Professional Documents
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Group Statements Volume 1 (Sixteenth Edition) - 1-1-1
Group Statements Volume 1 (Sixteenth Edition) - 1-1-1
Sixteenth edition
Group Statements – Volume 1
Sixteenth edition
CS Binnekade
MCom(Taxation)(Pret) CA(SA)
Associate Professor of Accounting
University of South Africa
ZR Koppeschaar
DCom(Acc)(Pret) CA(SA)
Associate Professor of Accounting
University of South Africa
N Stegmann
DCom(RAU)
Associate Professor of Accounting
University of Johannesburg
J Rossouw
MAcc(UFS) CA(SA)
Associate Professor of Accounting
University of the Free State
C Wright
MCom(Forensic Acc) (Potchefstroom) CA(SA)
Senior Lecturer of Accounting
University of South Africa
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© 2015
ISBN 978 0 409 05720 1
E-book ISBN 978 0 409 12111 0
First edition 1975, Reprinted 1976 Ninth edition 2004
Second edition 1982 Tenth edition 2005, Reprinted 2007
Third edition 1988, Reprinted 1992 Eleventh edition 2008
Fourth edition 1993, Reprinted 1995, 1996 Twelfth edition 2009
Fifth edition 1997 Thirteenth edition 2010
Sixth edition 1998, Reprinted 1999, Revised reprint 1999 Fourteenth edition 2011
Seventh edition 2001, Reprinted 2002, 2003 Fifteenth edition 2013
Eighth edition 2003
Copyright subsists in this work. No part of this work may be reproduced in any form or by any means without
the publisher’s written permission. Any unauthorised reproduction of this work will constitute a copyright in-
fringement and render the doer liable under both civil and criminal law.
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editors, publishers and printers take no responsibility for any loss or damage suffered by any person as a
result of the reliance upon the information contained therein.
Editor: Mandy Jonck
Technical Editor: Liz Bisschoff
The purpose of this book is to set out the principles and conceptual issues of
consolidated financial statements as based on International Financial Reporting
Standards (IFRSs). It focuses on the principles of control and consolidation techniques
in preparing consolidated financial statements for a group of entities. Furthermore, the
accounting treatment of an investor’s interests in associates and joint arrangements is
covered in Volume 2 of this work.
The previous edition of Group Statements was adjusted to incorporate changes to the
following IFRSs (or revisions thereof):
• IAS 27 Separate Financial Statements relating to the equity method in separate
financial statements;
• IFRS 3 Business Combinations relating to disclosure requirements; and
• IFRS 10 Consolidated Financial Statements and IAS 28 Investments in Associates
and Joint Ventures relating to the sale or contribution of assets between an investor
and its associate or joint venture.
Most of the changes required by the adjustments in IFRSs affect Volume 2 of the work.
A number of examples have been added to Volume 2 to better illustrate the accounting
treatment of the relevant transactions/events. In chapter 1 of Volume 1, attention was
given to making the sections dealing with the requirements of the Companies Act 2008
more understandable. Examples of disclosure in the separate financial statements of
the parent have been added to chapters 1 and 2. The treatment of transaction costs on
acquisition received special attention in chapters 1 and 5.
The biggest change to the 16th edition of Volume 1 is the inclusion of LexisNexis
Passplus. PassPlus is an electronic assessment tool which allows students to
continuously assess their own understanding of, and progress through the textbook. All
PassPlus questions are automatically and immediately graded by the system, which
allows students to receive their feedback immediately. PassPlus also affords lecturers
the opportunity to use the system for continuous assessment purposes, without adding
any additional marking to their own workload. The most beneficial way for students to
use PassPlus is to work through each chapter in the textbook and then complete the
accompanying questions to test their progress. Some of the existing questions were
used for this purpose. A large number of short questions that are useful for self-
assessment were added to each chapter of Volume 1.
The text includes numerous illustrative and practical examples which expand on the
principles and conceptual issues of IFRS 3, IFRS 10 and other related aspects of other
IFRSs. The approach of the text is to primarily make use of the analysis of owners’
equity in table format, but extensive use is also made of consolidation journal entries. In
addition, the worksheet approach is applied up to the end of chapter 4. The text makes
use of commentary to explain important concepts. Disclosure requirements for the
v
Preface
consolidated financial statements are illustrated and taxation issues are also addressed
to the extent that deferred tax is applicable to certain accounting areas.
The book is aimed at:
• undergraduate and postgraduate university students registered for financial
accounting modules;
• members and students of professional bodies such as the South African Institute of
Chartered Accountants (SAICA), the South African Institute of Professional
Accountants (SAIPA), the Institute of Certified Professional Accountants (CPA), etc.;
and
• practicing accountants and preparers of consolidated financial statements.
We trust that users of this publication will find it beneficial.
THE AUTHORS
November 2015
vi
Contents
Page
1 A group of entities and its financial statements: theory and background ....... 1
2 IFRS 3 Business combinations ...................................................................... 35
3 Consolidation at acquisition date ................................................................... 79
4 Consolidation after acquisition date ............................................................... 125
5 Intragroup transactions .................................................................................. 191
6 Adjustments and sundry aspects of group statements ................................... 315
7 Consolidation of complex groups ................................................................... 445
8 Interim acquisition of an interest in a subsidiary ............................................ 519
Legend
P/L = Profit or loss section of the statement of profit or loss and other
comprehensive income
SFP = Statement of financial position
SCI = Statement of profit or loss and other comprehensive income
SCE = Statement of changes in equity
OCI = Other comprehensive income section of the statement of profit or loss and
other comprehensive income
NCI = Non-controlling interests
vii
1
A group of entities and its
financial statements:
theory and background
1
Chapter 1
2
A group of entities and its financial statements: theory and background
3
Chapter 1
the rights or control (e.g. a shareholders’ agreement) then that will constitute a
subsidiary relationship.
Comments
A subsidiary relationship is set out in section 3 of the Companies Act, 2008 as follows:
3(1) A company is a subsidiary of another juristic person, –
(a) if that juristic person, one or more other subsidiaries of the juristic person, or one
or more nominees of that juristic person or any of its subsidiaries, alone or in
combination –
(i) is or are directly or indirectly able to exercise, or control the exercise of, a
majority of the general voting rights associated with issued securities of that
company, whether pursuant to a shareholder agreement or otherwise; or
(ii) has or have the rights to appoint or elect, or control the appointment or
election of, directors of that company who control a majority of the votes at a
meeting of the board; or
(b) a wholly-owned subsidiary or another juristic person if all the general voting rights
associated with issued securities of the company are held or controlled, alone or
in combination, by persons contemplated in paragraph (a).
2 The Act further determines that for the purpose of determining the control of voting
rights, the following should be considered:
l voting rights that are exercisable only in certain circumstances are to be taken
into account only when those circumstances have arisen and for as long as they
will continue, or when the circumstances are under control of the person holding
the voting rights;
l voting rights that are exercisable only on instruction or with the consent of
another person are to be treated as being held by a nominee for that other
person; and
l voting rights held by a person as nominee for another person are to be treated
as held by that other person, or held by a person in a fiduciary capacity to be
treated as held by the beneficiary of those voting rights.
4
A group of entities and its financial statements: theory and background
Comment
1 Each issued share of a company, regardless of its class, has associated with it one
general voting right, except to the extent provided otherwise by:
l the Companies Act; or
l the preferences, rights, limitations and other terms determined by or in terms of
the company’s Memorandum of Incorporation (MoI)(section 37(2)).
2 However, despite anything to the contrary in a company’s MoI, every share issued by
that company has associated with it an irrevocable right of the shareholder to vote on
any proposal to amend preferences, rights, limitations and other terms associated
with that share (section 37(3)). The specific contingent voting rights exercisable by
the holders of preference shares under such conditions will therefore have to be
taken into account in determining whether a company (the investor) holds the
majority voting rights in another company (the investee) for it to be deemed to be the
subsidiary of such company (the investor).
3 Shares do not have a nominal or par value in terms of the Companies Act, 2008
(section 3). Any shares of a pre-existing company that have been issued with a
nominal or par value (in terms of the old Companies Act 61 of 1973), and that are
held by a shareholder immediately before the effective date (of the Act, i.e. 1 May
2011), continue to have the nominal or par value assigned to them when issued,
subject to any regulations to be made regarding their transitional status and
conversion. The rights of shareholders will be preserved to the extent that doing so is
compatible with the new Act. Shareholders will be compensated for the loss of any
such rights (Schedule 5(6)).
Before the accounting treatment of groups in terms of IFRS can be discussed, it should
be determined which reporting framework is relevant in terms of the Companies Act,
2008. This discussion commences with a brief exposition of the different classes of
companies defined in the Act.
3 The Companies Act, 2008 identifies two types of companies to be incorporated
under the Act. A company can either be a profit company or a non-profit
company. A profit company is defined as a company incorporated for the purpose of
financial gain for its shareholders. A non-profit company is incorporated for public
benefit and the income and property are not distributable to its incorporates. Profit
companies can be either:
l a state-owned company (SOC Ltd);
l a private company (Proprietary Limited) (Pty) Ltd);
l a personal liability company (Incorporated)(Inc); or
l a public company (Limited)(Ltd).
5
Chapter 1
Personal liability
company (Inc)
Meets criteria for private
company, and
Memorandum of
Incorporation stipulates
that it is a personal liability
company
6
A group of entities and its financial statements: theory and background
Comment
A company may always elect to use a “higher” framework, but never a “lower”
framework.
Comment
The Public Interest Score is calculated by awarding 1 mark for each of the following:
l every R1 million turnover;
l every employee (average number);
l every security holder; and
l every R1 million third party obligation (Regulation 26).
5 The focus of this work is privately owned profit companies and therefore, from the
discussion above, it is clear that financial reporting will be governed by IFRS or the
7
Chapter 1
IFRS for SMEs. For the remainder of the discussion reference will therefore be
made to the requirements of the relevant IFRSs, namely:
l IFRS 10 Consolidated Financial Statements;
l IFRS 12 Disclosure of Interests in Other Entities;
l IAS 27 Separate Financial Statements; and
l IFRS for SMEs.
Comment
In May 2015, the IASB completed a comprehensive review of the IFRS for SMEs and
made limited amendments to the Standard. A complete revised version was published in
the third quarter of 2015 and the revisions have been taken into account in the
16th edition of this work.
8
A group of entities and its financial statements: theory and background
economic unit, in the sense that the different parent and subsidiary entities no
longer carry out their commercial activities on a basis of complete economic
independence.
11 Although the disclosure requirements of the Act in respect of group financial
statements (such as consolidated annual financial statements) treat the group as an
economic unit or business entity, they do not detract from the separate legal
personalities of the different parent and subsidiary entities. The duty on the part of
the parent to submit group financial statements is purely an additional statutory
requirement.
Comment
The Companies Act, 2008 (Act) uses the term “holding company”, while International
Financial Reporting Standards (IFRS) uses the term “parent”, indicating that not only
companies may be subsidiaries, as indicated in the definition below. The term “parent” is
used in this work to comply with IFRS.
Comment
IFRS for SMEs defines a subsidiary as an entity that is controlled by the parent
(par 9.4).
Comment
The terms “investor” and “investee” are not defined in IFRS 10. “Investor” is used to refer
to a reporting entity that potentially controls one or more other entities, and “investee” to
refer to an entity that is, or may potentially be, the subsidiary of a reporting entity.
9
Chapter 1
1.5 Power
1 Power is defined as existing rights that give the current ability to direct the relevant
activities and for the purpose of IFRS 10, relevant activities are activities of the
investee that significantly affect the investee’s returns (Appendix A).
2 The determination of the investor’s powers depends on the relevant activities, the
way decisions about the relevant activities are made and the rights the investors
and other parties have in relation to the investee (Appendix B .B10).
10
A group of entities and its financial statements: theory and background
3 Power arises from rights. Such rights can be straightforward (e.g. through voting
rights) or complex (e.g. embedded in contractual arrangements) and require more
than one factor to be considered. Rights that, either individually or in
combination, give an investor power, include:
l voting rights granted by equity instruments such as shares (see 1.8);
l potential voting rights;
l rights to appoint, reassign or remove members of an investee’s key management
personnel who have the ability to direct the relevant activities;
l rights to appoint or remove another entity that directs the relevant activities;
l rights to direct the investee to enter into, or veto any changes to, transactions for
the benefit of the investor; and
l other rights (such as decision-making rights specified in a management contract)
that give the holder the ability to direct the relevant activities (Appendix B .B15).
4 When an investor assesses whether it has control over an investee, only
substantive rights relating to an investee are considered. A substantive right gives
the holder thereof the practical ability to exercise that right (IFRS 10.B22). This
means that the holder should not be hindered from exercising the right through
penalties, inabilities to obtain the necessary information or prohibitive legal or
regulatory requirements, amongst others. In Volume 1 of this work all rights will be
assumed to be substantive rights, unless the opposite is stated specifically.
5 Relevant activities could be any operating and financing activities of an entity,
including selling and purchasing of goods or services, selecting, acquiring and
disposing of assets, researching and developing new products or processes,
managing financial assets during their life and determining funding structures or
obtaining funding.
6 Often an investor has the current ability, through voting or similar rights, to direct the
relevant activities. This will be the case where the investor holds more than half of
the voting rights of an investee and the relevant activities are directed by a vote of
the holder of the majority of the voting rights, or a majority of the members of the
governing body that directs the relevant activities is appointed by vote of the
holder of the majority of the voting rights (IFRS 10.B34í36).
7 An investor can have power even if it holds less than a majority of the voting rights
of an investee. Such power could be obtained through a contractual arrangement
between the investor and other vote holders giving the former the right to exercise
voting rights sufficient to give the investor power, rights arising from other
contractual arrangements, potential voting rights or a combination thereof (IFRS
10.B38).
8 When assessing whether an investor’s voting rights are sufficient to give it power, all
facts and circumstances should be considered. The size of the investor’s holding of
voting rights relative to the size and dispersion of holdings of the other vote holders
is important, as the more voting rights an investor holds, the more likely the investor
is to have existing rights enabling it to direct relevant activities. An investor is also
11
Chapter 1
more likely to have the current ability to direct relevant activities, where a lot of
parties are needed to act together to outvote the investor. All facts and
circumstances should therefore be taken into account, for example previous voting
patterns by other voters (IFRS 10.B42).
9 Another factor that also warrants attention in the assessment is where the investor
has a special relationship with the investee, which suggests that the investor has
more than a passive interest in the investee. Indicators of a special relationship are
where the investee’s key management personnel are current or previous employees
of the investor, where the investee’s operations are dependent on the investor,
where a significant portion of the investee’s activities either involve or are conducted
on behalf of the investor or the investor’s exposure, or rights, to returns from its
involvement with the investee is disproportionately greater than its voting or similar
rights.
12
A group of entities and its financial statements: theory and background
Comment
In this book, the following is used throughout the text:
P = Parent
S = Subsidiary
2 A simple group, which consists of a parent and a single subsidiary, may thus be
diagrammatically represented as follows:
P Ltd
51%
S Ltd
In the above diagram, P Ltd has made an assessment and established that it
controls S Ltd through the holding of the majority of the voting rights, which in turn
was obtained from holding 51% of the issued equity share capital of S Ltd.
3 A complex group may be constituted by, for example, the following ownership
interest in issued equity share capital:
P Ltd
13
Chapter 1
P Ltd owns 51% of the shares of S Ltd. Each share entitles the holder to one general
vote at the annual general meeting (AGM). The relevant activities are directed by the
AGM. S Ltd has no other classes of issued shares.
P Ltd
51%
S Ltd
S Ltd is a subsidiary of P Ltd and P Ltd is the parent of S Ltd, as P Ltd, by holding the
majority of the general voting rights (51%), has the existing rights that give it the current
ability to direct the relevant activities.
In the absence of additional arrangements that alter decision-making, the assessment
of control focuses on which party, if any, is able to exercise voting rights sufficient to
determine the investee’s operating and financial policies (IFRS 10.B6). In the most
straightforward scenario, such as the one above, the investor that holds a majority of
those voting rights, in the absence of other factors, controls the investee.
Comments
a In all the examples in Volume 1 where control was obtained through the majority
voting rights, it is assumed that the parent has the ability to determine the relevant
activities, without specifically stating this fact.
b It is necessary to distinguish between control and ownership. P Ltd controls 100%
(all the net) assets of S Ltd, but P Ltd has an economic interest (ownership interest)
of 51% of the undivided net assets of S Ltd. P Ltd controls 100% of the net assets of
S Ltd, therefore 100% of S Ltd’s net assets are taken up in the consolidated financial
statements. Due to P Ltd only owning 51% of the net assets, the non-controlling
interest (the remaining 49%) in the net assets of S Ltd are also included in the
consolidated statement of financial position.
14
A group of entities and its financial statements: theory and background
P Ltd holds 51% of the shares of S Ltd and S Ltd hold 51% of the shares of SS Ltd.
Each share entitles the holder of the share to one general vote on the annual general
meeting. S Ltd and SS Ltd have no other classes of issued shares.
P Ltd
51%
S Ltd
51%
SS Ltd
P Ltd owns 48% of the shares of S Ltd. Each share entitles the holder to one general
vote at the annual general meeting (AGM). The relevant activities are directed by the
AGM. S Ltd has no other classes of issued shares. The remaining voting rights are held
by 1 000 shareholders (none holding more than 1% and no arrangements exist
between them to consult one another or make collective decisions).
P Ltd
48%
S Ltd
S Ltd is a subsidiary of P Ltd and P Ltd is the parent of S Ltd, as P Ltd can exercise
power through its 48% shareholding. The relative size of the other shareholders’
interest, gives P Ltd a large enough dominant voting interest to meet the power criterion
without the need to consider any other evidence of power.
15
Chapter 1
P Ltd owns 40% of the shares of S Ltd. Each share entitles the holder to one general
vote at the annual general meeting (AGM). The relevant activities are directed by the
AGM. S Ltd has no other classes of issued shares. The remaining voting rights are held
by Mr A, who owns 35%, and Mrs B, who owns 25% of the issued shares. No other
arrangement exists that could influence decision-making.
P Ltd
40%
S Ltd
S Ltd is not a subsidiary of P Ltd and therefore P Ltd is not the parent of S Ltd. The size
of P Ltd’s voting interest and its size relative to the other shareholdings are sufficient to
conclude that P Ltd does not have power over S Ltd. Only two other investors would
need to co-operate to be able to prevent P Ltd from directing the relevant activities of
S Ltd.
P Ltd holds 40% of the shares of S Ltd and S Ltd hold 51% of the shares of SS Ltd.
Each share entitles the holder to one vote on the annual general meeting. S Ltd and
SS Ltd have no other classes of issued shares.
P Ltd
40%
S Ltd
51%
SS Ltd
S Ltd is not a subsidiary of P Ltd, as P Ltd does not hold enough voting rights in S Ltd
to direct its relevant activities.
SS Ltd is a subsidiary of S Ltd and S Ltd is the parent of SS Ltd, as S Ltd, by holding
the majority of the general voting rights (51%), has the existing rights that give it the
current ability to direct the relevant activities of SS Ltd.
16
A group of entities and its financial statements: theory and background
SS Ltd is not a subsidiary of P Ltd, as P Ltd does not have control over S Ltd.
If, however, the following arrangement exists in the example above, the whole scenario
changes:
The remaining 60% of S Ltd’s shares are held by 12 other shareholders, each holding
only 5% of the voting rights of S Ltd. A shareholder agreement grants P Ltd the right to
appoint, remove and set the remuneration of management responsible for directing the
relevant activities. To change the agreement, a two-thirds majority vote of the
shareholders is required.
The shareholding of P Ltd and the relative shareholding of the other 12 shareholders
solely is not sufficient to determine whether P Ltd can exercise control over S Ltd. If
P Ltd’s ability to determine S Ltd’s management (through which the relevant activities
are directed) is however considered, it is clear that P Ltd controls S Ltd and that S Ltd is
a subsidiary of P Ltd (IFRS 10 B34 Example 10).
P Ltd holds 60% of the shares of S1 Ltd and S2 Ltd. S1 Ltd holds 30% of the shares of
SS Ltd and S2 Ltd holds 30% of the shares of SS Ltd. Each share entitles the holder of
the share to one vote on the annual general meeting. S1 Ltd, S2 Ltd and SS Ltd have
no other classes of issued shares.
P Ltd
60% 60%
S1 Ltd S2 Ltd
30% 30%
SS Ltd
S1 Ltd is a subsidiary of P Ltd and P Ltd is S1 Ltd’s parent, as P Ltd holds the majority
voting rights (60%) in S1 Ltd.
S2 Ltd is a subsidiary of P Ltd and P Ltd is S2 Ltd’s parent, as P Ltd holds the majority
voting rights (60%) in S2 Ltd.
If it is assumed that there are no other arrangements, in both the abovementioned
relationships, the majority shareholdings (and thereby the majority voting rights) give
P Ltd the ability to direct the relevant activities of the subsidiaries (S1 Ltd and S2 Ltd).
As it controls both S1 Ltd and S2 Ltd, by implications it also controls the relevant
activities of SS Ltd, thus establishing a parent-subsidiary relationship.
17
Chapter 1
P Ltd holds 40% of the shares of S Ltd, but has, in terms of an agreement with the
other shareholders, the right to appoint four of the six directors of S Ltd. Each director
has one vote on the directors’ meetings.
P Ltd
40%
S Ltd
S Ltd is a subsidiary of P Ltd and P Ltd is the parent of S Ltd, as P Ltd has the right to
appoint directors of S Ltd that have a majority (4/6 = 67%) of the voting rights on directors’
meetings through which the relevant activities of S Ltd are directed.
P Ltd holds 51% of the Class A shares and 10% of the Class B 5% preference shares
of S Ltd. Each Class A share entitles the holder to one general vote on the annual
general meeting. The MoI determines that a Class B preference shareholder is entitled
to one vote per share when the preference dividend is in arrears. The preference
dividend has been in arrears for the past five years. S Ltd’s issued share capital is as
follows:
100 000 Class A shares
50 000 Class B 5% preference shares
Interest in Class A shares
P Ltd
51%
S Ltd
Under the present circumstances S Ltd is not a subsidiary of P Ltd, as P Ltd only holds
37% ((51 000 + 5 000)/100 000 (Class A shares) + 50 000 (Class B 5% preference
shares)) of the total voting rights on the annual general meeting of S Ltd as long as the
preference dividends are in arrears. P Ltd will not be able to direct the relevant activities
under such circumstances. As soon as the arrears Class B preference dividends are
paid, P Ltd’s shareholding (and voting rights) would be equal to 51%, which constitutes
a parent-subsidiary relationship.
18
A group of entities and its financial statements: theory and background
Comment
The IFRS for SMEs is also clear that a parent entity shall present consolidated financial
statements that include all its subsidiaries (9.2).
2 The term group financial statements (group statements) is commonly used for all
forms of financial statements presenting information of a group of entities as those
of a single entity.
3 Consolidated financial statements constitute the most important and widely used
form of group statements and are defined as the financial statements of a group in
which the assets, liabilities, equity, income, expenses and cash flows of the parent
and its subsidiaries are presented as those of a single economic entity (IFRS 10
Appendix A). In this work, the primary focus is thus on the consolidation of company
financial statements in dealing with group statements and the underlying accounting
techniques.
4 Consolidated financial statements comply with the need of users of financial
statements to obtain information on the financial position, results of operations and
changes in the financial position of the group as a whole. In consolidated financial
statements, financial information is presented about the group as a single entity
without regard for the legal boundaries of the separate legal entities. In order to
obtain a clear picture of the financial position and prospects of a parent, it is not
sufficient to have insight into only the financial statements of the parent as such.
The intimate business ties between the parent and subsidiaries as well as sub-sub-
sidiaries require more complete information.
19
Chapter 1
Comment
The Companies Act, 2008 requires the following regarding financial statements:
29(1) If a company provides any financial statements, including any annual financial
statements, to any person for any reason, those statements must –
(a) satisfy the financial reporting standards as to form and content, if any such
standards are prescribed;
(b) present fairly the state of affairs and business of the company, and explain the
transactions and the financial position of the business of the company.
5 It is obvious that consolidated financial statements shall in the first instance comply
with IAS 1 Presentation of Financial Statements. Part 1 Illustrative
Presentation of Financial Statements is in fact based on a group’s financial
statements.
Due to a lack of space an abridged statement of profit or loss and other
comprehensive income is used in this work. The reader must however take notice
that a complete statement of comprehensive income must be prepared in practice.
The format of the statement of profit or loss and other comprehensive income
(according to function) of an individual entity according to IAS 1 is as follows:
20.18 20.17
R R
Revenue xxx xxx
Cost of sales (xx) (x)
Gross profit xxx xxx
Other income xx xx
Distribution costs (xx) (xx)
Administrative expenses (xx) (xx)
Other expenses (xx) (xx)
Finance costs (xx) (xx)
Profit before tax xxx xxx
Income tax expense (xx) (xx)
PROFIT FOR THE YEAR xxx xxx
Other comprehensive income
Mark-to-market reserve
(fair value adjustment on investment) xx xx
Income tax relating to items not reclassified (xx) (xx)
Other comprehensive income for the year, net of tax xx xx
TOTAL COMPREHENSIVE INCOME FOR THE YEAR xxx xxx
The portion up to Profit before tax, as indicated above, is omitted in most examples
in this work purely to save space.
20
A group of entities and its financial statements: theory and background
Comment
In the case of an SME, a subsidiary is not excluded from consolidation:
l simply because the investor is a venture capital organisation, mutual fund, unit trust
or similar entity (IFRS for SMEs.9.8);
l because its business activities are dissimilar from those of the other entities within
the group. In such cases the subsidiary is consolidated and additional information is
disclosed about the different activities of the subsidiary (IFRS for SMEs.9.9).
l because it operates in a jurisdiction that imposes restrictions on transferring cash or
other assets out of the jurisdiction (IFRS for SMEs.9.9).
It may however be excluded from consolidation if:
l both of the following conditions are met:
• the parent is itself a subsidiary; and
• its ultimate parent (or any intermediate parent) produces consolidated general
purpose financial statements that comply with full IFRSs or with the IFRS for
SMEs (IFRS for SMEs.9.3).
A subsidiary is also not consolidated if it is acquired and held with the intention of selling
of disposing of it within one year from its acquisition date (IFRS for SMEs.9.3A).
The carrying amounts of subsidiaries that are not consolidated are disclosed either in the
statement of financial position or the notes.
21
Chapter 1
Comment
Notwithstanding the requirements set out above, if an investment entity has a subsidiary
that provides services that relate to the investment entity’s investment activities, it shall
consolidate that subsidiary in accordance with IFRS 10 and apply the requirements of
IFRS 3 to the acquisition of the subsidiary.
22
A group of entities and its financial statements: theory and background
Comment
Refer to chapter 5 for a detailed discussion of the treatment of intragroup balances and
intragroup transactions, as well as chapter 6 for a discussion of impairment.
(d) IAS 12 Income Taxes applies to temporary differences that arise from the
elimination of profits and losses resulting from intragroup transactions
(IFRS 10.B86).
3 Consolidation of a subsidiary begins from the date the investor obtains control and
ceases when the parent loses control of the subsidiary (IFRS 10.20).
4 The financial statements of the parent and its subsidiaries used in the preparation of
the consolidated financial statements shall have the same reporting date
(IFRS 10.B92). If the reporting date of a subsidiary differs from that of the parent,
the subsidiary has to prepare additional financial information as of the same date as
the financial statements of the parent to enable the parent to consolidate the
financial information of the subsidiary, unless it is impracticable to do so. If it is
impracticable to do so, the most recent financial statements of the subsidiary are
adjusted for the effects of significant transactions or events that occur between the
date of those financial statements and the date of the consolidated financial
statements (IFRS 10.B93).
Comment
The IFRS for SMEs determines that the financial statements of the parent and the
subsidiary that are used for the preparation of the consolidated financial statements
shall have the same reporting date, unless it is impracticable to do so. In such a case
the most recent financial statements of the subsidiary is used, adjusted for the effects of
significant transactions and events that occur between the reporting date of the
subsidiary and the date of the consolidated financial statements (9.16)
23
Chapter 1
Comment
a Where potential voting rights exist, the proportion of profit or loss and changes in
equity allocated to the parent and non-controlling interests are determined solely on
the basis of the existing ownership interests and do not reflect the possible exercise
or conversion of potential voting rights (and other derivatives) (IFRS 10.B89).
b If a subsidiary has issued cumulative preference shares that are classified as equity
and are held by non-controlling interests, the parent’s share of profit or loss is
calculated after adjusting for the dividends attributable to such shares, whether or not
such dividends have been declared (IFRS 10.B95).
Comment
In this chapter the emphasis falls on the basic disclosure relating to subsidiaries and
because a change in ownership is not discussed in Volume 1, disclosure requirements
relating to such changes are also omitted. Disclosure relating to joint arrangements,
associates and unconsolidated structured entities are discussed in Volume 2 of the
work.
24
A group of entities and its financial statements: theory and background
l it controls another entity even though it holds less than half of the voting rights of
the other entity; and
l it is an agent or a principal (IFRS 12.9).
Comment
Example of note on significant judgements and assumptions:
The company has determined that it controls S Ltd, even though it owns less than 50%
of the voting rights. The factors taken into consideration in making this judgement
include the size of its block of shares, the relative size and dispersion of holdings by
other shareholders, the ability to appoint and remove the majority of the directors on the
Board of Directors and the sharing of key management positions between the company
and S Ltd.
5 The parent shall disclose information to enable users of its consolidated financial
statements:
(a) to understand:
l the composition of the group;
l the interest that non-controlling interests have in the group’s activities and
cash flows; and
(b) to evaluate:
l the nature and extent of significant restrictions on its ability to access or use
assets, and settle liabilities, of the group;
l the nature of, and changes in, the risks associated with its interests in
consolidated structured entities (IFRS 12.10).
25
Chapter 1
Comment
Example of composition of the group:
Principal subsidiaries:
The consolidated financial statements for the year ended 28 February 20.18 include the
amounts of the company and its subsidiaries. The principal subsidiaries and their
activities are:
South African
subsidiaries:
A Ltd (80%) Research and development of products
B Ltd (75%) Owner of manufacturing plant and leasing to the
company (parent)
German subsidiary:
C Ltd (55%) Consultation services
6 When the financial statements of a subsidiary are as of a date or for a period that is
different from that of the consolidated financial statements, an entity shall disclose
the date of the end of the reporting period of the financial statements of the
subsidiary and the reason for using a different period (IFRS 12.11).
7 For each subsidiary that has non-controlling interests that are material to the
reporting entity, the following shall be disclosed:
l the name of the subsidiary;
l the principal place of business;
l the proportion of ownership interests held by non-controlling interests;
l the proportion of voting rights held by non-controlling interests, if different from
the proportion of ownership interests held;
l the profit or loss allocated to non-controlling interests during the period;
l the accumulated non-controlling interests of the subsidiary at the end of the
reporting period;
l the following summarised financial information about the subsidiary:
• dividends paid to non-controlling interests;
• summarised financial information about the assets, liabilities, profit or loss and
cash flows of the subsidiary that enables users to understand the interest that
non-controlling interests have in the group’s activities and cash flows (before
intragroup eliminations) (IFRS 12.12).
26
A group of entities and its financial statements: theory and background
Comment
Example of disclosure:
Non-controlling interests
The following subsidiaries have material NCI:
Name Principal place Operating Ownership interests (%)
of business segment held by NCI
20.18 20.17
A Ltd Namibia Dealer 25 25
B Ltd South Africa Manufacturer 20 20
The following is the summarised financial information of the P Ltd Group prepared in
accordance with IFRS, modified for fair value adjustments on acquisition and
differences in the Group’s accounting policies, before any intragroup eliminations have
been done:
A Ltd B Ltd
20.18 20.17 20.18 20.17
R’000 R’000 R’000 R’000
Revenue 30 000 20 000 12 000 10 000
Profit 2 000 1 500 800 600
Profit attributable to NCI 500 375 160 120
Other comprehensive income – – 40 10
Total comprehensive income 2 000 1 500 840 610
Total comprehensive income 500 375 168 122
attributable to NCI
27
Chapter 1
8 In the case of SMEs the following shall be disclosed (IFRS for SMEs.9.23):
l the fact that the statements are consolidated financial statements;
l the basis for concluding that control exists when the parent does not own,
directly or indirectly through subsidiaries, more than half of the voting power;
l any difference in the reporting date of the financial statements of the parent and
its subsidiaries used in the preparation of the consolidated financial statements;
and
l the nature and extent of any significant restrictions (e.g. resulting from borrowing
arrangements or regulatory requirements) on the ability of subsidiaries to transfer
funds to the parent in the form of cash dividends or to repay loans.
Comment
The disclosure relating to the loss of control of a subsidiary is discussed in chapter 13.
Comment
The IFRS for SMEs does not require presentation of separate financial statements for
the parent entity or for the individual subsidiaries (par .9.24).
However, when a parent does prepare separate financial statements and describes
them as conforming to the IFRS for SMEs, the entity’s financial statements shall
comply with all of the requirements of the IFRS for SMEs. The entity shall account for
investments in subsidiaries:
l at cost less impairment; or
l at fair value with changes in fair value recognised in profit or loss; or
l using the equity method (9.26).
2 Investments in subsidiaries are either measured using the cost model or the fair
value model. Two options are available for using the fair value model in terms of
IFRS 9. Investments in subsidiaries may be classified as either financial assets at
fair value through profit or loss, or at initial recognition the parent may make an
irrevocable decision to measure its investment in equity instruments at fair value
through other comprehensive income. Once an investment in subsidiary is
designated as one of the two categories, this classification may not be changed.
The classification of the investment may only change if the entity’s business model
for managing financial assets changes.
28
A group of entities and its financial statements: theory and background
Comment
Examples of financial assets classified as at fair value through other comprehensive
income are investments in shares held for long-term purposes (e.g. strategic
investments). This could be the case for investments in subsidiaries, as investments in
subsidiaries are seldom made with a view to speculate with the shares in the short term
or for trading purposes (except where the investor is an investment entity – see 1.12
above).
4 Transaction costs on financial instruments are defined as incremental costs that are
directly attributable to the acquisition, issue or disposal of a financial asset (or
liability) (IFRS 9). An incremental cost is one that would not have been incurred if
the entity had not acquired the financial asset (IFRS 9). Transaction costs are
typically fees and commissions paid to agents and brokers, levies of regulatory
services and securities exchanges, and transfer taxes and duties. The treatment of
the transaction costs is determined by IFRS 9 and is set out below. Briefly, such
transaction costs are capitalised against the investment if the investment is
measured at fair value through other comprehensive income or if the cost method is
applied. Where the investment is measured at fair value through profit or loss, the
transaction costs are expensed in profit or loss.
