1)/(b) 4 600
74 000
167
A LTD GROUP
CONSOLIDATED STATEMENT OF CHANGES IN EQUITY FOR THE YEAR ENDED 31
DECEMBER 20.9
Non-
Total
interests
R R R R R
Balance at 1 January 20.9 200 000 88 000* 288 000 23 000(a) 311 000
the year
Dividend paid: ordinary (15 000) (15 000) - (15 000)
Balance at 31 December 20.9 200 000 142 400 342 400 27 600(c) 370 000
(2)
* (84 000 + 4 000 )
EXAMPLE 2
Dividends paid by subsidiary
A Ltd B Ltd
R R
ASSETS
Investment in B Ltd – 80 000 shares at fair value 88 000 -
Current account with B Ltd 10 000 -
456 000 206 000
Current account with A Ltd - 10 000
456 000 206 000
168
A Ltd B Ltd
R R
Sharecapital Retainedearnings Total

ALtd BLtd ALtd BLtd ALtd BLtd
R R R R R R
Balance at 1 January
200 000 100 000 84 000 15 000 284 000 115 000
20.9
20.9
Total comprehensive
income for the year
200 000 100 000 129 600 26 000 329 600 126 000
20.9
169
SOLUTION 2
Calculations
A Ltd 80%* NCI

Total At Since 20 %
R R R R
At acquisition
Share capital 100 000 80 000 20 000
110 000 88 000 22 000
Since acquisition
(2)
1 000
(15 000 -10 000)
• Current year
(1)
Ordinary dividend (12 000) (9 600) (2 400)

(3)
126 000 12 800 25 200
* 80 000/100 000 shares x 100% = 80%
170
Dr Cr NCI
R R R
Goodwill NIL
Elimination of owners' equity of
B Ltd at acquisition

23 000(a)

Dividends received (A Ltd) 9 600
Non-controlling interests 2 400 (2 400)(c)
Dividends paid (B Ltd) 12 000
Elimination of intragroup dividend and
recording of non-controlling interests in
dividend

Current account with A Ltd (B Ltd) 10 000
Current account with B Ltd (A Ltd) 10 000
25 200(d)
171
A LTD GROUP
R
ASSETS
Non-current assets
Current assets

342 400
Non-controlling interests(3)/(d) 25 200
Current liabilities
A LTD GROUP
R

74 000
172
A LTD GROUP
31 DECEMBER 20.9
Non-
Total
interests
R R R R R
year
Balance at 31 December 20.9 200 000 142 400 342 400 25 200(d) 367 600
(2)
* (84 000 + 4 000 )
COMMENT
We always eliminate the dividends paid by the subsidiary, as the transaction takes place
within the group. Dividends paid normally have a debit balance, while dividends received
have a credit balance as it is an income. To eliminate the dividends, we debit the dividends
amounting to R9 600 received by A Ltd and credit the dividends amounting to R12 000 paid
by B Ltd. (That is why the statement of profit or loss and other comprehensive income no
longer includes dividends received.) The balancing figure in the journal is a debit balance of
R2 400. We debit non-controlling interests, thereby reducing the balance in the statement of
financial position as the non-controlling owners realised a portion of their share in the profit
in the form of a dividend received.
Dr Cr
R R
Dividends received – A Ltd R9 600
Non-controlling interests R2 400
Dividends paid – B Ltd R12 000
173
EXAMPLE 3
Parent made provision for dividend declared by subsidiary.
A Ltd B Ltd
R R
ASSETS
Investment in B Ltd – 80 000 shares at fair value
(cost price: R88 000) 88 000 -
Current account: B Ltd 19 600 -
465 600 206 000
Current account: A Ltd - 10 000
Dividends payable - 12 000
465 600 206 000

A Ltd B Ltd
R R

R R R R R R
20.9
Total comprehensive
income for the year
Dividends declared and
(15 000) (12 000) (15 000) (12 000)
paid: ordinary
200 000 100 000 129 600 26 000 329 600 126 000
20.9
174
SOLUTION 3
Calculations
A Ltd 80 %* NCI
Total At Since 20 %
R R R R
At acquisition
100 000 80 000 20 000
Share capital
110 000 88 000 22 000
110 000 88 000 22 000
Since acquisition
(2)
1 000
(15 000 - 10 000)
• Current year
Profit for the year 4 600
(1)
23 000 18 400
Ordinary dividend (2 400)
(12 000) (9 600)
(3)
126 000 12 800 25 200
* 80 000/100 000 shares x 100% = 80%
175
Dr Cr NCI
R R R
Goodwill NIL

23 000(a)
for the current year
Dividend received (A Ltd) 9 600

Dividend declared (B Ltd) 12 000
non-controlling interests in dividend
Dividends payable – B Ltd 9 600

Current account: A Ltd – B Ltd 9 600
Transfer of relevant share of dividend due by
B Ltd to the current account of A Ltd
Current account: A Ltd – B Ltd 19 600

Current account: B Ltd – A Ltd 19 600
25 200(d)
176
A LTD GROUP
R
ASSETS
Non-current assets
Current assets

342 400
Current liabilities
Dividends payable (12 000 í 9 600) 2 400
A LTD GROUP
R
Profit before tax (82 600 í 9 600 + 33 000) 106 000

74 000
177
A LTD GROUP
31 DECEMBER 20.9
Non-
Total
interests
R R R R R
for the year
Dividend declared and paid:
(15 000) (15 000) (2 400)(c) (17 400)
ordinary
* (84 000 + 4 000(2))
COMMENT
x In this example, the subsidiary declared a dividend that it has not paid yet. In the
subsidiary's financial records, the dividend payable is a liability of R12 000. For the
parent, it is a receivable asset of R9 600.
x We should eliminate the current accounts in the group (what they owe each other)
against each other, but we can only do this once the accounts are equal. R9 600 of
the R12 000 dividends payable by B Ltd are payable to A Ltd. We transfer the liability
of R9 600 from dividends payable to the current account: A Ltd, as both represent
what is payable to A Ltd.
Hence:
Dr Cr
R R
Dividends payable – B Ltd R9 600
Current account: A Ltd – B Ltd R9 600
x After making the entry above, the current account in B Ltd is also equal to R19 600
(R10 000 + R9 600), and we can eliminate the two accounts against each other.
Hence:
Dr Cr
R R
Current account: A Ltd – B Ltd R19 600
Current account: B Ltd – A Ltd R19 600
178
EXAMPLE 4
Parent made no provision for dividend
A Ltd B Ltd
ASSETS R R
(cost price: R88 000) 88 000 -
456 000 206 000
456 000 206 000

A Ltd B Ltd
R R

R R R R R R
for the year
Dividend declared: ordinary (15 000) (12 000) (15 000) (12 000)
179
SOLUTION 4
Calculations
A Ltd 80 %* NCI
Total At Since 20 %
R R R R
At acquisition
Share capital 100 000 80 000 20 000
110 000 88 000 22 000
Since acquisition
Retained earnings
(2)
(15 000 - 10 000) 5 000 4 000 1 000
• Current year
Profit for the year 23 000 18 400 (1)
4 600
(3)
126 000 12 800 25 200
* 80 000/100 000 shares x 100% = 80%
2. Entry in the financial records of A Ltd
Dr Cr NCI
R R R
Current account: B Ltd 9 600
Dividend received 9 600
Recording of dividend receivable
180
Dr Cr NCI
R R R
Goodwill NIL

Recording of non-controlling interests in B Ltd for the
period ended 31 December 20.8 23 000(a)

Recording of non-controlling interests in B Ltd for the
current year
Dividend received (A Ltd) 9 600

Dividend paid (B Ltd) 12 000
non-controlling interests in dividend
Dividends payable (B Ltd) 9 600

Current account: A Ltd (B Ltd) 9 600
Transfer of appropriate share of dividend due by
B Ltd to the current account of A Ltd

Current account: B Ltd (A Ltd) 19 600
25 200(d)
181
A LTD GROUP
ASSETS R
Non-current assets
Current assets

342 400
Current liabilities
Dividends payable (12 000 í 9 600) 2 400
A LTD GROUP
R

74 000
182
A LTD GROUP
31 DECEMBER 20.9
Non-
Total
interests
R R R R R
for the year
Dividend declared: ordinary (15 000) (15 000) (2 400)(c) (17 400)
200 000 142 400 342 400 25 200(d) 367 600
20.9
* (84 000 + 4 000(2))
COMMENT
x The only difference between this example and example three, is in this example the
parent has not accounted for the dividend receivable of R9 600 yet. That is why there
is an entry in A Ltd's individual records first, to account for this, before we make the
consolidation journal entries.
x We do not adjust the profit before tax with the R9 600 as in example three. There are
journals where dividends receivable are debited and credited with R9 600 in this
example. These cancel out each other.
183
EXAMPLE 5
Subsidiary made no provision for dividend
A Ltd B Ltd
ASSETS R R
(cost price: R88 000) 88 000 -
456 000 206 000
456 000 206 000

A Ltd B Ltd
R R
184
R R R R R R
Balance at 1 January
200 000 100 000 84 000 15 000 284 000 115 000
20.9
20.9
Total comprehensive
income for the year
Balance at 31
200 000 100 000 120 000 38 000 320 000 138 000
December 20.9
On 31 December 20.9, B Ltd decided to declare a dividend of R12 000.
SOLUTION 5
Calculations
A Ltd 80 %* NCI
Total At Since 20 %
R R R R
At acquisition
Share capital 100 000 80 000 20 000
110 000 88 000 22 000
Since acquisition
Retained earnings (2)
(15 000 - 10 000) 5 000 4 000 1 000
• Current year
(1)
Ordinary dividend (12 000) (9 600) (2 400)(4)
(3)
126 000 12 800 25 200
* 80 000/100 000 shares x 100% = 80%
185
Because B Ltd has not yet made provision for the dividend and A Ltd has not yet reacted to it,
we only provide for the dividend owing to the non-controlling owners, as we would have
eliminated the dividends between A Ltd and B Ltd anyway.
Dr Cr NCI
R R R
Goodwill NIL

23 000(a)

Dividends payable 2 400
Provision for dividend payable to non-controlling owners

Current account: B Ltd (A Ltd) 10 000
25 200(d)
186
A LTD GROUP
R
ASSETS
Non-current assets
Current assets

342 400
Current liabilities
Dividends payable(4) 2 400
A LTD GROUP
R

74 000
187
A LTD GROUP
31 DECEMBER 20.9
Non-
Total controlling
interests
R R R R R
Changes in equity for 20 .9
for the year
200 000 142 400 342 400 25 200(d) 367 600
20.9
* (84 000 + 4 000(2))
8.3 EXERCISES
Answer the following two questions for further practice. Your e-tutor can guide you with the
completion of these questions.
QUESTION 1
The following balances were obtained from the books of A Ltd and its subsidiary, B Ltd, for the
year ended 28 February 20.4:
A Ltd B Ltd
R R
Sales 600 000 400 000
Cost of sales 340 000 220 000
Repairs and maintenance 35 000 30 000
Depreciation – equipment 18 000 16 000
Interest received on loan to B Ltd 10 000 -
Loan from A Ltd - 15 000
Loan to B Ltd 20 000 -
Staff cost 36 000 24 000
Interest paid 4 000 20 000
Taxation 67 600 32 800
Retained earnings – 1 March 20.3 45 000 59 000
Included in cost of sales:
- Inventories 1 March 20.3 18 000 18 000
- Inventories 28 February 20.4 15 000 20 000
188
1. On 1 March 20.2, when B Ltd was incorporated, A Ltd acquired 80% of the shares and
voting rights in B Ltd. No goodwill was payable by A Ltd, and at the date of acquisition, the
carrying amount of the assets and liabilities were equal to the fair value thereof.
2. Since incorporation, A Ltd has bought all its inventories from B Ltd at cost plus 33,3%. On
28 February 20.4 inventories to the value of R5 000 were still in transit. B Ltd sold
inventories of R317 000 to A Ltd during the year.
3. On 1 March 20.2, B Ltd sold equipment to A Ltd at a profit of R20 000. Both companies
depreciate equipment at 20% per annum on the straight-line method.
4. On 28 February 20.4, A Ltd sold property to B Ltd at a profit of R20 000. This profit was
included in the sales of the company.
REQUIRED
income and the consolidated statement of changes in equity of the A Ltd
Group for the year ended 28 February 20.4 in compliance with the
requirements of International Financial Reporting Standards. Show all your
calculations and ignore taxation on unrealised profits and/or losses as well
as capital gains tax.
189
QUESTION 2
The following represent the condensed statements of profit or loss and other comprehensive
income and statements of changes in equity of X Ltd and its subsidiary, Y Ltd, for the year ended
30 June 20.3:

X Ltd Y Ltd
R R
Gross profit 465 000 329 000
Other income 35 000 1 000
Interest received – trade receivables 5 000 1 000
500 000 330 000
Expenses (200 000) (150 000)
Staff cost 80 000 50 000

R R R R R R
Balance at 1 July 20.2 300 000 200 000 150 000 160 000 450 000 360 000
the year
Balance at 30 June 20.3 300 000 200 000 280 000 250 000 580 000 450 000
190
1. On 1 July 20.0, X Ltd acquired 70% of the voting rights in Y Ltd for R155 000, on which
date Y Ltd's owners' equity consisted of the following:
R
Consider the carrying amount of the assets and liabilities of Y Ltd to be equal to the fair
value thereof on the date of acquisition. It is the policy of the group to show goodwill at
cost price in the financial statements.
2. Y Ltd manufactures the same kind of heavy machinery that X Ltd uses. On 1 July 20.1,jY
Ltd sold a machine, which had cost R150 000 to manufacture to X Ltd for R200 000.
3. The records with regard to X Ltd's machinery contain the following:
R
Machinery purchased – 1 July 20.0 400 000
Depreciation – 30 June 20.1 (80 000)
320 000
Purchase of new machinery from Y Ltd – 1 July 20.1 200 000
Depreciation – 30 June 20.2 (120 000)
– 30 June 20.3 (120 000)
Machinery at carrying amount – 30 June 20.3 280 000
Depreciation is calculated at 20% per annum on the straight-line method.
4. X Ltd sells some of its inventories to Y Ltd at a profit of 20% on the cost price. Y Ltd had
the following inventories on hand, which they purchased from X Ltd:
R
30 June 20.2 36 000

30 June 20.3 72 000
REQUIRED
income and the consolidated statement of changes in equity of the X Ltd
Group for the year ended 30 June 20.3 in compliance with the
requirements of International Financial Reporting Standards. Show all
your calculations. (Ignore taxation on unrealised profits and/or losses as
well as capital gains tax).
191
SOLUTIONS
QUESTION 1
A LTD GROUP
Note R
Revenue (600 000 + 400 000 í 20 000 í 317 000) 663 000
Cost of sales (340 000 + 220 000 í 317 000 í 4 500 + 5 000) (243 500)
Administrative expenses [(18 000 + 16 000 í 4 000) + 8 000 (170 000)
+ 7 000 + 36 000 + 24 000 + 35 000 + 30 000]
Finance cost (4 000 + 20 000 í 10 000) (14 000)

Non-controlling interests (calculation 1)(b) 10 740
135 100
192
A LTD GROUP
NOTES FOR THE YEAR ENDED 28 FEBRUARY 20.4
R
Expenses
Depreciation (18 000 + 16 000 í 4 000) 30 000
Staff cost (36 000 + 24 000) 60 000
A LTD GROUP
28 FEBRUARY 20.4
Non-
Total controlling
interests
R R R R R
Balance at 1 March 20.3 100 000 75 800# 175 800 23 700(a) 199 500
Balance at 28 February 20.4 100 000 190 160 290 160 30 440(d) 320 600
# 45 000 + 30 800(e)
(a) 16 000(a) + 7 700(a)
193
Calculations
A Ltd 80 % NCI
Total 20 %
At Since
R R R R
At acquisition
Share capital
80 000 64 000 16 000
Purchase difference 80 000 64 000 16 000
Consideration and NCI - - -
80 000 64 000 16 000(a)
Since acquisition
Retained earnings
Given 38 500 30 800(e) 7 700(a)
At acquisition 59 000
-
Unrealised profit
1
in inventory 59 000
33 3
(18 000 x 133 13)
Unrealised profit on sale of (4 500)
equipment
Depreciation on unrealised profit (20 000)
20
(20 000 x 100 )
4 000
• Current year
Profit for the year
(b)
Profit after tax 53 700 42 960 10 740
Unrealised profit in opening 50 200(1)
inventory
Unrealised profit in closing inven-
1
4 500
33 3
tory (15 000 + 5 000) x 133 13
Depreciation on unrealised (5 000)
profit
4 000
Dividend paid
(c)
(20 000) (16 000) (4 000)
152 200 57 760 30 440(d)
(1)
400 000 - 220 000 - 30 000 - 16 000 - 24 000 - 20 000 - 7 000 - 32 800
194
2. Entry in the financial records of A Ltd
Dr Cr
R R
Inventory 5 000
Loan to B Ltd 5 000
Recording of inventory in transit

Dr Cr NCI
R R R
Sales – B Ltd 317 000
Cost of sales – A Ltd 317 000
Cost of sales – B Ltd 5 000

Inventory – A Ltd 5 000
Elimination of unrealised profit in closing inventory of A Ltd
Retained earnings – B Ltd 4 500

Cost of sales – B Ltd 4 500
Elimination of unrealised profits in opening inventory of A Ltd

Equipment – A Ltd 20 000
Elimination of unrealised profits on sale of equipment
Accumulated depreciation – A Ltd 4 000

Elimination of depreciation associated with sale of equipment for the
period ended 28 February 20.3
Accumulated depreciation – A Ltd 4 000

Depreciation – B Ltd 4 000
Elimination of depreciation associated with sale of equipment for the
year ended 28 February 20.4
Sales – A Ltd 20 000

Property – B Ltd 20 000
Elimination of unrealised profits on sale of property
Interest received – A Ltd 10 000

Interest paid – B Ltd 10 000
Elimination of intragroup interests on loan


Recording of non-controlling interests in B Ltd for the period ended
28 February 20.3
23 700(a)
Recording of non-controlling interests in B Ltd for the current year
195
Dr Cr NCI
R R R
Dividend received – A Ltd 16 000

Dividend paid – B Ltd 20 000
Elimination of intragroup dividends and recording of non-controlling
interests in the dividend
Loan from A Ltd – B Ltd 15 000

Loan to B Ltd – A Ltd 15 000
Elimination of intragroup balances on loan accounts
30 440(d)
QUESTION 2
X LTD GROUP
Note R
Gross profit [465 000 + 329 000 + (20/
120 x 36 000) í 788 000
(20/120 x 72 000)]
Other income [5 000 + 1 000 + 30 000 í (20 000 x 70%)] 22 000
Administrative expenses [120 000 + 100 000 í (340 000)
(50 000 x 20%) + 80 000 + 50 000]

Non-controlling interests (calculation 1)(b) 36 000
280 000
X LTD GROUP
NOTES FOR THE YEAR ENDED 30 JUNE 20.3

R
Profit before tax is calculated after taking into account the following:
Income
Dividends received (30 000 - 14 000(f)) 16 000
Expenses
Depreciation (120 000 + 100 000 - 10 000) 210 000
Staff costs (80 000 + 50 000) 130 000
196
X LTD GROUP
30 JUNE 20.3
Non-
Total controlling
interests
R R R R R
Balance at 1 July 20.2 300 000 214 000# 514 000 96 000(a) 610 000
year
Balance at 30 June 20 .3 300 000 408 000 708 000 126 000(d) 834 000
# 150 000 - 6 000 (unrealised profit in opening inventory) + 70 000(e)

(a) 66 000(1) + 30 000(2)
197
Calculations
X Ltd 70 % NCI
Total At Since 30 %
R R R R
At acquisition
Share capital 200 000 140 000 60 000
220 000 154 000 66 000
jjjjjgoodwill - parent 1 000 1 000 -
(1)
Since acquisition
year
(e)
(2)
Given 160 000

140 000
Unrealised profit on sale (50 000)
of machinery (200 000 -
150 000)
Depreciation on unrealised 10 000
20
llprofit (50 000 x 100 )
• Current year
Profit for the year 120 000 (84 000) 36 000
(b)
Profit after tax 110 000

Depreciation on
unrealised profit 10 000
(f) (c)
Dividend paid (20 000) (14 000) (6 000)
(d)
421 000 140 000 126 000
198
Dr Cr NCI
R R R
Goodwill 1 000
Retained earnings – Y Ltd 50 000

Machinery – X Ltd 50 000
Elimination of intragroup profits on sale of machinery
Accumulated depreciation – X Ltd 10 000

Retained earnings – Y Ltd 10 000
machinery for the period ended 30 June 20.2
Accumulated depreciation – X Ltd 10 000

Depreciation – Y Ltd 10 000
Elimination of depreciation associated with sale of the
machinery for the current year
Cost of sales – X Ltd 12 000

Inventory – Y Ltd 12 000
Elimination of unrealised profits in closing inventories
Retained earnings – X Ltd 6 000

Cost of sales – X Ltd 6 000
Elimination of unrealised profits in opening inventories

Y Ltd for the period ended 30 June 20.2
96 000(a)
Y Ltd for the year ended 30 June 20.3
Dividends received – X Ltd 14 000

Dividends paid – Y Ltd 20 000
Elimination of intragroup dividends and recording of
non-controlling interests in the dividends
126 000(d)
199
SELF-ASSESSMENT
x calculate any ordinary dividend declared or paid by a subsidiary in the
x record any ordinary dividend declared or paid by a subsidiary in the
200
FAC2602
LEARNING UNIT 9
TREATMENT OF
PREFERENCE SHARES
DURING CONSOLIDATION
Introductiontogroup
201 annualfinancial
statements
LEARNING OUTCOME
Students should be able to account for any preference dividends in the consolidated annual
financial statements of companies in accordance with International Financial Reporting
Standards (IFRS).
OVERVIEW
9.1 INTRODUCTION ....................................................................................................... 203

9.2 CONSOLIDATION PROCEDURES IF THE SUBSIDIARY'S CAPITAL INCLUDES
PREFERENCE SHARES ....................................................................................... 204
9.3 TREATMENT OF PREFERENCE DIVIDENDS OF THE SUBSIDIARY .................... 211
9.4 EXERCISES .............................................................................................................. 234
SELF-ASSESSMENT .......................................................................................................... 258
KEY CONCEPTS
x Preferential rights
x Non-cumulative preference shares
x Cumulative preference shares
x Participating and non-participating
x Arrear preference dividends
ASSESSMENT CRITERIA
x calculate the parent's interest percentage in the preference share capital
of the subsidiary
x record any preference dividends paid or declared by a subsidiary in the
consolidated annual financial statements in accordance with
International Financial Reporting Standards
x record arrear cumulative preference dividends payable or paid by a
subsidiary in the consolidated annual financial statements in accordance
with International Financial Reporting Standards
202
9.1 INTRODUCTION
In learning unit 8, we discussed the treatment of dividends where the subsidiary's share capital
consists of ordinary share capital only. In this learning unit, we deal with the treatment of
preference share capital and preference dividends. Preference shares carry a fixed dividend
percentage. When adequate profits are available, these shares have a preference right to
dividends.
Preference shares can only exist when another class of shares (generally ordinary shares)
exists so the preference shares can enjoy certain preferential rights in comparison to the other
shares. We can summarise these preferential rights as follows:
x For the purposes of the following discussion, the preferential rights in respect of
dividends are probably the most important right attached to preference shares. This right
is normally expressed as a percentage of the value of the share, for example 9%
preference shares with an issued value of R400 000 would receive a dividend of R36 000
(9% x R400 000).
x If the subsidiary is liquidated, the preference owners will receive a maximum amount of
R400 000.
x Where a subsidiary has issued preference shares, these shares have a preferential claim to
the profit of the company, whilst the balance is attributable to the ordinary owners. As in the
case of ordinary shares, preference owners cannot legally lay claim to their share of the
profit before a company has declared a preference dividend. If the preference shares are
cumulative, ordinary owners may receive no dividend in the current reporting
period, unless a preference dividend is declared.
We can classify preference shares as follows with regard to dividends:
x Non-cumulative
These owners are not entitled to payment of arrear dividends.
x Cumulative
If no dividend is declared in a specific reporting period, there is a cumulative preferential
right, which is a right to have preference to the arrear and current preference dividends
before a dividend may be declared on any other class of shares on the first subsequent
dividend declaration. Even if the company does not declare a formal dividend to the
preference owners, a dividend will accrue and become payable based on the terms of the
preference shares.
Normally, cumulative preferential rights to dividends are normally specifically prescribed in

the designation of the shares, for example 8% cumulative preference shares. Where it is
not specifically stipulated, it is assumed that preference shares are cumulative.
Participating preference shares share in the profits of a company after the payment of the
preference dividend, while convertible preference shares are convertible to ordinary shares
at a specific date in future. Although a company may not buy its own shares, it may buy
203
back (redeem) redeemable preference shares at a predetermined price after a specific
period.
Where preference shares are held in a subsidiary, this affects the calculation of the non-
controlling interests in the consolidated statement of profit or loss and other comprehensive
income and the statement of financial position. By the time you have completed this learning
unit, you should have a clear understanding of this concept.
Liability versus equity
When the issuer of preference shares has a contractual obligation to deliver cash or a financial
instrument to the holder of the preference shares, or does not have an unconditional right to
avoid delivering cash or a financial asset to settle the contractual obligation, the obligation
meets the definition of a financial liability (IAS 32.19). Likewise, if the issuer of preference
shares does have an unconditional right to avoid delivering cash or a financial asset to settle
the contractual obligation, the obligation meets the definition of an equity instrument. An equity
instrument is any contract that evidences a residual interest in the assets of an entity after
deducting the liabilities.
In FAC2602 we do not classify financial instruments. It is therefore assumed that preference

shares that provide for the mandatory redemption by the issuer of the shares, for a fixed amount
at a fixed future date, and where the payment of the dividends are compulsory are classified
as financial liabilities. Such an investment is not consolidated. In all other instances preference
shares are assumed to be non-redeemable and therefore regarded as equity instruments. In
FAC2602 we will assume all preference shares are classified as equity and hence consolidate
it when applicable.
9.2 CONSOLIDATION PROCEDURES IF THE SUBSIDIARY'S CAPITAL