5 At initial recognition, a financial asset is measured at its fair value, generally being
the consideration given, i.e. the transaction price. At initial recognition, there is a
rebuttable presumption that the transaction price is equal to the fair value. The
measurement models chosen to account for an investment in a subsidiary lead to
the following accounting treatments on initial recognition:
l Financial assets at fair value through profit or loss
The investment is recognised at cost, being the fair value, excluding transaction
costs, which are expensed.
l Financial asset at fair value through other comprehensive income
The investment is recognised at cost, being the fair value and transaction costs
are capitalised to the investment.
l Financial assets that do not have quoted prices in an active market and whose
fair value cannot be reliably measured.
This type of investment is carried at cost. Initial transaction costs are capitalised
to the investment.
29
Chapter 1
Comment
IFRS 3 Business Combinations determines that acquisition-related costs are expensed
in the periods in which they are incurred. (Refer Ex 2.13.) Acquisition-related costs are
defined as costs the acquirer incurs to effect a business combination. Those costs
include finder’s fees; advisory, legal, accounting, valuation and other professional or
consulting fees; general administrative costs, including the costs of maintaining an
internal acquisition department (IFRS 3.53). It is clear that this definition is much broader
than the one for transaction costs on financial instruments. (Also see chapter 2.10 of this
work.)
The authors are of the opinion that the transaction costs on financial instruments should
be capitalised against the investment in the separate financial statements of the parent
as discussed above. However, due to the fact that these and other costs are expensed
in the consolidated financial statements, as required by IFRS 3, the amount should be
eliminated against the investment in the subsidiary and transferred to profit or loss on a
pro forma basis on consolidation. This aspect is addressed in detail in chapter 5 (5.3) of
this work as well as chapter 2 (2.10).
30
A group of entities and its financial statements: theory and background
Comment
An entity recognises a dividend from a subsidiary in profit or loss in its separate financial
statements when its right to receive the dividend is established. Even though the
dividend relates to the previous reporting period when A Ltd had no interest in B Ltd,
A Ltd’s right to receive the dividend was established on 31 January 20.18 (post
acquisition) and is therefore recognised in profit or loss for the reporting period ended
31 December 20.18.
31
Chapter 1
Comment
The same principle applies as in example 1.11.
32
A group of entities and its financial statements: theory and background
Comment
The same principle applies as in examples 1.11 and 1.12.
33
Chapter 1
34
2
IFRS 3 Business combinations
Introduction
2.1 Overview of the topic ............................................................................... 37
2.2 Scope of IFRS 3 ...................................................................................... 39
Example 2.1: Entities under common control ..................................... 39
2.3 Identifying a business combination .......................................................... 39
Example 2.2: Accounting for a transaction as an asset acquisition ... 40
Example 2.3: Accounting for a transaction as a business
combination .................................................................. 40
35
Chapter 2
Self-assessment question
Question 2.1 .......................................................................................................... 76
36
IFRS 3 Business combinations
Introduction
2.1 Overview of the topic
The objective of IFRS 3 Business Combinations is to enhance the relevance,
reliability and comparability of information reported by an entity regarding business
combinations. It does that by applying the acquisition method for accounting for
business combinations and prescribing information that should be disclosed in the
financial statements. IFRS 3 establishes important principles for how the acquirer
recognises and measures the following in its records:
l the assets acquired and liabilities assumed;
l the non-controlling interests in the acquiree;
l the goodwill acquired in a business combination or the gain from a bargain
purchase; and
l adequate disclosure of information relating to the business combination, in order to
provide useful information for decision-making to the user of the financial
statements.
In terms of IFRS 3, each identifiable asset and liability should be measured at its
acquisition-date fair value. The non-controlling interests in an acquiree are measured
either at fair value or as the non-controlling interests’ proportionate share of the
acquiree’s identifiable net assets.
Once the acquirer has identified the identifiable assets and liabilities and the non-
controlling interests in the acquiree, any difference that exists between:
(a) the aggregate (sum) of the consideration transferred (the latter being measured at
fair value), any non-controlling interests in the acquiree and the acquisition-date fair
values of any previously held equity interest in the acquiree; and
(b) the identifiable net assets acquired,
should be identified. If such a difference is an excess of (a) over (b), the amount of the
difference will be recognised as goodwill. If the difference is not an excess but a
shortfall of (a) over (b), the acquirer has made a gain from a bargain purchase, and that
gain will then be recognised in profit or loss immediately.
In this chapter the basic principles of IFRS 3 Business Combinations are discussed,
while more advanced aspects relating to the recognition and measurement of the
identifiable assets acquired, the liabilities assumed and any non-controlling interests in
the acquiree, as well as the consideration transferred and measurement period, are
discussed in chapter 9 of Volume 2.
IFRS 3 is applicable to all transactions that meet the definition of a business
combination. The business combination definition comprises mainly two core aspects,
namely “control” and “business”. Chapter 10 of Volume 2 elaborates on the definition of
control and the definition of a business is discussed in chapter 2.3.
37
Chapter 2
IFRS 3
Business Combinations
38
IFRS 3 Business combinations
S1 Ltd S2 Ltd
P Ltd
60%
S1 Ltd 40%
55%
S2 Ltd
After S1 Ltd’s acquisition of the shares in S2 Ltd, P Ltd still ultimately controls both
S1 Ltd and S2 Ltd by virtue of agreement. IFRS 3 is therefore not applicable to the
above business combination transaction.
39
Chapter 2
On 1 January 20.18 P Ltd acquired the following group of assets from S Ltd at a cost of
R4,9 million in a single transaction:
Individual fair values of items (1 January 20.18)
Property, plant and equipment 1 600 000
Intangible assets 750 000
Investment property 2 000 000
Current assets (inventory) 400 000
R4 750 000
The cost price of the assets was paid in cash by P Ltd on 1 January 20.18.
The transaction was considered by P Ltd and it was concluded that it does not meet the
definition of a business as defined in IFRS 3 Business Combinations. Goodwill or a
gain from a bargain purchase can therefore not be recognised at the date of acquisition.
The purchase price of R4,9 million is allocated to the individual assets based on their
relative fair values as at 1 January 20.18. The following journal entry will be recognised
in the accounting records of P Ltd on 1 January 20.18:
Dr Cr
R R
1 January 20.18
Property, plant and equipment (SFP)
(1 600 000/4 750 000 × 4 900 000) 1 651 000
Intangible assets (SFP) (750 000/4 750 000 × 4 900 000) 774 000
Investment property (SFP) (2 000 000/4 750 000 × 4 900 000) 2 063 000
Inventory (SFP) (400 000/4 750 000 × 4 900 000) 412 000
Bank (SFP) 4 900 000
Recognising an asset acquisition at the acquisition date
Assume the same information as in example 2.2. Also, assume that after consideration
of the transaction by P Ltd, it was concluded that the transaction meets the definition of
a business as defined in IFRS 3 Business Combinations. It is therefore possible that
goodwill or a gain from a bargain purchase can arise at the acquisition date.
40
IFRS 3 Business combinations
The journal entry to recognise the business combination transaction on 1 January 20.18
would be as follows:
Dr Cr
R R
1 January 20.18
Property, plant and equipment (SFP) 1 600 000*
Intangible assets (SFP) 750 000*
Investment property (SFP) 2 000 000*
Inventory (SFP) 400 000
Goodwill (SFP) (balancing) 150 000
Bank (SFP) 4 900 000
Recognising a business combination at the acquisition
date
* at fair value
The importance of determining whether assets are acquired or liabilities assumed as a
business is evident from the above examples. IFRS 3 defines a business combination
as a transaction or other event in which an acquirer obtains control of one or more
businesses by (for example) the transfer of cash, incurrence of liabilities, issue of equity
interests or by contract alone.
Various types of business combinations may be identified, including (for example) a
business becoming a subsidiary of the acquirer; the net assets of a business being
legally merged into the acquirer; assets or equity interests being transferred to another
combining entity, and so forth.
There are two crucial aspects in the definition of a business combination, namely
“control” and “business”:
l Control – IFRS 10 (Appendix A) defines when an investor controls an investee, 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.
l Business – IFRS 3 defines a business as an integrated set of activities and assets
that is capable of being conducted and managed for the purpose of providing a
return in the form of dividends, lower costs or other economic benefits directly to
investors or other owners, members or participants. A business consists of inputs
and processes applied to those inputs that have the ability to create outputs.
Outputs are however not required for an integrated set of activities and assets to
qualify as a business (IFRS 3 (Appendix B, B7–B12)).
Therefore, the acquisition of a subsidiary by an acquirer would constitute a business
combination, as the acquirer gained control over the business of the subsidiary.
There are three main elements in a business:
l input;
l process; and
l output.
41
Chapter 2
Input is any economic resource that creates or has the ability to create outputs when
one or more processes are applied to it. Examples would be non-current assets,
intellectual property, the ability to obtain access to necessary materials or rights, and
employees.
Process is any system, standard, protocol, convention or rules that, when applied to an
input or inputs, creates or has the ability to create outputs. Examples would be strategic
management processes, operational processes and resource management processes.
Accounting, billing, payroll and administrative systems are typically not processes used
to create outputs.
Output is the result of inputs and the processes applied to those inputs that provide or
have the ability to provide a return in the form of dividends, lower costs or other
economic benefits directly to investors or other owners, members or participants.
An integrated set of activities and assets in the development stage might not have
outputs. If not, the acquirer should consider other factors to determine whether the set
is a business as defined. Those factors include whether the set:
l has begun principal activities;
l has employees, intellectual property and other inputs and processes that could be
applied to those inputs;
l is pursuing a plan to produce outputs; and
l will be able to obtain access to customers that will purchase the outputs.
In the absence of evidence to the contrary, a particular set of assets and activities in
which goodwill is present shall be presumed to be a business. However, a business
need not have goodwill.
42
IFRS 3 Business combinations
43
Chapter 2
P Ltd acquired 70% of the shares in S Ltd and paid the consideration on
31 October 20.18. In terms of an agreement with the former owners of S Ltd, P Ltd took
control of the business of S Ltd on 30 September 20.18. From 30 September 20.18 P Ltd
controlled all the assets of S Ltd and assumed responsibility for all the obligations of
S Ltd.
The acquisition date is therefore 30 September 20.18.
44
IFRS 3 Business combinations
45
Chapter 2
2 Measurement principle
The acquirer shall measure the identifiable assets acquired and liabilities assumed at
their acquisition-date fair values. The effect of any remeasurement of assets and
liabilities to fair value at the acquisition date should be taken into account in the
consolidated financial statements. For example, if machinery is remeasured to its fair
value at acquisition date, the depreciation on the machinery should be based on the fair
value in the consolidated financial statements (also refer to the examples in chapter 6.3
to 6.6).
Comment
Chapter 9.3 provides examples relating to this section, and chapter 9.4 explains the
exceptions to the recognition and measurement principles.
On 1 January 20.19, P Ltd acquired a 75% interest in S Ltd. From that date P Ltd had
control over S Ltd as per the definition of control in terms of IFRS 10. The fair value of
the consideration was R1,4 million. The fair value of the identifiable net assets of S Ltd
amounted to R1,65 million at the acquisition date. The non-controlling interests are
measured at their proportionate share of the acquiree’s identifiable net assets at the
acquisition date.
46
IFRS 3 Business combinations
On 1 January 20.19, P Ltd acquired a 75% interest in S Ltd. From that date P Ltd had
control over S Ltd as per the definition of control in terms of IFRS 10. The fair value of
the consideration was R1,4 million. The fair value of the identifiable net assets of S Ltd
amounted to R1,65 million at the acquisition date. The non-controlling interests are
measured at fair value of R430 000 at the acquisition date.
Goodwill is calculated as follows:
Consideration transferred 1 400 000
Non-controlling interests at fair value 430 000
Fair value of previously held equity interest (n/a) –
1 830 000
Less: Net identifiable assets acquired (1 650 000)
Goodwill (SFP) R180 000
It will occasionally happen that the acquirer will make a bargain purchase. The gain is
recognised in profit or loss of the combined entity on acquisition date and is attributable
to the acquirer. However, before such a gain is recognised on a bargain purchase, the
acquirer shall:
l reassess whether it has correctly identified all of the assets acquired and liabilities
assumed and shall then recognise the additional assets or liabilities identified in
such an assessment;
l review the procedures used to measure the amounts that IFRS 3 requires to be
recognised at the acquisition date for all of the following:
(i) the identifiable assets acquired and liabilities assumed;
(ii) the non-controlling interests in the acquiree;
(iii) for a business combination achieved in stages, the acquirer’s previously held
equity interest in the acquiree; and
(iv) the consideration transferred.
47
Chapter 2
On 1 January 20.19, P Ltd acquired a 75% interest in S Ltd. From that date P Ltd had
control over S Ltd as per the definition of control in terms of IFRS 10. The fair value of
the consideration was R1,1 million. The fair value of the identifiable net assets of S Ltd
amounted to R1,6 million at the acquisition date. The non-controlling interests are
measured at the proportionate share of the acquiree’s identifiable net assets at the
acquisition date.
P Ltd reassesses its identification of assets and liabilities of S Ltd and reviews its
procedures to recognise and measure all the items required by IFRS 3. No adjustments
are made.
The gain from the bargain purchase is calculated as follows:
Consideration transferred 1 100 000
Non-controlling interests (25% × R1,6 million) 400 000
1 500 000
Less: Net identifiable assets acquired (1 600 000)
Gain from bargain purchase (P/L) R100 000
1 Consideration transferred
The consideration transferred in a business combination shall be measured at fair
value, i.e. the sum of the acquisition-date fair values of:
l the assets transferred by the acquirer;
l the liabilities incurred by the acquirer to former owners of the acquiree; and
l equity interests issued by the acquirer.
It should be noted here that any portion of the acquirer’s share-based payment awards
exchanged for awards held by the acquiree’s employees that are included in the
consideration transferred in the business combination, should be measured in terms of
the “market-based measure” of the award instead of at fair value.
If the carrying amounts of assets or liabilities transferred by the acquirer in the business
combination differ from their acquisition-date fair value, these assets and/or liabilities
should be remeasured to their acquisition-date fair values by the acquirer, and the
resulting gains or losses will be recognised by the acquirer in profit or loss in the
statement of profit or loss and other comprehensive income.
On 1 January 20.19 P Ltd acquired a 90% interest in S Ltd. P Ltd acquired the shares
from Mr Controlall, the former owner. From that date P Ltd had control over S Ltd as
per the definition of control in terms of IFRS 10. The consideration is to be settled as
follows:
l A cash payment of R800 000.
l Transfer of a vehicle to Mr Controlall. The fair value of the vehicle is R75 000 and
the carrying amount in the records of P Ltd was R65 000.
48
IFRS 3 Business combinations
Dr Cr
R R
1 January 20.19
Investment in S Ltd (SFP) 945 000
Bank (SFP) 800 000
Property, plant and equipment (SFP) (carrying amount) 65 000
Gain on transfer of vehicle (P/L) 10 000
Sundry liabilities (SFP) 40 000
Share capital (SCE) 30 000
Recognition of the consideration for the business
combination of S Ltd
Comment
The consideration transferred should be measured at the acquisition-date fair values.
Where assets or liabilities, whose acquisition-date fair values differ from their carrying
amounts, are transferred directly to the acquiree (instead of to the former owners of the
acquiree) as part of the consideration transferred, these assets and/or liabilities shall be
measured not at their acquisition-date fair values, but at their acquisition-date carrying
amounts, and no resulting gains or losses will be recognised on them by the acquirer at
the acquisition date. This is because the acquirer controls the assets and/or liabilities
before and after the business combination.
2 Contingent consideration
The acquirer may agree to transfer additional equity interests, cash, or other assets to
the former owners of the acquiree after the acquisition date, provided that specified
events occur, for example if certain profit levels are reached – this is referred to as
contingent consideration. Any asset or liability that arises from a contingent
consideration agreement will be included in the consideration transferred by the
acquirer in the business combination. The contingent consideration shall be measured
at the acquisition-date fair value thereof as part of the consideration transferred by the
acquirer to obtain the acquiree. The obligation to pay the contingent consideration shall
be classified in terms of IAS 32 Financial Instruments: Presentation as either an
equity instrument or as a financial liability. An asset will also be recognised by the
acquirer for the right it has to the return of previously transferred consideration if certain
49
Chapter 2
On 1 January 20.19 P Ltd acquired a 70% interest in S Ltd for R1,3 million from a
former owner, payable in cash. From that date P Ltd had control over S Ltd as per the
definition of control in terms of IFRS 10. In terms of the agreement with the seller, P Ltd
will have to pay an extra R200 000 to the seller if the sales of S Ltd increase by more
than 15% in total over the next three financial periods. On 1 January 20.19 both P Ltd
and the seller were confident that the 15% increase will indeed take place. The fair
value of the financial liability for the contingent payment is estimated at R110 000.
By 31 December 20.19, the sales of S Ltd declined somewhat due to an adverse
economic climate. P Ltd now estimates that the 15% target will probably not be met at
the end of the third financial period. The fair value of the financial liability for the
contingent payment is now estimated at R30 000.
P Ltd shall account for the transaction in its own records as follows:
Dr Cr
R R
1 January 20.19
Investment in S Ltd (SFP) 1 410 000
Bank (SFP) 1 300 000
Financial liability at fair value through profit or loss (SFP) 110 000
Recognition of the consideration and contingent
consideration for the business combination of S Ltd
Dr Cr
R R
31 December 20.19
Financial liability at fair value through profit or loss (SFP)
(110 000 – 30 000) 80 000
Fair value adjustment (P/L) 80 000
Recognition of the fair value adjustment on the liability
for the contingent consideration for the business
combination of S Ltd
On 1 January 20.19 P Ltd acquired a 70% interest in S Ltd for R1,3 million from a
former owner. From that date P Ltd had control over S Ltd as per the definition of
control in terms of IFRS 10. P Ltd shall settle the consideration by issuing 100 000 of
50
IFRS 3 Business combinations
P Ltd’s shares to the former owner at market price of R13 per share. P Ltd and the
seller agreed that P Ltd would issue more shares to the seller if the market price of
the P Ltd’s shares declined below R13 per share by 28 February 20.19. On
28 February 20.19 P Ltd’s shares were trading at R10 per share, and P Ltd issued
130 000 shares to the seller.
The fair value of the total consideration for the acquisition of S Ltd is R1,3 million on
1 January 20.19 and is classified as a financial liability (fixed amount for variable
number of shares). By 28 February 20.19 the fair value of the consideration had not
changed, but P Ltd issued more shares to the seller to compensate for the decline in
the individual share price. Details of the consideration are therefore as follows:
On 1 January 20.19: 100 000 shares at R13 each = R1,3 million
On 28 February 20.19: 130 000 shares at R10 each = R1,3 million
P Ltd shall account for the transaction in its own records as follows:
Dr Cr
R R
1 January 20.19
Investment in S Ltd (SFP) 1 300 000
Financial liability (SFP) 1 300 000
Financial liability (SFP) 1 300 000
Share capital (SCE) (100 000 × R13) 1 300 000
Recognition of the consideration and issue of shares
for the business combination of S Ltd
51
Chapter 2
other comprehensive income in terms of IFRS 9 Financial Instruments). Such fair value
adjustments recognised in other comprehensive income should be derecognised on the
same basis as if the acquirer had disposed directly of the previously held equity interest
(i.e. the cumulative fair value adjustments accumulated in other comprehensive income
may be reclassified to retained earnings on the date that control is obtained).
The issued share capital of S Ltd consists of 100 000 shares. On 1 January 20.18 P Ltd
acquired 10 000 shares in S Ltd at fair value for R100 000 (transaction costs are
immaterial). The investment was classified as a financial asset subsequently measured
at fair value through other comprehensive income (OCI). On 31 December 20.18 the
fair value of the investment was R130 000. On 1 January 20.19 P Ltd acquired 50 000
shares in S Ltd at market value of R13 per share (transaction costs are immaterial).
From that date P Ltd had control over S Ltd as per the definition of control in terms of
IFRS 10.
Comment
The acquisition date is 1 January 20.19 when P Ltd gained control over S Ltd through its
60% interest (see chapter 2.5).
Dr Cr
R R
31 December 20.18
Financial asset (SFP) (130 000 – 100 000) 30 000
Mark-to-market reserve (OCI) 30 000
Recognition of the fair value adjustment on the
investment
52
IFRS 3 Business combinations
Dr Cr
R R
1 January 20.19
J1 Investment in S Ltd (SFP) 780 000
Bank (SFP) (50 000 × R13) 650 000
Financial asset (SFP) 130 000
Recognition of the consideration for the
business combination of S Ltd
J2 Mark-to-market reserve (SCE) 30 000
Retained earnings (SCE) 30 000
Reclassification of fair value adjustments within equity
Comment
In the latter example, the acquirer shall attribute the full net assets (i.e. equity interests in)
of the acquiree to the non-controlling interests in the post-combination consolidated
financial statements of the acquirer.
53
Chapter 2
During the measurement period, the acquirer shall also recognise additional assets and
liabilities if new information is obtained about facts and circumstances that existed at
the acquisition date that, if known, would have resulted in the recognition of those
assets and liabilities at the acquisition date.
The measurement period ends as soon as the acquirer receives the information it was
seeking about facts and circumstances that existed at the acquisition date or learns that
more information is not obtainable. However, the measurement period shall not exceed
one year from the acquisition date.
The effect of the above principle is that goodwill is subsequently adjusted for such
changes due to the fact that the changes resulting from new information are processed
retrospectively, as if the information had existed at the acquisition date. This results in a
fairer presentation of the goodwill (or gain from a bargain purchase) at the acquisition
date.
It is very important to note that not all information obtained in the measurement period
will result in changes to the provisional amounts at the acquisition date. The acquirer
should apply professional judgement to ensure that the new information reflects the
circumstances that existed at the acquisition date and not those that arose thereafter.
The shorter the time period between the estimate of the provisional amount at the
acquisition date and the receipt of additional information about the provisional amount
in the measurement period, the more likely that the new information relates to a
circumstance that existed at the acquisition date. The opposite is also true.
After the measurement period ends, the acquirer shall revise the accounting for a
business combination only to correct an error in accordance with IAS 8 Accounting
Policies, Changes in Accounting Estimates and Errors.
Comment
Chapter 9 contains examples relating to the measurement period (examples 9.22–9.23).
54
IFRS 3 Business combinations
Acquisition-related costs
These are costs the acquirer incurs to effect the business combination. Examples are
advisory, legal, accounting, valuation and other professional and consulting fees and
other general administrative costs. The acquirer shall account for acquisition-related
costs as expenses in the periods in which the costs are incurred and the services are
received. The costs to issue debt or equity securities shall however be recognised in
accordance with IAS 32 Financial Instruments: Presentation and IFRS 9 Financial
Instruments (i.e. these costs shall be set off against the cash flow at initial recognition of
the debt or equity securities). Acquisition-related costs must be distinguished from
transaction costs in terms of IFRS 9 (e.g. brokerage fees), which may be capitalised to
the carrying amount of the investment in the separate records of investor. These
transaction costs will be reclassified to profit or loss in accordance with IFRS 3 in the pro
forma consolidation journals.
55
Chapter 2
P Ltd acquired a 90% interest in S Ltd on 1 October 20.18 for R1 million. From that date
P Ltd had control over S Ltd as per the definition of control in terms of IFRS 10. The
consideration was settled as follows:
l cash of R500 000;
l issuing 50 000 shares to the seller to the value of R300 000;
l issuing debentures to the seller to the value of R200 000.
Legal and other costs incurred in relation to the acquisition of the shares in S Ltd
amounted to R63 000. Costs to issue the shares and the debentures amounted to
R45 000 and R32 000 respectively.
P Ltd shall account for the transaction in its own records as follows:
Dr Cr
R R
1 October 20.18
J1 Investment in S Ltd (SFP) 1 000 000
Bank (SFP) 500 000
Share capital (SCE) 300 000
Debentures (financial liability) (SFP) 200 000
Recognition of the consideration for the business
combination of S Ltd
J2 Other expense (P/L) 63 000
Retained earnings (SCE) 45 000
Debentures (financial liability) (SFP) 32 000
Bank (SFP) 140 000
Recognition of the acquisition-related costs for the
business combination of S Ltd
56
IFRS 3 Business combinations
to the acquiree. The right is now reacquired by the acquirer from the acquiree in the
business combination transaction (refer to chapter 9.12 for an example).
A reacquired right which was recognised at the acquisition date as an intangible asset
shall be amortised over the remaining contractual period of the contract in which the right
was granted. An acquirer that subsequently sells a reacquired right to a third party will
include the carrying amount of the intangible asset in determining the loss or gain on the
sale of the reacquired right. This principle is consistent with IAS 38.115A Intangible
Assets.
57
Chapter 2
On 1 April 20.19, P Ltd acquired all of the shares of S Ltd for R700 000 cash. From that
date P Ltd had control over S Ltd as per the definition of control in terms of IFRS 10. In
terms of the agreement with the seller, P Ltd will issue 20 000 shares in P Ltd to the
seller, if the profit of S Ltd for the financial reporting period ended 31 December 20.19 is
more than R1,4 million. On 1 April 20.19 the fair value of the contingent consideration is
estimated at R60 000. The fair value of P Ltd’s shares on 1 April 20.19 is R5 per share.
The contingent consideration is classified as equity, as it will be settled through a fixed
number of shares.
The actual profit of S Ltd for the financial reporting period ended 31 December 20.19
was R1,44 million and P Ltd issued the additional 20 000 shares to the seller. The fair
value of P Ltd’s shares on 31 December 20.19 is R7 per share.
P Ltd shall account for the transaction in its own records as follows:
Dr Cr
R R
1 April 20.19
Investment in S Ltd (SFP) 760 000
Bank (SFP) 700 000
Equity – contingent consideration (SCE) 60 000
Recognition of the consideration and contingent
consideration for the business combination of S Ltd
Dr Cr
R R
31 December 20.19
Equity – contingent consideration (SFP) 60 000
Share capital (SFP) 60 000
Recognition of the issuing of additional shares in respect
of the contingent consideration for the business
combination of S Ltd
58
IFRS 3 Business combinations
Comment
Even though the total fair value of the 20 000 shares increased from R100 000 (20 000
× R5) to R140 000 (20 000 × R7), the contingent consideration was not remeasured as
it was classified as equity. According to IAS 32.22 changes in the fair value of an equity
instrument are not recognised in the financial statements.
59
Chapter 2
On 1 January 20.16, P Ltd decided to expand its operations by acquiring all of the
assets and liabilities of S Ltd in a business combination transaction. The assets and
liabilities meet the definition of a “business” in terms of IFRS 3 Business
Combinations. The following information is available:
60
IFRS 3 Business combinations
The purchase consideration for the assets and liabilities is paid as follows:
l R2 million is paid in cash immediately to the former owners on 1 January 20.16.
l 100 000 of P Ltd’s shares with a market price on 1 January 20.16 of R10 per share
are issued to the former owners of S Ltd on 1 January 20.16.
l Land, with a carrying amount of R200 000 and fair value of R600 000, is
transferred to the former owners of S Ltd on 1 January 20.16.
l A final once-off amount of R1 million is payable on 31 December 20.18 in cash to
the former owners of S Ltd. In terms of the business combination agreement, no
interest is charged on this amount. The market-related interest rate available to
P Ltd for financing purposes is 10% per annum, nominal and pre-tax.
Additional information
S Ltd expensed development costs of R100 000 (fair value on 1 January 20.16:
R200 000) in its separate financial statements. The project meets the definition of an
intangible asset in terms of IAS 38 Intangible Assets but was not recognised by S Ltd
in its separate financial statements, as S Ltd could not previously demonstrate the
probability of future economic benefits in terms of IAS 38.
S Ltd has a contingent liability of R450 000, which is a present obligation for which the
probability criterion was not met in S Ltd’s separate financial statements. At the
acquisition date the fair value of the contingent liability was R300 000. The contingent
liability forms part of the business combination transaction. The amount is not
deductible for taxation purposes.
61
Chapter 2
Certain employees of S Ltd will have to be retrenched due to the business combination,
at a cost of R2 million. This transaction is regarded as a separate transaction in terms
of IFRS 3.
The South African Revenue Service (SARS) accepts all transfer values of assets and
liabilities for taxation purposes.
The following considerations should be taken into account in respect of the
business combination transaction:
Is control obtained? Yes; P Ltd obtains control over assets and
liabilities of S Ltd through direct acquisition.
Is there an acquirer? Yes; P Ltd is the party obtaining control.
Is there a business? Yes; the assets acquired and liabilities
assumed meet the definition of a business in
terms of IFRS 3.
What is the acquisition date? 1 January 20.16
Are there any identifiable assets (e.g. Yes; therefore recognise them now in terms
intangible assets) that do not appear on the of the principles of IFRS 3 and IAS 38
acquiree’s statement of financial position? (section dealing with intangible assets in a
business combination).
Are there any identifiable liabilities and/or Yes; therefore recognise them now in terms
contingent liabilities that do not appear on of the principles of IFRS 3.
the acquiree’s statement of financial
position?
Are the assets and liabilities on S Ltd’s No; therefore make sure to recognise them
statement of financial position all fairly at the appropriate fair value in P Ltd’s
valued? records at their acquisition-date fair values.
Are there assets and liabilities on S Ltd’s No; the example did not state any such
statement of financial position that should assets. If it had, these assets/liabilities may
not be recognised in terms of IFRSs (e.g. not be recognised in the business
intangible assets that do not meet the combination.
definition in IAS 38)?
Are there any assets or liabilities that cannot Yes; existing goodwill is not an identifiable
be taken over in the business combination? intangible asset and deferred tax of the
acquiree may never be taken over in a
business combination.
Are all items of the consideration transferred No; the deferred payment should be
measured at fair value? measured at the present value thereof,
using a market-related discount rate.
Are there any separate transactions that do Yes; these transactions may not be
not form part of the business combination recognised as part of the acquisition journal
transaction? entry and should be accounted for in the
post-acquisition period (employees
retrenched).
62
IFRS 3 Business combinations
The acquisition journal entry is therefore as follows in the separate financial statements
of P Ltd (there are no consolidated financial statements):
Dr Cr
R R
1 January 20.16
J1 Property, plant and equipment (SFP) 1 200 000
Investment property (SFP) 700 000
Intangible assets (SFP) (900 000 + 200 000) 1 100 000
Trade receivables (SFP) 1 200 000
Goodwill (SFP) (balancing) 1 251 315
Long-term loan (SFP) 500 000
Trade and other payables (SFP) 300 000
Contingent liability (SFP) 300 000
Bank (SFP) 2 000 000
Share capital (SCE) 1 000 000
Land (SFP) 200 000
Profit on transfer of land (P/L) 400 000
Trade and other payables (SFP) (at present value)
(FV = 1 million; i = 10%; n = 3) or (1 000 000 / 1.103) 751 315
Acquisition journal entry in the separate financial
statements of P Ltd
J2 Other expenses (P/L) 2 000 000
Provision for retrenchment costs (SFP) 2 000 000
Provide the retrenchment costs that arose as a separate
transaction through the post-acquisition profit or loss
Comment
Deferred tax is not recognised in this example, as SARS accepts all transfer values of
assets and liabilities for taxation purposes. Therefore, the tax bases of assets and
liabilities are equal to the carrying amounts thereof and there are no temporary
differences.
The principles illustrated in this example (except for the deferred tax) apply equally to
business combinations where control is obtained through the acquisition of shares in a
subsidiary (as is discussed in the next section).
63
Chapter 2
It should always be borne in mind that IFRS 3 has, as one of its main objectives, the fair
presentation of goodwill or a gain from a bargain purchase arising in a business
combination transaction. It is therefore of the utmost importance that the principles of
the standard be applied in all such relevant transactions.
To summarise the approach required by IFRS 3, the following steps should be followed:
64
IFRS 3 Business combinations
Comment
* A pro forma journal entry is a journal entry that is not processed in the separate
financial statements of the acquirer or the acquiree but is processed for the purposes
of drawing up consolidated financial statements only. The pro forma journal entry
therefore only adjusts the consolidated financial statements and is mostly processed
to ensure compliance with the requirements of IFRS 3 and to eliminate intragroup
transactions and balances once the acquirer and acquiree are consolidated.
Step 3: Measure all identifiable assets and liabilities at their respective fair values as
prescribed by IFRS 3 in the consolidated financial statements of the acquirer.
Most assets and liabilities are measured at their acquisition-date fair values,
although certain exceptions to this measurement rule have been identified by
IFRS 3. Measure all assets and liabilities that cannot be measured reliably at
the acquisition date, at their provisional fair values. Also, note that certain
assets and liabilities may have to be adjusted to their appropriate fair values
by means of pro forma journal entries at the acquisition date. This would be
done to ensure compliance with the requirements of IFRS 3. Note that where
assets and liabilities are acquired directly, no such pro forma journal entries
would be required as the transaction is recognised and measured directly in
the separate financial statements of the acquirer and no subsequent
consolidated financial statements are prepared. All identifiable assets and
liabilities are therefore recognised and measured by means of actual journal
entries processed in the separate financial statements of the acquirer.
However, where an equity investment is acquired, the financial statements of
the acquirer and acquiree are subsequently consolidated. Therefore, certain
adjustments may need to be done both at the acquisition date as well as
subsequently to ensure that the consolidated financial statements comply with
the requirements of IFRS 3. Chapter 6 of this text book deals mainly with the
pro forma fair value adjustments that are required in consolidated financial
statements.
Step 4: A choice should be made in respect of the measurement of the non-controlling
interests in the acquiree. According to IFRS 3, a non-controlling interest in the
acquiree is measured at the acquisition date either at the fair value of the
non-controlling interests or at the non-controlling interests’ proportionate share
of the acquiree’s identifiable net assets.
Step 5: Eliminate the cost price of the investment of the acquirer (fair value of the
consideration for the business combination) against the fairly valued equity of
the acquiree that was included in the consolidated financial statements and
recognise the amount of the non-controlling interests (as determined in
step 4). Note here that the equity of the acquiree at the acquisition date is
indirectly fairly valued by ensuring that all the identifiable assets and liabilities
of the acquiree are measured at their acquisition-date fair values (or other
specified values per the exceptions to the measurement principle of IFRS 3) at
the acquisition date. It is also important to note that any fair value
65
Chapter 2
66
IFRS 3 Business combinations
On 1 January 20.16, P Ltd decided to invest in S Ltd by acquiring 80% of the issued
share capital of S Ltd in a business combination transaction. Control is obtained as
defined in IFRS 10 Consolidated Financial Statements. The following information is
available:
STATEMENT OF FINANCIAL POSITION OF S LTD AS AT 31 DECEMBER 20.15
Carrying Fair
amounts values
ASSETS
Property, plant and equipment 1 000 000 R1 200 000
Investment property 500 000 R700 000
Intangible assets 800 000 R800 000
Trade receivables 1 300 000 R1 200 000
Total assets R3 600 000
EQUITY AND LIABILITIES
Share capital 2 100 000 n/a
Retained earnings 500 000 n/a
Long-term loan (10% interest) 600 000 R660 000
Trade and other payables 400 000 R400 000
Total equity and liabilities R3 600 000
67
Chapter 2
l S Ltd expensed development cost of R100 000 (fair value on 1 January 20.16:
R300 000) in its separate financial statements. The project meets the definition of
an intangible asset in terms of IAS 38 Intangible Assets, but was not recognised
by S Ltd in its separate financial statements as the probability of future economic
benefits could not previously be demonstrated in terms of IAS 38 by S Ltd.
l S Ltd has a contingent liability of R450 000, which is a present obligation for which
the probability criterion was not met in S Ltd’s separate financial statements. At the
acquisition date the fair value of the contingent liability was R300 000. The
contingent liability forms part of the business combination transaction. The amount
is not deductible for taxation purposes.
l P Ltd elected to measure the non-controlling interests in the acquiree as its
proportionate share of the acquiree’s identifiable net assets.
l Assume a tax rate of 28% and a capital gains tax inclusion rate of 66,6%.