INCLUDES PREFERENCE SHARES
Since the parent's percentage interest in the ordinary share capital of the subsidiary is not
necessarily the same as its percentage interest in the preference share capital, we recommend
that you should always draw up two separate analyses of owners’ equity, namely one for
ordinary share capital and one for preference share capital.
Carefully work through the following example:
204
EXAMPLE
The following are the condensed financial statements of P Ltd and its subsidiary, S Ltd:
P Ltd S Ltd
R R
ASSETS
Land and buildings at cost price 100 000 80 000
Plant at carrying amount 40 000 20 000
Investment in S Ltd at fair value
75 000 ordinary shares (cost price: R120 000) 120 000 -
20 000 preference shares (cost price: R25 000) 25 000 -
Current account in S Ltd 8 000 -
338 000 208 000

Share capital – 10% preference shares (50 000 shares) - 50 000
Current account in P Ltd - 5 000
338 000 208 000

P Ltd S Ltd
R R
Income received from S Ltd
Ordinary dividend 7 500 -
Preference dividend 2 000 -
205
Ordinary share 10% preference Retained Total

capital share capital earnings
P Ltd S Ltd P Ltd S Ltd P Ltd S Ltd P Ltd S Ltd
R R R R R R R R
Balance at 1 January 20.7 200 000 100 000 - 50 000 24 000 14 000 224 000 164 000
for the year
Dividend paid: preference - (5 000) - (5 000)
200 000 100 000 - 50 000 54 000 37 000 254 000 187 000
20.7
1. P Ltd acquired its shareholding in S Ltd on 1 January 20.5, on which date S Ltd's retained
earnings was R9 000.
Consider the carrying amount of the assets and liabilities of S Ltd to be equal to the fair value
thereof at the date of acquisition, except for the land of S Ltd, which are valued at R120
000. No entries have been made in the books of the subsidiary. No purchases or sales of
land and buildings have taken place subsequently.
2. Since 1 April 20.7, S Ltd has been buying some of its inventories from P Ltd at cost price
plus 25%. On 31 December 20.7, the inventories of S Ltd included inventories to the value
of R10 000 that had been purchased from P Ltd. Inventories that P Ltd invoiced at R3 000
were in transit to S Ltd at 31 December 20.7.
REQUIRED
Draft the consolidated annual financial statements of the P Ltd Group for the
International Financial Reporting Standards. Ignore taxation on unrealised
profits and/or losses.
206
SOLUTION
P LTD GROUP
ASSETS R
Non-current assets
Property, plant and equipment [100 000 + 80 000 + 280 000
40 000 (revaluation) + 40 000 + 20 000]
Goodwill (8 250(4) + 5 000(4)) 13 250
293 250
Current assets
25)]
Inventories [25 000 + 60 000 + 3 000 (in transit) í (13 000 x125 85 400
153 400

(5) 72
Retained earnings
400
272 400
(d) 74
Non-controlling interests (44 250(3) + 30 000(3))
250

R
Profit before tax (calculation 2) 115 900

Non-controlling interest (9 500 í 1 250 + 3 000)(1)/(b) 11 250
70 900
207
P LTD GROUP
31 DECEMBER 20.7
Non-
Total controlling
interests
R R R R R
the year
* (24 000 + 3 750(2))
Calculations
Ordinary shares P Ltd 75%* NCI

Total At Since 25%
R R R R
At acquisition
Share capital 100 000 75 000 25 000
Revaluation surplus
(120 000 - 80 000) 40 000 30 000 10 000
Equity represented by goodwill - 149 000 111 750 37 250

parent
8 250 8 250(4) -
Since acquisition
(2)
1 250
(14 000 - 9 000)
• Current year
(1)
(1)
Preference dividend# (5 000) (3 750) (1 250)
(3)
185 250 21 000 44 250
# Refer to the comments at the end of the solution for an explanation.
* 75 000/100 000 shares x 100% = 75%
208
Preference shares P Ltd 40 %* NCI

Total At Since 60 %
R R R R
At acquisition 50 000 20 000 30 000
Share capital
Equity attributable to goodwill -
parent 5 000 5 000(4) -
Since acquisition
• Current year
(1)
Attributable profit# 5 000 2 000 3 000
Preference dividend (5 000) (2 000) (3 000)
(3)
55 000 - 30 000
* Refer to the comments on page 167 for an explanation.
* 20 000/50 000 shares x 100% = 40%
R
P Ltd 70 000
S Ltd 58 000
Ordinary dividend received from S Ltd (7 500)
Preference dividend received from S Ltd (2 000)
Unrealised profit in closing inventories (2 600)
25 ]
[(10 000 + 3 000) x125
115 900
209
3. Entries in the financial records of S Ltd
Dr Cr NCI
R R R
Land 40 000
Valuation of land and buildings at acquisition
Inventory 3 000
Current account in P Ltd 3 000
Inventory in transit at 31 December 20.7

Goodwill 8 250
S Ltd for the period ended 31 December 20.6
Preference share capital 50 000

Goodwill 5 000
68 500(a)
Non-controlling interests (SCI) [(38 000 - 5 000) x 25%] 8 250
Recording of non-controlling interests in profit after tax of S Ltd,
after provision for preference dividends for current year ended 31
December 20.7
Dividend paid – S Ltd 10 000
Elimination of intragroup dividend and recording of non-
controlling interests in the dividend

Recording of non-controlling interests in profit after tax for the
current year ended 31 December 20.7 in S Ltd
Dividends received (preference shares) – P Ltd 2 000

Dividend paid (preference shares) – S Ltd 5 000
Elimination of intragroup dividend and recording of non-
controlling interests in the dividend
210
Dr Cr NCI
R R R
Gross profit/Profit before tax – P Ltd 2 600

Inventory – S Ltd 2 600
Elimination of unrealised profit in closing inventory
Current account in P Ltd – S Ltd 8 000

Current account in S Ltd – P Ltd 8 000
Elimination of intragroup loans 74 250(d)
COMMENTS
x Please note that if the parent pays more for its investment in the subsidiary's preference
shares than the value of the shares, we call this "goodwill".
x Do not be confused: we do not take the preference dividend* into account twice in the
two analyses of owners' equity. We merely transfer the pro rata portion (10% x 50 000)
of the preference owners' interest in the profit from the ordinary owners' analysis to the
preference owners' analysis so that it can be distributed as dividends according to that
percentage interest (40:60).
x To calculate the goodwill and non-controlling interests' amounts in the statement of
financial position, we need to add together the amounts obtained from the ordinary and
preference analyses.
9.3 TREATMENT OF PREFERENCE DIVIDENDS OF THE SUBSIDIARY

You often come across situations where there are arrear preference dividends. Since we are
dealing with cumulative preference shares here, we need to make provision for any arrear
preference dividends. A company must pay all arrear preference dividends before it may pay
an ordinary dividend.
211
EXAMPLE 1
Preference dividend for 1 year outstanding at accounting date – declared

dividend must still be provided for
A Ltd B Ltd
ASSETS R R
Plant 50 000 120 000
Investment in B Ltd at fair value
- 75 000 ordinary shares (cost price: R86 250) 86 250 –
- 4 000 preference shares (cost price: R4 000) 4 000 –
167 000 168 000
Share capital – ordinary shares (100 000 shares) 100 000 100 000
– 12% preference shares (20 000/10 000 shares) 20 000 10 000
167 000 168 000

12% preference share
Ordinary share capital capital Retained earnings Total
A Ltd B Ltd A Ltd B Ltd A Ltd B Ltd A Ltd B Ltd
R R R R R R R R
Balance at 1 January 20.9 100 000 100 000 20 000 10 000 14 000 28 000 134 000 138 000
for the year
100 000 100 000 20 000 10 000 35 000 40 000 155 000 150 000
20.9
B Ltd amounted to R15 000. On 1 January 20.6, no preference dividends were in arrears.
Provision must still be made for the 20.9 preference dividend declared, by both companies.
Consider the carrying amount of the assets and liabilities of B Ltd to be equal to the fair value
thereof on the date of acquisition.
212
SOLUTION 1
Before we can draft the consolidated financial statements we must first do the two analyses of
owners' equity.
Calculations
1. Analysis of owners' equity in B Ltd
Ordinary shares A Ltd 75%* NCI

Total At Since 25%
R R R R
At acquisition
Share capital 100 000 75 000 25 000
115 000 86 250 28 750
Consideration and NCI 115 000 86 250 28 750(a)
Since acquisition
Retained earnings
(28 000 - 15 000) 13 000 9 750(3) 3 250(a)
• Current year
Profit for the year 12 000 9 000 3 000(2)
Preference dividend (1 200) (900) (300)(2)
(12% x 10 000)
138 800 1 7 850 34 700(4)
* 75 000/100 000 shares x 100% = 75%
213
Preference shares Total A Ltd 40 %* NCI
At Since 60 %
R R R R
At acquisition
Share capital 10 000 4 000 6 000
(a)
Since acquisition
• Current year
Profit attributable to
preference owners 480 720(2)
1 200
Preference dividend (480) (1)
(1 200) (720)
10 000 - 6 000(4)
* 4 000/10 000 shares x 100% = 40%
Dr Cr NCI
R R R
Share capital – ordinary shares 100 000
Goodwill NIL

for the period ended 31 December 20.8
Share capital – preference shares 10 000

Goodwill NIL
38 000(a)
Non-controlling interests (SCI)
2 700
[(12 000 í 1 200) x 25%)]
of B Ltd for the current year ended 31 December 20.9
– ordinary shares
214
Dr Cr NCI
R R R
Non-controlling interests (SCI) 720
Non-controlling interests (SFP) 720 720(b)
of B Ltd for the current year ended 31 December 20.9
– preference shares
Non-controlling interests (SFP) 720 (720)(c)

Dividends payable 720
Transfer of preference dividends proposed and due to
non-controlling owners
40 700(d)
A LTD GROUP
R
ASSETS
Non-current assets
Current assets

Share capital (100 000 + 20 000) 120 000
170 930
Non-controlling interests (34 700(4) + 6 000(4)) (d) 40 700
Current liabilities
Dividends payable [(20 000 x 12%) + 720(1)] 3 120
215
A LTD GROUP
R
PROFIT FOR THE YEAR (21 000 + 12 000) 33 000
Owners of the parent (33 000 í 3 420) (5) 29 580
Non-controlling interests (3 000 í 300 + 720) (2)/(b) 3 420
33 000
A LTD GROUP
31 DECEMBER 20.9
12%
Ordinary prefe- Non-
Retained Total
share rence control-
earnings equity
capital share ling
capital Total interests
R R R R R
Balance at 1 January 20.9 100 000 20 000 23 750* 143 750 38 000(a) 181 750
the year
Profit for the year (5)29 580 29 580 3 420(b) 33 000
Dividend declared: preference
(20 000 x 12%) (2 400) (2 400) (720)(c) (3 120)
Balance at 31 December 20.9 100 000 20 000 50 930 170 930 40 700(d) 211 630
* (14 000 + 9 750(3))
EXAMPLE 2
Arrear preference dividend – still in arrears; that is, it has not been declared.
The following represent the condensed annual financial statements of F Ltd and G Ltd for the
F Ltd G Ltd
R R
ASSETS
Land and buildings 475 990 308 700
Investment in G Ltd at fair value
70 000 ordinary shares (cost price: R156 800) 156 800 -
10 000 12% cumulative preference shares
(cost price: R12 500) 12 500 -
10% Debentures (cost price: R4 000) 4 000 -
Loan account – F Ltd - 21 000
685 900 387 780
216

Share capital
- Ordinary shares (250 000/100 000 shares) 500 000 200 000
- 100 000 12% cumulative preference shares - 100 000
Revaluation surplus 20 000 15 000
Bank overdraft 27 690 3 280
10% Debentures - 10 000
Loan account – G Ltd 21 000 -
685 900 387 780

F Ltd G Ltd
R R
217
Ordinary 12% cumulative Revaluation Retained earnings Total
share capital preference share surplus
capital
F Ltd G Ltd F Ltd G Ltd F Ltd G Ltd F Ltd G Ltd F Ltd G Ltd
Balance at 1 March 20.6 500 000 200 000 – 100 000 20 000 15 000 93 400 17 800 613 400 332 800

the year
Profit for the year – – 19 200 10 600 19 200 10 600
Balance at 28 February 20.7 500 000 200 000 – 100 000 20 000 15 000 112 600 28 400 632 600 343 400
1. F Ltd acquired its interest in G Ltd on 1 March 20.5, on which date the other components of equity were as follows:
F Ltd G Ltd
R R
Revaluation surplus 20 000 Ͳ
Each share carries one vote.

Consider the carrying amount of the assets and liabilities of G Ltd to be equal to the fair value thereof on the date of acquisition.
2. No preference dividends were in arrears at 1 March 20.5. No dividends have been declared or paid since.
3. Land and buildings of G Ltd was revalued on 31 January 20.6.
4. On 28 February 20.7, there was no arrear interest on debentures.
218
REQUIRED
Draft the consolidated annual financial statements of the F Ltd Group at
28 February 20.7 according to the requirements of International Financial
SOLUTION 2
F LTD GROUP
R
ASSETS
Non-current assets
Goodwill (10 780 + 2 500)(5) 13 280
797 970
Current assets
Inventories (15 510 + 45 280) 60 790
94 690

642 560
Non-controlling interests (65 820 + 111 600) (4)/(c) 177 420
Long-term borrowing – 10% debentures (10 000 – 4 000) 6 000
6 000
Current liabilities
Bank overdraft (27 690 + 3 280) 30 970
66 680
219
F LTD GROUP

Non-controlling interests (3 180 í 3 600 + 10 800)(1)/(b) 10 380
29 800
F LTD GROUP
CONSOLIDATED STATEMENT OF CHANGES IN EQUITY FOR THE YEAR ENDED 28
FEBRUARY 20.7
Revalua- Non-
Share tion Retained controlling Total
capital surplus earnings Total interest equity
R R R R R R
Balance at 1 March 20.6 500 000 30 500* 92 640# 623 140 167 040(a) 790 180
for the year
Balance at 28 February 20.7 500 000 30 500 112 060 642 560 177 420(c) 819 980
* (20 000 + 10 500(3))

#
(93 400 - 1 960(2) + 1 200(2))
220
Calculations
1. Analysis of owners' equity of G Ltd
Ordinary shares F Ltd 70 %* NCI

Total At Since 30 %
R R R R
At acquisition
Share capital 200 000 140 000 60 000
208 600 146 020 62 580
Equity represented by goodwill (5)
;l- parent 10 780 10 780 -
Since acquisition
(2)
Retained earnings/(loss) (2 800) (1 960) RE (840)
Given (17 800 - 8 600) 9 200
Arrear preference dividends
(12% x 100 000 x 1 year) (12 000)
(3)
• Current year
(1)
Profit for the year 10 600 7 420 RE 3 180
(1)
Preference dividends (12 000) (8 400) RE (3 600)
(2 940) RE
(4)
230 180 10 500 OCE 65 820
* 70 000/100 000 shares x 100% = 70%
221
Preference shares F Ltd 10 %* NCI
Total At Since 90 %
R R R R
At acquisition
Share capital 100 000 10 000 90 000
.parent
2 500 2 500(5) -
102 500 12 500 90 000
Since acquisition
Preference dividends (2)
12 000 1 200 10 800
• Current year
Preference dividends (1)
12 000 1 200 10 800
(4)
126 500 2 400 111 600
* 10 000/100 000 shares x 100% = 10%
R
F Ltd 29 600
G Ltd 16 300
Interest received on debentures (400)
Interest paid on debentures 400
45 900
Dr Cr NCI
R R R
Goodwill 10 780
Investment in G Ltd 156 800
Elimination of owners' equity of G Ltd at acquisition
840 (840)
Retained earnings/(loss) 840
Recording of non-controlling interests in profit/(loss)
since acquisition to beginning of current year
222
Dr Cr NCI
R R R
Recording of non-controlling interests in revaluation of
assets for the period ended 29 February 20.6

Goodwill 2 500
Investment in G Ltd 12 500
Elimination of owners' equity of G Ltd at acquisition –
preference shares
10 800
Retained earnings – preference shares
attributable to preference shares for the period ended
29 February 20.6
167 040(a)
Non-controlling interests (SFP) 420
(420)(b)
[(10 600 - 12 000) x 30%]
Non-controlling interests (SCI) 420
for the current year ended 28 February 20.7

attributable to preference shares for the current year
ended 28 February 20.7
10% Debentures – G Ltd 4 000

10% Debentures – F Ltd 4 000
Elimination of intragroup debentures
Loan account G Ltd – F Ltd 21 000

Loan account F Ltd – G Ltd 21 000
Interest received from G Ltd – F Ltd 400
Interest paid to F Ltd – G Ltd 400
Elimination of intragroup transactions
177 420(c)
223
COMMENTS
x Remember that we need to eliminate all intragroup transactions. Always scrutinise the
balances provided in the question carefully. We must also eliminate debentures and
the related interest issued within the group.
x There is no journal for the preference dividends, since it has not even been declared
yet.
EXAMPLE 3
Arrear preference dividend - paid since then
The following represent the condensed annual financial statements of W Ltd and V Ltd for the
W Ltd V Ltd
R R
ASSETS
Investment in V Ltd at fair value
- 70 000 ordinary shares (cost price: R150 000) 150 000 -
- 10 000 12% cumulative preference shares (cost price:
12 500 -
R12 500)
- 10% debentures (cost price: R4 000) 4 000 -
Bank - 20 720
Loan account – W Ltd - 28 000
679 100 408 500

Share capital
- Ordinary shares (250 000/100 000 shares) 500 000 200 000
- 100 000 12% cumulative preference shares - 100 000
Loan account – V Ltd 21 000 -
679 100 408 500
224

W Ltd V Ltd
R R
225
12%cumulative
Ordinarysharecapital Revaluationsurplus Retainedearnings Total
preferencesharecapital
WLtd VLtd WLtd VLtd WLtd VLtd WLtd VLtd WLtd VLtd
R R R R R R R R R R
Balance at 1 March 20.6 500 000 200 000 - 100 000 20 000 15 000 93 400 17 800 613 400 332 800
20.7
Total comprehensive
income for the year
Profit for the year - - 19 200 68 600 19 200 68 600
Dividend declared:
- (10 000) - (10 000)
ordinary
Dividend paid: preference - (24 000) - (24 000)
Balance at 28 February
500 000 200 000 - 100 000 20 000 15 000 112 600 52 400 632 600 367 400
20.7
226
1. W Ltd acquired its interest in V Ltd on 1 March 20.5, at which date the other components
of equity were as follows:
W Ltd V Ltd
R R
Revaluation surplus 20 000 -
Each share carries one vote.

Consider the carrying amount of the assets and liabilities of V Ltd to be equal to the
fair value thereof on the date of acquisition.
2. On 1 March 20.5, no preference dividends were in arrears. All preference dividends since
1 March 20.5 were paid on 28 February 20.7.
3. The land of V Ltd were revalued on 31 January 20.6.
4. On 28 February 20.7, V Ltd declared a dividend of 10 cents per ordinary share. W Ltd
recorded this receivable dividend.
5. On 28 February 20.7, there was no arrear interest on debentures.
REQUIRED
Draft the consolidated annual financial statements of the W Ltd Group at
28 February 20.7 according to the requirements of International Financial
227
SOLUTION 3
W LTD GROUP
R
ASSETS
Non-current assets
Goodwill (3 980 + 2 500)(6) 6 480
791 170
Current assets
Inventories (15 510 + 38 280) 53 790
108 410

673 760
Non-controlling interests (80 220 + 90 000) (4)/(e) 170 220
Long-term borrowing – 10% debentures (10 000 í 4 000) 6 000
6 000
Current liabilities
Dividends payable (5) 3 000
49 600
228
W LTD GROUP
R
Non-controlling interests (20 580 í 3 600 + 10 800) (1)/(b) 27 780
78 400
W LTD GROUP
28 FEBRUARY 20.7
Revalua- Non-
tion controlling
surplus Total interest
R R R R R R
Balance at 1 March 20.6 500 000 30 500* 92 640# 623 140 167 040(a) 790 180
the year
Dividend declared: ordinary – – (3 000)(c) (3 000)
Dividend paid: preference – – (21 600)(d) (21 600)
Balance at 28 February 20.7 500 000 30 500 143 260 673 760 170 220(e) 843 980
* (20 000 + 10 500(3))
# (93 400 – 1 960(2) + 1 200(2))
229
Calculations
1. Analysis of owners' equity of V Ltd
Ordinary shares W Ltd 70 %* NCI

Total At Since 30 %
R R R R
At acquisition
Share capital 200 000 140 000 60 000
208 600 146 020 62 580

Equity represented by goodwill (6)
- parent 3 980 3 980 -
Since acquisition
Retained earnings/(loss)
(2)
(1 960) RE (840)
(2 800)
Given (17 800 - 8 600) 9 200
Arrear preference dividends
(12% x 100 000 x 1 year) (12 000)
(3)
• Current year
Profit for the year 68 600 48 020 RE (1)
20 580
Preference dividends (12 000) (8 400)RE (3 600)
(1)
(5)
(10 000) (7 000)RE (3 000)
Ordinary dividends
30 660RE
(4)
271 380 10 500OCE 80 220
* 70 000/100 000 shares x 100% = 70%
230
Preference shares W Ltd 10 %* NCI

Total At Since 90 %
R R R R
At acquisition
Share capital 100 000 10 000 90 000
Equity represented by goodwill - parent 2 500 2 500(6) -

Since acquisition
Preference dividends 12 000 1 200(2) 10 800
• Current year
Profit attributable to preference owners 12 000 1 200(5) 10 800(1)
Arrear preference dividends paid (24 000) (2 400) (21 600)
102 500 - 90 000(4)
* 10 000/100 000 shares x 100% = 10%
R
W Ltd 29 600
V Ltd 106 000
Ordinary dividend declared by V Ltd (7 000)
Preference dividend paid by V Ltd [(10 000 x 12%) x 2] (2 400)
Interest received on debentures (400)
Interest paid on debentures 400
126 200
231
Dr Cr NCI
R R R
Goodwill 3 980
Investment in V Ltd 150 000
Elimination of owners' equity of V Ltd at acquisition
Non-controlling interests (SFP) 840 (840)

Retained earnings/(loss) 840
profit/(loss) since acquisition to beginning of
current year
4 500
Revaluation surplus
Recording of non-controlling interest in revaluation
surplus for the period ended 29 February 20.6
Goodwill 2 500
Investment in V Ltd 12 500
Elimination of owners' equity of V Ltd at acquisition
Retained earnings – preference shares 10 800
Recording of non-controlling interests in profit for
the period ended 29 February 20.6 – preference
shares
167 040(a)
[(68 600 í 12 000) x 30%]
the year ended 28 February 20.7
Dividends received – W Ltd 7 000

Ordinary dividends declared – V Ltd 10 000
Elimination of intragroup dividends and recording
of non-controlling interests in ordinary dividends

the year ended 28 February 20.7 - preference
shares
232
232
Dr Cr NCI
R R R
*Dividends received – W Ltd 2 400
Non-controlling interests (SFP) 21 600 (21 600)(d)
Preference dividends paid – V Ltd 24 000
of non-controlling interests in preference dividends
10% Debentures – V Ltd 4 000

10% Debentures – W Ltd 4 000
Dividends payable – V Ltd (10 000 x 70%) 7 000

Loan account in W Ltd – V Ltd 7 000
Transfer of dividends payable to loan account
Loan account V Ltd – W Ltd 21 000

Loan account W Ltd – V Ltd 21 000
(Please note: the two loan accounts of the parent
and the subsidiary balance on R21 000.)
Interest received on debentures – W Ltd 400

Interest paid on debentures – V Ltd 400
Elimination of intragroup interest on debentures
(4 000 x 10%)
170 220(e)
COMMENTS
The only difference between example two and three is that the dividends have been declared
and paid in example three. There is an additional journal (*) to eliminate the intragroup
dividend. Remember that we must subtract the dividend of R2 400 that the parent received
(income) from the profit before tax in the statement of profit or loss and other comprehensive
income to eliminate it there.
233
9.4 EXERCISES
Now that you have studied group statements, you can work through the following three
exercises. Your e-tutor can guide you with the completion of these questions.
QUESTION 1
The following represent the condensed statement of financial position of K Ltd and its
subsidiary, L Ltd, as at 28 February 20.2:
K Ltd L Ltd
R R
ASSETS
Land and buildings at cost 80 000 75 000
Investment in L Ltd at fair value 130 000 -
– 8 000 8% cumulative preference shares
(cost price: R13 000) 13 000 -
Loan – K Ltd - 20 000
– Trade and other receivables 30 000 53 000
– Inventories 15 000 19 000
255 000 167 000