The acquisition is journalised as follows in P Ltd’s separate financial statements:
Dr Cr
R R
1 January 20.16
Investment in S Ltd (SFP) 3 500 000
Bank (SFP) 3 500 000
Recognition of the investment in S Ltd in P Ltd’s records
The acquisition is dealt with as follows in the consolidated financial statements:
Pro forma fair value adjusting journal entries required at acquisition to comply with
IFRS 3 requirements:
Dr Cr
R R
1 January 20.16
J1 Property, plant and equipment (SFP) 200 000
Revaluation surplus (SCE) 144 000
Deferred tax (SFP) 56 000
Pro forma revaluation of property, plant and equipment
at group level
J2 Investment property (SFP) 200 000
Retained earnings (SCE) 162 704
Deferred tax (SFP) (200 000 × 66,6% × 28%) 37 296
Pro forma revaluation of investment property
at group level
J3 Retained earnings (SCE) 72 000
Deferred tax (SFP) 28 000
Allowance for credit losses (SFP) 100 000
Pro forma provision for credit losses at group level
continued
68
IFRS 3 Business combinations
Dr Cr
R R
J4 Retained earnings (SCE) 43 200
Deferred tax (SFP) 16 800
Long-term loan (SFP) 60 000
Pro forma revaluation of loan at group level
– interest recognised
J5 Intangible assets (SFP) 300 000
Revaluation surplus (SCE) 216 000
Deferred tax (SFP) 84 000
Pro forma recognition of intangible assets at group
level
J6 Retained earnings (SCE) 300 000
Contingent liability (SFP) 300 000
Pro forma recognition of contingent liability at group
level
After the above fair value adjustments, the equity (now fairly stated) at acquisition will be:
Share capital 2 100 000
Revaluation surplus (144 000 + 216 000) 360 000
Retained earnings (500 000 + 162 704 – 72 000 – 43 200 – 300 000) 247 504
Equity (i.e. net asset value) at acquisition (fairly valued) R2 707 504
The main elimination pro forma journal entry is therefore processed as follows in the
consolidated financial statements of P Ltd:
Dr Cr
R R
1 January 20.16
Share capital (SFP) 2 100 000
Retained earnings (SCE) 247 504
Revaluation surplus (SCE) 360 000
Goodwill (SFP) (balancing) 1 333 997
Investment in S Ltd (SFP) 3 500 000
Non-controlling interests (SFP/SCE) (20% × 2 707 504) 541 501
Elimination of owners’ equity of S Ltd at acquisition
69
Chapter 2
Comment
The pro forma fair value adjusting and elimination journal entries could also have been
combined into one journal:
Dr Cr
R R
1 January 20.16
Property, plant and equipment (SFP) 200 000
Investment property (SFP) 200 000
Allowance for credit losses (SFP) 100 000
Long-term loan (SFP) 60 000
Intangible asset (SFP) 300 000
Contingent liability (SFP) 300 000
Deferred tax (SFP) (((200 000 × 66,6%) +
(200 000 – 100 000 – 60 000 + 300 000)) × 28%) 132 496
Share capital (SCE) 2 100 000
Retained earnings (SCE) 500 000
Goodwill (SFP) (balancing) 1 333 997
Investment in S Ltd (SFP) 3 500 000
Non-controlling interests (SFP/SCE) (20% × 2 707 504) 541 501
Pro forma journal entry at acquisition
2.17 Disclosure
For each business combination that occurred during the current reporting period, the
following should be disclosed by the acquirer, unless it is impracticable to do so:
l the name of the acquiree;
l a description of the acquiree;
l the acquisition date;
l the percentage of voting equity interests acquired;
l the primary reasons for the business combination and a description of how the
acquirer obtained control of the acquiree;
l a description of the factors that make up goodwill, such as expected synergies
from combining operations of the acquiree and the acquirer, intangible assets that
do not qualify for separate recognition or other factors;
l the acquisition-date fair value of the total consideration transferred and the
acquisition-date fair value of each major class of consideration, such as:
• cash;
• other tangible or intangible assets, including a business or subsidiary of the
acquirer;
70
IFRS 3 Business combinations
71
Chapter 2
• the transaction amount and the line item in the financial statements in which the
amount is recognised; and
• if the transaction is the effective settlement of a pre-existing relationship, the
method used to determine the settlement amount;
l separately recognised acquisition-related costs as well as the amount recognised
as an expense and the line item in the statement of profit or loss and other
comprehensive income in which those expenses are recognised. The amount of
any issue costs not recognised as an expense and how they were recognised shall
also be disclosed;
l in a bargain purchase:
• the amount of any gain recognised and the line item in the statement of profit or
loss and other comprehensive income in which the gain is recognised; and
• a description of the reasons why the transaction resulted in a bargain purchase;
l for each business combination in which the acquirer holds less than 100% of the
equity interest in the acquiree at the acquisition date:
• the amount of the non-controlling interests in the acquiree recognised at the
acquisition date and the measurement basis for that amount; and
• for all non-controlling interests in an acquiree measured at fair value, the
valuation technique(s) and significant inputs used in the valuation;
l in a business combination achieved in stages:
• the acquisition-date fair value of the equity interest in the acquiree held by the
acquirer immediately before the acquisition date; and
• the amount of any gain or loss recognised as a result of remeasuring to fair
value the equity interest in the acquiree held by the acquirer before the business
combination and the line item in the statement of profit or loss and other
comprehensive income in which that gain or loss is recognised;
l the following information:
• the amounts of revenue and profit or loss of the acquiree since the acquisition
date included in the consolidated statement of profit or loss and other
comprehensive income for the reporting period; and
• the revenue and profit or loss of the combined entity for the current reporting
period as though the acquisition date for all business combinations that occurred
during the year had been as of the beginning of the annual reporting period.
If the acquisition date of a business combination is after the end of the reporting period
but before the financial statements are authorised for issue, the acquirer shall disclose
all the information as stated above, unless the initial accounting for the business
combination is incomplete at the time the financial statements are authorised for issue.
In that situation, the acquirer shall describe which disclosures could not be made and
the reasons why they cannot be made.
If any of the above disclosure is impracticable to provide, the acquirer shall note that
fact and explain why it is impracticable to disclose the information.
72
IFRS 3 Business combinations
The following information should be disclosed annually for each material business
combination or in the aggregate for individually immaterial business combinations that
are material collectively:
l if the initial accounting for a business combination is incomplete and some
amounts have only been determined provisionally:
• the reasons why the initial accounting for the business combination is
incomplete;
• the assets, liabilities, equity interests or items of consideration for which the
initial accounting is incomplete; and
• the nature and amount of any measurement period adjustments recognised
during the reporting period.
l for each reporting period after the acquisition date until the entity collects, sells or
otherwise loses the right to a contingent consideration asset, or until the entity
settles a contingent consideration liability or the liability is cancelled or expires:
• any changes in the recognised amounts, including any differences arising upon
settlement;
• any changes in the range of undiscounted outcomes and the reasons for those
changes; and
• the valuation techniques and significant inputs used in the valuation;
l for contingent liabilities recognised in a business combination, the acquirer shall
disclose the following for each class of provision:
• the carrying amount at the beginning and end of the period;
• additional provisions made in the period, including increases to existing
provisions;
• amounts used (incurred) during the period;
• unused amounts reversed during the period;
• the increase during the period in the discounted amount arising from the
passage of time and the effect of any change in the discount rate;
• a brief description of the nature of the obligation and the expected timing of any
resulting outflows of economic benefits;
• an indication of the uncertainties about the amount or timing of those outflows.
Where necessary to provide adequate information, an entity shall disclose the
major assumptions made concerning future events; and
• the amount of any expected reimbursement, stating the amount of any asset that
has been recognised for that expected reimbursement;
l a reconciliation of the carrying amount of goodwill at the beginning and end of the
reporting period showing separately:
• the gross amount and accumulated impairment losses at the beginning of the
reporting period.
• additional goodwill recognised during the reporting period (except goodwill
included in a disposal group that, on acquisition date, meets the criteria held for
73
Chapter 2
sale in accordance with IFRS 5 Non-current Assets Held for Sale and
Discontinued Operations);
• adjustments resulting from the subsequent recognition of deferred tax assets
during the reporting period;
• goodwill included in a disposal group held for sale in accordance with IFRS 5
and goodwill derecognised during the reporting period;
• impairment losses recognised during the reporting period in accordance with
IAS 36;
• net exchange rate differences arising during the reporting period in accordance
with IAS 21 The Effects of Changes in Foreign Exchange Rates;
• any other changes in the carrying amount during the reporting period;
• the gross amount and accumulated impairment losses at the end of the reporting
period;
l the amount and an explanation of any gain or loss recognised in the current
reporting period that both:
• relates to the identifiable assets acquired or liabilities assumed in a business
combination that were effected in the current or previous reporting period; and
• is of such a size, nature or incidence that disclosure is relevant to understanding
the combined entity’s financial statements.
74
IFRS 3 Business combinations
IFRS 3
disclosure
requirement
The fair value of the total consideration transferred amounted to B64(f)
R507 000 and is made up out of the following:
Cash 457 000
Deferred payment 50 000
R507 000
The non-controlling interests for the acquisition of S Ltd was B64(o)
measured at the proportionate interest in the acquiree’s identifiable
net assets on acquisition date and amounted to R123 000.
The fair value of the assets acquired and the liabilities assumed of B64(i)
S Ltd were as follows:
Property, plant and equipment 700 000
Trade receivables 60 000
Cash and cash equivalents 25 000
Long-term borrowings (140 000)
Trade payables (30 000)
Net assets acquired R615 000
The gross contractual amount receivable from trade receivables is B64(h)
R68 000 of which R8 000 is expected to be uncollectible.
Goodwill of R15 000 was recognised and is mostly made up of B64(k)
anticipated future synergy savings for the Group. The goodwill
recognised will not be deductible for income tax purposes in the
future.
Acquisition-related cost amounted to R25 000 in was included in B64(m)
other expenses in the statement of profit or loss and other
comprehensive income.
S Ltd’s revenue and profit for the period 1 June 20.15 to 30 June B64(q)(i)
20.15 amounted to R31 000 and R12 000 respectively.
S Ltd’s revenue and profit for the period 1 July 20.14 to 30 June B64(q)(ii)
20.15 amounted to R372 000 and R144 000 respectively.
75
Chapter 2
IFRS 3
disclosure
requirement
Goodwill
Carrying amount at the beginning of the period R40 000
Gross carrying amount 65 000 B67(d)(i)
Accumulated impairment losses (25 000) B67(d)(i)
Acquisition of subsidiary 15 000 B67(d)(ii)
Derecognition of goodwill on loss of control in subsidiary (8 000) B67(d)(vii)
Impairment loss (10 000) B67(d)(v)
Carrying amount at the end of the period R37 000
Gross carrying amount 72 000 B67(d)(viii)
Accumulated impairment losses (35 000) B67(d)(viii)
During the year an impairment loss of R10 000 was recognised in profit or loss (IAS
36.126(a)). The impairment loss of R10 000 is with regards to A Ltd, a subsidiary of the
P Ltd group acquired on 1 July 20.10 (IAS 36.130(d)(i)).
Self-assessment question
Question 2.1
Alpha Ltd purchased a 60% controlling interest in Omega Ltd on 1 January 20.11. On
this date Alpha Ltd obtained control over Omega Ltd when the share capital and
retained earnings of Omega Ltd amounted to R1 000 000 and R900 000 respectively.
On acquisition date Omega Ltd’s net asset value was considered to be fairly valued
with the exception of the following items:
1. Equipment with a cost price of R300 000 had a fair value of R400 000 on
1 January 20.11. Alpha Ltd, however, does not intend to use the equipment in the
future and subsequently valued the equipment only at R200 000 on 1 January
20.11.
2. Omega Ltd disclosed a contingent liability of R300 000 in its financial statements on
1 January 20.11 relating a court case. The claim represents a present obligation,
but at this point in time the attorneys of Omega Ltd are of the opinion that it is
unlikely to lead to an outflow of economic benefits due to a lack of evidence to
support the claim. The R300 000 is the fair value of the claim taking into account all
possible outcomes on 1 January 20.11.
The shareholders of Omega Ltd have, as part of the purchase agreement by Alpha
Ltd, guaranteed to reimburse Omega Ltd 50% of the claim, should it be successful.
The claim will not be deductible for taxation purposes should it succeed.
76
IFRS 3 Business combinations
Required
(a) Prepare the journal entry in the separate accounting records of Alpha Ltd to
account for the acquisition of Omega Ltd on 1 January 20.11.
(b) Prepare the pro forma journal entries for the Alpha Ltd Group to account for the
acquisition of Omega Ltd on 1 January 20.11. Journal entries relating to deferred
taxation are also required.
77
Chapter 2
Dr Cr
R R
1 January 20.11
J1 Investment in Omega Ltd (SFP) (balancing) 1 250 000
Acquisition cost (P/L) 120 000
Retained earnings (SCE) (share issue cost) 20 000
Office furniture (SFP) 30 000
Share capital (SCE) (1 000 × R460) 460 000
Contingent consideration (SFP) 50 000
Deferred consideration (SFP) 250 000
(275 000 × 100/110)
Bank (SFP) 600 000
Accounting for the investment in Omega Ltd
Dr Cr
1 January 20.11 R R
J1 Equipment (SFP) 100 000
Revaluation surplus (SCE) 72 000
Deferred tax (SFP) 28 000
Pro forma revaluation of equipment at group
level
J2 Retained earnings (SCE) 150 000
Indemnification asset (SFP) (300 000 × 50%) 150 000
Contingent liability (SFP) 300 000
Pro forma recognition of contingent liability at
group level
J3 Share capital (SCE) 1 000 000
Retained earnings (SCE) (900 000 – 150 000) 750 000
Revaluation surplus (SCE) 72 000
Goodwill (SFP) (balancing) 178 000
Non-controlling interests (SFP/SCE) 750 000
Investment in Omega Ltd (SFP) (part (a)) 1 250 000
Elimination of owners’ equity of Omega Ltd at
acquisition
Comment
According to IFRS 13 Fair Value Measurement, fair value refers to the highest and best
use of a non-financial asset. Therefore, although Alpha Ltd does not intend to use the
equipment after the acquisition of Omega Ltd, the highest and best use of the equipment
will be to sell it for R400 000 and thus R400 000 will be the fair value.
78
3
Consolidation at acquisition date
Review
3.1 Group statements and consolidated statements ..................................... 81
79
Chapter 3
Self-assessment questions
Question 3.1 ..................................................................................................... 116
Question 3.2 ..................................................................................................... 118
Question 3.3 ..................................................................................................... 121
80
Consolidation at acquisition date
Review
3.1 Group statements and consolidated statements
1 Chapter 1 dealt in general with groups and the element of control in the constitution of
a group of entities. The presentation of group statements by the parent and the
general principles governing group statements and consolidated statements were
considered. Consolidated financial statements are the most important and most
commonly used form of group statements. IFRS 10 Consolidated Financial
Statements very clearly requires an entity (the parent) that controls one or more other
entities (subsidiaries) to present consolidated financial statements (.2).
2 The next few chapters deal with the way in which the information contained in the
separate financial statements of the companies in a group is combined to present
consolidated financial statements (see chapter 1.10). Chapters 3 and 4 deal with the
consolidation of the financial statements of a simple group (consisting of the parent
and a single subsidiary) where the share capital of both companies includes no
preference shares. In chapter 3, the discussion is limited to consolidation of the
financial statements of the parent and the subsidiary as at the acquisition of the
controlling interest by the parent. The discussion deals with the procedures where
the subsidiary is respectively a wholly-owned or partially-owned subsidiary and
where, in both of these cases, the interest is acquired at the present fair value of the
identifiable assets and liabilities of the acquiree, a consideration higher than the fair
value of the identifiable assets and liabilities of the acquiree, or a consideration
lower than the fair value of the identifiable assets and liabilities of the acquiree.
81
Chapter 3
obverse sides or mirror images of the same item and must be eliminated in the new
reporting entity, i.e. the group. In branch accounts, the investment account in the
records of the head office (the branch account) is replaced on consolidation of the
records of the head office and branch, by the net assets of the branch. In a similar
manner, the account for the investment in a subsidiary in the parent’s records is in
effect replaced on consolidation by the appropriate portion of the interest of the
parent in the net assets of the subsidiary.
2 In this chapter, the only case that is discussed is one in which the investment in the
subsidiary is carried (in the records of the parent) at the original cost price for the
sake of simplicity and no fair value adjustments are taken into account.
82
Consolidation at acquisition date
83
Chapter 3
volume of Group Statements, the date of exchange coincides with the acquisition date.
It is generally the date on which the acquirer legally transfers the consideration,
acquires the assets and assumes the liabilities of the acquiree, and is also called the
closing date. However, the acquirer might obtain control on a date that is either earlier
or later than the closing date. An acquirer shall consider all pertinent facts and
circumstances in identifying the acquisition date (IFRS 3.9). A business combination
may however involve more than one exchange transaction, for example when it is
achieved in stages by successive share purchases. In chapter 13, step acquisition is
discussed in detail.
84
Consolidation at acquisition date
3.12 Interest acquired at the fair value of the identifiable assets acquired
and liabilities assumed of the acquiree
The following are the condensed statements of financial position of P Ltd and its wholly-
owned subsidiary, S Ltd, at 31 December 20.18, the date on which P Ltd acquired all
the shares in S Ltd. From that date P Ltd had control over S Ltd as per the definition of
control in terms of IFRS 10.
P Ltd S Ltd
ASSETS
Property, plant and equipment 91 000 65 000
Investment in S Ltd: 80 000 shares at cost price 89 000 –
Trade receivables 48 000 44 000
Total assets R228 000 R109 000
EQUITY AND LIABILITIES
Share capital (200 000/80 000 shares) 200 000 80 000
Retained earnings 8 000 9 000
Trade and other payables 20 000 20 000
Total equity and liabilities R228 000 R109 000
Assume that the identifiable assets acquired and the liabilities assumed at acquisition
date are shown at their acquisition-date fair values as determined in terms of IFRS 3.
P Ltd recognised the equity investment in S Ltd in its separate records using the cost
price method.
Ignore tax implications.
85
Chapter 3
Solution 3.1
As was stated earlier, the basic consolidation procedures comprise (a) the elimination
of common items and (b) the combination of the remaining (non-common) items on a
line-by-line basis.
When the two separate statements of financial position are combined (consolidated)
and regarded as those of a single reporting entity (i.e. the group), the only two common
items are the investment in the subsidiary (S Ltd) on the statement of financial position
of the parent and the portion of the equity of the subsidiary (S Ltd) held by the parent
(P Ltd) on the statement of financial position of the subsidiary.
The line item “Investment in S Ltd” of R89 000 represents the cost to P Ltd of acquiring
the equity of (and control over) S Ltd. The two line items, share capital and retained
earnings, together comprise “Equity” of R89 000 which represents the fair value of the
identifiable assets acquired and liabilities assumed of the acquiree in the statement of
financial position of S Ltd (or the interest of the owners in S Ltd) and must be eliminated
against the investment in S Ltd. As the shares in S Ltd were acquired at the fair value of
the identifiable assets acquired and liabilities assumed, these two items must be set off
against each other. The remaining non-common items in the two statements of financial
position are then simply added together on a line-by-line basis to produce the
consolidated statement of financial position.
An analysis of equity is used in this work to simplify the consolidation process. The
analysis of the equity at acquisition complies with the requirements of IFRS 3.
Calculations
C1 Analysis of owners’ equity of S Ltd
P Ltd 100%
Total
At acquisition
i At acquisition (31/12/20.18)
Share capital 80 000 (dr) 80 000
Retained earnings 9 000 (dr) 9 000
89 000 89 000
Purchase difference – –
Consideration R89 000 (cr) R89 000
Comments
The references to (dr) and (cr) in the above analysis refer to the relevant journal entry
(J1).
From the analysis it is clear that there is no purchase difference between the fair value
of the identifiable assets and liabilities of the acquiree and the consideration transferred
by the parent to obtain the investment. IFRS 3 requires that the purchase difference be
calculated in the following manner:
86
Consolidation at acquisition date
Comments
In order to comply with the requirements of IFRS 3, this calculation will be done for
every example, even though the purchase difference is also reflected in the analysis.
In order to apply the consolidation worksheet method, pro forma journals must be
prepared that are used solely to eliminate intragroup items in the consolidation process.
With the above analysis as basis, the elimination of the related items can be recorded
as follows by means of a pro forma consolidation journal entry:
C3 Pro forma consolidation journal entry
Dr Cr
R R
J1 Share capital (S)(SCE) 80 000
Retained earnings (S)(SCE) 9 000
Investment in S Ltd (P)(SFP) 89 000
Elimination of equity of S Ltd against investment
account at acquisition
Comments
a The references to (S) and (P) are purely for purposes of clarity, being references to
the respective financial statements in which these items appear, namely the
subsidiary (S) and the parent (P).
b The following abbreviations that are used in the pro forma journals refer to the
different parts of the financial statements that are influenced by each pro forma
journal:
SFP – Statement of financial position
SCE – Statement of changes in equity
P/L – Profit or loss
OCI – Other comprehensive income.
By netting off the pro forma journal entry against the amounts contained in the
statements of financial position of P Ltd and S Ltd, the non-common items which
remain are then added together on a line-by-line basis in the consolidated statement of
financial position. For this purpose, use is made of a consolidation worksheet.
87
Chapter 3
The consolidated statement of financial position is prepared from the worksheet and it
should be clear to you that all intragroup balances have now been eliminated and the
remaining items added together on a line-by-line basis. The consolidated statement of
financial position will therefore only contain items that result from transactions with
parties outside the group.
P LTD GROUP
CONSOLIDATED STATEMENT OF FINANCIAL POSITION AS AT 31 DECEMBER 20.18
ASSETS
Non-current assets
Property, plant and equipment (91 000(P) + 65 000(S)) 156 000
Current assets
Trade receivables (48 000(P) + 44 000(S)) 92 000
Total assets R248 000
EQUITY AND LIABILITIES
Equity attributable to owners of the parent
Share capital (P) 200 000
Retained earnings (P) 8 000
Total equity 208 000
Current liabilities
Trade and other payables (20 000(P) + 20 000(S)) 40 000
Total equity and liabilities R248 000
88
Consolidation at acquisition date
Comment
The investment in the subsidiary is not set off only against the share capital of the
subsidiary, but rather against the total equity of the subsidiary as at the acquisition date,
i.e. share capital and retained earnings.
Note therefore that as a result of the consolidation adjustment, no item of the equity of
the subsidiary at acquisition date appears in the equity of the consolidated statement of
financial position. Only the share capital and retained earnings of the parent are
presented in the consolidated statement of financial position.
Suppose that extracts from the statements of profit or loss and other comprehensive
income and statements of changes in equity of P Ltd and S Ltd were as follows for the
reporting period ended 31 December 20.18:
EXTRACT FROM THE STATEMENTS OF PROFIT OR LOSS
AND OTHER COMPREHENSIVE INCOME
FOR THE YEAR ENDED 31 DECEMBER 20.18
P Ltd S Ltd
Profit before tax 10 000 11 500
Income tax expense (3 000) (3 500)
PROFIT FOR THE YEAR 7 000 8 000
Other comprehensive income for the year – –
TOTAL COMPREHENSIVE INCOME FOR THE YEAR R7 000 R8 000
Comment
In this work, the presentation of the components of profit or loss in a single statement of
profit or loss and other comprehensive income is adopted in terms of IAS 1
Presentation of Financial Statements (.12 & .81), although initial examples include no
items of other comprehensive income.
P Ltd only obtained control over S Ltd on 31 December 20.18. P Ltd therefore had no
influence over the performance of S Ltd for the reporting period ended
31 December 20.18 and P Ltd has no right to the profit for that reporting period. That
profit “belongs” to the previous owners, from whom P Ltd obtained the shares.
89
Chapter 3
The consolidated statement of profit or loss and other comprehensive income of the
group for the reporting period will therefore contain only the profit of P Ltd for the
reporting period; likewise the consolidated statement of changes in equity will also
contain only the profit for the reporting period of P Ltd.
The dividend of R3 000 that was paid by S Ltd is also attributable to the previous
owners and not to P Ltd. The retained earnings of R9 000 of S Ltd at
31 December 20.18 is “purchased profit” and forms part of the “net identifiable assets”,
that were taken over in the business combination and is eliminated on consolidation.
The consolidated statement of profit or loss and other comprehensive income and
statement of changes in equity will therefore be as follows:
P LTD GROUP
EXTRACT FROM THE CONSOLIDATED STATEMENT OF PROFIT OR LOSS
AND OTHER COMPREHENSIVE INCOME
FOR THE YEAR ENDED 31 DECEMBER 20.18
Profit before tax 10 000
Income tax expense (3 000)
PROFIT FOR THE YEAR 7 000
Other comprehensive income for the year –
TOTAL COMPREHENSIVE INCOME FOR THE YEAR R7 000
P LTD GROUP
EXTRACT FROM THE CONSOLIDATED STATEMENT OF CHANGES IN EQUITY
FOR THE YEAR ENDED 31 DECEMBER 20.18
Share Retained
capital earnings
Balance at 1 January 20.18 200 000 5 000
Changes in equity for 20.18
Total comprehensive income for the year:
Profit for the year – 7 000
Ordinary dividend – (4 000)
Balance at 31 December 20.18 R200 000 R8 000
3.13 Interest acquired at more than the fair value of the identifiable
assets acquired and liabilities assumed of the acquiree (therefore at
a premium)
1 A parent may pay more than the fair value of the identifiable assets and liabilities of
the acquiree (through the shares it acquires) when an interest in a subsidiary is
obtained. Because the ownership of shares in an entity represents an indivisible
interest in the net assets and earning capacity of such an entity, the premium
(excess) which is paid to acquire the interest can arise as a result of different
factors. In simple terms, the parent may pay more than the fair value of the assets
acquired and liabilities assumed due to factors such as the investee’s good
customer base, its market share or to merely ensure that it gets the controlling
interest in the entity.
90
Consolidation at acquisition date
2 In the Basis for Conclusions to IFRS 3, the following, amongst others, are
identified as possible components of goodwill when it is measured as the residual
(which is currently the case):
l the fair value of the “going concern” element of the subsidiary’s existing
business. The “going concern” element represents the ability of the subsidiary to
earn a higher rate of return on an assembled collection of net assets than would
be expected if those assets had to be acquired separately. That value stems
from the synergies of the net assets of the business, as well as from other
benefits (such as factors related to market imperfections, including the ability to
earn monopoly profits and barriers to market entry – either legal or because of
transaction costs – by potential competitors);
l the fair value of the expected synergies and other benefits from combining the
subsidiary’s net assets and businesses with those of the parent (BC 313–318).
The two concepts described above represent the “core” goodwill, and qualify as an
asset under the definition of the Conceptual Framework for Financial Reporting,
due to the fact that the parent can direct the policies and management of the
subsidiary (BC 323).
3 Goodwill cannot be directly measured and IFRS 3 therefore determines that it is
measured as a residual (BC 328). Such residual (being a premium or excess of the
consideration over the fair value of the identifiable assets and liabilities of the
acquiree) must thus be analysed with care. If the excess is ascribable to specific
assets, it must be allocated to such items on consolidation (refer to chapter 6).
However, where the excess cannot be allocated in this way and thus in fact
represents the amount paid for an intangible asset which does not appear in the
records of the subsidiary, such excess must be recognised as an asset of the group
in the consolidated statements. According to International Financial Reporting
Standards (IFRS), such unallocated excess should be treated as goodwill. Goodwill
is defined in IFRS 3 in terms of its nature, rather than in terms of its measurement. It
is defined as an asset representing the future economic benefits arising from other
assets acquired in a business combination that are not individually identified and
separately recognised (IFRS 3 Appendix A).
4 It is important to note that the current view of the IASB is that the goodwill that is
created at the acquisition date in a business combination is regarded as an asset of
the subsidiary. This view is in compliance with the principle of IAS 21 where a
foreign operation is translated into the functional currency and any goodwill is
regarded as an asset of the subsidiary. In addition, a fair value could be awarded to
the non-controlling interest, as assets are recognised in full at fair value, including
goodwill. The fact that the goodwill “belongs” to the subsidiary implies that it
increases the equity that is analysed at the acquisition date (increase in assets
increases equity).
91
Chapter 3
transferred (at fair value) over the net of the identifiable assets acquired and the
liabilities assumed and the contingent liabilities, based on acquisition-date fair
values, i.e. the equity of the subsidiary (IFRS 3.32 – adopted for a wholly-owned
subsidiary).
2 After initial recognition, the goodwill acquired in a business combination shall be
measured at cost less any accumulated impairment losses. Goodwill may not be
amortised. Instead, it shall be tested 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 (.10) (see chapter 6.7).
The following are the condensed statements of financial position of P Ltd and its wholly-
owned subsidiary, S Ltd, at 1 January 20.19, the acquisition date of the shares in S Ltd
by P Ltd. The information in this example is thus very similar to that in the previous
example, except for the increased consideration paid for the investment. In this case,
the acquisition date is 1 January 20.19, i.e. the first day of the reporting period; thus
there is no profit that warrants the preparation of a consolidated statement of profit or
loss and other comprehensive income and statement of changes in equity. Only a
consolidated statement of financial position can be prepared at that date.
P Ltd S Ltd
ASSETS
Property, plant and equipment 91 000 65 000
Investment in S Ltd: 80 000 shares at cost price 95 000 –
Trade receivables 42 000 44 000
Total assets R228 000 R109 000
EQUITY AND LIABILITIES
Share capital (200 000/80 000 shares) 200 000 80 000
Retained earnings 8 000 9 000
Trade and other payables 20 000 20 000
Total equity and liabilities R228 000 R109 000
Assume that the identifiable assets acquired and the liabilities assumed at acquisition
date are shown at their acquisition-date fair values as determined in terms of IFRS 3.
P Ltd recognised the equity investment in S Ltd in its separate records using the cost
price method.
Ignore tax implications.
Solution 3.2
The basic consolidation procedures are the same as in example 3.1, i.e. eliminate the
common items and consolidate the remaining non-common items on a line-by-line
basis.
92
Consolidation at acquisition date
The line item “Investment in S Ltd” in the statement of financial position of P Ltd
represents the fair value to P Ltd of acquiring the equity in and control over S Ltd. P Ltd
has thus purchased equity (net assets) amounting to R89 000 and paid R95 000, which
leaves a difference of R6 000. P Ltd has in essence acquired, at a consideration at fair
value (assumed) of R95 000, the following net assets:
Consideration transferred (Investment at fair value) 95 000
Net recognised values of S Ltd’s identifiable assets and liabilities (89 000)
Property, plant and equipment 65 000
Trade receivables 44 000
109 000
Trade and other payables (20 000)
Excess/premium R6 000
As the excess of R6 000 cannot be attributed to a single asset that is undervalued, it
may be assumed that the excess was paid for factors that relate to various intangible
assets, which is called goodwill. As there is no common element or item against which
this goodwill of R6 000 can be set off, it is presented as a separate item in the
consolidated statement of financial position of the group. This goodwill is an asset and
because an increase in assets increases the equity of S Ltd, the amount is transferred
to the total column in the analysis of the equity of S Ltd.
Calculations
C1 Analysis of owners’ equity of S Ltd
P Ltd 100%
Total
At acquisition
i At acquisition (1/1/20.19)
Share capital 80 000 (dr) 80 000
Retained earnings 9 000 (dr) 9 000
89 000 89 000
Equity represented by goodwill – Parent 6 000 (dr) 6 000
Consideration R95 000 (cr) R95 000
93
Chapter 3
The pro forma consolidation journal entry for the elimination of common items and the
recognition of the goodwill is as follows:
C3 Pro forma consolidation journal entry
Dr Cr
R R
J1 Share capital (S)(SCE) 80 000
Retained earnings (S)(SCE) 9 000
Goodwill (S)(SFP) 6 000
Investment in S Ltd (P)(SFP) 95 000
Elimination of common items and recognition
of goodwill at acquisition
By netting off the pro forma journal entry against the amounts contained in the separate
statements of financial position of P Ltd and its subsidiary, only the non-common items
remain. These are then added together on a line-by-line basis in the consolidated
statement of financial position. For this procedure, use is again made of a consolidation
worksheet.
C4 Consolidation worksheet: P Ltd and subsidiary
Consolidation
adjustments Consoli-
P Ltd S Ltd
dated
Dr Cr
Property, plant and
equipment 91 000 65 000 156 000
Goodwill – – 6 000 (J1) 6 000
Investment in S Ltd 95 000 – 95 000 (J1) –
Trade receivables 42 000 44 000 86 000
R228 000 R109 000 R248 000
Share capital 200 000 80 000 80 000 (J1) 200 000
Retained earnings 8 000 9 000 9 000 (J1) 8 000
Trade and other
payables 20 000 20 000 40 000
R228 000 R109 000 R95 000 R95 000 R248 000
The last column of the worksheet can now easily be adapted into a consolidated
statement of financial position.
94
Consolidation at acquisition date
P LTD GROUP
CONSOLIDATED STATEMENT OF FINANCIAL POSITION AS AT 1 JANUARY 20.19
ASSETS
Non-current assets
Property, plant and equipment (91 000(P) + 65 000(S)) 156 000
Goodwill 6 000
Total non-current assets 162 000
Current assets
Trade receivables (42 000(P) + 44 000(S)) 86 000
Total assets R248 000
EQUITY AND LIABILITIES
Equity attributable to owners of the parent
Share capital (P) 200 000
Retained earnings (P) 8 000
Total equity 208 000
Current liabilities
Trade and other payables (20 000(P) + 20 000(S)) 40 000
Total equity and liabilities R248 000
Comment
Goodwill is an intangible asset that is presented as a non-current asset in the
consolidated statement of financial position.
3.15 Interest acquired at less than the fair value of the identifiable assets
acquired and liabilities assumed of the acquiree
(therefore at a discount)
1 It is possible that a parent may acquire the interest in a subsidiary at less than the net
fair value of the identifiable assets, liabilities and contingent liabilities. (In the interest
of brevity, this item is henceforth referred to as acquisition at a discount.) The
possibility of obtaining an interest in a subsidiary at a discount may be as a result of
different factors such as a forced sale in which the seller is acting under compulsion,
or due to the recognition of a contingent liability in terms of IFRS 3.22–.31.