– Ordinary shares (50 000/40 000 shares) 100 000 100 000
– 8% cumulative preference shares (40 000/20 000 shares) 40 000 20 000
Loan – L Ltd 16 000 -
Current liabilities – trade and other payables 54 000 13 000
255 000 167 000
1. K Ltd acquired its total interest in L Ltd on 1 March 20.1, on which date the retained earnings
of L Ltd was R20 000.
2. On the date of acquisition, it was decided to revalue L Ltd's land upwards with an amount of
R20 000. Consider the carrying amount of all the other assets and liabilities of L Ltd to be
equal to the fair value thereof.
3. L Ltd's preference dividends are in arrears for the 20.2 financial year.
4. With effect from 1 March 20.1, K Ltd purchased some of its inventories from L Ltd. L Ltd
sold its inventories to K Ltd at cost plus 3313%. On 28 February 20.2, K Ltd had inventories
to the value of R5 000 on hand, which it had purchased from L Ltd.
5. On 2 January 20.2, K Ltd sold a non-depreciable asset with a cost price of R10 000 to L Ltd
at cost plus 25%.
234
6. Cash to the value of R4 000 in respect of the last consignment of inventories that K Ltd
purchased from L Ltd was still in transit on 28 February 20.2.
7. Each share carries one vote.
REQUIRED
Draft the consolidated statement of financial position of the K Ltd Group as at
Financial Reporting Standards (IFRS). Notes are not required. (Show all
your calculations.)
QUESTION 2
The following balances were taken from the records of P Ltd and D Ltd for the year ended 30
June 20.9:
P Ltd D Ltd
R R
Debits
Property at cost 600 000 160 000
Equipment at cost 300 000 180 000
Investment in D Ltd at fair value
Bank – O Bank 1 200 12 000
Income tax expense 190 000 170 000
Provisional tax payments 100 000 90 000
Loan to parent (interest-free) - 140 000
Dividends paid – ordinary shares 40 000 30 000
– preference shares 12 000 7 500
1 671 600 1 276 300
Credits
Share capital
– Ordinary shares (100 000/50 000 shares) 240 000 120 000
– 15% cumulative preference shares 80 000 50 000
(80 000/50 000 shares)
Retained earnings at beginning of the year 150 000 118 000
Accumulated depreciation
– equipment 128 000 94 000
Bank overdraft – B Bank 48 000 -
Taxation payable 190 000 170 000
Loan from subsidiary 120 000 -
1 671 600 1 276 300
235
1. P Ltd acquired its interest in D Ltd on 1 July 20.5. At that date, D Ltd's retained earnings
amounted to R35 000. P Ltd paid R204 000 of which R75 000 was for goodwill. The balance
was attributable to the revaluation of D Ltd's property. The carrying amount of all the other
assets and liabilities was equal to the fair value thereof. At the date of acquisition, there
was no arrear preference dividend. Each share carries one vote.
2. P Ltd has bought all its inventories from D Ltd since 1 July 20.8. D Ltd made a profit of 25%
on the cost price of inventories sold to P Ltd.
3. D Ltd paid no preference dividends for the period 1 July 20.5 to 30 June 20.7. On 30 June
20.8, D Ltd paid a preference dividend of R22 500.
4. On 29 June 20.9, D Ltd sent goods to the value of R20 000 to P Ltd, which P Ltd only
received on 3 July 20.9.
5. On 2 January 20.8, P Ltd sold a machine to D Ltd at a profit of R40 000. It is group policy to
provide for depreciation at 25% per annum according to the reducing balance method.
REQUIRED
Draft the consolidated annual financial statements of the P Ltd Group for the
year ended 30 June 20.9 in accordance with the requirements of
International Financial Reporting Standards (IFRS). No notes are required.
Ignore taxation on unrealised profits and/or losses as well as capital gains
tax.
236
QUESTION 3
The following balances were extracted from the records of J Ltd and T Ltd at 31 December
20.3:
J Ltd T Ltd
Debits R R
Land at cost 150 000 180 000
Machinery
- Cost price 128 400 180 000
- Accumulated depreciation (59 600) (95 900)
Patents at carrying amount 7 600 9 500
Investment in T Ltd
- 70 000 ordinary shares at fair value
(cost price: R125 000) 125 000 -
- 40 000 6% cumulative preference shares
- 20 000 debentures at fair value (cost price: R20 000) 20 000 -
Loan account T Ltd 53 400 -
Provisional tax payments 14 000 17 000
Cash in bank 79 000 -
691 800 452 600
J Ltd T Ltd
Credits R R
Ordinary shares (320 000/100 000 shares) 352 000 100 000
6% cumulative preference shares (10 000/80 000 shares) 10 000 80 000
Loan account J Ltd - 50 000
Bank overdraft - 40 000
Tax payable 25 000 16 000
691 800 452 600
237
J Ltd T Ltd
R R
Expenses (36 800) (29 000)
Staff costs 15 000 13 000
Interest on debentures - 3 000
Interest on bank overdraft - 1 600
69 500 68 900
Other income 10 600 -
Interest received on debentures 1 200 -
Preference dividends received 2 400 -
Ordinary dividends received 7 000 -
238

6% cumulative
preference share
Ordinary share capital capital Retained earnings Total
J Ltd T Ltd J Ltd T Ltd J Ltd T Ltd J Ltd T Ltd
R R R R R R R R
Balance at 1 January 20.3 352 000 100 000 10 000 80 000 95 950 42 000 457 950 222 000
Dividend paid: preference (600) (4 800) (600) (4 800)
Balance at 31 December 20.3 352 000 100 000 10 000 80 000 130 450 80 100 492 450 260 100
239
1. On 1 January 20.1, J Ltd acquired 70 000 ordinary shares and 40 000 6% cumulative
preference shares in T Ltd. All the assets and liabilities were considered to be reasonably
valued, with the exception of the land, which were valued at R250 000. No purchases or
sales of land and buildings have taken place since then. No adjustment has been made
in respect of this yet.
2. At the date of acquisition, the subsidiary had retained earnings of R8 000. No preference
dividends were in arrears at acquisition.
3. J Ltd supplied goods to its subsidiary at cost plus 20%. Particulars of goods supplied to T
Ltd by J Ltd during the year ended 31 December 20.3 were as follows:
R
Inventories 1 January 20.3 12 000
Purchases during the year 120 000
Inventories at 31 December 20.3 4 800
On 27 December 20.3, J Ltd sent goods to T Ltd which were invoiced at R1 800. However,
T Ltd only received these goods on 5 January 20.4, and therefore the goods were not
taken into inventories at 31 December 20.3.
4. T Ltd sent R1 600 to J Ltd on 28 December 20.3. J Ltd only received and banked this
amount on 4 January 20.4.
5. J Ltd sold certain machinery to T Ltd at a price of R10 000 above the carrying amount after
the date of acquisition of its interest in T Ltd. T Ltd provides for depreciation on machinery
at 20% per annum on cost price, based on the assumption that the machine will still have
five years of service left as from the date of purchase, namely 1 January 20.2.
6. Each ordinary share carries one vote.
7. The retained earnings to the amount of R42 000 as at 1 January 20.3 includes the
preference dividends paid for the year-end 31 December 20.2.
REQUIRED
Draft the consolidated annual financial statements of the J Ltd Group for the
International Financial Reporting Standards (IFRS). Ignore taxation on
unrealised profits and/or losses as well as capital gains tax.
240
SOLUTIONS
QUESTION 1
K LTD GROUP
R
ASSETS
Non-current assets
Property, plant and equipment [80 000 + 75 000 + 20 000 (revaluation) 172 500
– 2 500(5)]
Goodwill (5 000 + 5 000)(1) 10 000
182 500
Current assets
Inventories (15 000 + 19 000 í 1 250(4)) 32 750
119 750

Equity attributable to the owners of the parent
Share capital (100 000 + 40 000) 140 000
(45 000 í 2 500(5) + 8 920(2) + 640(2))
192 060
Non-controlling interests (30 230 + 12 960)(3)/(a) 43 190
Current liabilities
241
Calculations
Ordinary shares K Ltd 80 %* NCI

Total At Since 20 %
Ordinary share capital 100 000 80 000 20 000
140 000 112 000 28 000
parent 5 000 5 000(1) -
Since acquisition
Given 34 000
Arrear preference dividends 20.2 (1 600)
Unrealised profit in closing (1 250)(4)
inventories (3313 /13331 x 5 000)
156 150 8 920(2) 30 230(3)
32,000
* 40,000 x 100% = 80%
242
Preference shares K Ltd 40 %* NCI

Total At Since 60 %
R R R R
At acquisition
Preference share capital 20 000 8 000 12 000
.parent 5 000 5 000(1) -
Since acquisition
Arrear preference dividend 20.2 1 600 640 960
26 600 640(2) 12 960(3)
8,000
* 20,000 x 100% = 40%
2. Profit on sale of non-depreciable asset
Cost price R10 000

Profit 25%
Profit to be eliminated 10 000 x 25% = R2 500(5)
3. Entries in the financial records of L Ltd
Dr Cr NCI
R R R
Land 20 000
Recording of the revaluation of land and buildings in L Ltd
Bank (cash in transit) 4 000

Loan K Ltd 4 000
Recording of cash in transit from K Ltd to L Ltd
243
Dr Cr NCI
R R R
Goodwill 5 000
Cost of sales – L Ltd 1 250

Inventories – K Ltd 1 250
Elimination of unrealised profit on closing inventory
2 500
Profit on sale of property – K Ltd
Property – L Ltd 2 500
Elimination of unrealised profit included in L Ltd's property
Loan L Ltd – K Ltd 16 000

Loan K Ltd – L Ltd 16 000
Elimination of intragroup loan accounts

Recording of non-controlling interests in profit/(loss)

Goodwill 5 000
Elimination of owners' equity of L Ltd at acquisition –
preference shares
Retained earnings – preference shares 960
Recording of non-controlling interests in profit for the
period ended 28 February 20.2 - preference shares
43 190(a)
244
COMMENTS
On consolidation, we add the parent's retained earnings (100%) to the subsidiary's retained
earnings, but limited to the parent's share in the subsidiary's equity. We will disclose the non-
controlling interests' portion separately under non-controlling interests in the statement of
changes in equity. We will include only the "since acquisition date" portion of the subsidiary's
retained earnings which we obtained from the analysis. We eliminated the "at acquisition
date" portion against the investment in the subsidiary. We have already taken the unrealised
profits the subsidiary made into account in the analysis. However, we must account for the
unrealised profit of R2 500 that the parent made on the sale of the property additionally in
retained earnings.
QUESTION 2
P LTD GROUP
R
ASSETS
Non-current assets
Property, plant and equipment [(600 000 + 160 000 + 60 000) + 1 051 750
(300 000 + 180 000 í 40 000) í (128 000 + 94 000 í 5 000(4) í 8 750(5))]
Goodwill (6)75000
1 126 750
Current assets
Inventories (100 000 + 80 000 + 20 000 í 24 000) 176 000
720 400

Share capital (240 000 + 80 000) 320 000
Retained earnings (8)624 250
944 250
Non-controlling interests (221 000 + 50 000)(7)/(e) 271 000
Current liabilities
Tax payable (190 000 + 170 000 - 100 000 - 90 000) 170 000
245
P LTD GROUP
R

Non-controlling interests (113 800 + 7 500)(2)/(b) 121 300
632 750

30 JUNE 20.9
15% cum.
Non-
Ordinary prefe-
Retained control- Total
share rence Total
earnings ling equity
capital share
interests
capital
R R R R R R
Balance at 1 July 20.8 240 000 80 000 164 800* 484 800 169 200(a) 654 000
for the year
Dividend paid: preference (12 000) (12 000) (7 500)(d) (19 500)
Balance at 30 June 2 .9 240 000 80 000 (8)624 250 944 250 271 000(e) 1 215 250
* (150 000 + 49 800(1) – 40 000(3) + 5 000(4) )
246
Calculations
1. Analysis of owners' equity of D Ltd
Ordinary shares P Ltd 60 %* NCI

Total At Since 40 %
Share capital 120 000 72 000 48 000
Revaluation surplus 60 000* 36 000 24 000
215 000 129 000 86 000
Equity represented by goodwill - parent 75 000 75 000(6) -
Consideration and NCI# 290 000 204 000 86 000
Since acquisition
Retained earnings (118 000 - 35 000) 83 000 49 800(1) 33 200
• Current year
Profit for the year 284 500 170 700 113 800(2)
Profit after tax 316 000

(486 000 -170 000)
Unrealised profit in inventories (24 000)
25
(120 000 x 125 )
Preference dividend (7 500)
Ordinary dividends paid (30 000) (18 000) (12 000)

627 500 202 500 221 000(7)
* 30 000/50 000 shares x 100% = 60%
R
# P Ltd paid 204 000
Goodwill (75 000)
60% investment 129 000
129 000 í (72 000 + 21 000) = 36 000 (60%)
36 000 x 100 = 60 000

60
247
Preference shares P Ltd 0 % NCI
Total At Since 10%
R R R R
At acquisition
Preference share capital 50 000 - - 50 000
Since acquisition
• Current year
Profit attributable to preference owners 7 500 7 500(2)
Preference dividend paid (7 500) (7 500)
50 000 - - 50 000(7)
2 Profit before tax R

Profit – P Ltd 540 000
Dividends received from D Ltd (30 000 x 60%) (18 000)
Adjustment for depreciation (calculation 3) 8 750
Profit – D Ltd 486 000
Unrealised profit in closing inventories (24 000)
992 750
3 Depreciation
Profit – 2 January 20.8 40 000(3)
Depreciation adjustment in 20.8 (40 000 x126 x 25%) (5 000)(4)
35 000
Depreciation adjustment in 20.9 (35 000 x 25%) (8 750)(5)
4 Entry in D Ltd's financial records

Land and buildings 60 000
Recording of the revaluation of land and buildings in
D Ltd
5 Entry in P Ltd's financial records

Inventories 20 000
Loan account D Ltd 20 000
Recording of inventories sent to P Ltd
248
6 Pro-forma consolidated journal entries

Dr Cr NCI
R R R
Goodwill 75 000
Investment in D Ltd 204 000
Elimination of owners' equity of D Ltd at acquisition

Recording of non-controlling interests in retained
earnings for the period ended 30 June 20.8

Elimination of owners' equity of D Ltd at acquisition
169 200(a)
Cost of sales – D Ltd 24 000
Inventories – P Ltd 24 000
Retained earnings – P Ltd 40 000
Machinery – D Ltd 40 000
Elimination of unrealised profit included in
D Ltd's machinery
Accumulated depreciation – D Ltd 13 750
Retained earnings – P Ltd 5 000
Depreciation – P Ltd 8 750
Elimination of the depreciation associated with the
profit on sale of machinery
Loan D Ltd – P Ltd 140 000
Loan P Ltd – D Ltd 140 000

tax
249
Dr Cr NCI
R R R
Ordinary dividends paid – D Ltd 30 000
of non-controlling interests in ordinary dividends
Dividends received – P Ltd NIL
Preference dividends paid – D Ltd 7 500
of non-controlling interests in preference dividends

Non-controlling interests (SFP) 7 500 (7 500)(b)
Recording of non-controlling interests share in
profit attributable to preference shares for the
period ended 30 June 20.9
271 000(e)
COMMENTS
It is still advisable to do the analysis of preference owners, even though the parent does not
hold any preference shares of the subsidiary because of the following:
- We should still allocate the preference share capital of R50 000 to non-controlling
interests.
- We should still allocate the non-controlling owners' share of profit of R7 500 to them
in the statement of profit or loss and other comprehensive income.
250
QUESTION 3
J LTD GROUP
R
ASSETS
Non-current assets
Property, plant and equipment [(150 000 + 250 000) + 564 000
298 400 (calculation 4) í 151 500 (calculation 4) + (7 600 + 9 500)]
Goodwill (400(2)) 400
564 400
Current assets
Inventories [62 000 + 62 000 + 1 800 (in transit) í 1 100 (unrealised profit)] 124 700
Cash and cash equivalents [79 000 + 1 600 (in transit)] 80 600
377 300

Share capital (352 000 + 10 000) 362 000
535 820
Non-controlling interests (75 030 + 40 000)(4)/(e) 115 030
Long-term borrowing – 6% debentures (50 000 í 20 000) 30 000
30 000
Current liabilities
Tax payable (25 000 + 16 000 í 14 000 í 17 000) 10 000
260 850
251
J LTD GROUP
Note R
Gross profit (calculation 2) 205 100
Administrative expenses [2 000 + 1 000 + 19 800 + 10 400 í (59 200)
(10 000 x 20%) + 15 000 + 13 000]
Finance costs [3 000 + 1 600 í (3 000 x 40%)] (3 400)
Total comprehensive income attributable to: R

Non-controlling interest (14 430 + 2 400)(1)/(b) 16 830
101 500
J LTD GROUP
1.lllProfit before tax

R
Expenses
Depreciation 28 200
[19 800 + 10 400 í (10 000 x 20%)]
Staff costs (15 000 + 13 000) 28 000
252
J LTD GROUP
31 DECEMBER 20.3
15% cum
preference Non-
Share share Retained controlling Total
capital capital earnings Total interests equity
R R R R R R
Balance at 1 January 20.3 352 000 10 000 109 750* 471 750 103 600(a) 575 350
for the year
Dividends paid: ordinary (20 000) (20 000) (3 000)(c) (23 000)
Dividend paid: preference (600) (600) (2 400)(d) (3 000)
Balance at 31 December 20.3 352 000 10 000 173 820 535 820 115 030(e) 650 850
* calculation 3
Calculations
1. Analysis of owners' equity of T Ltd
Ordinary shares J Ltd 70 %* NCI

Total At Since 30 %
R R R R
At acquisition
Share capital 100 000 70 000 30 000
178 000 124 600 53 400
parent 400 400(2) -
Since acquisition
Retained earnings 34 000 23 800(3) 10 200
Given (42 000 – 8 000)
• Current year
Profit after tax and preference 48 100 33 670 14 430(1)
dividend (52 900 - 4 800)
Ordinary dividend paid (10 000) (7 000) (3 000)
250 500 50 470 75 030(4)
* 70 000/100 000 shares x 100% = 70%
253
Cumulative preference shares J Ltd 50 %* NCI
Total
At Since 50 %
R R R R
At acquisition
Share capital 80 000 40 000 40 000
parent - - -
Since acquisition
• Current year
Profit attributable to preference 4 800 2 400 2 400(1)
owners
Preference dividend paid (4 800) (2 400) (2 400)
80 000 - 40 000(4)
* 40 000/80 000 shares x 100% = 50%
2. Gross profit
R
Profit – J Ltd 106 300
– T Ltd 97 900
20)
Unrealised profit in opening inventories (12 000 x120 2 000
20 ]
Unrealised profit in closing inventories [(4 800 + 1 800) x120 (1 100)
205 100
3. Retained earnings at the beginning of the year
Retained earnings – J Ltd 95 950

– T Ltd(3) 23 800
Profit on sale of machinery (10 000)
Depreciation adjustment on machinery sold 2 000
(10 000 x 20% x 1 year)
Unrealised profit in opening inventories (2 000)
109 750
254
254
4. Machinery
R
Cost price – J Ltd 128 400
– T Ltd 180 000
– profit on sale (10 000)
298 400
Accumulated depreciation – J Ltd 59 600
– T Ltd 95 900
– depreciation on machinery sold
– 20.2 (2 000)
– 20.3 (2 000)
151 500
5. Entries in T Ltd's financial records
Dr Cr NCI
R R R
Land 70 000
Recording of the revaluation of land and buildings in D Ltd
Inventories 1 800
Loan account J Ltd 1 800
Recording of inventories sent to T Ltd
6. Entries J Ltd's financial records
Bank – cash in transit 1 600

Loan account T Ltd 1 600
Recording of cash sent by T Ltd to J Ltd

Goodwill 400
Investment in T Ltd 125 000
Elimination of owners' equity of T Ltd at acquisition
255
Dr Cr NCI
R R R
Recording of non-controlling interests in retained
earnings for the period ended 31 December 20.2

Investment in T Ltd 40 000
Elimination of owners' equity of T Ltd at acquisition –
preference shares
103 600(a)
Income – sales – J Ltd 120 000
Cost of sales – T Ltd 120 000
Cost of sales – J Ltd 1 100

Inventories – T Ltd 1 100

Cost of sales – J Ltd 2 000
Elimination of unrealised profit on opening inventory

Machinery – T Ltd 10 000
Elimination of unrealised profit included in T Ltd's
machinery
Accumulated depreciation – T Ltd 4 000

Depreciation – J Ltd 2 000
Elimination of the depreciation associated with the profit
on sale of machinery
Loan J Ltd – T Ltd 51 800

Loan T Ltd – J Ltd 51 800
256
Dr Cr NCI
R R R
6% Debentures – T Ltd 20 000
6% Debentures – J Ltd 20 000
Interest on debentures received – J Ltd 1 200

Interest on debentures paid – T Ltd 1 200
Elimination of intragroup interests on debentures


Ordinary dividends paid – T Ltd 10 000
Elimination of intragroup dividends and recording of non-
controlling interests in ordinary dividends

Preference dividends paid – T Ltd 4 800
Elimination of intragroup dividends and recording of non-
controlling interests in preference dividends

Recording of non-controlling interests share in profit
attributable to preference shares
115 030(e)
257
SELF-ASSESSMENT
x calculate the parent's percentage interest in the preference share capital
of the subsidiary?
x record any preference dividends a subsidiary paid or declared in the
consolidated annual financial statements in accordance with
International Financial Reporting Standards (IFRS)?
x record arrear cumulative preference dividends payable/paid by a
subsidiary in the consolidated annual financial statements in accordance
with International Financial Reporting Standards (IFRS)?
258
FAC2602
TOPIC B: LEARNING UNIT 1
STATEMENT OF
CASH FLOWS
Statement of cash flows

259

LEARNING OUTCOMES
Students should be able to draft the statement of cash flows for a company in accordance
with International Financial Reporting Standards (IFRS).
OVERVIEW
The study unit is divided into the following:
1.1 INTRODUCTION ........................................................................................................ 261

1.2 PURPOSE AND PRESENTATION OF A STATEMENT OF CASH FLOWS ............. 262
1.3 ELEMENTS AND FRAMEWORK OF A STATEMENT OF CASH FLOWS ............... 262
SELF-ASSESSMENT ........................................................................................................... 285
KEY CONCEPTS
x Cash
x Cash flow equivalents
x Cash flow
x Operating activities
x Investing activities
x Financing activities
ASSESSMENT CRITERIA
x draft a statement of cash flows, with accompanying notes, for a company
by means of the direct method in accordance with International Financial
Reporting Standards (IFRS)
x draft a statement of cash flows, with accompanying notes, for a company
using the indirect method in accordance with International Financial
260
FAC2602 / TOPIC B / Learning unit 1
1.1 INTRODUCTION
In Accounting I, we introduced you to company annual financial statements. You studied
aspects such as the statement of financial position and the statement of profit or loss and other
comprehensive income. In Accounting II, you will be studying the above aspects in greater
detail and will acquire knowledge of International Financial Reporting Standards (IFRS).
Although the sections of the Companies Act and the IFRS statements are very important for
your studies, we do not expect you to read them all. However, in order to equip you thoroughly,
we will refer to them in the learning unit from time to time.
Cash flow information involves the meaningful presentation of the cash that the entity generated
and applied. We present this information to the readers of financial statements in the form of a
statement of cash flows.
A complete set of financial statements comprises of the following:
x statement of financial position

x statement of profit or loss and other comprehensive income
x statements of changes in equity
x statement of cash flows
x notes
Users of financial statements are interested in the information on cash flow, which can be
derived from the statement of cash flows. As the name indicates, this statement has to do with
the cash flows in an enterprise, which implies that we omit all the items in the annual financial
statements that have nothing to do with the cash flow when we compile the statement of cash
flows.
261
1.2 PURPOSE AND PRESENTATION OF A STATEMENT OF CASH FLOWS
The purpose of the statement of cash flows is to provide information to the various users of
financial statements. Each enterprise presents its cash flows from operations, investment and
financing in the way most suitable for its business.
The following would be a logical presentation:
x Net cash flow from operating activities
o cash receipts from customers

o cash paid to suppliers and employees
o investment income
o interest paid
o income tax paid
o dividends paid
o proceeds from the sale of financial assets at fair value through profit or loss: held for
trading
x Net cash flow from investing activities
x Net cash flow from financing activities
x Net change in cash and cash equivalents
Operating activities are the principal income-producing activities of the enterprise as well as
other activities which are not investing or financing activities.
Investing activities include the acquisition and sale of non-current assets and other investments
not included in cash flow equivalents.
Financing activities are activities that result in changes in the size and composition of the equity
capital and borrowings to the enterprise.
1.3 ELEMENTS AND FRAMEWORK OF A STATEMENT OF CASH FLOWS

The elements of a statement of cash flows are the following:
x operating activities
x investing activities
x financing activities
Operating activities
The amount of cash arising from operating activities is a key indicator of the extent to which the
operations of the entity have generated sufficient cash to repay loans, maintain the operating
capability of the entity, pay dividends and make new investments without recourse to external
financing.
262
Cash flows from operating activities are derived primarily from the principal revenue-producing
activities of the entity. Therefore, they generally result from the transactions and other events
that determine profit or loss. The following are examples of cash flows from operating activities:
x cash receipts from the sale of goods and the rendering of services
x cash payments to suppliers for goods and services
x cash payments to and on behalf of employees
x cash payments and refunds in respect of income taxes
Investing activities
It is important to disclose cash flows from investing activities because they represent the extent
to which payments have been made for resources intended to generate future receipts and
cash flows.
The following are examples of cash flows arising from investing activities:
x cash payments to acquire property, plant and equipment and other non-current assets
x cash receipts from sales of property, plant and equipment and other non-current assets
Financing activities
It is important to disclose cash flows arising from financing activities because they are useful in
predicting claims from providers of capital to the entity on future cash flows.
The following are examples of cash flows arising from financing activities:
x cash proceeds from issuing shares

x cash payments to owners to acquire or redeem the entity's shares
x cash proceeds from issuing debentures, loans, mortgage bonds and current or non-current
borrowings
x cash repayments for amounts borrowed
We can represent a statement of cash flows schematically as follows:
263
STATEMENT OF CASH FLOWS
CASH FLOW FROM OPERATING ACTIVITIES
minus
CASH APPLIED IN INVESTING ACTIVITIES
plus/minus
CASH INFLOW/(OUTFLOW) FROM