2 The parent pays less than the fair value of the identifiable assets and liabilities for
the acquisition of the interest in the subsidiary; in other words the net fair value of
the identifiable assets, liabilities and contingent liabilities exceeds the consideration
transferred for the shares acquired. This difference is called a gain from a bargain
purchase. Due to the potential of inappropriately recognising a gain, IFRS requires a
reassessment of the identification and measurement of the assets acquired, the
liabilities assumed and the measurement of the consideration transferred, as
discussed in chapter 2. If after the review process an excess remains, a gain from
95
Chapter 3
Assume the same information as in example 3.2, except that P Ltd acquired the interest
in S Ltd for R75 000 and that its trade receivables amounted to R62 000.
The following are the condensed statements of financial position of P Ltd and its wholly-
owned subsidiary S Ltd at 1 January 20.19, the date on which P Ltd acquired all the
shares in S Ltd:
P Ltd S Ltd
ASSETS
Property, plant and equipment 91 000 65 000
Investment in S Ltd: 80 000 shares at cost price 75 000 –
Trade receivables 62 000 44 000
Total assets R228 000 R109 000
EQUITY AND LIABILITIES
Share capital (200 000/80 000 shares) 200 000 80 000
Retained earnings 8 000 9 000
Trade and other payables 20 000 20 000
Total equity and liabilities R228 000 R109 000
Assume that the identifiable assets acquired and the liabilities assumed at acquisition
date are shown at their acquisition-date fair values as determined in terms of IFRS 3.
P Ltd recognised the equity investment in S Ltd in its separate records using the cost
price method.
Ignore tax implications
Solution 3.3
The basic consolidation procedures are once again the same as in the two previous
examples: elimination of the common items and consolidation of the remaining non-
common items on a line-by-line basis. As previously explained, only the consolidated
statement of financial position can be prepared.
The line item “Investment in S Ltd” of R75 000 in the statement of financial position of
P Ltd represents the fair value to P Ltd to acquire the equity in and full control of S Ltd.
96
Consolidation at acquisition date
P Ltd thus purchased equity (net assets) amounting to R89 000 and only paid R75 000,
the gain thus being R14 000. This is clear from the following calculation:
Consideration transferred (Investment at fair value) 75 000
Net recognised values of S Ltd’s identifiable assets
and liabilities (89 000)
Property, plant and equipment 65 000
Trade receivables 44 000
109 000
Trade and other payables (20 000)
Gain from bargain purchase (R14 000)
In practice, the reassessment required by IFRS 3.36 is done at this stage and if the
excess remains, the gain is recognised immediately in profit or loss at the acquisition
date (IFRS 3.34) as an excess of fair value over cost on acquisition (hereafter called
gain from bargain purchase, for the sake of brevity). This gain is regarded as part of the
equity of the subsidiary and added to the other components of equity of the subsidiary.
Calculations
C1 Analysis of owners’ equity of S Ltd
P Ltd 100%
Total
At acquisition
i At acquisition (1/1/20.19)
Share capital 80 000 (dr) 80 000
Retained earnings 9 000 (dr) 9 000
R89 000 89 000
Gain from a bargain purchase – Parent (14 000) (cr) (14 000)
Consideration R75 000 (cr) R75 000
97
Chapter 3
The last column of the worksheet can now, once again, be adopted into a consolidated
statement of financial position.
P LTD GROUP
CONSOLIDATED STATEMENT OF FINANCIAL POSITION AS AT 1 JANUARY 20.19
ASSETS
Non-current assets
Property, plant and equipment (91 000(P) + 65 000(S)) 156 000
Current assets
Trade receivables (62 000(P) + 44 000(S)) 106 000
Total assets R262 000
EQUITY AND LIABILITIES
Equity attributable to owners of the parent
Share capital (P) 200 000
Retained earnings (8 000(P) + 14 000(gain from a bargain purchase)) 22 000
Total equity 222 000
Current liabilities
Trade and other payables (20 000(P) + 20 000(S)) 40 000
Total equity and liabilities R262 000
Comment
The gain resulting from the acquisition of an interest in a subsidiary at less than the fair
value of the identifiable assets and liabilities of the acquiree (called a gain from a
bargain purchase) is recognised in profit or loss on the acquisition date (IFRS 3.34). As
no consolidated statement of profit or loss and other comprehensive income is prepared
in this example, the amount is added to retained earnings at the end of the year.
Remember, any gain (e.g., a gain from a bargain purchase) that was recognised during
a reporting period forms part of “retained earnings at the end of the year” by the end of
that reporting period.
98
Consolidation at acquisition date
70%
30%
S Ltd NCI
As is the case with the parent, their ownership interests entitle owners other than
the parent to their undivided share of the net assets. As the total equity equals net
assets, it follows that the respective interests of the parent and the non-controlling
interests can be determined simply by allocating to each their respective share of
equity.
In preparing consolidated financial statements, the non-controlling interests in the
net assets of consolidated subsidiaries, as well as the non-controlling interests in
the profit or loss of consolidated subsidiaries for the reporting period, is identified
separately from the parent’s ownership interests in them. Non-controlling interests in
the net assets consist of:
l the amount of the non-controlling interests at the date of the original business
combination (calculated in accordance with IFRS 3); and
l the non-controlling interests’ share of changes in equity since the date of the
business combination.
2 For the sake of brevity, a subsidiary that is partially owned is hereafter referred to as
a partially-owned subsidiary.
3 The non-controlling interests shall be presented in the consolidated statement of
financial position within equity, separately from the equity of the owners of the
parent (IFRS 10.22).
4 Profit or loss, and each component of other comprehensive income, are attributed to
the owners of the parent and to the non-controlling interests. Total comprehensive
income is similarly attributed to the owners of the parent and to the non-controlling
interests, even if this results in the non-controlling interests having a deficit balance
(IFRS 10.B94).
99
Chapter 3
100
Consolidation at acquisition date
valuation technique (BC 207). It is therefore clear that the non-controlling interests
may be measured:
l at the acquisition date fair value; or
l as their proportionate share of the subsidiary’s identifiable net assets (BC 210).
101
Chapter 3
3.20 Interest acquired at the fair value of the identifiable assets acquired
and liabilities assumed of the acquiree – NCI measured at their
proportionate share of the subsidiary’s identifiable net assets at
acquisition date
102
Consolidation at acquisition date
Assume that the identifiable assets acquired and the liabilities assumed at acquisition
date are shown at their acquisition-date fair values as determined in terms of IFRS 3.
P Ltd recognised the equity investment in S Ltd in its separate records using the cost
price method.
P Ltd elected to measure any non-controlling interest in an acquiree at its proportionate
share of the acquiree’s identifiable net assets.
Ignore tax implications.
Solution 3.4
The basic consolidation procedures are once again the same as explained earlier in
this chapter:
l eliminate common items, and
l consolidate the remaining non-common items, on a line-by-line basis.
The 80 000 shares (which make up the issued capital of S Ltd) are held in the following
percentage ratio:
60 000
P Ltd in S Ltd: = 75%
80 000
20 000
Non-controlling interests in S Ltd: = 25%
80 000
Comment
The calculation of the percentage ownership in a subsidiary is always based on the
number of shares (not the carrying amount of the investment). It is also assumed that
one vote is attached to every share, as control is assumed to vest in control of the
voting rights on shareholders’ meetings (as discussed in chapter 1) of this work in the
absence of other factors. In Volume 1 it is therefore assumed that the parent exercises
control over the subsidiary as per the definition of control in terms of IFRS 10.
Calculations
C1 Analysis of owners’ equity of S Ltd
P Ltd 75% Non-controlling
Total interests (NCI)
At acquisition
i At acquisition (30/9/20.18)
Share capital 80 000 (dr) 60 000 20 000
Retained earnings 20 000 (dr) 15 000 5 000
100 000 75 000 R25 000
Purchase difference – – –
Consideration and NCI R100 000 R75 000 (cr) R25 000 (cr)
Comment
As from this point onwards, in this work the abbreviation NCI will be used in the analysis
for the concept “non-controlling interests”.
103
Chapter 3
From the analysis it is clear that no purchase difference arises on acquisition. In terms
of the IFRS 3.32 calculation, it is also clear that there is no purchase difference:
C2 Proof of calculation of purchase difference of S Ltd in terms of IFRS 3.32
Consideration transferred at acquisition date: IFRS 3.32(a)(i) 75 000
Amount of non-controlling interests: IFRS 3.32(a)(ii) 25 000
100 000
Net of the identifiable assets acquired and liabilities assumed at acquisition
date: IFRS 3.32(b) (100 000)
Purchase difference R–
With the above analysis as basis, the elimination of the related items can be recorded
by means of pro forma consolidation journal entries.
C3 Pro forma consolidation journal entry
Dr Cr
R R
J1 Share capital (S)(SCE) 80 000
Retained earnings (S)(SCE) 20 000
Investment in S Ltd (P)(SFP) 75 000
Non-controlling interests (SFP) 25 000
Elimination of common items and recognition
of non-controlling interests at acquisition
By netting off the pro forma journal entry against the amounts contained in the separate
statements of financial position of P Ltd and S Ltd, the non-common items remain.
Thereafter, the non-common items are added together on a line-by-line basis in the
consolidated statement of financial position.
C4 Consolidation worksheet: P Ltd and subsidiary
Consolidation adjustments Consoli-
P Ltd S Ltd
Dr Cr dated
Property, plant and
equipment 23 000 50 000 73 000
Investment in S Ltd 75 000 – 75 000 (J1) –
Trade receivables 112 000 86 000 198 000
R210 000 R136 000 R271 000
Share capital 100 000 80 000 80 000 (J1) 100 000
Retained earnings 26 000 20 000 20 000 (J1) 26 000
Non-controlling
interests – – 25 000 (J1) 25 000
Trade and other
payables 84 000 36 000 120 000
R210 000 R136 000 R100 000 R100 000 (J1) R271 000
104
Consolidation at acquisition date
The last column of the worksheet is now adapted into a consolidated statement of
financial position.
P LTD GROUP
CONSOLIDATED STATEMENT OF FINANCIAL POSITION
AS AT 30 SEPTEMBER 20.18
ASSETS
Non-current assets
Property, plant and equipment (23 000(P) + 50 000(S)) 73 000
Current assets
Trade receivables (112 000(P) + 86 000(S)) 198 000
Total assets R271 000
EQUITY AND LIABILITIES
Equity attributable to owners of the parent
Share capital (P) 100 000
Retained earnings (P) 26 000
126 000
Non-controlling interests 25 000
Total equity 151 000
Current liabilities
Trade and other payables (84 000(P) + 36 000(S)) 120 000
Total equity and liabilities R271 000
Comment
In terms of IFRS 10.22, the non-controlling interests shall be presented separately in the
consolidated statement of financial position within equity, from the equity of the owners
of the parent. This can be observed through the total amount for equity which includes
the non-controlling interests.
The consolidated statement of profit or loss and other comprehensive income and
consolidated statement of changes in equity will be as follows: (Keep in mind that the
controlling interest and the non-controlling interests only originated on the last day of
the reporting period and that P Ltd is not entitled to the pre-acquisition profits of S Ltd.)
P LTD GROUP
EXTRACT FROM THE CONSOLIDATED STATEMENT OF PROFIT OR LOSS
AND OTHER COMPREHENSIVE INCOME
FOR THE YEAR ENDED 30 SEPTEMBER 20.18
Profit before tax (only P Ltd) 23 000
Income tax expense (7 000)
PROFIT FOR THE YEAR 16 000
Other comprehensive income for the year –
TOTAL COMPREHENSIVE INCOME FOR THE YEAR R16 000
105
Chapter 3
P LTD GROUP
CONSOLIDATED STATEMENT OF CHANGES IN EQUITY
FOR THE YEAR ENDED 30 SEPTEMBER 20.18
Non-
Share Retained Total
Total controlling
capital earnings equity
interests
Balance at 1 October 20.17 100 000 14 000 114 000 – 114 000
Changes in equity for 20.18
Total comprehensive income
for the year:
Profit for the year – 16 000 16 000 – 16 000
Dividend paid (P) – (4 000) (4 000) – (4 000)
Subsidiary acquired at the end
of the reporting period – – – 25 000 25 000
Balance at 30 September
20.18 R100 000 R26 000 R126 000 R25 000 R151 000
Comments
a The statement of profit or loss and other comprehensive income of S Ltd cannot be
consolidated, as P Ltd did not have the power to control S Ltd during the reporting
period. Therefore, P Ltd could not obtain economic benefits from it. The dividend of
R2 000 that was paid by S Ltd therefore is not attributable to P Ltd.
b The concept “non-controlling interests” only exists in relation to the subsidiary. Before
a parent-subsidiary relationship comes into existence, non-controlling interests can
not exist. In this example, the non-controlling interests only come into being on the
last day of the reporting period.
Assume the same basic information as in example 3.4, with the exception that the
parent acquired the 75% interest in the subsidiary at a premium on the first day of the
next reporting period.
106
Consolidation at acquisition date
The following are the condensed statements of financial position of P Ltd and S Ltd, a
subsidiary which is partially owned, at 1 October 20.18, the acquisition date:
P Ltd S Ltd
ASSETS
Property, plant and equipment 23 000 50 000
Investment in S Ltd: 60 000 shares at cost price 80 000 –
Trade receivables 107 000 86 000
Total assets R210 000 R136 000
EQUITY AND LIABILITIES
Share capital (100 000/80 000 shares) 100 000 80 000
Retained earnings 26 000 20 000
Trade and other payables 84 000 36 000
Total equity and liabilities R210 000 R136 000
Assume that the identifiable assets acquired and the liabilities assumed at acquisition date
are shown at their acquisition-date fair values, as determined in terms of IFRS 3.
P Ltd recognised the equity investment in S Ltd in its separate records using the cost
price method.
P Ltd elected to measure the non-controlling interests of the acquiree at its
proportionate share of the acquiree’s identifiable net assets at acquisition date.
Ignore tax implications.
Solution 3.5
107
Chapter 3
108
Consolidation at acquisition date
The consolidated statement of financial position is prepared from the information contained
in the worksheet.
P LTD GROUP
CONSOLIDATED STATEMENT OF FINANCIAL POSITION AS AT 1 OCTOBER 20.18
ASSETS
Non-current assets
Property, plant and equipment (23 000(P) + 50 000(S)) 73 000
Goodwill 5 000
78 000
Current assets
Trade receivables (107 000(P) + 86 000(S)) 193 000
Total assets R271 000
EQUITY AND LIABILITIES
Equity attributable to owners of the parent
Share capital (P) 100 000
Retained earnings (P) 26 000
126 000
Non-controlling interests 25 000
Total equity 151 000
Current liabilities
Trade and other payables (84 000(P) + 36 000(S)) 120 000
Total equity and liabilities R271 000
Comments
a It is clear that a consolidated statement of profit or loss and other comprehensive
income and statement of changes in equity cannot be prepared, as there has not yet
been any performance in respect of the current reporting period, and no changes in
equity have as yet occurred.
109
Chapter 3
The following are the condensed statements of financial position of P Ltd and S Ltd, a
subsidiary which is partially owned, at 1 October 20.18, the acquisition date:
P Ltd S Ltd
ASSETS
Property, plant and equipment 123 000 50 000
Investment in S Ltd: 60 000 shares at cost price 80 000 –
Trade receivables 107 000 86 000
Total assets R310 000 R136 000
EQUITY AND LIABILITIES
Share capital 200 000 80 000
Retained earnings 26 000 20 000
Trade and other payables 84 000 36 000
Total equity and liabilities R310 000 R136 000
Assume that the identifiable assets acquired and the liabilities assumed at acquisition
date are shown at their acquisition-date fair values, as determined in terms of IFRS 3.
P Ltd elected to measure any non-controlling interests at fair value at the acquisition
date. On 1 October 20.18 the fair value of the non-controlling interests was R35 000
based on current market prices.
P Ltd recognised the equity investment in S Ltd in its separate records using the cost
price method.
Ignore tax implications.
Solution 3.6
110
Consolidation at acquisition date
Calculations
C1 Analysis of owners’ equity of S Ltd
Total P Ltd 75% NCI
At acquisition
i At acquisition (1/10/20.18)
Share capital 80 000 (dr) 60 000 20 000
Retained earnings 20 000 (dr) 15 000 5 000
100 000 75 000 25 000
Equity represented by goodwill – Parent 5 000 (dr) 5 000 –
Equity represented by goodwill – NCI 10 000 (dr) – 10 000
Consideration and NCI at fair value 115 000 80 000 (cr) 35 000 (cr)
The goodwill calculation now incorporates the non-controlling interests measured at fair
value:
C2 Proof of calculation of goodwill of S Ltd in terms of IFRS 3.32
Consideration transferred at acquisition date: IFRS 3.32(a)(i) 80 000
Amount of non-controlling interests: IFRS 3.32(a)(ii) 35 000
115 000
Net of the identifiable assets acquired and liabilities assumed
at acquisition date: IFRS 3.32(b) (100 000)
Goodwill (5 000 (Parent) + 10 000 (NCI)) R15 000
The relevant pro forma consolidation journal entry is clear from the analysis of the
equity of S Ltd.
C3 Pro forma consolidation journal entry
Dr Cr
R R
J1 Share capital (S)(SCE) 80 000
Retained earnings (S)(SCE) 20 000
Goodwill (S) (SFP) 15 000
Investment in S Ltd (P)(SFP) 80 000
Non-controlling interests (SFP) 35 000
Elimination of common items and recognition of
goodwill and non-controlling interests measured
at fair value at acquisition
111
Chapter 3
The last column of the worksheet is now adapted into a consolidated statement of
financial position.
P LTD GROUP
CONSOLIDATED STATEMENT OF FINANCIAL POSITION AS AT 1 OCTOBER 20.18
ASSETS
Non-current assets
Property, plant and equipment (123 000(P) + 50 000(S)) 173 000
Goodwill 15 000
188 000
Current assets
Trade receivables (107 000(P) + 86 000(S)) 193 000
Total assets R381 000
EQUITY AND LIABILITIES
Equity attributable to owners of the parent
Share capital (P) 200 000
Retained earnings (P) 26 000
226 000
Non-controlling interests 35 000
Total equity 261 000
Current liabilities
Trade and other payables (84 000(P) + 36 000(S)) 120 000
Total equity and liabilities R381 000
112
Consolidation at acquisition date
In this example the 75% interest in the subsidiary is acquired at less than the fair value
of the identifiable assets and liabilities of the acquiree by the parent.
The following are the condensed statements of financial position of P Ltd and sub-
sidiary S Ltd at 1 October 20.18, the date on which P Ltd acquired the interest in S Ltd:
P Ltd S Ltd
ASSETS
Property, plant and equipment 23 000 50 000
Investment in S Ltd: 60 000 shares at cost price 65 000 –
Trade receivables 122 000 86 000
Total assets R210 000 R136 000
EQUITY AND LIABILITIES
Share capital 100 000 80 000
Retained earnings 26 000 20 000
Trade and other payables 84 000 36 000
Total equity and liabilities R210 000 R136 000
Assume that the identifiable assets acquired and the liabilities assumed at acquisition
date are shown at their acquisition-date fair values, as determined in terms of IFRS 3.
P Ltd recognised the equity investment in S Ltd in its separate records using the cost
price method.
P Ltd elected to measure any non-controlling interests in an acquiree at its
proportionate share of the acquiree’s identifiable net assets.
Ignore tax implications.
Solution 3.7
Calculations
C1 Analysis of owners’ equity of S Ltd
Total P Ltd 75% NCI
At acquisition
i At acquisition (1/10/20.18)
Share capital 80 000 (dr) 60 000 20 000
Retained earnings 20 000 (dr) 15 000 5 000
100 000 75 000 25 000
Gain from a bargain purchase – Parent (10 000) (cr) (10 000) –
Consideration and NCI R90 000 R65 000 (cr) R25 000 (cr)
113
Chapter 3
Comment
Compare this analysis with the analysis of the equity of S Ltd in example 3.6 where the
non-controlling interest has a fair value of R35 000. It should be clear that in this
example (as in example 3.5) the non-controlling interests do not have an interest in the
purchase difference.
114
Consolidation at acquisition date
The last column of the worksheet can now easily be adapted into a consolidated
statement of financial position.
P LTD GROUP
CONSOLIDATED STATEMENT OF FINANCIAL POSITION AS AT 1 OCTOBER 20.18
ASSETS
Non-current assets
Property, plant and equipment (23 000(P) + 50 000(S)) 73 000
Current assets
Trade receivables (122 000(P) + 86 000(S)) 208 000
Total assets R281 000
EQUITY AND LIABILITIES
Equity attributable to owners of the parent
Share capital (P) 100 000
Retained earnings (26 000 + 10 000(gain from a bargain purchase)) 36 000
136 000
Non-controlling interests 25 000
Total equity 161 000
Current liabilities
Trade and other payables (84 000(P) + 36 000(S)) 120 000
Total equity and liabilities R281 000
Comment
As in example 3.3 the gain resulting from the acquisition of an interest in a subsidiary at
less than the fair value of the identifiable assets and liabilities of the acquiree, called a gain
from a bargain purchase, is recognised in profit or loss at acquisition date (IFRS 3 .34)).
As no consolidated statement of profit or loss and other comprehensive income is
prepared in this example, the amount is added to retained earnings at the end of the
year.
115
Chapter 3
Self-assessment questions
Question 3.1
The following are the condensed statements of financial position of P Ltd and wholly-
owned subsidiary S Ltd at 31 December 20.18, the acquisition date of the shares in
S Ltd by P Ltd:
STATEMENTS OF FINANCIAL POSITION AS AT 31 DECEMBER 20.18
P Ltd S Ltd
ASSETS
Property, plant and equipment 25 000 12 000
Investment in S Ltd: 10 000 shares at cost price 27 000 –
Trade receivables 59 000 28 000
Total assets R111 000 R40 000
EQUITY AND LIABILITIES
Share capital (50 000/10 000 shares) 50 000 10 000
Retained earnings 40 000 20 000
Trade and other payables 21 000 10 000
Total equity and liabilities R111 000 R40 000
Assume that the identifiable assets acquired and the liabilities assumed at acquisition
date are shown at their acquisition-date fair values, as determined in terms of IFRS 3.
P Ltd recognised the equity investment in S Ltd in its separate records using the cost
price method.
Ignore tax implications.
Required
Prepare the consolidated statement of financial position of the P Ltd Group at
31 December 20.18.
116
Consolidation at acquisition date
P LTD GROUP
CONSOLIDATED STATEMENT OF FINANCIAL POSITION AS AT 31 DECEMBER 20.18
ASSETS
Non-current assets
Property, plant and equipment (25 000(P) + 12 000(S)) 37 000
Current assets
Trade receivables (59 000(P) + 28 000(S)) 87 000
Total assets R124 000
EQUITY AND LIABILITIES
Equity attributable to owners of the parent
Share capital (P) 50 000
Retained earnings (40 000(P) + 3 000(gain from a bargain purchase)) 43 000
Total equity 93 000
Current liabilities
Trade and other payables (21 000(P) + 10 000(S)) 31 000
Total equity and liabilities R124 000
Calculations
C1 Analysis of owners’ equity of S Ltd
P Ltd 100%
Total
At acquisition
i At acquisition (31/12/20.18)
Share capital 10 000 10 000
Retained earnings 20 000 20 000
30 000 30 000
Gain from a bargain purchase – Parent (3 000) (3 000)
Consideration R27 000 R27 000
117
Chapter 3
Question 3.2
The following are the condensed statements of financial position of P Ltd and its wholly-
owned subsidiary S Ltd at 31 December 20.18, the acquisition date of the shares in
S Ltd by P Ltd:
STATEMENTS OF FINANCIAL POSITION AS AT 31 DECEMBER 20.18
P Ltd S Ltd
ASSETS
Property, plant and equipment 100 000 50 000
Investment in S Ltd: 10 000 shares at cost price 60 000 –
Trade receivables 5 000 5 000
Total assets R165 000 R55 000
EQUITY AND LIABILITIES
Share capital (50 000/10 000 shares) 100 000 20 000
Revaluation surplus 20 000 10 000
Retained earnings 40 000 20 000
Trade and other payables 5 000 5 000
Total equity and liabilities R165 000 R55 000
118
Consolidation at acquisition date
Assume that the identifiable assets acquired and the liabilities assumed at acquisition
date are shown at their acquisition-date fair values, as determined in terms of IFRS 3.
P Ltd recognised the equity investment in S Ltd in its separate records using the cost
price method.
Ignore tax implications.
Required
Prepare the consolidated statement of financial position of the P Ltd Group at
31 December 20.18.
P LTD GROUP
CONSOLIDATED STATEMENT OF FINANCIAL POSITION AS AT 31 DECEMBER 20.18
ASSETS
Non-current assets
Property, plant and equipment (100 000(P) + 50 000(S)) 150 000
Goodwill (C1) 10 000
160 000
Current assets
Trade receivables (5 000(P) + 5 000(S)) 10 000
Total assets R170 000
EQUITY AND LIABILITIES
Equity attributable to owners of the parent
Share capital (P) 100 000
Retained earnings (P) 40 000
Other components of equity (Revaluation reserve) (P) 20 000
Total equity 160 000
Current liabilities
Trade and other payables (5 000(P) + 5 000(S)) 10 000
Total equity and liabilities R170 000
Calculations
C1 Analysis of owners’ equity of S Ltd
P Ltd 100%
Total
At acquisition
i At acquisition (31/12/20.18)
Share capital 20 000 20 000
Revaluation surplus 10 000 10 000
Retained earnings 20 000 20 000
50 000 50 000
Equity represented by goodwill – Parent 10 000 10 000
Consideration R60 000 R60 000
119
Chapter 3
120
Consolidation at acquisition date
Question 3.3
The following are the abridged statements of financial position of P Ltd and its
subsidiary at 1 January 20.18, the date at which P Ltd acquired the interest in S Ltd:
STATEMENTS OF FINANCIAL POSITION AS AT 1 JANUARY 20.18
P Ltd S Ltd
ASSETS
Property, plant and equipment 32 000 40 000
Investment in S Ltd: 40 000 shares at cost price 48 000 –
Trade receivables 70 000 50 000
Total assets R150 000 R90 000
EQUITY AND LIABILITIES
Share capital (80 000/50 000 shares) 80 000 50 000
Revaluation surplus 18 000 7 000
Retained earnings 12 000 8 000
Long-term borrowings 10 000 5 000
Trade and other payables 30 000 20 000
Total equity and liabilities R150 000 R90 000
P Ltd elected to measure the non-controlling interests at fair value at acquisition date.
At that date the directors of P Ltd were of the opinion that the non-controlling interests
were worth R3 000 more than their proportionate share of the fair value of the
identifiable assets and liabilities of the acquiree.
Assume that the identifiable assets acquired and the liabilities assumed at acquisition
date are shown at their acquisition-date fair values, as determined in terms of IFRS 3.
P Ltd recognised the equity investment in S Ltd in its separate records using the cost
price method.
Ignore tax implications.
Required
Prepare the consolidated statement of financial position of the P Ltd Group at
1 January 20.18.
121
Chapter 3
P LTD GROUP
CONSOLIDATED STATEMENT OF FINANCIAL POSITION AS AT 1 JANUARY 20.18
ASSETS
Non-current assets
Property, plant and equipment (32 000(P) + 40 000(S)) 72 000
Current assets
Trade receivables (70 000(P) + 50 000(S)) 120 000
Total assets R192 000
EQUITY AND LIABILITIES
Equity attributable to owners of the parent
Share capital (P) 80 000
Retained earnings (12 000 (P) + 1 000(gain from a bargain purchase)) 13 000
Other components of equity (revaluation surplus) (P) 18 000
111 000
Non-controlling interests (C1) 16 000
Total equity 127 000
Non-current liabilities
Long-term borrowings (10 000(P) + 5 000(S)) 15 000
Current liabilities
Trade and other payables (30 000(P) + 20 000(S)) 50 000
Total equity and liabilities R192 000
Calculations
C1 Analysis of owners’ equity of S Ltd
P Ltd 80%
Total NCI
At acquisition
i At acquisition (1/1/20.18)
Share capital 50 000 40 000 10 000
Revaluation surplus 7 000 5 600 1 400
Retained earnings 8 000 6 400 1 600
65 000 52 000 13 000
Gain from a bargain purchase – Parent (4 000) (4 000) –
Equity represented by goodwill – NCI 3 000 3 000
Consideration and NCI at fair value R64 000 R48 000 R16 000
122
Consolidation at acquisition date
123
4
Consolidation after acquisition date
125
Chapter 4
Self-assessment questions
Question 4.1 ....................................................................................................... 175
Question 4.2 ....................................................................................................... 181
Question 4.3 ....................................................................................................... 183
126
Consolidation after acquisition date
127
Chapter 4
chapter 1 (1.) the accounting treatment of the investment in the subsidiary in the
separate records of the parent is discussed. From this discussion it is clear that an
investment in a subsidiary is normally classified as a financial asset at fair value
through other comprehensive income (OCI) in the records of the parent. Changes in
fair value are recognised in other comprehensive income and accumulated in equity
through the mark-to-market reserve. On consolidation, any fair value adjustments
that were recognised in the parent’s separate records since acquisition must be
reversed to obtain the acquisition-date fair value, i.e. the consideration transferred
for the investment in the subsidiary.
2 A distinction needs to be made between the reversal of the current period’s
movement against other comprehensive income and movements that occurred in
previous reporting periods, which are reversed against the opening balance of the
mark-to-market reserve in the statement of changes in equity.
3 The following journals will be done in the separate records of the parent (the
investor) to account for the investment correctly as a financial asset at fair value
through OCI. Thereafter the pro forma journals that must be done at group level to
reverse the fair value adjustments are shown.
On 1 January 20.18 P Ltd purchased a 70% interest in S Ltd for R100 000 cash. At the
end of that reporting period (31 December 20.18) the fair value of the investment was
R110 000. On 31 December 20.19, the end of the current reporting period, the fair
value of the investment was R130 000.
The recognition of the purchase of the investment and the changes in fair value will be
done as follows in P Ltd’s records (ignore taxation in this example for the sake of
simplicity):
Reporting period ended 31 December 20.18:
Dr Cr
R R
1 January 20.18
Investment in S Ltd (SFP) 100 000
Bank (SFP) 100 000
Recognition of investment in subsidiary
31 December 20.18
Investment in S Ltd (SFP) 10 000
Mark-to-market reserve (OCI) 10 000
Recognition of fair value adjustment of investment
in subsidiary
128
Consolidation after acquisition date
129
Chapter 4
130
Consolidation after acquisition date
Contingent Assets it does not meet the criteria of a present obligation (.18). Such
dividends that were proposed or declared before the financial statements were
authorised for issue, but not recognised as a distribution to owners during the
reporting period, and the related amount per share are disclosed only in the notes to
the financial statements in accordance with IAS 1 Presentation of Financial (.137).
6 It is therefore important to note that a final dividend that is only approved after the
end of the reporting period (which is normally the case), is not recognised in the
period to which it relates, but in the following reporting period. With regards to the
example above it means that S Ltd will only recognise the dividend relating to the
20.18 reporting period in the 20.19 reporting period, as no liability existed at
31 December 20.18 to pay a dividend.
7 The shareholders of a company will in turn recognise the dividend in their separate
records at the date when the other company’s board of directors approved the
dividend. In the case of a listed company an additional requirement should be met,
i.e. that a dividend may only be recognised on the last day to register (when the
shareholder’s right to receive payment has been established) and the dividend has
been approved in terms of S46 of the Companies Act 2008. Such dividend is
recognised as income in the reporting period in which the shareholder becomes
entitled to the dividend (when the right to receive the dividend has been
established). Suppose that P Ltd owns all the shares in S Ltd. This means that P Ltd
becomes entitled to the dividend income on 1 March 20.19. The following journal
will be recorded in the separate records of P Ltd to record the dividend receivable:
Records of P Ltd:
Dr Cr
R R
1 March 20.19
Dividend receivable (SFP) 10 000
Other income (Dividend received) (P/L) 10 000
Recognition of dividend receivable from
subsidiary
8 At the date when the dividend is paid (15 March 20.19), and the actual cash flow
occurs, the liability is reversed through the following journal in S Ltd’s separate
records:
S Ltd’s records:
Dr Cr
R R
15 March 20.19
Shareholders for dividend (SFP)) 10 000
Bank (SFP) 10 000
Payment of dividend payable
131
Chapter 4
9 On the date when the cash is received, the shareholders (P Ltd) will reverse the
asset, dividend receivable, through the following journal:
P Ltd’s records:
Dr Cr
R R
15 March 20.19
Bank (SFP)) 10 000
Dividend receivable (SFP) 10 000
Recognition of dividend received in cash
10 On consolidation the effect of the transaction above must be eliminated. The
distribution of a dividend by a wholly-owned subsidiary out of profit after acquisition
is, in truth, from the point of view of the group, only a transfer of a portion of the
retained earnings of the subsidiary to the retained earnings of the parent: that is why
it is merely eliminated as an intragroup transaction and the amounts disclosed in the
consolidated statement of financial position are not affected at all by the transaction.
The pro forma journal that should be taken into account on consolidation to
recognise the elimination is as follows:
Pro forma journal on 31 December 20.19:
Dr Cr
R R
31 December 20.19
J1 Other income (Dividend received) (P)(P/L) 10 000
Dividend declared (S)(SCE) 10 000
Elimination of intragroup dividend on
consolidation
11 Additional motivation for the elimination of intragroup dividends is as follows:
l The consolidated statement of profit or loss and other comprehensive income in
effect comprises a merger of the statements of profit or loss and other
comprehensive income of the parent and the subsidiary. In order to prevent
duplication of amounts, the dividend received from the subsidiary as it appears in
the records of P Ltd must be eliminated pro forma.
l The consolidated statement of changes in equity is prepared for the owners of
the parent; it can consequently only account for the dividends paid in favour of
the owners of the parent. The group, as an economic entity, cannot pay a
dividend to itself.
l The elimination of the intragroup transactions will cause the line items disclosed
in the consolidated financial statements to be fairly presented. Not eliminating
these items will produce a statement of financial position with potentially
materially misstated line items.
12 In practice the dividend paid as presented in the financial statements (in the
statement of changes in equity) for a particular reporting period will therefore
normally consist of the final dividend of the previous reporting period (that was
declared and paid after the end of that reporting period) as well as any interim
dividend in respect of the current reporting period. An interim dividend that was
declared during a reporting period is however not accounted for until such time as
the dividend is paid, as until that date the dividend declaration may be withdrawn.
132
Consolidation after acquisition date
Comment
The elimination of intragroup debts and unrealised profit on intragroup transactions is
explained in chapter 5.
133
Chapter 4
4.7 Interest acquired at the fair value of the identifiable assets acquired
and liabilities assumed
The following are the condensed statements of financial position of P Ltd and its wholly-
owned subsidiary S Ltd on 30 June 20.18, one year after P Ltd acquired the interest in
S Ltd:
STATEMENTS OF FINANCIAL POSITION AS AT 30 JUNE 20.18
P Ltd S Ltd
ASSETS
Property, plant and equipment 20 000 80 000
Investment in S Ltd: 80 000 shares at fair value
(cost price: R88 000) 90 000 –
Trade receivables 132 000 60 000
Total assets R242 000 R140 000
EQUITY AND LIABILITIES
Share capital (100 000/80 000 shares) 100 000 80 000
Mark-to-market reserve 2 000 –
Retained earnings 15 000 11 000
Trade and other payables 125 000 49 000
Total equity and liabilities R242 000 R140 000
134
Consolidation after acquisition date
On 1 July 20.17, the date on which P Ltd acquired the interest in S Ltd, the balance of
the retained earnings account of S Ltd amounted to R8 000. There has been no change
in the share capital of S Ltd since 1 July 20.17.
The extracts from the statements of profit or loss and other comprehensive income of
the two companies for the reporting period ended 30 June 20.18 are as follows:
EXTRACT FROM THE STATEMENTS OF PROFIT OR LOSS
AND OTHER COMPREHENSIVE INCOME
FOR THE YEAR ENDED 30 JUNE 20.18
P Ltd S Ltd
Profit 13 000 10 000
Dividend received from subsidiary 4 000 –
Profit before tax 17 000 10 000
Income tax expense (4 000) (3 000)
PROFIT FOR THE YEAR 13 000 7 000
Other comprehensive income:
Mark-to-market reserve (fair value adjustment on investment) 2 000 –
Other comprehensive income for the year 2 000 –
TOTAL COMPREHENSIVE INCOME FOR THE YEAR R15 000 R7 000
The extracts from the statements of changes in equity of the two companies for the
reporting period ended 30 June 20.18 are as follows:
EXTRACT FROM THE STATEMENTS OF CHANGES IN EQUITY
FOR THE YEAR ENDED 30 JUNE 20.18
Mark-to-market
Retained earnings
reserve
P Ltd P Ltd S Ltd
Balance at 1 July 20.17 – 7 000 8 000
Changes in equity for 20.18
Total comprehensive income for the year:
Profit for the year – 13 000 7 000
Other comprehensive income 2 000 – –
Dividend – (5 000) (4 000)
Balance at 30 June 20.18 R2 000 R15 000 R11 000
Assume that the identifiable assets acquired and the liabilities assumed at acquisition
date are shown at their acquisition-date fair values, as determined in terms of IFRS 3.
P Ltd classified the equity investment in S Ltd under IFRS 9 in its separate financial
statements and recognised fair value adjustments in a mark-to-market reserve (other
comprehensive income).
Ignore tax implications.
135
Chapter 4
Solution 4.2
Calculations
C1 Analysis of owners’ equity of S Ltd
P Ltd 100%
Total
At Since
i At acquisition (1/7/20.17)
Share capital 80 000 (dr) 80 000
Retained earnings 8 000 (dr) 8 000
88 000 88 000
Purchase difference – –
Consideration (90 000 – 2 000(J1)) 88 000 (cr) 88 000
ii Since acquisition
• To beginning of current year:
Not applicable – –
• Current year:
Profit for the year (per statement of profit or loss
and other comprehensive income) 7 000 7 000
Dividend (4 000) (4 000)
R91 000 R3 000
136
Consolidation after acquisition date
Comment
a The words “at” and “since” as headings to the column, used to analyse P Ltd’s
interest in S Ltd (100%), are abbreviations for the terms “at acquisition” and “since
acquisition”.
b The period “to the beginning of the current year” falls away for the first reporting
period following the acquisition date as the investment was only obtained at the
beginning of the year.
c The elimination of the investment in P Ltd is done at the original consideration (cost
price). If the fair value adjustment was not reversed, a purchase difference of
R2 000 would have been created. This would be incorrect, as the consideration paid
for the investment equalled the fair value of the net assets taken over.
From the analysis it is clear that there is no purchase difference between the fair value
of the net identifiable assets of the acquiree and the consideration transferred to obtain
the investment.
C2 Proof of calculation of purchase difference of S Ltd in terms of IFRS 3.32
Consideration transferred at acquisition date: IFRS 3.32(a)(i) 88 000
Amount of non-controlling interests: IFRS 3.32(a)(ii) –
88 000
Net of the identifiable assets acquired and liabilities assumed
at acquisition date: IFRS 3.32(b) (88 000)
Purchase difference R–
On the date of acquisition of the interest by the parent in the subsidiary, R88 000 is
eliminated from the equity of the subsidiary as being the opposite side of the balance of
the investment in the subsidiary, in the records of the parent.
137
Chapter 4
Comment
Note that certain amounts in the consolidated column represent either subtotals or totals
in that column and do not reflect a horizontal totalling of the other columns in the
worksheet. These amounts are identified with an *.
138
Consolidation after acquisition date
The last column of the worksheet can now, once again, be adapted into consolidated
financial statements:
P LTD GROUP
CONSOLIDATED STATEMENT OF FINANCIAL POSITION AS AT 30 JUNE 20.18
ASSETS
Non-current assets
Property, plant and equipment (20 000(P) + 80 000(S)) 100 000
Current assets
Trade receivables (132 000(P) + 60 000(S)) 192 000
Total assets R292 000
EQUITY AND LIABILITIES
Equity attributable to owners of the parent
Share capital 100 000
Retained earnings 18 000
Total equity 118 000
Current liabilities
Trade and other payables (125 000(P) + 49 000(S)) 174 000
Total equity and liabilities R292 000
Comment
As the at-acquisition equity of S Ltd was eliminated as part of the basic elimination
journal entry, the equity will be represented by the share capital of P Ltd, the retained
earnings of P Ltd and the growth in retained earnings of S Ltd since acquisition.
P LTD GROUP
EXTRACT FROM THE CONSOLIDATED STATEMENT OF PROFIT OR LOSS
AND OTHER COMPREHENSIVE INCOME
FOR THE YEAR ENDED 30 JUNE 20.18
Profit before tax (17 000(P) + 10 000(S) – 4 000(J2)) 23 000
Income tax expense (4 000(P) + 3 000(S)) (7 000)
PROFIT FOR THE YEAR 16 000
Other comprehensive income for the year –
TOTAL COMPREHENSIVE INCOME FOR THE YEAR R16 000
Profit attributable to:
Owners of the parent R16 000
Total comprehensive income attributable to:
Owners of the parent R16 000
139
Chapter 4
Comment
According to IAS 1 Guidance on Implementing the profit attributable to the owners
should be presented below the statement of profit or loss and other comprehensive
income. In this example, the subsidiary is wholly owned and as the parent is the only
owner, all of the profit is ultimately attributable to the owners of the parent.
P LTD GROUP
EXTRACT FROM THE CONSOLIDATED STATEMENT OF CHANGES IN EQUITY
FOR THE YEAR ENDED 30 JUNE 20.18
Share Retained Total
capital earnings equity
Balance at 1 July 20.17 100 000 7 000 7 000
Changes in equity for 20.18
Total comprehensive income for the year:
Profit for the year – 16 000 16 000
Dividend – (5 000) (5 000)
Balance at 30 June 20.18 100 000 *R18 000 R18 000
The following are the condensed statements of financial position of P Ltd and
subsidiary S Ltd at 31 December 20.18, two years after P Ltd acquired the interest in
S Ltd:
STATEMENTS OF FINANCIAL POSITION AS AT 31 DECEMBER 20.18
P Ltd S Ltd
ASSETS
Property, plant and equipment 15 000 30 000
Investment in S Ltd: 40 000 shares at cost price 50 000 –
Trade receivables 70 000 67 000
Total assets R135 000 R97 000
EQUITY AND LIABILITIES
Share capital (100 000/40 000 shares) 100 000 40 000
Retained earnings 10 000 8 000
Trade and other payables 25 000 49 000
Total equity and liabilities R135 000 R97 000
On 31 December 20.16, the date at which P Ltd acquired the interest in S Ltd, the credit
balance on retained earnings of S Ltd was R2 500. There has been no change in the
share capital of S Ltd since 31 December 20.16.
140
Consolidation after acquisition date
The statements of profit or loss and other comprehensive income of P Ltd and S Ltd for
the reporting period ended 31 December 20.18 were as follows:
EXTRACT FROM THE STATEMENTS OF PROFIT OR LOSS
AND OTHER COMPREHENSIVE INCOME
FOR THE YEAR 31 DECEMBER 20.18
P Ltd S Ltd
Profit 34 000 18 000
Dividend received from subsidiary 6 000 –
Profit before tax 40 000 18 000
Income tax expense (16 000) (8 000)
PROFIT FOR THE YEAR 24 000 10 000
Other comprehensive income – –
TOTAL COMPREHENSIVE INCOME FOR THE YEAR R24 000 R10 000
The condensed statements of changes in equity of P Ltd and S Ltd for the reporting
period ended 31 December 20.18 are as follows:
EXTRACT FROM THE STATEMENTS OF CHANGES IN EQUITY
FOR THE YEAR ENDED 31 DECEMBER 20.18
Retained earnings
P Ltd S Ltd
Balance at 1 January 20.18 5 000 4 000
Changes in equity for 20.18
Total comprehensive income for the year:
Profit for the year 24 000 10 000
Dividend (19 000) (6 000)
Balance at 31 December 20.18 R10 000 R8 000
Assume that the identifiable assets acquired and the liabilities assumed at acquisition
date are shown at their acquisition-date fair values, as determined in terms of IFRS 3.
P Ltd recognised the equity investment in S Ltd in its separate records using the cost
method.
Ignore tax implications.
Solution 4.3
141
Chapter 4
Calculations
C1 Analysis of owners’ equity of S Ltd
P Ltd 100%
Total
At Since
i At acquisition (31/12/2016)
Share capital 40 000 (dr) 40 000
Retained earnings 2 500 (dr) 2 500
42 500 42 500
Equity represented by goodwill – Parent 7 500 (dr) 7 500
Consideration 50 000 (cr) R50 000
ii Since acquisition
• To beginning of current year:
Retained earnings (4 000 – 2 500) 1 500 1 500
• Current year:
Profit for the year 10 000 10 000
Dividend (6 000) (6 000)
R55 500 R5 500
Comment
The change in retained earnings since the acquisition date until the beginning of the
current reporting period is calculated as follows:
Retained
earnings
Balance at 1/1/20.18 from statement of changes in equity 4 000
Balance at 31/12/20.16 (acquisition date) (2 500)
Therefore: Increase until 1/1/20.18 R1 500
142
Consolidation after acquisition date
143
Chapter 4
144
Consolidation after acquisition date
The last column of the worksheet can now, once again, be adapted into consolidated
financial statements.
P LTD GROUP
CONSOLIDATED STATEMENT OF FINANCIAL POSITION AS AT 31 DECEMBER 20.18
ASSETS
Non-current assets
Property, plant and equipment (15 000(P) + 30 000(S)) 45 000
Goodwill 7 500
52 500
Current assets
Trade receivables (70 000(P) + 67 000(S)) 137 000
Total assets R189 500
EQUITY AND LIABILITIES
Equity attributable to owners of the parent
Share capital 100 000
Retained earnings 15 500
Total equity 115 500
Current liabilities
Trade and other payables (25 000(P) + 49 000(S)) 74 000
Total equity and liabilities R189 500
P LTD GROUP
EXTRACT FROM THE CONSOLIDATED STATEMENT OF PROFIT OR LOSS
AND OTHER COMPREHENSIVE INCOME
FOR THE YEAR ENDED 31 DECEMBER 20.18
Profit before tax (40 000(P) + 18 000(S) – 6 000(J2)) 52 000
Income tax expense (16 000(P) + 8 000(S)) (24 000)
PROFIT FOR THE YEAR 28 000
Other comprehensive income for the year –
TOTAL COMPREHENSIVE INCOME FOR THE YEAR R28 000
Profit attributable to:
Owners of the parent R28 000
Total comprehensive income attributable to:
Owners of the parent R28 000
145
Chapter 4
P LTD GROUP
EXTRACT FROM THE CONSOLIDATED STATEMENT OF CHANGES IN EQUITY
FOR THE YEAR ENDED 31 DECEMBER 20.18
Share Retained Total
capital earnings equity
Balance at 1 January 20.18 100 000 *6 500 106 500
Changes in equity for 20.18
Total comprehensive income for the year:
Profit for the year – 28 000 28 000
Dividend – (19 000) (19 000)
Balance at 31 December 20.18 R100 000 ȜR15 500 R115 500
The following are the condensed statements of financial position of P Ltd and its
subsidiary S Ltd at 31 December 20.18, two years after P Ltd acquired the interest in
S Ltd:
STATEMENTS OF FINANCIAL POSITION AS AT 31 DECEMBER 20.18
P Ltd S Ltd
ASSETS
Property, plant and equipment 25 000 30 000
Investment in S Ltd: 40 000 shares at cost price 39 000 –
Trade receivables 70 000 67 000
Total assets R134 000 R97 000
EQUITY AND LIABILITIES
Share capital (100 000/40 000 shares) 100 000 40 000
Retained earnings 10 000 8 000
Trade and other payables 24 000 49 000
Total equity and liabilities R134 000 R97 000
On 31 December 20.16, the date at which P Ltd acquired the interest in S Ltd, the credit
balance of the retained earnings account of S Ltd amounted to R2 500. There has been
no change in the share capital of S Ltd since 31 December 20.16.
146
Consolidation after acquisition date
The condensed statements of profit or loss and other comprehensive income of P Ltd
and S Ltd for the reporting period ended 31 December 20.18 were as follows:
EXTRACT FROM THE STATEMENTS OF PROFIT OR LOSS
AND OTHER COMPREHENSIVE INCOME
FOR THE YEAR ENDED 31 DECEMBER 20.18
P Ltd S Ltd
Profit 34 000 18 000
Dividend received from subsidiary 6 000 –
Profit before tax 40 000 18 000
Income tax expense (16 000) (8 000)
PROFIT FOR THE YEAR 24 000 10 000
Other comprehensive income for the year – –
TOTAL COMPREHENSIVE INCOME FOR THE YEAR R24 000 R10 000
The condensed statements of changes in equity of P Ltd and S Ltd for the reporting
period ended 31 December 20.18 are as follows:
EXTRACT FROM THE STATEMENTS OF CHANGES IN EQUITY
FOR THE YEAR ENDED 31 DECEMBER 20.18
Retained earnings
P Ltd S Ltd
Balance at 1 January 20.18 5 000 4 000
Changes in equity for 20.18
Total comprehensive income for the year:
Profit for the year 24 000 10 000
Dividend (19 000) (6 000)
Balance at 31 December 20.18 R10 000 R8 000
Assume that the identifiable assets acquired and the liabilities assumed at acquisition
date are shown at their acquisition-date fair values, as determined in terms of IFRS 3.
P Ltd recognised the equity investment in S Ltd in its separate financial records using
the cost method.
Ignore tax implications.
Solution 4.4
147
Chapter 4
Comment
This comprehensive approach is at this stage still being used deliberately. It will soon be
apparent that it is not necessary to use all three of these steps when preparing
consolidated statements.
From the above analysis it is clear that three consolidation journal entries are required:
C3 Pro forma consolidation journal entries
Dr Cr
R R
J1 Share capital (S)(SCE) 40 000
Retained earnings (S)(SCE) 2 500
Investment in S Ltd (P)(SFP) 39 000
Retained earnings (Gain from a bargain purchase) 3 500
(S)(SCE)
Elimination of common items at acquisition date and
recognition of gain from a bargain purchase at
acquisition
continued
148
Consolidation after acquisition date
Dr Cr
R R
J2 Dividend received (P)(P/L) 6 000
Dividend paid (S)(SCE) 6 000
Elimination of intragroup dividend
Comment
The gain from a bargain purchase originated at acquisition, that is on 31/12/20.16. This
gain had been included in the consolidated profit or loss for the year ended 31/12/20.16.
However, as the current consolidation has been done for the year ended 31/12/20.18,
the gain that originated on acquisition would now be included in the consolidated
retained earnings at the beginning of the year in the consolidated statement of changes
in equity.
The last column of the worksheet can now, once again, be adapted into consolidated
financial statements.
149
Chapter 4
P LTD GROUP
CONSOLIDATED STATEMENT OF FINANCIAL POSITION
AS AT 31 DECEMBER 20.18
ASSETS
Non-current assets
Property, plant and equipment (25 000(P) + 30 000(S)) 55 000
Current assets
Trade receivables (70 000(P) + 67 000(S)) 137 000
Total assets R192 000
EQUITY AND LIABILITIES
Equity attributable to owners of the parent
Share capital 100 000
Retained earnings 19 000
Total equity 119 000
Current liabilities
Trade and other payables (24 000(P) + 49 000(S)) 73 000
Total equity and liabilities R192 000
P LTD GROUP
EXTRACT FROM THE CONSOLIDATED STATEMENT OF PROFIT OR LOSS
AND OTHER COMPREHENSIVE INCOME
FOR THE YEAR ENDED 31 DECEMBER 20.18
Profit before tax (40 000(P) + 18 000(S) – 6 000(J2)) 52 000
Income tax expense (16 000(P) + 8 000(S)) (24 000)
PROFIT FOR THE YEAR 28 000
Other comprehensive income for the year –
TOTAL COMPREHENSIVE INCOME FOR THE YEAR R28 000
Profit attributable to:
Owners of the parent R28 000
Total comprehensive income attributable to:
Owners of the parent R28 000
150
Consolidation after acquisition date
P LTD GROUP
EXTRACT FROM THE CONSOLIDATED STATEMENT OF CHANGES IN EQUITY
FOR THE YEAR ENDED 31 DECEMBER 20.18
Share Retained Total
capital earnings equity
Balance at 1 January 20.18 100 000 *10 000 110 000
Changes in equity for 20.18
Total comprehensive income for the year:
Profit for the year – 28 000 28 000
Dividend – (19 000) (19 000)
Balance at 31 December 20.18 R100 000 ȜR19 000 R119 000
* (5 000(P) + 1 500(S – analysis) + 3 500 (J1 – Gain from a bargain purchase)) = 10 000
Ȝ 10 000(P) + 5 500(S – analysis) + 3 500 (J1 – Gain from a bargain purchase) = 19 000
Comment
Where a gain from a bargain purchase is created on acquisition, the amount must be
added to the consolidated retained earnings at the beginning and the end of the
reporting period as it is only created on consolidation and forms part of equity.
151
Chapter 4
152
Consolidation after acquisition date
The following are the condensed financial statements of P Ltd and its subsidiary S Ltd,
which is partially owned, two years after P Ltd acquired 80% of the issued share capital
of S Ltd:
STATEMENTS OF FINANCIAL POSITION AS AT 30 JUNE 20.18
P Ltd S Ltd
ASSETS
Property, plant and equipment 15 000 50 000
Investment in S Ltd: 64 000 shares at fair value
(cost price: R70 000) 76 000 –
Trade receivables 119 000 86 000
Total assets R210 000 R136 000
EQUITY AND LIABILITIES
Share capital (100 000/80 000 shares) 100 000 80 000
Retained earnings 14 000 15 000
Mark-to-market reserve 6 000 –
Trade and other payables 90 000 41 000
Total equity and liabilities R210 000 R136 000
153
Chapter 4
On 1 July 20.16, the date at which P Ltd acquired the shareholding in S Ltd, the
financial statements of S Ltd showed the following credit balance:
Retained earnings R7 500
Assume that the identifiable assets acquired and the liabilities assumed at acquisition
date are shown at their acquisition-date fair values, as determined in terms of IFRS 3.
P Ltd elected to measure the non-controlling interests in an acquiree at their
proportionate share of the acquiree’s identifiable net assets at acquisition date.
P Ltd classified the equity investment in S Ltd under IFRS 9 in its separate financial
statements and recognised fair value adjustments in a mark-to-market reserve (other
comprehensive income).
Ignore tax implications.
154
Consolidation after acquisition date
Solution 4.5
Since consolidation takes place after the acquisition date, the analysis of the owners’
equity of S Ltd is apportioned over the following periods:
i At date of acquisition
ii Since date of acquisition:
l To the beginning of the current year
l Current year
155
Chapter 4
Comment
The changes in retained earnings from the acquisition date up to the beginning of the
current reporting period are calculated as follows:
Retained
earnings
Balance at 1/7/20.17 in statement of changes in equity 9 500
Balance at 30/6/20.16 (acquisition date) (7 500)
Thus: Increase to 30/6/20.17 R2 000
156
Consolidation after acquisition date
In respect of the current reporting period the non-controlling interests in the profit of the
subsidiary must be allocated to them. The result of the adjustment is that the total profit
of the group as a whole, as far as the owners of the parent are concerned, is disclosed:
Dr Cr
R R
J4 Non-controlling interests (P/L) 1 900
Non-controlling interests (SFP) 1 900
Recognition of non-controlling interests in the
profit for the year (9 500 × 20%)
Finally, it is necessary to eliminate the dividend paid by the subsidiary completely. The
portion which is paid to the parent is cancelled out because, as has already been
explained, it is an intragroup transaction, while the non-controlling interests are debited
because the pro rata portion paid to them represents a reduction of their total interest in
the subsidiary:
Dr Cr
R R
J5 Dividend received (P)(P/L) 3 200
Non-controlling interests (SFP) 800
Dividend paid (S)(SCE) 4 000
Elimination of intragroup dividend and recognition
of non-controlling interests in the dividend
157
Chapter 4
158
Consolidation after acquisition date
The last column of the worksheet can now easily be adapted into consolidated financial
statements:
P LTD GROUP
CONSOLIDATED STATEMENT OF FINANCIAL POSITION AS AT 30 JUNE 20.18
ASSETS
Non-current assets
Property, plant and equipment (15 000(P) + 50 000(S)) 65 000
65 000
Current assets
Trade receivables (119 000(P) + 86 000(S)) 205 000
Total assets R270 000
EQUITY AND LIABILITIES
Equity attributable to owners of the parent
Share capital 100 000
Retained earnings 20 000
120 000
Non-controlling interests 19 000
Total equity 139 000
Current liabilities
Trade and other payables (90 000(P) + 41 000(S)) 131 000
Total equity and liabilities R270 000
P LTD GROUP
EXTRACT FROM THE CONSOLIDATED STATEMENT OF PROFIT OR LOSS
AND OTHER COMPREHENSIVE INCOME
FOR THE YEAR ENDED 30 JUNE 20.18
Profit before tax (17 000(P) + 14 500(S) – 3 200(J4)) 28 300
Income tax expense (7 000(P) + 5 000(S)) (12 000)
PROFIT FOR THE YEAR 16 300
Other comprehensive income for the year –
TOTAL COMPREHENSIVE INCOME FOR THE YEAR R16 300
Profit attributable to:
Owners of the parent 14 400
Non-controlling interests (analysis) 1 900
R16 300
Total comprehensive income attributable to:
Owners of the parent 14 400
Non-controlling interests 1 900
R16 300
159
Chapter 4
Comment
The profit attributable to the non-controlling interests is obtained from the analysis, i.e.
the portion of profit for the year attributable to the non-controlling interests
(9 500 × 20%). The profit attributable to the owners of the parent is the difference
between the total comprehensive profit for the year, less the portion attributable to the
non-controlling interests (16 300 – 1 900), i.e. the balancing figure.
In the case of the allocation of the total comprehensive income, as there is no other
comprehensive income for the year, the same amounts are used for the distribution of
the total comprehensive income.
Non-
Share Retained Total
Total controlling
capital earnings equity
interests
Balance at
1 July 20.17 100 000 * 10 600 110 600 @ 17 900 128 500
Changes in equity
for 20.18
Total comprehensive
income for the year:
Profit for the year – 14 400 14 400 1 900 16 300
Dividend paid – (5 000) (5 000) (800) (5 800)
Balance at
30 June 20.18 R100 000 # R20 000 R120 000 R19 000 R139 000
¥ Analysis
* 9 000(P) + 1 600(S – analysis) = 10 600
@ 17 500 + 400 = 17 900(analysis)
# 14 000(P) + 6 000(S – analysis) = 20 000
Analysis
The next example shows the consolidation after acquisition of a partially-owned
subsidiary. However, in this case the non-controlling interests are measured at fair
value at the acquisition date. The basic information is very similar to the previous
example, but it should be regarded as a separate example.
160
Consolidation after acquisition date
The following are the condensed financial statements of P Ltd and its subsidiary S Ltd,
which is partially-owned, two years after P Ltd acquired 75% of the issued share capital of S
Ltd:
STATEMENTS OF FINANCIAL POSITION AS AT 30 JUNE 20.18
P Ltd S Ltd
ASSETS
Property, plant and equipment 15 000 50 000
Investment in S Ltd: 60 000 shares at fair value 78 000 –
(cost price: R76 000)
Trade receivables 119 000 86 000
Total assets R212 000 R136 000
EQUITY AND LIABILITIES
Share capital (100 000/80 000 shares) 100 000 80 000
Retained earnings 14 000 15 000
Mark-to-market reserve 2 000 –
Trade and other payables 96 000 41 000
Total equity and liabilities R212 000 R136 000
161
Chapter 4
On 1 July 20.16, the date at which P Ltd acquired the shareholding in S Ltd, the
financial statements concerned of the latter showed the following credit balance:
Retained earnings R7 500
P Ltd elected to measure any non-controlling interests in an acquiree at fair value at
acquisition date. At the acquisition date, the directors of P Ltd were of the opinion that
the non-controlling interests were worth R25 000, after a remeasurement was done.
Assume that the identifiable assets acquired and the liabilities assumed at acquisition
date are shown at their acquisition-date fair values, as determined in terms of IFRS 3.
P Ltd classified the equity investment in S Ltd under IFRS 9 in its separate financial
statements and recognised fair value adjustments in a mark-to-market reserve (other
comprehensive income).
Ignore tax implications.
Solution 4.6
The consolidated financial statements of P Ltd and the subsidiary must be prepared for
the reporting period ended 30 June 20.18, as illustrated below.
Since consolidation takes place after the acquisition date, the analysis of the owners’
equity of S Ltd is apportioned over the following periods:
i At date of acquisition
ii Since date of acquisition
l To the beginning of the current year
l Current year
162
Consolidation after acquisition date
Calculations
C1 Analysis of owners’ equity of S Ltd
P Ltd 75%
Total NCI
At Since
i At acquisition (1/7/20.16)
Share capital 80 000 60 000 20 000
Retained earnings 7 500 5 625 1 875
87 500 65 625 21 875
Equity represented by goodwill
– Parent 10 375 10 375 –
Equity represented by goodwill – NCI 3 125 – 3 125
Consideration (78 000 – 5 000(J1) + 101 000 76 000 25 000
3 000(J1)) and NCI
ii Since acquisition
• To beginning of current year:
Retained earnings (9 500 – 7 500) 2 000 1 500 500
25 500
• Current year:
Profit for the year 9 500 7 125 2 375
Dividend (4 000) (3 000) (1 000)
108 500 5 625 26 875
163
Chapter 4
164
Consolidation after acquisition date
165
Chapter 4
P LTD GROUP
CONSOLIDATED STATEMENT OF FINANCIAL POSITION AS AT 30 JUNE 20.18
ASSETS
Non-current assets
Property, plant and equipment (15 000(P) + 50 000(S)) 65 000
Goodwill 13 500
78 500
Current assets
Trade receivables (119 000(P) + 86 000(S)) 205 000
Total assets R283 500
EQUITY AND LIABILITIES
Equity attributable to owners of the parent
Share capital 100 000
Retained earnings 19 625
119 625
Non-controlling interests 26 875
Total equity 146 500
Current liabilities
Trade and other payables (96 000(P) + 41 000(S)) 137 000
Total equity and liabilities R283 500
P LTD GROUP
EXTRACT FROM THE CONSOLIDATED STATEMENT OF PROFIT OR LOSS AND
OTHER COMPREHENSIVE INCOME FOR THE YEAR ENDED 30 JUNE 20.18
Profit before tax (17 000(P) + 14 500(S) – 3 000 (J5)) 28 500
Income tax expense (7 000(P) + 5 000(S)) (12 000)
PROFIT FOR THE YEAR 16 500
Other comprehensive income for the year –
TOTAL COMPREHENSIVE INCOME FOR THE YEAR R16 500
Profit attributable to:
Owners of the parent 14 125
Non-controlling interests (analysis) 2 375
R16 500
Total comprehensive income attributable to:
Owners of the parent 14 125
Non-controlling interests (analysis) 2 375
R16 500
166
Consolidation after acquisition date
Comment
The amount attributable to the non-controlling interests is obtained from the analysis,
i.e. the portion of profit for the year attributable to the non-controlling interests
(9 500 × 25%). The amount attributable to the owners of the parent is the difference
between the total comprehensive income for the year, less the portion attributable to the
non-controlling interests (16 500 – 2 375), i.e. the balancing figure.
P LTD GROUP
CONSOLIDATED STATEMENT OF CHANGES IN EQUITY
FOR THE YEAR ENDED 30 JUNE 20.18
Non-con-
Share Retained Total
Total trolling
capital earnings equity
interests
Balance at 1 July 20.17 100 000 * 10 500 110 500 @ 25 500 136 000
Changes in equity for 20.18
Total comprehensive income
for the year:
Profit for the year – 14 125 14 125 2 375 16 500
Dividend paid – (5 000) (5 000) (1 000) (6 000)
Balance at 30 June 20.18 R100 000 # R19 625 R119 625 R26 875 R146 500
167
Chapter 4
The case will now be addressed where a subsidiary has a mark-to-market reserve that
forms part of equity at acquisition and that has changed since due to the recognition of
fair value adjustments. This reserve is treated exactly the same as retained earnings in
the consolidation process.
The following are the financial statements of P Ltd and its subsidiary for 20.18:
STATEMENTS OF FINANCIAL POSITION AS AT 31 DECEMBER 20.18
P Ltd S Ltd
ASSETS
Property, plant and equipment 99 400 45 000
Investment in S Ltd: 40 000 shares at fair value 49 800 –
Financial asset (at fair value through OCI) – 20 000
Trade receivables 15 000 23 800
Cash and cash equivalents 15 200 10 000
Total assets R179 400 R98 800
EQUITY AND LIABILITIES
Share capital (100 000/50 000 shares) 100 000 50 000
Mark-to-market reserve 5 000 4 000
Retained earnings 49 400 28 800
Trade and other payables 25 000 16 000
Total equity and liabilities R179 400 R98 800
168
Consolidation after acquisition date
Additional information
P Ltd paid R44 800 for its interest in S Ltd on 1 January 20.16 when the latter had
retained earnings of R5 000 and a mark-to-market reserve of R1 000. The capital has
remained unchanged since that date.
P Ltd classified the equity investment in S Ltd under IFRS 9 in its separate financial
statements and recognised fair value adjustments in a mark-to-market reserve (other
comprehensive income).
P Ltd elected to measure non-controlling interests in an acquiree at their proportionate
share of the acquiree’s identifiable net assets.
The following information is relevant to the dividends of S Ltd:
Final dividend paid (paid 15 February 20.18) R3 000
Interim dividend (paid 31 July 20.18) R5 000
Final dividend declared (registration date for payment – 31 January 20.19) R6 000
Ignore tax implications.
Solution 4.7
When the equity of the subsidiary contains more than one reserve, a distinction should
be made between such reserves in the analysis to simplify the preparation of the
consolidated financial statements.
169
Chapter 4
Calculations
C1 Analysis of owners’ equity of S Ltd
P Ltd 80%
Total NCI
At Since
i At acquisition (1/1/20.16)
Share capital 50 000 40 000 10 000
Mark-to-market reserve 1 000 800 200
Retained earnings 5 000 4 000 1 000
56 000 44 800 11 200
Purchase difference – – –
Consideration (49 800 – 5 000(J1)) and
NCI 56 000 R44 800 11 200
ii Since acquisition
• To beginning of current year:
Mark-to-market reserve (1 500 – 1 000) 500 400MM 100
Retained earnings (20 000 – 5 000) 15 000 12 000BV 3 000
14 300
• Current year:
Profit for the year 16 800 13 440BV 3 360
Mark-to-market reserve 2 500 2 000MM 500
Final dividend paid (3 000) (2 400)BV (600)
Interim dividend paid (5 000) (4 000)BV (1 000)
R82 800 R19 040BV R16 560
R2 400MM
170
Consolidation after acquisition date
171
Chapter 4
172
Consolidation after acquisition date
The consolidated financial statements of the P Ltd group for the reporting period ended
31 December 20.18 will be prepared as follows:
P LTD GROUP
CONSOLIDATED STATEMENT OF FINANCIAL POSITION
AS AT 31 DECEMBER 20.18
ASSETS
Non-current assets
Property, plant and equipment (99 400(P) + 45 000(S)) 144 400
Financial asset (S) 20 000
164 400
Current assets
Trade receivables (15 000(P) + 23 800(S)) 38 800
Cash and cash equivalents (15 200(P) + 10 000(S)) 25 200
64 000
Total assets R228 400
EQUITY AND LIABILITIES
Equity attributable to owners of the parent
Share capital 100 000
Mark-to-market reserve 2 400
Retained earnings 68 440
170 840
Non-controlling interests 16 560
Total equity 187 400
Current liabilities
Trade and other payables (25 000(P) +16 000(S)) 41 000
Total equity and liabilities R228 400
173
Chapter 4
P LTD GROUP
EXTRACT FROM THE CONSOLIDATED STATEMENT OF PROFIT OR LOSS
AND OTHER COMPREHENSIVE INCOME
FOR THE YEAR ENDED 31 DECEMBER 20.18
Profit before tax (46 400(P) + 24 000(S) – 6 400(J6)) 64 000
Income tax expense (12 000(P) + 7 200(S)) (19 200)
PROFIT FOR THE YEAR 44 800
Other comprehensive income for the year –
Mark-to-market reserve 2 500
TOTAL COMPREHENSIVE INCOME FOR THE YEAR R47 300
Total comprehensive income attributable to:
Owners of the parent 41 440
Non-controlling interests 3 360
R44 800
Total comprehensive income attributable to:
Owners of the parent (41 440 + 2 000) 43 440
Non-controlling interests (3 360 + 500) 3 860
R47 300
P LTD GROUP
CONSOLIDATED STATEMENT OF CHANGES IN EQUITY
FOR THE YEAR ENDED 31 DECEMBER 20.18
Mark-
Non-
Share to- Retained Total
Total controlling
capital market earnings equity
interests
reserve
Balance at
1 January 20.18 100 000 Ŷ 400 # 37 000 137 400 14 300 151 700
Changes in equity
for 20.18
Total comprehensive
income for the
year:
Profit for the year: – 41 440 41 440 3 360 44 800
Mark-to-market
reserve – 2 000 – 2 000 500 2 500
Dividend _ (10 000) (10 000) (1 600) (11 600)
Balance at
31 December 20.18 R100 000 ƇR 2 400 * R68 440 R170 840 R16 560 R187 400
Ŷ (Analysis)
# 25 000(P) + 12 000(S – analysis) = 37 000
Ƈ (Analysis)
* 49 400(P) + 19 040(S – analysis) = 68 440
174
Consolidation after acquisition date
Self-assessment questions
Question 4.1
On 1 July 20.14, P Ltd acquired all the shares in S Ltd at R52 000. At that date, the
balance on S Ltd’s retained earnings account amounted to R12 000. The share capital
amounted to R40 000 and no shares have been issued since that date.