FINANCING ACTIVITIES
is represented by, or is equal to
net increase/(decrease) in CASH AND CASH EQUIVALENTS
We do not compile the statement of cash flows from separate transactions. To draft a statement
of cash flows for the year ended 31 December 20.8, we use the following:
x statement of profit or loss and other comprehensive income for the year ended
31 December 20.8
x statements of financial position as at 31 December 20.7 and 31 December 20.8
x additional information
Remember: Amounts that are not in brackets represent the inflow of cash, and
amounts in brackets represent the outflow of cash.
An enterprise should report cash flow from operating activities by means of either the direct or
the indirect method.
If it uses the direct method, it will disclose the principal categories of gross cash proceeds and
gross cash payments. On the other hand, if it uses the indirect method, profit or loss is adjusted
for the effect of non-cash transactions as well as any deferrals or accruals of previous or future
operating cash receipts or payments and income or expenditure items which are related to
investment or financing cash flow.
The only difference between the direct and indirect method lies in the presentation of the section
dealing with cash flow from operating activities. The sections dealing with investing and financing
activities remain in the same format irrespective of the method used.
Study the following frameworks of the two methods:
264
FRAMEWORK OF A STATEMENT OF CASH FLOWS IN ACCORDANCE WITH THE

DIRECT METHOD
R R
Cash flows from operating activities
Cash receipts from customers xxx
Cash paid to suppliers and employees (xxx)
Cash generated from operations xxx
Interest received xxx
Interest paid (xxx)
Dividends received xxx
Dividends paid (xxx)
Tax paid (xxx)
Proceeds from the sale of financial assets at fair value through profit or xxx
loss: held for trading (such as listed shares)
Net cash from/(used in) operating activities xxx
Cash flows from investing activities
Investment to maintain production capacity (xxx)
Replacement of non-current assets xxx
Investment to expand production capacity (xxx)
Additions to non-current assets xxx
Proceeds from the sale of property, plant and equipment xxx
Proceeds from the sale of investments (such as in equity shares or loans) xxx
Net cash from/(used in) investing activities (xxx)
Cash flows from financing activities
Proceeds from the issue of shares xxx
Proceeds from long-term borrowings/debentures xxx
Repayment of loans (xxx)
Redemption of redeemable preference shares (xxx)
Net cash from/(used in) financing activities xxx
Net increase in cash and cash equivalents xxx
Cash and cash equivalents at beginning of year xxx
Cash and cash equivalents at end of year xxx
265
FRAMEWORK OF A STATEMENT OF CASH FLOWS IN ACCORDANCE WITH THE
INDIRECT METHOD
Cash flows from operating activities R R

Profit before tax xxx
Adjustments for:
Depreciation xxx
Loss on sale of non-current assets xxx
Profit on sale of non-current assets (xxx)
Investment income (xxx)
Interest expense xxx
xxx
Changes in working capital xxx
Decrease/(Increase) in inventory xxx
Decrease/(Increase) in trade and other receivables xxx
(Decrease)/Increase in trade and other payables (xxx)
Cash generated from operations xxx
Interest received xxx
Interest paid (xxx)
Dividends received xxx
Dividends paid (xxx)
Tax paid (xxx)
Proceeds from the sale of financial assets at fair value through xxx
profit or loss: held for trading (such as listed shares)
Net cash from/(used in) operating activities xxx
Investment to maintain production capacity (xxx)
Replacement of non-current assets xxx
Investment to expand production capacity (xxx)
Additions to non-current assets xxx
Proceeds from the sale of property, plant and equipment xxx
Proceeds from the sale of investments (such as in equity shares xxx
or loans)
Net cash from/(used in) investing activities (xxx)
Proceeds from the issue of shares xxx
Proceeds from long-term borrowings/debentures xxx
Repayment of loans (xxx)
Redemption of redeemable preference shares (xxx)
Net cash from/(used in) financing activities xxx
Net increase in cash and cash equivalents xxx
Cash and cash equivalents at beginning of period xxx
Cash and cash equivalents at end of period xxx
266
We will use the following example throughout the learning unit to illustrate certain aspects of
cash flow information:
The following balances appear in the books of Ross Ltd for the financial year ended 30 June:
20.6 20.5
R R
Plant and machinery 105 000 124 000
Motor vehicles 108 900 67 300
Financial assets at amortised cost - 25 200
Inventory 67 000 50 000
Prepaid expenses 500 2 600
Bank 2 000 -
670 800 659 100
Share capital (280 000/250 000 shares) 292 000 258 200
Long-term borrowings - 80 000
Revaluation surplus – land and buildings 15 000 -
10% R200 Debentures 40 000 -
Ordinary dividends payable 16 800 -
Accumulated depreciation
- Plant and machinery 27 000 18 000
- Motor vehicles 27 200 10 000
Accrued interest 2 000 -
Bank overdraft - 300
670 800 659 100
267
ROSS LTD
STATEMENT OF PROFIT OR LOSS AND OTHER COMPREHENSIVE INCOME FOR THE
Revenue 500 000

Cost of sales (250 000)
Other income (3 000 + 2 000) 5 000
Administrative expenses (78 200 + 63 600) (141 800)
Selling expenses (87 400)
Other costs (8 000)
Finance cost (7 300)
Income tax expense -
1. The long-term borrowing bears interest at 12% per annum, payable in arrears, and was
repaid on 31 December 20.5. Interest did not qualify for capitalisation.
2. In December 20.5, a piece of land that cost R15 000 was sold for its carrying amount and
replaced with another piece of land. On 30 June 20.6, the remaining land was revalued.
These were the only transactions in respect of land and buildings for the current financial
year.
3. During the current financial year, a machine with a carrying amount of R51 000 was sold at
a loss of R8 000 and replaced with a new machine which cost R62 000. The total
depreciation on plant and machinery for the current financial year amounted to R39 000.
4. A motor vehicle with a cost price of R14 400 on which depreciation of R7 400 had already
been written off was traded in for R9 000 on a new vehicle that cost R35 000.
5. No other machines or motor vehicles were sold during the year, but one additional motor
vehicle was purchased.
6. The provision for tax for the current financial year was R15 000. This includes an
underprovision of R5 100 for the 20.5 tax year.
7. New shares were issued on 30 April 20.6.
8. On 31 December 20.5, an interim ordinary dividend of 4c per share was declared and paid.
9. Ordinary dividends of 6c per share were declared on 30 June 20.6.
10. The financial assets were sold at amortised cost on 1 July 20.5. These shares were
purchased without the intention of short-term profit taking as part of the business model.
11. During the year, dividends to the value of R3 000 were received.
268
Cash flows from operating activities (using the direct method)
Cash receipts from customers
Please note: This amount is determined by reconstructing the trade and other receivables
account.
Cash receipts from customers
Trade and other receivables

R R
Balance b/d 50 000 Bank* 512 600
Sales 500 000 Balance c/d 37 400
550 000 550 000
* Balancing figure
Cash paid to suppliers and employees
We calculate this amount by comparing the figures for inventory and trade and other payables
as given in the two statements of financial position. If inventory increased from one year to the
next, the effect on cash flow would be negative, as it implies more cash flowed out to purchase
inventory. If the figure of trade and other payables increased from one year to the next, this
means that less cash flowed out to pay creditors and the figure would then be positive in respect
of cash flow. All purchases of inventory and expenses which were paid for in cash are also
included in the calculation.
269
R R
Balances b/d Balance b/d
Inventory 50 000 Trade and other payables 26 000
Prepaid 2 600 Cost of sales 250 000
Bank* 417 700 Administrative
Balance c/d expenses 78 200
Trade and other payables 38 800 Selling expenses 87 400
Balances c/d
Inventory 67 000
Prepaid expenses 500
509 100 509 100
* Balancing figure
Depreciation to the value of R63 600 does not give rise to a cash flow.
Plant and machinery 39 000 (given)

Vehicles 24 600 [27 200 í (10 000 í 7 400)]
63 600
Cash generated from operations
We obtain this amount by subtracting the cash paid to suppliers and employees from cash
receipts from customers.
Interest paid, dividends received and paid and normal tax paid
The company normally make all payments to the South African Revenue Service (SARS) and
to suppliers of funds from cash generated by operating activities. We should therefore disclose
interest paid as well as tax and dividends paid during a year separately from cash generated
by operating activities.
270
Dividends paid R
Unpaid amount at beginning of period (statement of financial position 20.5)
Amount debited against income* (total dividends declared for 20.6) 26 800
Unpaid amount at end of period (statement of financial position 20.6) (16 800)
10 000
*Ordinary dividends
- Interim (250 000 x 4c) 10 000
- Final (280 000 x 6c) 16 800
26 800
Tax paid
Unpaid amount at beginning of period (statement of financial position 20.5) 46 600
Amount debited against income (additional information 6) 15 000
Unpaid amount at end of period (statement of financial position 20.6) (23 300)
38 300
We can now complete the section described as cash flows from operating activities using the
direct method:
Cash flows from operating activities (according to the direct method):
ROSS LTD
STATEMENT OF CASH FLOWS FOR THE YEAR ENDED 30 JUNE 20.6
R R
Cash receipts from customers 512 600
Cash paid to suppliers and employees (417 700)
Cash generated from operations 94 900
Interest paid (7 300 í 2 000) (5 300)
Tax paid (38 300)
Net cash from operating activities 44 300
Cash flows from operating activities (using the indirect method)
When we prepare the statement of cash flows using the indirect method, we must ignore the
calculations for cash received from customers and cash payments to suppliers and employees.
We now calculate cash generated by operations by adjusting profit or loss for the effect of non-
cash transactions, any deferrals or accruals of previous or future operating cash receipts or
payments and income or expenditure items related to investment or financing cash flow. The
calculations for interest, dividends and tax remain unaltered, irrespective of the method used.
271
Cash flows from operating activities (using the indirect method):
ROSS LTD
STATEMENT OF CASH FLOWS FOR THE YEAR ENDED 30 JUNE 20.6
R R
Adjustments for:
Depreciation 63 600
Profit on sale of non-current asset (2 000)
Loss on sale of non-current asset 8 000
Interest expense 7 300
Investment income (3 000)
84 400
Changes in working capital 10 500
Increase in inventory (50 000 í 67 000) (17 000)
Decrease in trade and other receivables (50 000 í 37 400) 12 600
Decrease in prepaid expenses (2 600 í 500) 2 100
Increase in trade and other payables (38 800 í 26 000) 12 800
Interest paid (7 300 í 2 000) (5 300)
Tax paid (38 300)
Cash flows related to investing activities may include both the inflow and the outflow of cash. The
outflow of cash includes the purchase of assets and investments, while the inflow of cash
includes items such as proceeds from the sale of non-current assets.
Regarding the amount of assets purchased, we distinguish between the amount for
replacement and that for addition to assets. Replacement refers to the maintenance of
operations, while additions refers to the expansion of operations.
x Assets purchased
When the increase in the balance of the accumulated depreciation accounts in the two
statements of financial position is equal to the depreciation in the statement of profit or loss
and other comprehensive income, the company did not sell or write off any assets during the
year. We can then account for any increase in the asset account (at cost price) directly as
purchases of assets.
272
x Revaluation of property
Companies often revalue property, and when this happens during a particular financial year, we
treat it as follows: the value of the property increased because of the revaluation and because
there was in fact no flow of cash, we can ignore it when drafting the statement of cash flows.
The increase in the revaluation surplus represents the increase in the value of the property.
x Purchase and sale of assets
If an enterprise has purchased or sold assets during the year, it is desirable to reconstruct the
ledger accounts concerned.
Land and buildings

R R
Balance b/d 340 000 Proceeds on sale 15 000
Revaluation# 15 000 Balance c/d 350 000
Replacement* 10 000
365 000 365 000
Balance b/d 350 000
# Increase in balance of surplus on revaluation account
* Balancing figure
Motor vehicles at cost price

R R
Balance b/d 67 300 Cost of trade-in 14 400
Replacement (given) 35 000 Balance c/d 108 900
Addition* 21 000
123 300 123 300
Balance b/d 108 900
* Balancing figure
Accumulated depreciation: motor vehicles

R R
Accumulated depreciation Balance b/d 10 000
on trade-in 7 400 Depreciation* 24 600
Balance c/d 27 200
34 600 34 600
Balance b/d 27 200
* Balancing figure
273
Realisation account: motor vehicles
R R
Cost price of trade-in 14 400 Accumulated depreciation 7 400
Profit on trade-in on trade-in
[(14 400 - 7 400) - 9 000] 2 000 Proceeds 9 000
16 400 16 400
Plant and machinery at carrying amount

R R
Balance b/d 106 000 Carrying amount 51 000
-sold
Replacement (given) 62 000 Depreciation 39 000
Balance c/d 78 000
168 000 168 000
Balance b/d 78 000
Realisation account: plant and machinery

R R
Carrying amount sold 51 000 Proceeds on sale 43 000
(51 000 - 8 000)
Loss on sale 8 000
51 000 51 000
Financial assets
When trading in shares is part of the business model of the company and there is an intention
of short-term profit taking, typically listed shares held for trading, the increase or decrease in
cash would be part of the operating activities. In this example, however, the shares were
purchased without the intention of short-term profit taking as part of the business model. The
shares not held for trading, will be disclosed in the cash flows from investing activities section.
We are now able to complete the section described as cash flows from investing activities.
Cash flows from investing activities (both methods)
R R
Investment to maintain production capacity (107 000)
Replacement of land 10 000
Replacement of motor vehicle 35 000
Replacement of machine 62 000
Investment to expand production capacity (21 000)
Addition to motor vehicles 21 000
Proceeds from the sale of financial assets at amortised cost 25 200
Proceeds of sale of land 15 000
274
Proceeds on sale of motor vehicle 9 000