The following are the condensed statements of financial position of P Ltd and
subsidiary S Ltd at 31 December 20.18:
STATEMENTS OF FINANCIAL POSITION AS AT 31 DECEMBER 20.18
P Ltd S Ltd
ASSETS
Property, plant and equipment 41 000 35 000
Investment in S Ltd: 4 000 shares at fair value
(cost price: R56 000) 60 000 –
Trade receivables 29 000 52 000
Total assets R130 000 R87 000
EQUITY AND LIABILITIES
Share capital (8 000/4 000 shares) 80 000 40 000
Mark-to-market reserve 4 000 –
Retained earnings 18 000 18 000
Long-term borrowings 10 000 2 000
Trade and other payables 18 000 27 000
Total equity and liabilities R130 000 R87 000
The statements of profit or loss and other comprehensive income of the two companies
for the reporting period ended 31 December 20.18 are as follows:
EXTRACT FROM THE STATEMENTS OF PROFIT OR LOSS
AND OTHER COMPREHENSIVE INCOME
FOR THE YEAR ENDED 31 DECEMBER 20.18
P Ltd S Ltd
Profit 18 500 10 000
Dividend received 3 000 –
Profit before tax 21 500 10 000
Income tax expense (5 500) (3 000)
PROFIT FOR THE YEAR 16 000 7 000
Other comprehensive income
Items that will not be reclassified to profit or loss
Mark-to-market reserve (fair value adjustment on investment) 1 500 –
Other comprehensive income for the year 1 500 –
TOTAL COMPREHENSIVE INCOME FOR THE YEAR R17 500 R7 000
175
Chapter 4
The statements of changes in equity for the reporting period ended 31 December 20.18
are as follows:
EXTRACT FROM THE STATEMENTS OF CHANGES IN EQUITY
FOR THE YEAR ENDED 31 DECEMBER 20.18
Mark-to-
Retained
market
earnings
reserve
P Ltd P Ltd S Ltd
Balance at 1 January 20.18 2 500 10 000 14 000
Changes in equity for 20.18
Total comprehensive income for the year:
Profit for the year – 16 000 7 000
Other comprehensive income for the year 1 500 – –
Dividend – (8 000) (3 000)
Balance at 31 December 20.18 R4 000 R18 000 R18 000
Assume that the identifiable assets acquired and the liabilities assumed at acquisition
date are shown at their acquisition-date fair values, as determined in terms of IFRS 3.
P Ltd elected to measure the non-controlling interests in an acquiree at their
proportionate share of the acquiree’s identifiable net assets at acquisition date.
P Ltd classified the equity investment in S Ltd under IFRS 9 in its separate financial
statements and recognised fair value adjustments in a mark-to-market reserve (other
comprehensive income).
Ignore tax implications.
Required
Prepare the consolidated financial statements of the P Ltd Group for the reporting
period ended 31 December 20.18.
176
Consolidation after acquisition date
P LTD GROUP
CONSOLIDATED STATEMENT OF FINANCIAL POSITION AS AT
31 DECEMBER 20.18
ASSETS
Non-current assets
Property, plant and equipment (41 000(P) + 35 000(S)) 76 000
Goodwill 4 000
80 000
Current assets
Trade receivables (29 000(P) + 52 000(S)) 81 000
Total assets R161 000
EQUITY AND LIABILITIES
Equity attributable to owners of the parent
Share capital (P) 80 000
Retained earnings 24 000
Total equity 104 000
Non-current liabilities
Long-term borrowings (10 000(P) + 2 000(S)) 12 000
Current liabilities
Trade and other payables (18 000(P) + 27 000(S)) 45 000
Total equity and liabilities R161 000
P LTD GROUP
EXTRACT FROM THE CONSOLIDATED STATEMENT OF PROFIT OR LOSS
AND OTHER COMPREHENSIVE INCOME
FOR THE YEAR ENDED 31 DECEMBER 20.18
Profit before tax (21 500(P) + 10 000(S) – 3 000(div)) 28 500
Income tax expense (5 500(P) + 3 000(S)) (8 500)
PROFIT FOR THE YEAR 20 000
Other comprehensive income for the year –
TOTAL COMPREHENSIVE INCOME FOR THE YEAR R20 000
Profit attributable to:
Owners of the parent R20 000
Total comprehensive income attributable to:
Owners of the parent R20 000
177
Chapter 4
P LTD GROUP
EXTRACT FROM THE CONSOLIDATED STATEMENT OF CHANGES IN EQUITY
FOR THE YEAR ENDED 31 DECEMBER 20.18
Share Retained Total
capital earnings equity
Balance at 1 January 20.18 80 000 *12 000 92 000
Changes in equity for 20.18
Total comprehensive income for the year:
Profit for the year – 20 000 20 000
Dividend – (8 000) (8 000)
Balance at 31 December 20.18 R80 000 ȜR24 000 R104 000
Calculations
C1 Analysis of owners’ equity of S Ltd
P Ltd 100%
Total
At Since
i At acquisition (1/7/20.14)
Share capital 40 000 40 000
Retained earnings 12 000 12 000
52 000 52 000
Equity represented by goodwill – Parent 4 000 4 000
Consideration (60 000 – 4 000(J1)) 56 000 R56 000
ii Since acquisition
• To beginning of current year:
Retained earnings (14 000 – 12 000) 2 000 2 000
• Current year:
Profit for the year 7 000 7 000
Dividend (3 000) (3 000)
R62 000 R6 000
178
Consolidation after acquisition date
179
Chapter 4
180
Consolidation after acquisition date
Question 4.2
On 1 January 20.14 S Ltd was incorporated with an authorised share capital of 150 000
shares. Shares were issued as follows:
1 January 20.15 100 000 shares at R1 each
1 January 20.16 50 000 shares at R1,20 each
On 1 January 20.18, P Ltd purchased 120 000 of these shares for R155 000, at which
date S Ltd’s mark-to-market reserve was R15 000, and the retained earnings amounted
to R12 000.
The following represents the abridged statement of financial position of S Ltd at
31 December 20.18:
S LTD
STATEMENT OF FINANCIAL POSITION AS AT 31 DECEMBER 20.18
ASSETS
Property, plant and equipment 140 000
Financial assets 60 000
Trade receivables 55 000
Total assets R255 000
EQUITY AND LIABILITIES
Share capital (150 000 shares) 160 000
Mark-to-market reserve 20 000
Retained earnings 18 000
Trade and other payables 57 000
Total equity and liabilities R255 000
Assume that the identifiable assets acquired and the liabilities assumed at acquisition
date are shown at their acquisition-date fair values, as determined in terms of IFRS 3.
P Ltd elected to measure the non-controlling interests in an acquiree at their
proportionate share of the acquiree’s identifiable net assets at acquisitioin date.
P Ltd classified the equity investment in S Ltd under IFRS 9 in its separate financial
statements and recognised fair value adjustments in a mark-to-market reserve (other
comprehensive income).
Ignore tax implications.
Required
Prepare an analysis of the owners’ equity of S Ltd at 31 December 20.18.
181
Chapter 4
182
Consolidation after acquisition date
Question 4.3
The following represents the abridged financial statements of P Ltd and its subsidiary
S Ltd:
STATEMENTS OF FINANCIAL POSITION AS AT 31 DECEMBER 20.18
P Ltd S Ltd
ASSETS
Property, plant and equipment 390 000 400 000
Investment in S Ltd: 48 000 shares at fair value
(cost: R330 000) 350 000 –
Financial assets – 60 000
Trade receivables 255 000 105 000
Inventories 80 000 165 000
Bank 55 000 –
Total assets R1 130 000 R730 000
EQUITY AND LIABILITIES
Share capital (75 000/60 000 shares) 300 000 240 000
Mark-to-market reserve 20 000 10 000
Retained earnings 375 000 240 000
Long-term borrowings 225 000 150 000
Trade and other payables 210 000 50 000
Bank overdraft – 40 000
Total equity and liabilities R1 130 000 R730 000
183
Chapter 4
Additional information
On 1 January 20.15, the date on which P Ltd acquired the interest in S Ltd, the equity of
S Ltd consisted of:
Share capital R240 000
Mark-to-market reserve R4 000
Retained earnings R135 000
P Ltd elected to measure non-controlling interests at fair value at the acquisition date.
On 1 January 20.15 the directors were of the opinion that the non-controlling interests’
shares were worth R6,50 each, based on market prices.
Assume that the identifiable assets acquired and the liabilities assumed at acquisition
date are shown at their acquisition-date fair values, as determined in terms of IFRS 3.
P Ltd classified the equity investment in S Ltd under IFRS 9 in its separate financial
statements and recognised fair value adjustments in a mark-to-market reserve (other
comprehensive income). Ignore tax implications.
Required
Prepare consolidated financial statements for the P Ltd Group for the reporting period
ended 31 December 20.18.
184
Consolidation after acquisition date
P LTD GROUP
CONSOLIDATED STATEMENT OF FINANCIAL POSITION AS AT
31 DECEMBER 20.18
ASSETS
Non-current assets
Property, plant and equipment (390 000(P) + 400 000(S)) 790 000
Financial assets 60 000
Goodwill (C2) 29 000
879 000
Current assets
Inventories (80 000(P) + 165 000(S)) 245 000
Trade receivables (255 000(P) + 105 000(S)) 360 000
Bank (P) 55 000
660 000
Total assets R1 539 000
EQUITY AND LIABILITIES
Equity attributable to owners of the parent
Share capital (P) 300 000
Retained earnings 459 000
Other components of equity (Mark-to-market reserve) 4 800
763 800
Non-controlling interests (C1) 100 200
Total equity 864 000
Non-current liabilities
Long-term borrowings (225 000 (P) + 150 000 (S)) 375 000
Current liabilities
Trade and other payables (210 000(P) + 50 000(S)) 260 000
Bank overdraft (S) 40 000
Total current liabilities 300 000
Total liabilities 675 000
Total equity and liabilities R1 539 000
185
Chapter 4
P LTD GROUP
CONSOLIDATED STATEMENT OF PROFIT OR LOSS AND OTHER COMPREHENSIVE
INCOME FOR THE YEAR ENDED 31 DECEMBER 20.18
Revenue (945 000(P) + 1 500 000(S)) 2 445 000
Cost of sales (472 500(P) + 750 000(S)) (1 222 500)
Gross profit 1 222 500
Other expenses (202 500(P) + 450 000(S)) (652 500)
Profit before tax 570 000
Income tax expense (108 000(P) + 120 000(S)) (228 000)
PROFIT FOR THE YEAR 342 000
Other comprehensive income to profit or loss
Items that will not be reclassified
Mark-to-market reserve (fair value adjustment on investment) 2 000
Other comprehensive income for the year 2 000
TOTAL COMPREHENSIVE INCOME FOR THE YEAR R344 000
Profit attributable to:
Owners of the parent 306 000
Non-controlling interests 36 000
R342 000
Total comprehensive income attributable to:
Owners of the parent (306 000(profit) + 1 600(OCI)) 307 600
Non-controlling interests (36 000(profit) + 400(OCI)) 36 400
R344 000
186
Consolidation after acquisition date
P LTD GROUP
CONSOLIDATED STATEMENT OF CHANGES IN EQUITY
FOR THE YEAR ENDED 31 DECEMBER 20.18
Non-
Mark-to-
Share Retained con- Total
market Total
capital earnings trolling equity
reserve
interests
Balance at
1 January 20.18 300 000 * 261 000 @3 200 564 200 #87 800 652 000
Changes in equity
for 20.18
Total comprehensive
income for the
year:
Profit for the year – 306 000 – 306 000 36 000 342 000
Other comprehensive
income for the year – – 1 600 – 400 2 000
Dividend paid – (108 000) – (108 000) (24 000) (132 000)
Balance at
31 December R300 000 ƇR459 000 ŶR4 800 R763 800 ƔR100 200 R864 000
20.18
187
Chapter 4
Calculations
C1 Analysis of owners’ equity of S Ltd
Total P Ltd 80% NCI
At Since
i At acquisition (1/1/20.15)
Share capital 240 000 192 000 48 000
Mark-to-market reserve 4 000 3 200 800
Retained earnings 135 000 108 000 27 000
379 000 303 200 75 800
Equity represented by goodwill
– Parent and NCI 29 000 26 800 2 200
Consideration (350 000 – 20 000)
and NCI (*12 000 × R6,50) 408 000 R330 000 *78 000
ii Since acquisition
• To beginning of current year:
Retained earnings (180 000 – 135 000) 45 000 36 000RE 9 000
Mark-to-market reserve (8 000 – 4 000) 4 000 3 200MM 800
87 800
• Current year:
Profit for the year 180 000 144 000RE 36 000
Dividend (120 000) (96 000)RE (24 000)
Mark-to-market reserve 2 000 1 600MM 400
R519 000 R84 000RE R100 200
R4 800MM
188
Consolidation after acquisition date
189
Chapter 4
190
5
Intragroup transactions
Intragroup balances
5.2 Elimination of intragroup balances ........................................................... 193
5.3 Elimination of transaction costs at acquisition of investment
in subsidiary ........................................................................................... 195
5.4 Bank overdrafts and guarantees .............................................................. 197
191
Chapter 5
Self-assessment questions
Question 5.1 .......................................................................................................... 301
Question 5.2 .......................................................................................................... 306
192
Intragroup transactions
Intragroup balances
5.2 Elimination of intragroup balances
1 In terms of IFRS 10.B86(c) all intragroup assets and liabilities, equity, income and
expenses relating to transactions between entities of the group must be eliminated
on consolidation. Examples of such intragroup balances are amounts receivable/
payable between entities in the group. Such intragroup balances are mainly the
result of:
l intragroup rendering of services, for example management and payroll services;
and
l intragroup borrowings
2 The recording of such transactions in the individual (separate) records of the parent
and the subsidiary represents mirror images of the same transaction. As soon as
the financial statements of the parent and the subsidiary are consolidated, and the
group is regarded as one economic and reporting entity, it is logical to set-off these
balances. From the new reporting entity’s (the group) perspective you cannot enter
into a transaction with yourself. The following consolidation journal entry is an
example of the elimination of intragroup balances which arose from a loan by the
parent to a subsidiary:
Dr Cr
R R
Loan from parent (S)(SFP) 100 000
Loan to subsidiary (P)(SFP) 100 000
Elimination of intragroup loan
The elimination of intragroup balances ensures that the assets and liabilities of the
group are not overstated per individual line item for disclosure purposes in the
consolidated statement of financial position.
Comment
P = Parent
S = Subsidiary
193
Chapter 5
3 The accompanying interest on the loan should also be eliminated. Suppose interest
was charged on the loan at 8% for the full year. The elimination journal will be as
follows:
Dr Cr
R R
Finance income (P)(P/L) 8 000
Finance costs (S)(P/L) 8 000
Elimination of intragroup interest (100 000 × 8% × 12/12)
4 Other transactions incurred between entities within the group should be eliminated
in a similar manner. The following consolidation journal entry is for example
prepared on consolidation to eliminate intragroup rent where S Ltd paid rent to
P Ltd. On consolidation, the group is regarded as one reporting entity, and once
again the group as entity cannot pay rent to itself and should therefore be
eliminated:
Dr Cr
R R
Other income (P)(P/L) 20 000
Other expenses (S)(P/L) 20 000
Elimination of intragroup rent
Comments
The consolidation journal to eliminate intragroup management fees is the same as the
journal above, but the description refers to the elimination of intragroup management
fees.
194
Intragroup transactions
The pro forma consolidation journal entry, where S Ltd issued debentures to P Ltd to
the value of R10 000, would therefore be as follows:
Dr Cr
R R
J1 Debenture liability (S)(SFP) 10 000
Investment in debentures (P)(SFP) 10 000
Elimination of intragroup debentures
195
Chapter 5
other comprehensive income. The following costs, paid in cash, were incurred that
relate to the acquisition:
Brokerage R1 600
Transfer taxes R200
Valuation fees R4 200
The journal entry in the separate records of P Ltd at 1 January 20.18 will be as follows:
Dr Cr
R R
Investment in S Ltd (SFP) 81 800
Valuation expense (P/L) 4 200
Bank (SFP) 86 000
Recognition of investment in S Ltd and capitalisation of
transaction costs (80 000 + 1 600 + 200)
Comment
The transaction costs in the example are the brokerage and transfer duties, i.e.
incremental costs that would not have been incurred if the entity had not acquired the
shares in S Ltd. In terms of IFRS 9 such costs are capitalised where the financial asset
is measured at fair value through other comprehensive income. The valuation costs fall
under the broader definition of acquisition-related costs in IFRS 3 and are expensed.
In terms of IFRS 3 the brokerage and transfer taxes are expensed in the consolidated
financial statements. This implies that these transaction costs should be reversed
against the investment in S Ltd and expensed through a pro forma journal on
consolidation.
Comments
No pro forma consolidation journal entry is required for the valuation expense
(acquisition-related cost i.t.o. IFRS 3), as it should be expensed in both the separate
financial statements of the parent and the consolidated financial statements of the
group.
196
Intragroup transactions
Comment
Even without considering the conditions stated above, the offsetting of items should not
be done in consolidated financial statements based on the requirements of IAS 1:
An entity shall not offset assets and liabilities or income and expenses, unless required
or permitted by an IFRS (IAS 1.32).
An entity reports separately both assets and liabilities, and income and expenses.
Offsetting in the statement of profit or loss and other comprehensive income or financial
position, except when offsetting reflects the substance of the transaction or other event,
detracts from the ability of users both to understand the transactions, other events and
conditions that have occurred and to assess the entity’s future cash flows (IAS 1.33).
Any note to the financial statements of an entity in the group, concerning a contingent
liability in respect of a guarantee made in favour of another entity in the group, falls
away on consolidation because both the item guaranteed and the net assets backing
such guarantee will now appear in the consolidated statements of the group, which is
regarded as one entity for reporting purposes.
197
Chapter 5
The following are the abridged statements of financial position, statements of profit or loss
and other comprehensive income and statements of changes in equity of P Ltd and the
partially-owned subsidiary, S Ltd:
STATEMENTS OF FINANCIAL POSITION AS AT 31 DECEMBER 20.18
P Ltd S Ltd
ASSETS
Property, plant and equipment 80 000 150 000
Investment in S Ltd: 64 000 shares at fair value
(cost price: R90 000) 120 000 –
Investment in S Ltd: Loan 50 000 –
Inventories 65 000 55 000
Trade receivables 55 000 35 000
Bank 30 000 –
Total assets R400 000 R240 000
EQUITY AND LIABILITIES
Share capital (100 000/80 000 shares) 100 000 80 000
Retained earnings 125 000 90 000
Mark-to-market reserve 30 000 –
Long-term borrowings 75 000 –
Loan from P Ltd – 50 000
Trade and other payables 70 000 10 000
Bank overdraft – 10 000
Total equity and liabilities R400 000 R240 000
198
Intragroup transactions
On 1 January 20.15, the date on which P Ltd acquired the interest in S Ltd, the equity of
S Ltd was as follows:
Share capital R80 000
Retained earnings R45 000
P Ltd elected to measure the non-controlling interests in an acquiree at their
proportionate share of the acquiree’s identifiable net assets at acquisition date.
P Ltd classified the equity investment in S Ltd under IFRS 9 in its separate financial
statements and recognised fair value adjustments in a mark-to-market reserve (other
comprehensive income).
Ignore tax implications.
199
Chapter 5
Solution 5.1
The consolidated financial statements of the P Ltd Group can be prepared as follows by
applying the direct method of consolidation:
P LTD GROUP
CONSOLIDATED STATEMENT OF FINANCIAL POSITION
AS AT 31 DECEMBER 20.18
ASSETS
Non-current assets
Property, plant and equipment (80 000(P) + 150 000(S)) 230 000
230 000
Current assets
Inventories (65 000(P) + 55 000(S)) 120 000
Trade receivables (55 000(P) + 35 000(S)) 90 000
Bank (P) 30 000
240 000
Total assets R470 000
EQUITY AND LIABILITIES
Equity attributable to owners of the parent
Share capital (P) 100 000
Retained earnings 171 000
271 000
Non-controlling interests 34 000
Total equity 305 000
Non-current liabilities
Long-term borrowings (P) 75 000
Current liabilities
Trade and other payables (70 000(P) + 10 000(S)) 80 000
Bank overdraft (S) 10 000
Total current liabilities 90 000
Total liabilities 165 000
Total equity and liabilities R470 000
200
Intragroup transactions
Comments
a Calculations are shown in brackets but do not form part of the financial statements.
b It is not necessary to record all the pro forma consolidation journal entries, but the
aggregate effect of all the pro forma journals is accounted for, for example the
elimination of intragroup dividends and debts is done although the pro forma
consolidation journal entries are not shown. Usually at least those journal entries
which have an effect on the subsidiary’s equity are shown.
c The intragroup loan does not appear in the consolidated statement of financial position.
d The positive bank balance of P Ltd and the bank overdraft of S Ltd may not be set
off; as there is no evidence of P Ltd providing a guarantee for the bank overdraft of
S Ltd or an agreement with the bank in terms of which the amounts may be set off.
e The mark-to-market reserve in the parent’s records has been eliminated together
with the reversal of the fair value adjustment in other comprehensive income in
connection with the investment in S Ltd.
P LTD GROUP
EXTRACT FROM THE CONSOLIDATED STATEMENT OF PROFIT OR LOSS
AND OTHER COMPREHENSIVE INCOME
FOR THE YEAR ENDED 31 DECEMBER 20.18
Profit before tax (122 000(P + 100 000(S)) – 32 000(div)) 190 000
Income tax expense (36 000(P) + 30 000(S)) (66 000)
PROFIT FOR THE YEAR 124 000
Other comprehensive income for the year –
TOTAL COMPREHENSIVE INCOME FOR THE YEAR R124 000
Profit attributable to:
Owners of the parent (Balancing figure) 110 000
Non-controlling interests (Analysis) 14 000
R124 000
Total comprehensive income attributable to:
Owners of the parent 110 000
Non-controlling interests 14 000
R124 000
Comment
The profit for the year attributable to the non-controlling interests is obtained from the
analysis of the equity of S Ltd (Calculation C1). The amount attributable to the owners of
the parent is the difference between the total profit for the year and the amount
attributable to NCI.
As there is no other comprehensive income for the reporting period in this example, the
attributable total comprehensive income is the same as the attributable profit for the
year.
201
Chapter 5
P LTD GROUP
CONSOLIDATED STATEMENT OF CHANGES IN EQUITY
FOR THE YEAR ENDED 31 DECEMBER 20.18
Non-
Share Retained Total
Total controlling
capital earnings equity
interests
Balance at
1 January 20.18 100 000 * 97 000 197 000 28 000 225 000
Changes in equity
for 20.18
Total comprehensive
income for the year:
Profit for the year – 110 000 110 000 14 000 124 000
Dividend paid – (36 000) (36 000) (8 000) (44 000)
Balance at
31 December 20.18 R100 000 ¨ R171 000 R271 000 R34 000 R305 000
Calculations
C1 Analysis of owners’ equity of S Ltd
P Ltd 80%
Total NCI
At Since
i At acquisition (2/1/20.15)
Share capital 80 000 64 000 16 000
Retained earnings 45 000 36 000 9 000
125 000 100 000 25 000
Gain from a bargain purchase – Parent (10 000) (10 000) –
Consideration
(120 000 – 30 000(J1)) and NCI 115 000 R90 000 25 000
ii Since acquisition
• To beginning of current year:
Retained earnings (60 000 – 45 000) 15 000 12 000 3 000
28 000
• Current year:
Profit for the year 70 000 56 000 14 000
Dividend (40 000) (32 000) (8 000)
R160 000 R36 000 R34 000
202
Intragroup transactions
203
Chapter 5
204
Intragroup transactions
Comment
The above journal entry corrects the figures for revenue and cost of sales as presented
in the separate financial statements of the entities, as both would be overstated from the
group’s perspective. The pro forma consolidation journal entry has no effect on the
consolidated profit of the group as an equal debit and credit is recognised in the profit
before tax of the consolidated entity. It does however have the effect of showing the line
items, (consolidated) revenue and (consolidated) cost of sales to parties outside the
group correctly.
The next step is to eliminate the unrealised profit contained in the closing inventories
through the following pro forma journal:
Dr Cr
R R
Cost of sales (P)(P/L) 10 000
Inventories (S)(SFP) 10 000
Elimination of the unrealised intragroup profit included in
the closing inventories of S Ltd (50 000 × 25/125)
205
Chapter 5
Comment
a Only the profit on inventories at the end of the reporting period that was purchased
from an entity within the group has to be eliminated. The inventories that have
already been sold to outside parties have already realised.
b P Ltd sold the inventories to S Ltd at cost price (CP) plus 25%. As the inventories
were recognised in S Ltd’s records at the selling price (SP) (125%), the profit
“contained” in the selling price can be determined through the following ratio:
CP + profit = SP
100 + 25 = 125
The unrealised profit is determined as 25/125 × SP, therefore 25/125 × 50 000 = R10 000
c For profit or loss and equity items, it is important to indicate in the pro forma journal
who the buyer and seller were. If the subsidiary was the seller, the effect of the pro
forma journal needs to be taken into account before the profit (or loss) or equity
component can be analysed for consolidation purposes. In the example above P Ltd
was the seller which would have no effect on the analysis of the equity of the
subsidiary and thus no effect on NCI.
The effect of the above journal entry is that the total amount of the unrealised
intragroup profit is debited against the consolidated cost of sales, which leads to a
decrease in the consolidated profit of the group.
3 Elimination of unrealised profit where a sale is made by a partially-owned
subsidiary
The elimination of the amount of the unrealised intragroup profit in closing inventories,
where a subsidiary which is partially owned is the seller, is not influenced by the
existence of the non-controlling interests. The total (100%) unrealised intragroup profit
is still eliminated as a debit against the cost of sales of the seller and a credit against
the inventories of the purchasing entity. On consolidation, 100% of each line item
should be consolidated and therefore 100% of the transaction should be eliminated.
Explanatory example
P Ltd has inventories on hand amounting to R100 000 (at cost price to P Ltd) which
was purchased from S Ltd (in which P Ltd has a 90% interest). S Ltd makes a profit of
25% on the cost price of goods sold to P Ltd. The total sales of inventories from S Ltd
to P Ltd during the current reporting period amounted to R250 000.
Ignore tax implications.
The pro forma consolidation journal entry to eliminate the intragroup sales is as follows:
Dr Cr
R R
Revenue (S)(P/L) 250 000
Cost of sales (P)(P/L) 250 000
Elimination of intragroup sales
206
Intragroup transactions
The above journal entry has no effect on the consolidated profit of the group, but has
the effect that the consolidated line items, revenue and cost of sales to parties outside
the group are correctly presented.
Dr Cr
R R
Cost of sales (S)(P/L) 20 000
Inventories (P)(SFP) 20 000
Elimination of unrealised intragroup profit included
in the closing inventories of P Ltd (100 000 × 25/125)
The effect of the above journal entry is that the full amount of the unrealised intragroup
profit is debited against the consolidated cost of sales, which leads to a decrease in the
consolidated profit of the group. The non-controlling interests in the profit of S Ltd for
the current reporting period is calculated after the profit of S Ltd has been reduced by
the above debit.
4 Determination of non-controlling interests
Suppose in the above example that the profit of S Ltd was R80 000 after tax. The non-
controlling interests in the profit for the reporting period will then be calculated as
follows:
Profit for the year 80 000
Unrealised profit (20 000)
60 000
Non-controlling interests in profit (60 000 × 10%) R6 000
It is thus clear that when the intragroup sales are made by a subsidiary with non-
controlling interests, a portion of the unrealised intragroup profit is allocated to the non-
controlling interests. If the unrealised intragroup profit had not been taken into account,
the non-controlling interests in the current reporting period’s profit would have been
R8 000 (10% × R80 000).
This interest is, however, reduced by the non-controlling interests in the unrealised
intragroup profit, namely R2 000 (10% × R20 000). The final effect of the consolidation
journal entry is thus that the consolidated profit is only reduced by the share of the
parent in the unrealised intragroup profit.
5 Rationale for debiting the non-controlling interests with a pro rata portion
of unrealised profit
Certain experts object to debiting the non-controlling interests with a pro rata portion of
the unrealised profit. They submit that, from the point of view of the non-controlling
interests, their share of the intragroup profit is in fact realised. Although this is so from
the point of view of the separate legal person, this point of view does not take into
account the fact that the consolidated group is a single economic entity.
The effect, as well as the reasonableness of the point of view followed in this book, is
clear from example 5.2 below.
207
Chapter 5
The following are the abridged financial statements of P Ltd and subsidiary S Ltd, which
is partially owned:
STATEMENTS OF FINANCIAL POSITION AS AT 30 JUNE 20.18
P Ltd S Ltd
ASSETS
Investment in S Ltd: 64 000 shares at fair value 85 000 –
Inventories 10 000 30 000
Trade receivables 130 000 106 000
Total assets R225 000 R136 000
EQUITY AND LIABILITIES
Share capital (100 000/80 000shares) 100 000 80 000
Mark-to-market reserve 15 000 –
Retained earnings 26 000 20 000
Trade and other payables 84 000 36 000
Total equity and liabilities R225 000 R136 000
208
Intragroup transactions
Since 1 July 20.17, P Ltd has been purchasing all its inventories from S Ltd at a profit
mark-up of 25% on the cost of the goods. These goods are inventories in the records of
S Ltd. Total sales from S Ltd to P Ltd during the current reporting period amounted to
R50 000.
On 1 July 20.15, the date on which P Ltd acquired the interest in S Ltd for R70 000, the
retained earnings of the latter amounted to R7 500. The share capital has remained
unchanged since that date.
P Ltd classified the equity investment in S Ltd under IFRS 9 in its separate financial
statements and recognised fair value adjustments in a mark-to-market reserve (other
comprehensive income).
P Ltd elected to measure the non-controlling interests in an acquiree at their
proportionate share of the acquiree’s identifiable net assets at acquisition date.
Ignore tax implications.
209
Chapter 5
Solution 5.2
A consolidated statement of financial position of the P Ltd Group at 30 June 20.18, as
well as a consolidated statement of profit or loss and other comprehensive income and
consolidated statement of changes in equity for the reporting period ended
30 June 20.18, will be prepared as follows:
P LTD GROUP
CONSOLIDATED STATEMENT OF FINANCIAL POSITION AS AT 30 JUNE 20.18
ASSETS
Current assets
Inventories (10 000(P) + 30 000(S) – 2 000(J3)) 38 000
Trade receivables (130 000(P) + 106 000(S)) 236 000
274 000
Total assets R274 000
EQUITY AND LIABILITIES
Equity attributable to owners of the parent
Share capital 100 000
Retained earnings 34 400
134 400
Non-controlling interests 19 600
Total equity 154 000
Current liabilities
Trade and other payables (84 000(P) + 36 000(S)) 120 000
Total equity and liabilities R274 000
P LTD GROUP
CONSOLIDATED STATEMENT OF PROFIT OR LOSS
AND OTHER COMPREHENSIVE INCOME
FOR THE YEAR ENDED 30 JUNE 20.18
Revenue (100 000(P) + 80 000(S) – 50 000(J2)) 130 000
Cost of sales (50 000(P) + 40 000(S) – 50 000(J2) + 2 000(J3)) (42 000)
Gross profit 88 000
Other expenses (33 000(P) + 29 500(S)) (62 500)
Profit before tax 25 500
Income tax expense (7 000(P) + 5 000(S)) (12 000)
PROFIT FOR THE YEAR 13 500
Other comprehensive income for the year –
TOTAL COMPREHENSIVE INCOME FOR THE YEAR R13 500
Profit attributable to:
Owners of the parent 12 800
Non-controlling interests 700
R13 500
Total comprehensive income attributable to:
Owners of the parent 12 800
Non-controlling interests 700
R13 500
210
Intragroup transactions
P LTD GROUP
CONSOLIDATED STATEMENT OF CHANGES IN EQUITY
FOR THE YEAR ENDED 30 JUNE 20.18
Non-
Share Retained con- Total
Total
capital earnings trolling equity
interests
Balance at 1 July 20.17 100 000 *26 600 126 600 18 900 145 500
Changes in equity for 20.18
Total comprehensive income
for the year:
Profit for the year – 12 800 12 800 700 13 500
Dividend paid – (5 000) (5 000) – (5 000)
Balance at 30 June 20.18 R100 000 R34 400
Ż
R134 400 R19 600 R154 000
Calculations
C1 Analysis of owners’ equity of S Ltd
P Ltd 80%
Total NCI
At Since
i At acquisition (1/7/20.15)
Share capital 80 000 64 000 16 000
Retained earnings 7 500 6 000 1 500
87 500 70 000 17 500
Purchase difference – – –
Consideration
(85 000 – 15 000(J1)) and NCI 87 500 R70 000 17 500
ii Since acquisition
• To beginning of current year:
Retained earnings (14 500 – 7 500) 7 000 5 600 1 400
18 900
• Current year:
Profit for the year (5 500 – 2 000(J3)) 3 500 2 800 700
R98 000 R8 400 R19 600
211
Chapter 5
Comment
a J2 has no effect on the consolidated profit, therefore it is not included in the analysis
of S Ltd’s owner’s equity.
b Where the subsidiary is the seller, the pro forma consolidation journal entry for the
elimination of the unrealised intragroup profit is recognised before commencing with
the analysis of the equity of the subsidiary
c Where the direct method is applied, the pro forma journal entry is directly accounted
for in the analysis (see J1 and J3).
d The following consolidation journals do not have to be prepared when the direct
method is applied, as all the required information can be obtained directly from the
analysis of the equity of the subsidiary.
Further pro forma consolidation journal entries
Dr Cr
R R
J4 Share capital (S)(SCE) 80 000
Retained earnings (S)(SCE) 7 500
Investment in S Ltd (P)(SFP) 70 000
Non-controlling interests (SFP) 17 500
Elimination of equity of S Ltd at acquisition date
J5 Retained earnings – Beginning of year (S)(SCE) 1 400
Non-controlling interests (SFP) 1400
Recognition of non-controlling interests
in the retained earnings of the subsidiary
for the reporting period 1/7/20.15–30/6/20.17
J6 Non-controlling interests (P/L) 700
Non-controlling interests (SFP) 700
Recognition of the non-controlling interests
in the profit for the yea
of one reporting period are the opening inventories of the following reporting period,
the elimination of unrealised profit at the end of (say) 20.17 necessarily affects the
balance of the consolidated retained earnings brought forward from 20.17, as well
as the consolidated profit of 20.18. It must be remembered that each entity in the
group is a separate entity and that each entity in the group draws up its own
separate financial statements within this framework. The consolidation journal
entries are pro forma adjustments processed to draft the consolidated financial
statements. The entities in the group thus do not recognise intragroup adjustments
in their own separate financial statements.
2 The consolidated financial statements for 20.18 are prepared from the separate
financial statements of the entities in the group. Should there have been an
adjustment on consolidation at the end of 20.17 for unrealised intragroup profit, an
adjustment must be made to ensure that the consolidated retained earnings at the
beginning of 20.18 are in agreement with the closing consolidated balance of 20.17
This adjustment is made on the assumption that the inventories on hand at the end
of 20.17 were sold during 20.18 to parties outside the group and that the intragroup
profit has thus realised. This comprises no new concepts; it is simply a question of
procedures: the consolidated results at the end of one reporting period must simply,
by means of pro forma consolidation journal entries, be brought forward in the
consolidation process of the following reporting period.
S Ltd purchased all its inventories from P Ltd at cost price plus 33䱩 %. The inventories
on hand in the records of S Ltd were as follows:
31 December 20.17 R20 000
31 December 20.18 R25 000
Total sales of inventories from P Ltd to S Ltd were as follows:
20.17 R50 000
20.18 R80 000
Ignore tax implications.
Solution 5.3
213
Chapter 5
First ensure that the consolidated retained earnings at the beginning of 20.18 agree
with the consolidated retained earnings at the end of 20.17:
31 December 20.18 – Pro forma consolidation journal entries
Dr Cr
R R
J1 Retained earnings – Beginning of year (P)(SCE) 5 000
Cost of sales (P)(P/L) 5 000
Adjustment to ensure that the consolidated retained
earnings at the beginning of 20.18 is in agreement
with the consolidated retained earnings at the
end of 20.17
Comment
This journal can be explained as follows, as it is a combination of the following two pro
forma journals:
At the beginning of the reporting period the following pro forma journal is done:
R R
Retained earnings – Beginning of year (P)(SCE) 5 000
Inventories (S)(SFP) 5 000
Adjustment to ensure that the consolidated retained
earnings at the beginning 20.18 are in agreement with
the consolidated retained earnings at the end of 20.17.
Once the inventories are sold by the S Ltd, the following pro forma journal would be
recorded on date of sale to account for the realisation of the profit:
R R
Inventories (S)(SFP) 5 000
Cost of sales (P)(P/L) 5 000
Recognition of realisation of profit
By the end of the reporting period the pro forma journal (as shown above) is put through
instead.
Now eliminate intragroup sales and unrealised profit in closing inventories for the
current reporting period:
Dr Cr
R R
J2 Revenue (P)(P/L) 80 000
Cost of sales (S)(P/L) 80 000
Elimination of intragroup sales during the current
reporting period
J3 Cost of sales (P)(P/L) 6 250
Inventories (S)(SFP) 6 250
Elimination of unrealised profit in the closing
inventories of S Ltd at 31/12/20.18 (25 000 × 33,3/133,3)
The elimination of unrealised profit in essence comprises the deferment of the
recognition of the profit from one reporting period to the following reporting period
(compare J2 of 20.17 with J1 of 20.18 above). In the above example, the parent was
the seller, thus the intragroup profit is included in the profit or loss of the parent. As a
result, the intragroup adjustments are not taken into account in the analysis of the
214
Intragroup transactions
equity of S Ltd and have no effect on any possible non-controlling interests in S Ltd.
This is also clear from the pro forma consolidation journal entries of the example, where
each time only the profit or loss of P Ltd is affected.
Where the subsidiary is, however, the selling entity, the pro forma journals must be
taken into account before the analysis of the equity is done and a portion of the
unrealised intragroup profit is appropriated to the non-controlling interests in the
subsidiary, as will be clear from the following example:
The following are the abridged financial statements of P Ltd and subsidiary S Ltd for the
reporting periods 20.17 and 20.18:
STATEMENTS OF FINANCIAL POSITION AS AT 31 DECEMBER
P Ltd S Ltd
20.17 20.18 20.17 20.18
ASSETS
Investment in S Ltd:
45 000 shares at fair value 70 000 75 000 – –
Inventories 30 000 40 000 20 000 30 000
Trade receivables 62 500 102 500 60 000 55 000
Total assets R162 500 R217 500 R80 000 R85 000
EQUITY AND LIABILITIES
Share capital (100 000/50 000 shares) 100 000 100 000 50 000 50 000
Mark-to-market reserve 2 500 7 500
Retained earnings 60 000 110 000 30 000 35 000
Total equity and liabilities R162 500 R217 500 R80 000 R85 000
215
Chapter 5
216
Intragroup transactions
Solution 5.4
The consolidated financial statements of the P Ltd Group for the reporting periods
ended 31 December 20.17 and 20.18 will be prepared as follows by applying the direct
method:
Reporting period ended 31 December 20.17:
P LTD GROUP
CONSOLIDATED STATEMENT OF FINANCIAL POSITION
AS AT 31 DECEMBER 20.17
ASSETS
Current assets
Inventories (30 000(P) + 20 000(S) – 2 000(J3)) 48 000
Trade receivables (62 500(P) + 60 000(S)) 122 500
170 500
Total assets R170 500
EQUITY AND LIABILITIES
Equity attributable to owners of the parent
Share capital (P) 100 000
Retained earnings (SCE) 62 700
162 700
Non-controlling interests (Analysis) 7 800
Total equity 170 500
Total equity and liabilities R170 500
Comment
The figures and acronyms in brackets fulfil the role of a worksheet and are not intended
for publication.
217
Chapter 5
P LTD GROUP
CONSOLIDATED STATEMENT OF PROFIT OR LOSS
AND OTHER COMPREHENSIVE INCOME
FOR THE YEAR ENDED 31 DECEMBER 20.17
Revenue (70 000(P) + 50 000(S) – 30 000(J2)) 90 000
Cost of sales (35 000(P) + 25 000(S) – 30 000(J2) + 2 000(J3)) (32 000)
Gross profit 58 000
Other expenses (15 000(P) + 15 000(S)) (30 000)
Profit before tax 28 000
Income tax expense (5 000(P) + 5 000(S)) (10 000)
PROFIT FOR THE YEAR 18 000
Other comprehensive income for the year –
TOTAL COMPREHENSIVE INCOME FOR THE YEAR R18 000
Profit attributable to:
Owners of the parent (Balancing figure) 17 700
Non-controlling interests 300
R18 000
Total comprehensive income attributable to:
Owners of the parent (Balancing figure) 17 700
Non-controlling interests (Analysis) 300
R18 000
P LTD GROUP
CONSOLIDATED STATEMENT OF CHANGES IN EQUITY
FOR THE YEAR ENDED 31 DECEMBER 20.17
Non-
Share Retained con- Total
Total
capital earnings trolling equity
interests
Balance at 1 January 20.17 100 000 45 000 145 000 – 145 000
Changes in equity for 20.17
Total comprehensive income
for the year:
Profit for the year – 17 700 17 700 300 18 000
Acquisition of subsidiary – – – 7 500 7 500
Balance at
31 December 20.17 R100 000 R62 700 R162 700 R7 800 R170 500
Comment
As control of the subsidiary was obtained in the current reporting period (on
1 January 20.17), the non-controlling interests should be presented in the
consolidated financial statements for the period.
218
Intragroup transactions
Calculations
C1 Analysis of owners’ equity of S Ltd
P Ltd 90%
Total NCI
At Since
i At acquisition (1/1/20.17)
Share capital 50 000 45 000 5 000
Retained earnings 25 000 22 500 2 500
75 000 67 500 7 500
Purchase difference – – –
Consideration (70 000 – 2 500(J1)) and NCI 75 000 R67 500 7 500
ii Since acquisition
• To beginning of current year :
None (control acquired on 1/1/20.17) – – –
• Current year:
Profit for the year (5 000 – 2 000(J3)) 3 000 2 700 300
R78 000 R2 700 R7 800
continued
219
Chapter 5
Dr Cr
R R
J4 Share capital (S)(SCE) 50 000
Retained earnings (S)(SCE) 25 000
Investment in S Ltd (P)(SFP) 67 500
Non-controlling interests (SFP) 7 500
Elimination of owners’ equity at acquisition of S Ltd
J5 Non-controlling interests (P/L) 300
Non-controlling interests (SFP) 300
Recognition of non-controlling interests in profit for
the year
220
Intragroup transactions
P LTD GROUP
CONSOLIDATED STATEMENT OF PROFIT OR LOSS
AND OTHER COMPREHENSIVE INCOME
FOR THE YEAR ENDED 31 DECEMBER 20.18
Revenue (90 000(P) + 60 000(S) – 20 000(J3)) 130 000
Cost of sales (20 000(P) + 30 000(S) – 20 000(J3) – 2 000(J2) + 3 000(J4)) (31 000)
Gross profit 99 000
Other expenses (10 000(P) + 18 000(S)) (28 000)
Profit before tax 71 000
Income tax expense (10 000(P) + 7 000(S)) (17 000)
PROFIT FOR THE YEAR 54 000
Other comprehensive income for the year –
TOTAL COMPREHENSIVE INCOME FOR THE YEAR R54 000
Profit attributable to:
Owners of the parent (Balancing figure) 53 600
Non-controlling interests (Analysis) 400
R54 000
Total comprehensive income attributable to:
Owners of the parent (Balancing figure) 53 600
Non-controlling interests 400
R54 000
P LTD GROUP
CONSOLIDATED STATEMENT OF CHANGES IN EQUITY
FOR THE YEAR ENDED 31 DECEMBER 20.18
Non-
Share Retained con- Total
Total
capital earnings trolling equity
interests
Balance at 1 January 20.18 100 000 *62 700 162 700 7 800 170 500
Changes in equity for 20.18
Total comprehensive income
for the year:
Profit for the year – 53 600 53 600 400 54 000
Balance at
31 December 20.18 R100 000 R116 300 R216 300 R8 200 R224 500
221
Chapter 5
Calculations
C1 Analysis of owners’ equity of S Ltd
P Ltd 90%
Total NCI
At Since
i At acquisition (1/1/20.17)
Share capital 50 000 45 000 5 000
Retained earnings 25 000 22 500 2 500
75 000 67 500 7 500
Purchase difference – – –
Consideration (75 000 – 7 500(J1)) and NCI 75 000 R67 500 7 500
ii Since acquisition
• To beginning of current year :
Retained earnings
(30 000 – 25 000 – 2 000(J2)) 3 000 2 700 300
7 800
• Current year :
Profit for the year
(5 000 + 2 000(J2) – 3 000(J4)) 4 000 3 600 400
R82 000 R6 300 R8 200
222
Intragroup transactions
Comment
Note that J2 only moves the R2 000 to the current reporting period – the reporting
period in which the inventories are sold to parties outside the group, thus realising the
profit.
223
Chapter 5
224
Intragroup transactions
Comment
The following table illustrates this principle clearly:
Inventory Value accord- Net realisable
at selling price ing to group value
R R R
As the value should be R40 000 from the group’s perspective and the net realisable
value is lower (R39 000), no further pro forma consolidation journal is required for
consolidation purposes.
If P Ltd did not recognise the write-down to net realisable value in its individual records,
the unrealised intragroup profit would firstly have to be eliminated and then the write
down would have to be done on a pro forma basis as follows:
Dr Cr
R R
Cost of sales (S)(P/L) 10 000
Inventories (P)(SFP) 10 000
Elimination of unrealised profit included in closing
inventories (50 000 x 25/125)
and
Dr Cr
R R
Cost of sales (Loss on write down of inventories to net
realisable value) (S)(P/L) 1 000
Inventories (P)(SFP) 1 000
Inventories written down to their net realisable value
at the end of the reporting period according to IAS 2
requirements (40 000 – 39 000)
Explanatory example
S Ltd (subsidiary) sells inventories to P Ltd (the parent) at cost plus 25%. The closing
inventories in the records of P Ltd at 31 December 20.18 are R50 000. At
31 December 20.18, P Ltd writes the inventories down to net realisable value at
31 December 20.18 of R44 000 in its separate records. Ignore tax implications. The
journal entry in the records of P Ltd at 31 December 20.18 is as follows:
225
Chapter 5
Dr Cr
R R
Cost of sales (Loss on write down of inventories to net
realisable value) (P/L) 6 000
Inventories (SFP) 6 000
Inventories written down to their net realisable value
at the end of the reporting period according to IAS 2
requirements
The net realisable value of the inventories (R44 000) is more than the original cost price
to the group (R50 000 × 100/125 = R40 000) and therefore a further pro forma
consolidation journal entry is required in respect of the elimination of unrealised profit.
Dr Cr
R R
Cost of sales (S)(P/L) (44 000 – 40 000) 4 000
Inventories (P)(SFP) 4 000
Elimination of unrealised profit in the closing inventories
of P Ltd at 31 December 20.18
Comment
The following table illustrates this principle clearly:
Inventory at Net realisable Value according
selling price value to group
R R R
50 000 44 000 40 000
226
Intragroup transactions
S Ltd (a partially-owned subsidiary) sold inventories for the first time to its parent, P Ltd,
during the reporting period ended 28 February 20.18, at a profit mark-up of 25% on cost
price. On 28 February 20.18, inventories to the value of R100 000 (at cost to P Ltd)
were still on hand. The company tax rate is 28%. Total sales from S Ltd to P Ltd for the
current reporting period amounted to R200 000.
227
Chapter 5
Solution 5.5
Comment
The deferred tax on the unrealised profit can be explained as follows in terms of
IAS 12.11:
In the records of P Ltd (the purchaser) the inventories would have had the following
accounting and tax values:
Carrying Temporary Deferred tax
Tax base
amount difference @ 28%
R100 000 R100 000 R0 R0
For the group, after the pro forma journals had been taken into account, the values
would be as follows:
Carrying Temporary Deferred tax
Tax base
amount difference @ 28%
R80 000 R100 000 (R20 000) R5 600dr
The DTA changes from R0 to R5,6, therefore requiring a debit adjustment of R5 600.
Comment
The net adjustment after tax amounts to R14 400 and a portion of the after tax
adjustment is allocated via the analysis of S Ltd’s owner’s equity to non-controlling
interests.
Assume that at 28 February 20.19 (i.e. a year later than in example 5.5) P Ltd had
inventories on hand to the value of R150 000 (at cost price to P Ltd) which it had
acquired from S Ltd at the same profit mark-up as during the previous reporting period.
228
Intragroup transactions
Total sales of inventories from S Ltd to P Ltd for the current reporting period amounted
to R300 000. Again assume a company tax rate of 28%.
Solution 5.6
Based on the FIFO cost formula, it is assumed that the inventories which P Ltd had on
hand at 28 February 20.18 were sold entirely during the course of the current reporting
period. The following consolidation journal entries will be necessary at 28 February
20.19:
Dr Cr
R R
J1 Retained earnings – Beginning of year (S)(SCE) 14 400
Deferred tax (S)(SFP) 5 600
Cost of sales (S)(P/L) 20 000
Adjustment to ensure that the consolidated
retained earnings at the beginning of 20.19 are in
agreement with the consolidated retained earnings
at the end of 20.18
J2 Income tax expense (S)(P/L) 5 600
Deferred tax (S)(SFP) 5 600
Tax implications of realisation of unrealised profit
in opening inventories of P Ltd
J3 Revenue (S)(P/L) 300 000
Cost of sales (P)(P/L) 300 000
Elimination of intragroup sales
J4 Cost of sales (S)(P/L 30 000
Inventories (P)(SFP) 30 000
Elimination of unrealised intragroup profit included
in P Ltd’s closing inventories (150 000 × 25/125)
J5 Deferred tax (S)(SFP) 8 400
Income tax expense (S)(P/L) 8 400
Adjustment of deferred tax on R30 000
unrealised intragroup profit (30 000 × 28%)
Comment
By 28 February 20.19 the inventories on hand at the end of the previous reporting
period are assumed to have been sold. The intragroup profit has therefore realised from
the group’s perspective and furthermore the taxation has therefore become payable,
necessitating the recognition of a tax expense (J2 above) and the reversal of the
temporary differences.
229
Chapter 5
also warrant attention. In terms of tax requirements, capital gains tax is payable when a
financial asset at fair value through OCI (the investment in the subsidiary) is sold to a
third party. (See IAS12.51 on the assumption that the carrying amount of the
investment will ultimately be recovered through sale.) Deferred tax is therefore taken
into account at the capital gains rate on any gains or losses on financial asset at fair
value through OCI. The capital gains tax rate is calculated as 66,6% of the company tax
rate, as 66,6% of the capital gain is taxable. As the tax rate is set at 28% in this work,
the capital gains tax rate will be 18,6% (66,6% × 28%).
At the end of every reporting period, the investment in the subsidiary is measured at fair
value in the parent’s individual financial statements. Gains or losses on the
remeasurement of financial assets are recognised in OCI through the mark-to-market
reserve. On consolidation of the financial statements of the parent and the subsidiary,
the mark-to-market reserve is reversed to determine the original consideration
transferred to obtain the controlling interest in the subsidiary at the acquisition date.
The deferred tax that was taken into account on any gains or losses on financial assets
at fair value through OCI must also be reversed on consolidation of the financial
statements of the parent and the subsidiary.
On 2 January 20.17 P Ltd acquired an 80% interest in S Ltd at R8 000. P Ltd classifies
the investment in terms of IFRS 9 in its separate financial statements and recognises
fair value adjustments in a mark-to-market reserve (other comprehensive income).
On 31 December 20.17 the fair value of the investment in S Ltd was R9 500.
On 31 December 20.18 the fair value of the investment in S Ltd was R10 000.
Assume a company tax rate of 28% and that 66,6% of the capital gain is subject to
capital gains tax.
Solution 5.7
230
Intragroup transactions
Comment
The deferred tax on the movement in the fair value of the investment can be explained
as follows in terms of IAS 12.11:
In the records of P Ltd (the investor) the investment would have had the following
accounting and tax values:
Carrying Temporary Deferred tax
Tax base
amount difference @ 66,6% × 28%
9 500 8 000 1 500 280cr
For the group, after the pro forma journals had been taken into account, the values
would be as follows:
Carrying Temporary Deferred tax
Tax base
amount difference @ 14%
8 000 8 000 0 0
The deferred tax balance needs to be adjusted from R280 to R0, therefore requiring a
debit adjustment of R280.
231
Chapter 5
Dr Cr
R R
Mark-to-market reserve (P)(OCI) (10 000 – 9 500) 500
Investment in S Ltd (P)(SFP) 500
Reversal of fair value adjustment on investment in S Ltd
for current reporting period at group level
Deferred tax (P)(SFP) (500 × 66,6% × 28%) 93
Income tax expense of OCI (P)(OCI) 93
Deferred tax effect of reversal of fair value adjustment on
investment in S Ltd for current reporting period at group
level
The explanation in example 5.7 serves as basis for the fair value adjustments to the
investment in example 5.8 which follows:
The following are the abridged financial statements of P Ltd and its subsidiary S Ltd for
the reporting period ended 31 December 20.18:
STATEMENTS OF FINANCIAL POSITION AS AT 31 DECEMBER 20.18
P Ltd S Ltd
ASSETS
Investment in S Ltd: 8 000 shares at fair value (20.17 – R9 500) 10 000 –
Inventories 15 000 15 000
Trade receivables 9 000 6 200
Total assets R34 000 R21 200
EQUITY AND LIABILITIES
Share capital (10 000/10 000 shares) 10 000 10 000
Mark-to-market reserve 1 627 –
Retained earnings 20 400 11 200
Deferred tax 1 973 –
Total equity and liabilities R34 000 R21 200
232
Intragroup transactions
233
Chapter 5
Solution 5.8
P LTD GROUP
CONSOLIDATED STATEMENT OF FINANCIAL POSITION
AS AT 31 DECEMBER 20.18
ASSETS
Current assets
Inventories (15 000(P) + 15 000(S) – 3 000(J5)) 27 000
Trade receivables (9 000(P) + 6 200(S)) 15 200
42 200
Total assets R42 200
EQUITY AND LIABILITIES
Equity attributable to owners of the parent
Share capital 10 000
Retained earnings 27 200
37 200
Non-controlling interests 4 240
Total equity 41 440
Non-current liabilities
Deferred tax (1 973 – 280(J1) – 93(J3) – 840(J6)) 760
Total equity and liabilities R42 200
P LTD GROUP
CONSOLIDATED STATEMENT OF PROFIT OR LOSS
AND OTHER COMPREHENSIVE INCOME
FOR THE YEAR ENDED 31 DECEMBER 20.18
Revenue (50 000(P) + 60 000(S) – 30 000(J4)) 80 000
Cost of sales (25 000(P) + 40 000(S) – 30 000(J4) + 3 000(J5)) (38 000)
Gross profit 42 000
Other expenses (5 000(P) + 10 000(S)) (15 000)
Profit before tax 27 000
Income tax expense (5 600(P) + 2 800(S) – 840(J6)) (7 560)
PROFIT FOR THE YEAR 19 440
Other comprehensive income for the year –
TOTAL COMPREHENSIVE INCOME FOR THE YEAR R19 440
Profit attributable to:
Owners of the parent 18 000
Non-controlling interests 1 440
R19 440
Total comprehensive income attributable to:
Owners of the parent 18 000
Non-controlling interests 1 440
R19 440
234
Intragroup transactions
P LTD GROUP
CONSOLIDATED STATEMENT OF CHANGES IN EQUITY
FOR THE YEAR ENDED 31 DECEMBER 20.18
Non-
Share Retained con- Total
Total
capital earnings trolling equity
interests
Balance at 1 January 20.18 10 000 *9 200 19 200 2 800 22 000
Changes in equity for 20.18
Total comprehensive income
for the year:
Profit for the year – 18 000 18 000 1 440 19 440
Balance at 31 December 20.18 R10 000 R27 200 R37 200 R4 240 R41 440
Comment
As P Ltd is the seller of the inventories, the unrealised profit that was eliminated on
consolidation should be taken into account when the balances of the consolidated
retained earnings are calculated.
Calculations
C1 Analysis of owners’ equity of S Ltd
P Ltd 80%
Total NCI
At Since
i At acquisition (1/1/20.17)
Share capital 10 000 8 000 2 000
Retained earnings – – –
10 000 8 000 2 000
Purchase difference – – –
Consideration
(10 000 – 1 500(J1) – 500(J2)) and NCI 10 000 R8 000 2 000
ii Since acquisition
• To beginning of current year :
Retained earnings (4 000 – 0) 4 000 3 200 800
2 800
• Current year :
Profit for the year 7 200 5 760 1 440
R21 200 R8 960 R4 240
Comment
As P Ltd is the seller, the intragroup sale of inventories has no effect on the analysis of
the equity of S Ltd.
235
Chapter 5
Dr Cr
R R
J1 Mark-to-market reserve – Beginning of year
(P)(SCE)(1 500 × (100% - (66,6% × 28%)) 1 220
Deferred tax (P)(SFP) (1 500 × (66,6% × 28%) 280
Investment in S Ltd (P)(SFP) (9 500 – 8 000) 1 500
Reversal of fair value adjustment on investment
in S Ltd at beginning of reporting period at group
level
J2 Mark-to-market reserve (P)(OCI) (10 000 – 9 500) 500
Investment in S Ltd (P)(SFP) 500
Reversal of fair value adjustment on investment in
S Ltd for current reporting period at group level
J3 Deferred tax (P)(SFP)(500 × 66,6% × 28%) 93
Income tax expense of OCI (P)(OCI) 93
Tax effect of reversal of fair value adjustment on
investment in S Ltd for current reporting period at
group level
J4 Revenue (P)(P/L) 30 000
Cost of sales (S)(P/L) 30 000
Elimination of intragroup sales
J5 Cost of sales (P)(P/L) 3 000
Inventories (S)(SFP) 3 000
Elimination of unrealised intragroup profit included
in the closing inventories of S Ltd at 31/12/20.18
(15 000 × 25/125)
236
Intragroup transactions
Dr Cr
R R
J8 Retained earnings – Beginning of year (S)(SCE) 800
Non-controlling interests (SFP) 800
Recognition of non-controlling interests in retained
earnings of the subsidiary for the period since
acquisition until beginning of current reporting
period
J9 Non-controlling interests (P/L) 1 440
Non-controlling interests (SFP) 1 440
Recognition of non-controlling interests in profit for
the year
237
Chapter 5
Assume that P Ltd sold property (which originally cost R100 000) to S Ltd, a wholly-
owned subsidiary, at R150 000 on 2 January 20.17. S Ltd sold the property at
R250 000 on 30 June 20.18 to a third party. P Ltd’s reporting period ends on
31 December.
Solution 5.9
Comment
From the perspective of the group, the transaction did not take place and the carrying
amount of the property is still R100 000. It is clear that the carrying amount of the
property (as presented in S Ltd’s statement of financial position at R150 000) should be
reduced by R50 000. Furthermore, the gain on the sale that was recognised by P Ltd in
its profit or loss, is now deemed to be unrealised from the perspective of the group (as a
third party was not involved), and should therefore be reversed.
The gain on sale of property will be included in the line item, “other income” in the profit
or loss section of the statement of profit or loss and other comprehensive income.
238
Intragroup transactions
Comment
In 20.17 the consolidated profit for that reporting period was debited with the unrealised
gain of R50 000. The resulting effect was that the retained earnings at the end of 20.17
were reduced by the unrealised gain. The retained earnings at the end of 20.17 became
the retained earnings at the beginning of 20.18. As the asset is still owned within the
group, and the gain is still regarded as unrealised (reasons above), the adjustment
needs to be repeated with reference to the 20.18 line items.
Comment
In 20.19 when the property is sold to a third party, the following applies:
In S Ltd’s records a gain of R100 000 is shown, i.e. R250 000 – R150 000 (price at
which S Ltd purchased property intragroup from P Ltd).
From the perspective of the group the gain should however be R150 000, i.e. R250 000
– R100 000 (original cost to the group). By recognising the pro forma journal above, the
correct gain of R150 000 (100 000 + 50 000 (pro forma adjustment)) is recognised in the
consolidated profit or loss.
From the three pro forma journals above, it is clear that in the year of the intragroup
sale of property, the gain on the sale of property will be shown at R50 000 in P Ltd’s
profit or loss for 20.17, but no such item will appear in the 20.17 consolidated profit or
loss, as a result of the recording of the appropriate journal entry. When the property is
eventually sold to a third party in 20.19, the gain on the sale of property will appear as
R100 000 in the profit or loss of S Ltd for 20.19, but as R150 000 in the consolidated
profit or loss for 20.19.
239
Chapter 5
It is once again clear that the elimination of unrealised gain, in essence, shifts the
applicable gain to the reporting period where the gain is realised as a result of a
transaction with a party outside the group.
In the case where the subsidiary is the selling entity of property to another entity in the
group, the pro forma journals will remain unchanged, but the adjustment to equity will
have to be taken into account before the equity of the subsidiary is analysed. The non-
controlling interest will therefore be affected with “their share” of the unrealised gain
while the entity still holds the property, or the realised gain in the reporting period that
the property is sold.
240
Intragroup transactions
At 31 December 20.18, the end of the reporting period, P Ltd holds an interest of 80%
in S Ltd. On 2 January 20.18, P Ltd sold certain equipment which originally cost
R10 000 to S Ltd for R15 000. S Ltd recognises depreciation on this equipment on a
straight-line basis at a rate of 20% per annum.
Solution 5.10
241
Chapter 5
Dr Cr
R R
Retained earnings – Beginning of year (P) (SCE) (5 000 – 1 000) 4 000
Accumulated depreciation: Equipment (S)(SFP) 1 000
Equipment (S)(SFP) 5 000
Adjustment to ensure that the consolidated retained
earnings at the beginning of 20.19 agrees with the
consolidated retained earnings of 20.18.
Comment
This pro forma consolidation journal is purely a combination of the two pro forma
journals that were prepared for the consolidation of the previous reporting period, but in
relation to the current reporting period’s (20.19) figures and financial statements.
The following are the abridged financial statements of P Ltd and its subsidiary S Ltd for
the reporting periods 20.18 and 20.19:
STATEMENTS OF FINANCIAL POSITION AS AT 31 DECEMBER
P Ltd S Ltd
20.18 20.19 20.18 20.19
ASSETS
Plant at cost price 20 000 20 000 40 000 40 000
Accumulated depreciation (2 000) (4 000) (4 000) (8 000)
18 000 16 000 36 000 32 000
Investment in S Ltd: 45 000 shares 67 500 67 500 – –
Trade receivables 74 500 106 500 45 000 54 000
Total assets R160 000 R190 000 R81 000 R86 000
EQUITY AND LIABILITIES
Share capital (100 000/50 000 shares) 100 000 100 000 50 000 50 000
Retained earnings 60 000 90 000 31 000 36 000
Total equity and liabilities R160 000 R190 000 R81 000 R86 000
242
Intragroup transactions
P Ltd purchased all its plant from S Ltd on the acquisition date, 1 January 20.18. The
plant did not form part of S Ltd’s inventories. S Ltd realised a gain of R2 500 on the
transaction. Depreciation is provided annually on the straight line basis at a rate of 10%
per annum.
P Ltd recognised the equity investment in S Ltd in its separate records using the cost
price method.
Assume that the identifiable assets acquired and the liabilities assumed at acquisition
date are shown at their acquisition-date fair values, as determined in terms of IFRS 3.
P Ltd elected to measure the non-controlling interests in an acquiree at their
proportionate share of the acquiree’s identifiable net assets at acquisition date.
Ignore tax implications.
243
Chapter 5
Solution 5.11
The consolidated financial statements of the P Ltd Group for the reporting periods
ended 31 December 20.18 and 31 December 20.19 will be as follows:
Reporting period ended 31 December 20.18
P LTD GROUP
CONSOLIDATED STATEMENT OF FINANCIAL POSITION
AS AT 31 DECEMBER 20.18
ASSETS
Non-current assets
Plant (20 000(P) + 40 000(S) – 2 500(J1)) 57 500
Accumulated depreciation (2 000(P) + 4 000(S) – 250(J2)) (5 750)
51 750
Current assets
Trade receivables (74 500(P) + 45 000(S)) 119 500
Total assets R171 250
EQUITY AND LIABILITIES
Equity attributable to owners of the parent
Share capital 100 000
Retained earnings 63 375
163 375
Non-controlling interests 7 875
Total equity 171 250
Total equity and liabilities R171 250
244
Intragroup transactions
P LTD GROUP
CONSOLIDATED STATEMENT OF PROFIT OR LOSS
AND OTHER COMPREHENSIVE INCOME
FOR THE YEAR ENDED 31 DECEMBER 20.18
Revenue (50 000(P) + 25 000(S)) 75 000
Cost of sales (25 000(P) + 12 500(S)) (37 500)
Gross profit 37 500
Other income (15 800(P) + 8 300(S) – 2 500(J1)) 21 600
Other expenses (18 000(P) + 8 500(S) + (2 000(P) + 4 000(S)(depreciation))
– 250(J2) (32 250)
Profit before tax 26 850
Income tax expense (5 800(P) + 2 300(S)) (8 100)
PROFIT FOR THE YEAR 18 750
Other comprehensive income for the year –
TOTAL COMPREHENSIVE INCOME FOR THE YEAR R18 750
Profit attributable to:
Owners of the parent 18 375
Non-controlling interests 375
R18 750
Total comprehensive income attributable to:
Owners of the parent 18 375
Non-controlling interests 375
R18 750
P LTD GROUP
CONSOLIDATED STATEMENT OF CHANGES IN EQUITY
FOR THE YEAR ENDED 31 DECEMBER 20.18
Non-
Share Retained con- Total
Total
capital earnings trolling equity
interests
Balance at 1 January 20.18 100 000 45 000 145 000 – 145 000
Changes in equity for 20.18
Total comprehensive income
for the year:
Profit for the year – 18 375 18 375 375 18 750
Acquisition of subsidiary – – – 7 500 7 500
Balance at
31 December 20.18 R100 000 R63 375 R163 375 R7 875 R171 250
245
Chapter 5
Calculations
C1 Analysis of owners’ equity of S Ltd
P Ltd 90%
Total NCI
At Since
i At acquisition (1/1/20.18)
Share capital 50 000 45 000 5 000
Retained earnings 25 000 22 500 2 500
75 000 67 500 7 500
Purchase difference – – –
Consideration and NCI 75 000 R67 500 7 500
ii Since acquisition
• To beginning of current year :
None (control acquired on 1/1/20.18) – – –
• Current year :
Profit for the year
(6 000 – 2 500(J1) + 250(J2)) 3 750 3 375 375
R78 750 R3 375 R7 875
246
Intragroup transactions
Comment
Because S Ltd is the selling entity, the “other income” within profit or loss of S Ltd is
debited with the unrealised intragroup gain. Similarly, the realised portion is credited to
the “other expenses” of S Ltd. This procedure ensures that a portion of the unrealised
intragroup gain is allocated to the non-controlling interest in S Ltd, just as a portion of
the realised portion is allocated to the non-controlling interest in S Ltd.
P LTD GROUP
CONSOLIDATED STATEMENT OF CHANGES IN EQUITY
FOR THE YEAR ENDED 31 DECEMBER 20.19
Non-
Share Retained con- Total
Total
capital earnings trolling equity
interests
Balance at 1 January 20.19 100 000 *63 375 163 375 7 875 171 250
Changes in equity for
20.19
Total comprehensive
income for the year:
Profit for the year – 34 725 34 725 525 35 250
Balance at
31 December 20.19 R100 000 R98 100 R198 100 R8 400 R206 500
247
Chapter 5
P LTD GROUP
CONSOLIDATED STATEMENT OF PROFIT OR LOSS
AND OTHER COMPREHENSIVE INCOME
FOR THE YEAR ENDED 31 DECEMBER 20.19
Revenue (120 000(P) + 30 000(S)) 150 000
Cost of sales (60 000(P) + 15 000(S)) (75 000)
Gross profit 75 000
Other income (11 600(P) + 7 900(S)) 19 500
Other expenses
(28 000(P) + 12 000(S) + (2 000(P) + 4 000(S) – (depreciation) 250(J2)) (45 750)
Profit before tax 48 750
Income tax expense (11 600(P) + 1 900(S)) (13 500)
PROFIT FOR THE YEAR 35 250
Other comprehensive income for the year –
TOTAL COMPREHENSIVE INCOME FOR THE YEAR R35 250
Profit attributable to:
Owners of the parent 34 725
Non-controlling interests 525
R35 250
Total comprehensive income attributable to:
Owners of the parent 34 725
Non-controlling interests 525
R35 250
Calculations
C1 Analysis of owners’ equity of S Ltd
P Ltd 90%
Total NCI
At Since
i At acquisition (1/1/20.18)
Share capital 50 000 45 000 5 000
Retained earnings 25 000 22 500 2 500
75 000 67 500 7 500
Purchase difference – – –
Consideration and NCI 75 000 R67 500 7 500
ii Since acquisition
• To beginning of current year:
Retained earnings
(31 000 – 25 000 – 2 250(J1)) 3 750 3 375 375
7 875
• Current year :
Profit for the year (5 000 + 250(J2)) 5 250 4 725 525
R84 000 R8 100 R8 400
248
Intragroup transactions
Purchase difference R–
On 31 December 20.18, P Ltd purchased all its plant at R20 000 from S Ltd, a
subsidiary in which it holds a 90% interest. S Ltd is a manufacturer of plant and realised
a gain of R5 000 on this particular transaction. Depreciation is provided for by using the
straight-line basis at a rate of 10% on cost. Assume a company tax rate of 28%.