Proceeds on sale of machine 43 000
Net cash used in investing activities (35 800)
Cash flows from financing activities (both methods)
An enterprise must report on the main classes of gross cash receipts and gross cash payments
that resulted from financing activities separately.
We usually derive the effecting of new borrowings, the redemption of existing borrowings and
the issue of shares from the given statements of financial position.
2 .6 2 .5 Change
R R R
10% R200 Debentures 40 000 - 40 000
Long-term borrowings - 80 000 80 000
Share capital (280 000/250 000 shares) 292 000 258 200 33 800
The share capital increased by R33 800. Therefore, the total amount received upon issue of
the shares was R33 800.
We can now complete the section that deals with cash flows from financing activities.
Cash flows from financing activities (both methods)
R R
Proceeds from debentures issued 40 000
Payment on redemption of long-term borrowings (80 000)
Proceeds on issue of shares 33 800
Net cash used in financing activities (6 200)
Net change in cash and cash equivalents
The net effect of the first three sections of the statement of cash flows produced the net change.
R
Net increase in cash and cash equivalents 2 300
Cash and cash equivalents at beginning of year (300)
Cash and cash equivalents at end of year 2 000
275
1.4 EXERCISES
QUESTION 1
20 .3 20.2
R R
Debits
Property 1 750 000 1 400 000
Motor vehicles 436 000 410 000
Machinery 385 000 370 000
Inventory 178 000 154 000
Cash in bank 2 000 76 000
Financial assets at fair value through profit or loss - 40 000
2 965 000 2 670 000
Credits
Share capital (400 000/300 000 shares) 440 000 330 000
Long-term borrowings: interest free 900 000 1 100 000
Accumulated depreciation – Motor vehicles 76 000 54 000
– Machinery 141 000 120 000
Dividends payables (ordinary) 24 000 16 000
2 965 000 2 670 000
1. The following information was obtained from the statement of profit or loss and other
comprehensive income of A Ltd for the year ended 31 October 20.3:
R
Revenue 750 000
Other income 4 000
Administrative and selling expenses (88 000 + 48 000 + 72 000) (208 000)
Other expenses (26 000)
Other comprehensive income for the year
– Revaluation surplus 210 000
276
2. Extract from the statement of changes in equity for the year ended 31 October 20.3
Revaluation Retained Total

surplus earnings
R R R
Dividends declared (24 000) (24 000)
3. On 31 October 20.3, A Ltd purchased a new motor car for R54 000 and sold an old vehicle
at its carrying amount.
4. A Ltd traded in a machine with a carrying amount of R60 000 on which R51 000 had already
been written off in depreciation for R54 000 and replaced it with a new machine.
5. Depreciation for the current year R
Vehicles 48 000
Machinery 72 000
6. A Ltd sold the investment for R24 000 on 28 February 20.3, at a profit of R4 000. There
was also a fair value adjustment during the current year. Trading in shares is part of the
business model of A Ltd.
REQUIRED
Draft the statement of cash flows of A Ltd for the year ended 31 October
20.3 in accordance with the requirements of International Financial
Reporting Standards (IFRS) using the direct method. Ignore comparative
figures, but show the following calculations:
1. cash receipts from clients

2. cash paid to suppliers and employees
3. normal tax paid
4. dividends paid
277
QUESTION 2
The following information was derived from the books of B Ltd:
TRIAL BALANCE AT 28 FEBRUARY
20.5 20.4
R R

Land and buildings at valuation 244 500 200 000
Machinery at cost price 14 800 52 300
Financial assets at amortised cost - 2 400
Inventory 15 000 19 000
Bank 8 000 14 000
300 300 303 100

Share capital – 100 000 shares 100 000 100 000
Interest free long-term borrowings 40 000 50 000
Dividends payables 20 000 10 000
Accumulated depreciation – machinery 3 400 4 800
Allowance for credit losses 1 000 1 200
300 300 303 100
1. The following information was derived from the statement of profit or loss and other
comprehensive income of B Ltd for the year ended 28 February 20.5:
R
Revenue 179 500
Other income (1 000 + 200) 1 200
Administrative and selling expenses (48 000 + 42 600) (90 600)
Other expenses (400)
Other comprehensive income for the year
– Revaluation surplus 44 500
278
2. Extract from the statement of changes in equity for the year ended 28 February 20.5
Retai-
Revalua-
ned
tion Total
earnings
surplus
R
R R R
Balance at 1 March 20.4 15 000 107 000 122 000
Other comprehensive income for the year 44 500 44 500
Balance at 28 February 20.5 59 500 65 000 124 500
3. B Ltd grew rapidly during the year, and unless otherwise indicated, they purchased all
assets for the purposes of expanding the enterprise. The following transactions occurred
during the year ended 28 February 20.5:
3.1 B Ltd purchased new machinery to the value of R8 000 during the year to replace the
obsolete machinery. The cost price of the old machinery was R45 500, and B Ltd
resold it for R2 500. The accumulated depreciation on the machinery that was sold
was R44 000.
3.2 The company sold its financial assets at 1 March 20.4 for R2 000. These assets were
not held with the intention of short-term profit taking as part of the business model.
REQUIRED
Draft the statement of cash flows for B Ltd for the financial year ended
Financial Reporting Standards (IFRS) using the indirect method. Ignore
comparative figures, but show the following calculations:
1. normal tax paid

2. dividends paid
279
SOLUTION
QUESTION 1
A LTD
STATEMENT OF CASH FLOWS FOR THE YEAR ENDED 31 OCTOBER 20.3
R R
Cash receipts from customers (C1) 756 000
Cash paid to suppliers and employees (C2) (415 000)
Dividends paid (C3) (16 000)
Tax paid (C4) (69 000)
Proceeds from the sale of financial assets at fair 24 000
value through profit or loss: held for trading
Replacement of machinery (C5) (126 000)
Replacement of motor vehicle (C5) (54 000)
Investment to expand production capacity (140 000)
Additions to property (C5) (140 000)
Proceeds from sale of motor vehicles (28 000 –
2 000
26 000)
Proceeds from sale of machinery (60 000 – 6 000) 54 000
Proceeds from issue of shares (440 000 – 330 000) 110 000
Repayment of long-term borrowings (1 100 000 –
(200 000)
900 000)
Net decrease in cash and cash equivalents (74 000)
Cash and cash equivalents at the beginning of
76 000
the year
Cash and cash equivalents at the end of the
2 000
year
280
Calculations
C1. Cash receipts from customers
Trade and other receivables
R R
Balance b/d 220 000 Bank* 756 000
Sales 750 000 Balance c/d 214 000
970 000 970 000
* Balancing figure
C2. Cash paid to suppliers and employees

R R
Balance (inventory) b/d 154 000 Balance (trade and b/d
Bank* 415 000 other payables) 142 000
Balance (trade and other Cost of sales 300 000
payables) c/d 139 000 Administrative and
selling expenses 88 000
Balance (inventory) c/d 178 000
708 000 708 000
* Balancing figure
C3. Dividends paid

Unpaid amounts at the beginning of the period 16 000
Amounts debited to income 24 000
Unpaid amounts at the end of the period (24 000)
16 000
281
C4. Tax paid
Unpaid amounts at the beginning of the year 28 000
Amounts debited to income 85 000
Unpaid amounts at the end of the year (44 000)
69 000
C5. Ledger accounts

Property
R R
Balance b/d 1 400 000 Balance c/d 1 750 000
Revaluation 210 000
Purchases 140 000
1 750 000 1 750 000
Motor vehicles at cost

R R
Balance b/d 410 000 Sales* 28 000
New purchases 54 000 Balance c/d 436 000
464 000 464 000
* Balancing figure
Accumulated depreciation – motor vehicles

R R
Sales* c/d 26 000 Balance b/d 54 000
Balance 76 000 Depreciation 48 000
102 000 102 000
* Balancing figure
Machinery at cost
R R
Balance b/d 370 000 Sales (60 000 + 51 000) 111 000
New purchases* 126 000 Balance c/d 385 000
496 000 496 000
* Balancing figure
282
Accumulated depreciation – machinery

R R
Sales 51 000 Balance b/d 120 000
Balance c/d 141 000 Depreciation 72 000
192 000 192 000
Financial assets at fair value through profit or loss

R R
Balance b/d 40 000 Sold (24 000 – 4 000) 20 000
Impairment loss * 20 000
Balance b/d -
40 000 40 000
* Balancing figure
283
QUESTION 2
B LTD
STATEMENT OF CASH FLOWS FOR THE YEAR ENDED 28 FEBRUARY 20.5
R R
Adjustments for:
Depreciation (C4) 42 600
Decrease in allowance for credit losses (200)
Profit on sale of non-current assets (1 000)
Loss on sale of financial assets at amortised cost 400
55 300
Changes in working capital (2 500)
Decrease in inventory (15 000 í 19 000) 4 000
Increase in trade and other receivables (18 000 – 15 400) (2 600)
Decrease in trade and other payables (7 400 – 11 300) (3 900)
Dividends paid (C1) (40 000)
Tax paid (C2) (5 300)

Replacement of machinery (C3) (8 000)
Proceeds from sale of non-current assets 2 500
Proceeds from sale of financial assets at amortised cost 2 000

Redemption of long-term borrowings (50 000 – 40 000) (10 000)
Net decrease in cash and cash equivalents (6 000)
Cash and cash equivalents at the beginning of the year 14 000
Cash and cash equivalents at the end of the year 8 000
Calculations
C1. Dividends paid
Amount debited to income 50 000
40 000
284
C2. Tax paid

Amount debited to income 5 500
5 300
C3.
Machinery
R R
Balance b/d 52 300 Sales 45 500
New purchases* 8 000 Balance c/d 14 800
60 300 60 300
* Balancing figure
C4.
Accumulated depreciation – machinery
R R
Sales 44 000 Balance b/d 4 800
Balance c/d 3 400 Depreciation current year* 42 600
47 400 47 400
* Balancing figure
SELF-ASSESSMENT
After studying this study unit, are you able to
x draft a statement of cash flows with accompanying notes for a company
using the direct method in accordance with International Financial
Reporting Standards (IFRS)?
x draft a statement of cash flows with accompanying notes for a company
using the indirect method in accordance with International Financial
Reporting Standards (IFRS)?
285

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2. Lecturers and contact details iv

9. Learning unit 7 105

10. Learning unit 8 161

11. Learning unit 9 201

12. Topic B: Learning unit 1 259

Attached please find the following learning units:

x Learning unit 1 – Provisions in respect of companies in a group context

x Learning unit 2 – Consolidation of a wholly-owned subsidiary at date of acquisition

x Learning unit 3 – Consolidation of a partly-owned subsidiary at date of acquisition

x Learning unit 4 – Consolidation of a wholly-owned subsidiary after date of acquisition

x Learning unit 5 – Consolidation of a partly-owned subsidiary after date of acquisition

x Learning unit 6 – Acquisition of an interest in a subsidiary during the year

x Learning unit 7 – Elimination of intragroup transactions

x Learning unit 8 – Treatment of dividends during consolidation

x Learning unit 9 – Treatment of preference shares during consolidation

x Topic B: Learning unit 1 – Statement of cash flows

LECTURERS AND CONTACT DETAILS

Your FAC2602 lecturers and their offices are as follows:

Ms C Wolfaardt – AJH van der Walt Building 2-43

Our contact details are as follows:

Telephone: 012 429 4234

The learning unit is divided into the following:

1.1 INTRODUCTION ............................................................................................................ 3

x define a business combination

1.2 BUSINESS COMBINATION, PARENT AND SUBSIDIARIES

IFRS 3 Business combinations regulates business combinations. We can define a business

The following is an example of such a group:

75% of the control by

The following are two examples of complex groups:

80% of the control through 60% of the control through

a) P Ltd is the parent.

75% of the control through

80% of the control through

a) P Ltd is the parent.

x It has power over the investee (subsidiary).

1.3 ACCOUNTING FOR GROUPS

IFRS 10 requires parent companies to consolidate their investments in subsidiaries and to

When are group statements not required?

x The parent itself is a wholly-owned subsidiary, or the parent is a partially-owned subsidiary

1.4 GENERAL PRINCIPLES

Explain the following concepts:

When are consolidated annual financial statements not required?

x define a business combination?

The learning unit is divided into the following:

2.1 INTRODUCTION .......................................................................................................... 13

x draft the consolidated annual financial statements of a parent and its

We can represent consolidations schematically as follows:

2.2 BASIC CONSOLIDATION TECHNIQUES

x Eliminate common items.

STATEMENTS OF FINANCIAL POSITION AS AT 28 FEBRUARY 20.5

Investment in B Ltd - at fair value 10 000 -

Pro-forma consolidated journal entry

STATEMENTS OF FINANCIAL POSITION AS AT 28 FEBRUARY 20.9

Pro-forma consolidated journal entry