249
Chapter 5
Solution 5.12
The necessary pro forma consolidation journal entries for the reporting periods ending
31 December 20.18, 20.19 and 20.20 will be recorded as follows:
(a) At 31 December 20.18
Dr Cr
R R
J1 Revenue (S)(P/L) 20 000
Cost of sales (S)(P/L) 15 000
Plant (P)(SFP) 5 000
Elimination of intragroup sale and of unrealised
intragroup gain included in P Ltd’s plant
on 31/12/20.18
J2 Deferred tax (SFP) 1 400
Income tax expense (S)(P/L) 1 400
Recognition of deferred tax on unrealised intragroup
gain included in P Ltd’s plant (5 000 × 28%)
Comment
When one item that is classified as inventory in the records of the seller is sold to
another entity within the group, the gross profit included in the selling price must be
eliminated as it is regarded as being unrealised. This is done by adjusting both the
revenue and cost of sales line items, i.e. the selling price is debited against revenue and
the cost price is credited against cost of sales. The tax adjustment is subsequently
done.
250
Intragroup transactions
The first journal is a combination of the two pro forma journals that were taken into
account in the prior reporting period on consolidation. The realised portion of the gain is
then pro forma credited to the depreciation (“other expenses”) of S Ltd in 20.19, and the
tax provision pro forma adjusted in the statement of profit or loss and other
comprehensive income of S Ltd. As the subsidiary is the seller, in this way, it is ensured
that the non-controlling interests in S Ltd bear and receive their appropriate allocations
of the unrealised gain, later realisations and tax adjustments.
(c) At 31 December 20.20
Dr Cr
R R
J1 Retained earnings – Beginning of year (S)(SCE)
(3 600 – 500 + 140) 3 240
Deferred tax (SFP) (1 400 – 140) 1 260
Accumulated depreciation – Plant (SFP) 500
Plant (P)(SFP) 5 000
Adjustment to ensure that the consolidated
balances concerned at the beginning of 20.20
are in agreement with the adjusted balances
at the end of 20.19
J2 Accumulated depreciation – Plant (SFP) 500
Other expenses (Depreciation) (S)(P/L) 500
Recognition of the portion of unrealised intragroup
gain realised during the reporting period ended
31/12/20.19 (5 000 × 10%)
J3 Income tax expense (S)(P/L) 140
Deferred tax (SFP) 140
Reversal of deferred tax (500 × 28%)
Comment
It should be clear that the unrealised profit realises over the duration of the useful life of
the asset through the reversal of the excess depreciation. By the end of the useful life
the full profit would have realised from the perspective of the group, and no further pro
forma journals would be required
251
Chapter 5
P Ltd acquired a 70% interest in S Ltd on 1 January 20.15 for R24 500, when the
retained earnings of the latter amounted to R25 000. P Ltd was of the opinion that the
assets of S Ltd were shown at fair values at this date.
The following are the abridged financial statements of the two entities at
31 December 20.18:
STATEMENTS OF FINANCIAL POSITION AS AT 31 DECEMBER 20.18
P Ltd S Ltd
ASSETS
Plant: 19 000 18 000
Gross carrying amount 60 000 40 000
Accumulated depreciation (41 000) (22 000)
Investment in S Ltd at fair value 26 900 –
Inventories 17 000 15 000
Trade receivables 28 700 30 000
Total assets R91 600 R63 000
EQUITY AND LIABILITIES
Share capital 25 000 10 000
Mark-to-market reserve 1 953 –
Retained earnings 45 000 38 600
Deferred tax 8 447 6 000
Trade and other payables 11 200 8 400
Total equities and liabilities R91 600 R63 000
252
Intragroup transactions
253
Chapter 5
Solution 5.13
The consolidated financial statements of the group for 20.18 can be prepared as
follows:
P LTD GROUP
CONSOLIDATED STATEMENT OF FINANCIAL POSITION
AS AT 31 DECEMBER 20.18
ASSETS
Non-current assets
Plant (60 000(P) + 40 000(S) – 4 000(J4)) 96 000
Accumulated depreciation (41 000(P) + 22 000(S) – 800(J4) – 800(J5)) (61 400)
34 600
Current assets
Inventories (17 000(P) + 15 000(S) – 1 000(J10)) 31 000
Trade receivables (28 700(P) + 30 000(S)) 58 700
89 700
Total assets R124 300
EQUITY AND LIABILTIES
Equity attributable to owners of the parent
Share capital 25 000
Retained earnings 52 591
77 591
Non-controlling interests 14 061
Total equity 91 652
Non-current liabilities
Deferred tax (8 447(P) + 6 000(S) – 372(J1) – 75(J3) – 896(J4) + 224(J7) – 336(J7)
+ 336(J8) – 280(J11)) 13 048
Current liabilities
Trade and other payables (11 200(P) + 8 400(S)) 19 600
Total liabilities 32 648
Total equity and liabilities R124 300
254
Intragroup transactions
P LTD GROUP
CONSOLIDATED STATEMENT OF PROFIT OR LOSS
AND OTHER COMPREHENSIVE INCOME
FOR THE YEAR ENDED 31 DECEMBER 20.18
Revenue (40 000(P) + 30 000(S) – 10 000(J9)) 60 000
Cost of sales (20 000(P) + 15 000(S) – 1 200(J7) – 10 000(J9) + 1 000(J10)) (24 800)
Gross profit 35 200
Other expenses (13 300(P) + 10 000(S) – 800(J5)) (22 500)
Profit before tax 12 700
Income tax expense (1 900(P) + 1 400(S) + 224(J6) + 336(J8) – 280(J11)) (3 580)
PROFIT FOR THE YEAR 9 120
Other comprehensive income for the year –
TOTAL COMPREHENSIVE INCOME FOR THE YEAR R9 120
Profit attributable to:
Owners of the parent 7 867
Non-controlling interests 1 253
R9 120
Total comprehensive income attributable to:
Owners of the parent 7 867
Non-controlling interests 1 253
R9 120
P LTD GROUP
CONSOLIDATED STATEMENT OF CHANGES IN EQUITY
FOR THE YEAR ENDED 31 DECEMBER 20.18
Non-
Share Retained con- Total
Total
capital earnings trolling equity
interests
Balance at 1 January 20.18 25 000 *44 724 69 118 12 808 81 668
Changes in equity for 20.18
Total comprehensive income
for the year:
Profit for the year – 7 867 7 867 1 253 9 120
Balance at 31 December 20.18 R25 000 R52 591 R77 591 R14 061 R91 652
255
Chapter 5
Comment
It is important to note in this example that the subsidiary sold a plant to the parent, while
the parent sold inventories to the subsidiary. All the journals that affected the profit or
loss of the subsidiary (journals 4 to 6) were taken into account in the analysis of the
equity of S Ltd. On the other hand, the intragroup profit that was eliminated against the
profit or loss of the parent (journals 7 to 11) does not affect the analysis of the equity of
S Ltd. However, these journals must be taken into account when preparing the
consolidated financial statements. Special attention must be paid to the recognition of
the journal affecting the retained earnings of the parent (J4) when determining the
consolidated retained earnings at the beginning of the reporting period.
Calculations
C1 Analysis of owners’ equity of S Ltd
P Ltd 70%
Total NCI
At Since
i At acquisition (1/1/20.15)
Share capital 10 000 7 000 3 000
Retained earnings 25 000 17 500 7 500
35 000 24 500 10 500
Purchase difference – – –
Consideration (26 900 – 2 000(J1)
– 400(J2)) and NCI 35 000 R24 500 10 500
ii Since acquisition
• To beginning of current year :
Retained earnings (10 000 – 2 304 (J4)) 7 696 5 388 2 308
12 808
• Current year :
Profit for the year (3 600 + 800(J5) – 224(J6)) 4 176 2 923 1 253
R46 872 R8 311 R14 061
256
Intragroup transactions
257
Chapter 5
Dr Cr
R R
J8 Income tax expense (P)(P/L) 336
Deferred tax (P)(SFP) 336
Tax implication of unrealised gain in opening
inventories that realises in the current reporting
period
J9 Revenue (P)(P/L) 10 000
Cost of sales (S)(P/L) 10 000
Elimination of intragroup sales
J10 Cost of sales (P)(P/L) 1 000
Inventories (S)(SFP) 1 000
Elimination of unrealised gain in closing inventories
(5 000 × 25/125)
S Ltd sells a plant with a carrying amount and tax base (value) of R15 000 (original cost
price R25 000) for R20 000 on 1 January 20.18 to P Ltd. P Ltd depreciates the machine
at a rate of 20% per annum on the straight-line basis.
Assume a company tax rate of 28%.
258
Intragroup transactions
Solution 5.14
The unrealised profit which must be eliminated is R5 000. S Ltd will, however, pay tax
of R1 400 on the recoupment of R5 000 (20 000 – 15 000).
The pro forma consolidation journal entries on 31 December 20.18 are as follows:
Dr Cr
R R
J1 Other expenses (Gain on sale of plant) (S)(P/L) 5 000
(20 000 – 15 000)
Plant (P)(SFP) 5 000
Elimination of unrealised intragroup profit included
in P Ltd’s plant
J2 Deferred tax (S)(SFP) (5 000 × 28%) 1 400
Income tax expense (S)(P/L) 1 400
Tax implications of the elimination of unrealised
intragroup profit included in P Ltd’s plant
J3 Accumulated depreciation (SFP) (5 000 × 20%) 1 000
Other expenses (Depreciation) (S)(P/L) 1 000
Realisation of a part of the unrealised intragroup
profit included in the plant of P Ltd
J4 Income tax expense (S)(P/L) (1 000 × 28%) 280
Deferred tax (S)(SFP) 280
Tax on realisation of a part of the unrealised
intragroup profit included in the plant of P Ltd
On 1 January 20.18, S Ltd sold a plant with a carrying amount and tax base of R15 000
(original cost price R20 000) to P Ltd for R25 000. P Ltd depreciates machinery at 20%
per annum on the straight-line basis. Assume a company tax rate of 28%.
259
Chapter 5
Solution 5.15
The unrealised profit which must be eliminated is R10 000. The tax recoupment is
limited to R5 000 ((20 000 – 15 000) × 28%). Capital gains tax is payable on 66,6% of
the gain (excess over original cost price) ((25 000 – 20 000) × 66,6% × 28%).
The pro forma consolidation journal entries on 31 December 20.18 are as follows:
Dr Cr
R R
J1 Other income (Gain on sale of plant) (S)(P/L)
(25 000 – 15 000) 10 000
Plant (P)(SFP) 10 000
Elimination of unrealised intragroup profit included
in the plant of P Ltd
J2 Deferred tax (S)(SFP) (5 000 × 28%(recoupment))
+ (5 000 × 66,6% × 28%(CGT)) 2 333
Income tax expense (S)(P/L) 2 333
Tax implications of the elimination of unrealised
profit included in the intragroup profit of P Ltd
J3 Accumulated depreciation (SFP)(10 000 × 20%) 2 000
Other expenses (Depreciation) (S)(P/L) 2 000
Realisation of a part of the unrealised intragroup
profit included in the plant of P Ltd
J4 Income tax expense (S)(P/L)
((5 000 × 20% × 28%) + (5 000 × 20% × 66,6% × 28%)) 467
Deferred tax (S)(SFP) 467
Tax on realisation of a part of the unrealised
intragroup profit included in the plant of P Ltd
S Ltd sells a plant with a carrying amount of R15 000 and a tax base of R12 000
(original cost price R25 000) to P Ltd for R20 000. P Ltd depreciates machinery at 20%
on the straight-line basis.
Assume a company tax rate of 28%.
Solution 5.16
The unrealised profit which must be eliminated is R5 000. The tax expense which must
be eliminated on consolidation is R1 400; this is determined as follows:
Current tax on recoupment (8 000 × 28%) 2 240
Balance on the deferred tax account attributable to the difference
between the carrying amount and the tax base of the machinery
now reversed as the machine is sold (3 000 × 28%). (840)
R1 400
260
Intragroup transactions
The pro forma consolidation journal entries on 31 December 20.18 are as follows:
Dr Cr
R R
J1 Other income (Gain on sale of plant) (S)(P/L)
(20 000 – 15 000) 5 000
Plant (P)(SFP) 5 000
Elimination of unrealised intragroup profit included
in the plant of P Ltd
J2 Deferred tax (SFP) ((8 000 – 3000) × 28%) 1 400
Income tax expense (S)(P/L) 1 400
Tax implications of the elimination of unrealised
intragroup profit included in the plant of P Ltd
J3 Accumulated depreciation (SFP) (5 000 × 20%) 1 000
Other expenses (Depreciation) (S)(P/L) 1 000
Realisation of a part of the unrealised intragroup
profit included in the plant of P Ltd
J4 Income tax expense (S)(P/L) (5000 × 20% × 28%) 280
Deferred tax (SFP) 280
Tax on realisation of a part of the unrealised
intragroup profit included in the plant of P Ltd
The discussion up to this point has been confined to the case where the selling entity is
a dealer in plant. The case is now discussed where the selling entity is not a dealer in
the relevant depreciable property, plant and equipment. Where the selling entity is not a
dealer in plant, the following cases can be distinguished:
261
Chapter 5
The following are the abridged financial statements of P Ltd and its subsidiary S Ltd for
the reporting periods ended 31 December 20.18 and 20.19:
STATEMENTS OF FINANCIAL POSITION AS AT 31 DECEMBER
P Ltd S Ltd
20.18 20.19 20.18 20.19
ASSETS
Investment in S Ltd: 45 000 shares
at fair value (cost: R67 500) 67 500 67 500 – –
Equipment 20 000 40 000 10 000 14 000
Inventories 30 000 40 000 20 000 30 000
Trade receivables 52 500 72 500 60 000 50 000
Total assets R170 000 R220 000 R90 000 R94 000
EQUITY AND LIABILITIES
Share capital (100 000/50 000 shares) 100 000 100 000 50 000 50 000
Retained earnings 60 000 110 000 30 000 34 000
Deferred tax 10 000 10 000 10 000 10 000
Total equity and liabilities R170 000 R220 000 R90 000 R94 000
262
Intragroup transactions
P Ltd recognised the equity investment in S Ltd in its separate financial records using
the cost price method.
P Ltd elected to measure any non-controlling interests in an acquiree at its proportional
share of the acquiree’s identifiable net assets at acquisition date.
Assume that the identifiable assets acquired and the liabilities assumed at acquisition
date are shown at their acquisition-date fair values, as determined in terms of IFRS 3.
P Ltd obtained its interest in S Ltd on 1 January 20.18 at R67 500.
Intragroup sales (S Ltd to P Ltd at cost price plus 25%) were as follows:
20.18 R30 000
20.19 R50 000
P Ltd had the following items, which were bought from S Ltd, on hand at:
31 December 20.18 R10 000
31 December 20.19 R15 000
The items are inventories in the records of S Ltd (seller).
The items are inventories in the records of P Ltd (buyer).
The cost price of the investment in S Ltd equals the fair value of the investment.
Assume a company tax rate of 28%.
Assume that SARS accepts the buyer’s cost price as the new tax cost.
263
Chapter 5
The consolidated financial statements of the P Ltd Group for the reporting period ended
31 December 20.18 and 31 December 20.19, will be prepared as follows:
Reporting period ended 31 December 20.18
P LTD GROUP
CONSOLIDATED STATEMENT OF FINANCIAL POSITION
AS AT 31 DECEMBER 20.18
ASSETS
Non-current assets
Equipment (20 000(P) + 10 000(S)) 30 000
Current assets
Inventories (30 000(P) + 20 000(S) – 2 000(J2)) 48 000
Trade receivables (52 500(P) + 60 000(S)) 112 500
160 500
Total assets R190 500
EQUITY AND LIABILITIES
Equity attributable to owners of the parent
Share capital 100 000
Retained earnings 63 204
163 204
Non-controlling interests 7 856
Total equity 171 060
Non-current liabilities
Deferred tax (10 000(P) + 10 000(S) – 560(J3)) 19 440
Total equity and liabilities R190 500
264
Intragroup transactions
P LTD GROUP
CONSOLIDATED STATEMENT OF PROFIT OR LOSS
AND OTHER COMPREHENSIVE INCOME
FOR THE YEAR ENDED 31 DECEMBER 20.18
Revenue (70 000(P) + 50 000(S) – 30 000(J1)) 90 000
Cost of sales (35 000(P) + 25 000(S) – 30 000(J1) + 2 000(J2)) (32 000)
Gross profit 58 000
Other expenses (14 200(P) + 18 050(S)) (32 250)
Profit before tax 25 750
Income tax expense (5 800(P) + 1 950(S) – 560(J3)) (7 190)
PROFIT FOR THE YEAR 18 560
Other comprehensive income for the year –
TOTAL COMPREHENSIVE INCOME FOR THE YEAR R18 560
Profit attributable to:
Owners of the parent 18 204
Non-controlling interests 356
R18 560
Total comprehensive income attributable to:
Owners of the parent 18 204
Non-controlling interests 356
R18 560
P LTD GROUP
CONSOLIDATED STATEMENT OF CHANGES IN EQUITY
FOR THE YEAR ENDED 31 DECEMBER 20.18
Non-
Share Retained con- Total
Total
capital earnings trolling equity
interests
Balance at 1 January 20.18 100 000 45 000 145 000 – 145 000
Changes in equity for 20.18
Total comprehensive income
for the year:
Profit for the year – 18 204 18 204 356 18 560
Acquisition of subsidiary – – – 7 500 7 500
Balance at
31 December 20.18 R100 000 R63 204 R163 204 R7 856 R171 060
265
Chapter 5
Calculations
C1 Analysis of owners’ equity of S Ltd
P Ltd 90%
Total NCI
At Since
i At acquisition (1/1/20.18)
Share capital 50 000 45 000 5 000
Retained earnings 25 000 22 500 2 500
75 000 67 500 7 500
Purchase difference – – –
Consideration and NCI 75 000 R67 500 7 500
ii Since acquisition
• To beginning of current year :
None (control acquired on 1/1/20.18) – – –
• Current year :
Profit for the year
(5 000 – 2 000(J2) + 560(J3)) 3 560 3 204 356
R78 560 R3 204 R7 856
continued
266
Intragroup transactions
Dr Cr
R R
J4 Share capital (S)(SCE) 50 000
Retained earnings (S)(SCE) 25 000
Investment in S Ltd (P)(SFP) 67 500
Non-controlling interests (SFP) 7 500
Elimination of owners’ equity at acquisition of S Ltd
J5 Non-controlling interests (P/L) 356
Non-controlling interests (SFP) 356
Recognition of non-controlling interests in profit
of the subsidiary for the period
267
Chapter 5
P LTD GROUP
CONSOLIDATED STATEMENT OF PROFIT OR LOSS
AND OTHER COMPREHENSIVE INCOME
FOR THE YEAR ENDED 31 DECEMBER 20.19
Revenue (169 000(P) + 60 000(S) – 50 000(J3)) 179 000
Cost of sales (84 500(P) + 30 000(S) – 50 000(J3) – 2 000(J1) + 3 000(J4)) (65 500)
Gross profit 113 500
Other expenses (15 000(P) + 24 500(S)) (39 500)
Profit before tax 74 000
Income tax expense (19 500(P) + 1 500(S) + 560(J2) – 840(J5)) (20 720)
PROFIT FOR THE YEAR 53 280
Other comprehensive income for the year –
TOTAL COMPREHENSIVE INCOME FOR THE YEAR R53 280
Profit attributable to:
Owners of the parent 52 952
Non-controlling interests 328
R53 280
Total comprehensive income attributable to:
Owners of the parent 52 952
Non-controlling interests 328
R53 280
P LTD GROUP
CONSOLIDATED STATEMENT OF CHANGES IN EQUITY
FOR THE YEAR ENDED 31 DECEMBER 20.19
Non-
Share Retained con- Total
Total
capital earnings trolling equity
interests
Balance at 1 January 20.19 100 000 63 204 163 204 7 856 171 060
Changes in equity for 20.19
Total comprehensive
income for the year:
Profit for the year – 52 952 52 952 328 53 280
Balance at
31 December 20.19 R100 000 R116 156 R216 156 R8 184 R224 340
268
Intragroup transactions
Calculations
C1 Analysis of owners’ equity of S Ltd
P Ltd 90%
Total NCI
At Since
i At acquisition (1/1/20.18)
Share capital 50 000 45 000 5 000
Retained earnings 25 000 22 500 2 500
75 000 67 500 7 500
Purchase difference – – –
Consideration and NCI 75 000 R67 500 7 500
ii Since acquisition
• To beginning of current year :
Retained earnings
(30 000 – 25 000 – 1 440(J1)) 3 560 3 204 356
7 856
• Current year :
Profit for the year (4 000 + 2 000(J1) – 560(J2)
– 3 000(J4) + 840(J5)) 3 280 2 952 328
R81 840 R6 156 R8 184
269
Chapter 5
Dr Cr
R R
J2 Income tax expense (S)(P/L) 560
Deferred tax (S)(SFP) 560
Tax implications of realisation of unrealised gain
included in opening inventories of P Ltd
J3 Revenue (S)(P/L) 50 000
Cost of sales (P)(P/L) 50 000
Elimination of intragroup sales
J4 Cost of sales (S)(P/L) 3 000
Inventories (P)(SFP) 3 000
Elimination of the unrealised gain included in the
closing inventories of P Ltd (15 000 × 25/125)
J5 Deferred tax (S)(SFP) 840
Income tax expense (S)(P/L) 840
Tax implication of the elimination of the unrealised
gain included in the closing inventories of P Ltd
(3 000 × 28%)
270
Intragroup transactions
The following are the abridged financial statements of P Ltd and its subsidiary S Ltd, for
the reporting periods ended 31 December 20.18 and 20.19
STATEMENTS OF FINANCIAL POSITION AS AT 31 DECEMBER
P Ltd S Ltd
20.18 20.19 20.18 20.19
ASSETS
Investment in S Ltd: 45 000 shares at fair
value (cost: R67 500) 67 500 67 500 – –
Equipment 20 000 40 000 10 000 14 000
Inventories 30 000 40 000 20 000 30 000
Trade receivables 52 500 72 500 60 000 50 000
Total assets R170 000 R220 000 R90 000 R94 000
EQUITY AND LIABILITIES
Share capital (100 000/50 000 shares) 100 000 100 000 50 000 50 000
Retained earnings 60 000 110 000 30 000 34 000
Deferred tax 10 000 10 000 10 000 10 000
Total equity and liabilities R170 000 R220 000 R90 000 R94 000
271
Chapter 5
P Ltd recognised the equity investment in S Ltd in its separate financial records using
the cost price method.
P Ltd elected to measure any non-controlling interests in an acquiree at its proportional
share of the acquiree’s identifiable net assets at acquisition date.
Assume that the identifiable assets acquired and the liabilities assumed at acquisition
date are shown at their acquisition-date fair values, as determined in terms of IFRS 3.
P Ltd obtained its interest in S Ltd on 1 January 20.18 at R67 500.
P Ltd had the following items, which were bought from S Ltd at cost price plus 25%, on
hand at:
31 December 20.18 R10 000
31 December 20.19 R15 000
The items were equipment in the records of S Ltd (seller).
The items are inventories in the records of P Ltd (buyer).
Assume a company tax rate of 28%.
Assume that SARS accepts the buyer’s cost price as the new tax cost.
272
Intragroup transactions
The consolidated financial statements of the P Ltd Group for the reporting periods
ended 31 December 20.18 and 31 December 20.19 will be prepared as follows:
Reporting period ended 31 December 20.18
P LTD GROUP
CONSOLIDATED STATEMENT OF FINANCIAL POSITION
AS AT 31 DECEMBER 20.18
ASSETS
Non-current assets
Equipment (20 000(P) + 10 000(S)) 30 000
Current assets
Inventories (30 000(P) + 20 000(S) – 2 000(J1)) 48 000
Trade receivables (52 500(P) + 60 000(S)) 112 500
160 500
Total assets R190 500
EQUITY AND LIABILITIES
Equity attributable to owners of the parent
Share capital 100 000
Retained earnings 63 204
163 204
Non-controlling interests 7 856
Total equity 171 060
Non-current liabilities
Deferred tax (10 000(P) + 10 000(S) – 560(J3)) 19 440
Total equity and liabilities R190 500
273
Chapter 5
P LTD GROUP
CONSOLIDATED STATEMENT OF PROFIT OR LOSS
AND OTHER COMPREHENSIVE INCOME
FOR THE YEAR ENDED 31 DECEMBER 20.18
Revenue (70 000(P) + 50 000(S)) 120 000
Cost of sales (35 000(P) + 25 000(S)) (60 000)
Gross profit 60 000
Other income and expenses (14 200(P) + 18 050(S) + 2 000(J1)) (34 250)
Profit before tax 25 750
Income tax expense (5 800(P) + 1 950(S) – 560(J2)) (7 190)
PROFIT FOR THE YEAR 18 560
Other comprehensive income for the year –
TOTAL COMPREHENSIVE INCOME FOR THE YEAR R18 560
Profit attributable to:
Owners of the parent 18 204
Non-controlling interests 356
R18 560
Total comprehensive income attributable to:
Owners of the parent 18 204
Non-controlling interests 356
R18 560
P LTD GROUP
CONSOLIDATED STATEMENT OF CHANGES IN EQUITY
FOR THE YEAR ENDED 31 DECEMBER 20.18
Non-
Share Retained con- Total
Total
capital earnings trolling equity
interests
Balance at 1 January 20.18 100 000 45 000 145 000 – 145 000
Changes in equity for 20.18
Total comprehensive income
for the year:
Profit for the year – 18 204 18 204 356 18 560
Acquisition of subsidiary – – – 7 500 7 500
Balance at
31 December 20.18 R100 000 R63 204 R163 204 R7 856 R171 060
274
Intragroup transactions
Calculations
C1 Analysis of owners’ equity of S Ltd
P Ltd 90%
Total NCI
At Since
i At acquisition (1/1/20.18)
Share capital 50 000 45 000 5 000
Retained earnings 25 000 22 500 2 500
75 000 67 500 7 500
Purchase difference – – –
Consideration and NCI 75 000 R67 500 7 500
ii Since acquisition
• To beginning of current year :
None (control acquired on 1/1/20.18) – – –
• Current year :
Profit for the year
(5 000 – 2 000(J1) + 560(J2)) 3 560 3 204 356
R78 560 R3 204 R7 856
continued
275
Chapter 5
Dr Cr
R R
J3 Share capital (S)(SCE) 50 000
Retained earnings (S)(SCE) 25 000
Investment in S Ltd (P)(SFP) 67 500
Non-controlling interests (SFP) 7 500
Elimination of owners’ equity at acquisition of S Ltd
J4 Non-controlling interests (P/L) 356
Non-controlling interests (SFP) 356
Recognition of non-controlling interests in profit
of the subsidiary for the period
276
Intragroup transactions
P LTD GROUP
CONSOLIDATED STATEMENT OF PROFIT OR LOSS
AND OTHER COMPREHENSIVE INCOME
FOR THE YEAR ENDED 31 DECEMBER 20.19
Revenue (169 000(P) + 60 000(S)) 229 000
Cost of sales (84 500(P) + 30 000(S)) (114 500)
Gross profit 114 500
Other expenses (15 000(P) + 24 500(S) – 2 000(J1) + 3 000(J3)) (40 500)
Profit before tax 74 000
Income tax expense (19 500(P) + 1 500(S) + 560(J2) – 840(J4)) (20 720)
PROFIT FOR THE YEAR 53 280
Other comprehensive income for the year –
TOTAL COMPREHENSIVE INCOME R53 280
Profit attributable to:
Owners of the parent 52 952
Non-controlling interests 328
R53 280
Total comprehensive income attributable to:
Owners of the parent 52 952
Non-controlling interests 328
R53 280
P LTD GROUP
CONSOLIDATED STATEMENT OF CHANGES IN EQUITY
FOR THE YEAR ENDED 31 DECEMBER 20.19
Non-
Share Retained con- Total
Total
capital earnings trolling equity
interests
Balance at
1 January 20.19 100 000 63 204 163 204 7 856 171 060
Changes in equity
for 20.19
Total comprehensive
income for the year:
Profit for the year – 52 952 52 952 328 53 280
Balance at
31 December 20.19 R100 000 R116 156 R216 156 R8 184 R224 340
277
Chapter 5
Calculations
C1 Analysis of owners’ equity of S Ltd
P Ltd 90%
Total NCI
At Since
i At acquisition (1/1/20.18)
Share capital 50 000 45 000 5 000
Retained earnings 25 000 22 500 2 500
75 000 67 500 7 500
Purchase difference – – –
Consideration and NCI 75 000 R67 500 7 500
ii Since acquisition
• To beginning of current year :
Retained earnings
(30 000 – 25 000 – 1 440(J1)) 3 560 3 204 356
7 856
• Current year:
Profit for the year (4 000 + 2 000(J1) –
560(J2) – 3 000(J3) + 840(J4)) 3 280 2 952 328
R81 840 R6 156 R8 184
278
Intragroup transactions
279
Chapter 5
The following are the abridged financial statements of P Ltd and its subsidiary S Ltd, for
the reporting periods ended 31 December 20.18 and 20.19
STATEMENTS OF FINANCIAL POSITION AS AT 31 DECEMBER
P Ltd S Ltd
20.18 20.19 20.18 20.19
ASSETS
Investment in S Ltd: 45 000
share at fair value (cost: R67 500) 67 500 67 500 – –
Equipment 20 000 40 000 10 000 14 000
Inventories 30 000 40 000 20 000 30 000
Trade receivables 52 500 72 500 60 000 50 000
Total assets R170 000 R220 000 R90 000 R94 000
EQUITY AND LIABILITIES
Share capital (100 000/50 000 shares) 100 000 100 000 50 000 50 000
Retained earnings 60 000 110 000 30 000 34 000
Deferred tax 10 000 10 000 10 000 10 000
Total equity and liabilities R170 000 R220 000 R90 000 R94 000
280
Intragroup transactions
P Ltd recognised the equity investment in S Ltd in its separate financial records using
the cost price method.
P Ltd elected to measure any non-controlling interests in an acquiree at its proportional
share of the acquiree’s identifiable net assets at acquisition date.
Assume that the identifiable assets acquired and the liabilities assumed at acquisition
date are shown at their acquisition-date fair values, as determined in terms of IFRS 3.
P Ltd acquired its interest in S Ltd on 1 January 20.18 at R67 500.
P Ltd bought items to the value of R10 000 from S Ltd on 1 January 20.18 (cost plus
25%).
P Ltd bought items to the value of R15 000 from S Ltd on 1 January 20.19 (cost plus
25%).
The items are inventories in the records of S Ltd (seller).
The items are equipment in the records of P Ltd (buyer).
Depreciation on equipment is provided according to the straight-line method at 10% per
year.
Assume a company tax rate of 28%.
Assume that SARS accepts the buyer’s cost price as the new tax cost.
281
Chapter 5
The consolidated financial statements of the P Ltd Group for the reporting periods
ended 31 December 20.18 and 31 December 20.19 will be prepared as follows:
Reporting period ended 31 December 20.18
P LTD GROUP
CONSOLIDATED STATEMENT OF FINANCIAL POSITION
AS AT 31 DECEMBER 20.18
ASSETS
Non-current assets
Equipment (20 000(P) + 10 000(S) – 2 000(J1) + 200(J3)) 28 200
Current assets
Inventories (30 000(P) + 20 000(S)) 50 000
Trade receivables (52 500(P) + 60 000(S)) 112 500
162 500
Total assets R190 700
EQUITY AND LIABILITIES
Equity attributable to owners of the parent
Share capital 100 000
Retained earnings 63 334
163 334
Non-controlling interests 7 870
Total equity 171 204
Non-current liabilities
Deferred tax (10 000(P) + 10 000(S) – 560(J2) + 56(J4)) 19 496
Total equity and liabilities R190 700
282
Intragroup transactions
P LTD GROUP
CONSOLIDATED STATEMENT OF PROFIT OR LOSS
AND OTHER COMPREHENSIVE INCOME
FOR THE YEAR ENDED 31 DECEMBER 20.18
Revenue (70 000(P) + 50 000(S) – 10 000(J1)) 110 000
Cost of sales (35 000(P) + 25 000(S) – 8 000(J1)) (52 000)
Gross profit 58 000
Other expenses (14 200(P) + 18 050(S) – 200(J3)) (32 050)
Profit before tax 25 950
Income tax expense (5 800(P) + 1 950(S) – 560(J3) + 56(J4)) (7 246)
PROFIT FOR THE YEAR 18 704
Other comprehensive income for the year –
TOTAL COMPREHENSIVE INCOME FOR THE YEAR R18 704
Profit attributable to:
Owners of the parent 18 334
Non-controlling interests 370
R18 704
Total comprehensive income attributable to:
Owners of the parent 18 334
Non-controlling interests 370
R18 704
P LTD GROUP
CONSOLIDATED STATEMENT OF CHANGES IN EQUITY
FOR THE YEAR ENDED 31 DECEMBER 20.18
Non-
Share Retained con- Total
Total
capital earnings trolling equity
interests
Balance at 1 January 20.18 100 000 45 000 145 000 – 145 000
Changes in equity for 20.18
Total comprehensive income
for the year:
Profit for the year – 18 334 18 334 370 18 704
Acquisition of subsidiary – – – 7 500 7 500
Balance at
31 December 20.18 R100 000 R63 334 R163 334 R7 870 R171 204
283
Chapter 5
Calculations
C1 Analysis of owners’ equity of S Ltd
P Ltd 90%
Total NCI
At Since
i At acquisition (1/1/20.18)
Share capital 50 000 45 000 5 000
Retained earnings 25 000 22 500 2 500
75 000 67 500 7 500
Purchase difference – – –
Consideration and NCI 75 000 R67 500 7 500
ii Since acquisition
• To beginning of current year :
None (control acquired on 1/1/20.18) – – –
• Current year :
Profit for the year (5 000 – 2 000(J1)
+ 560(J2) + 200(J3) – 56(J4)) 3 704 3 334 370
R78 704 R3 334 R7 870
284
Intragroup transactions
Dr Cr
R R
J4 Income tax expense (S)(P/L) 56
Deferred tax (S)(SFP) 56
Tax implications of the realisation of unrealised gain
included in the equipment of P Ltd as a result of
depreciation (200 × 28%)
J5 Share capital (S)(SCE) 50 000
Retained earnings (S)(SCE) 25 000
Investment in S Ltd (P)(SFP) 67 500
Non-controlling interests (SFP) 7 500
Elimination of owners’ equity at acquisition of S Ltd
J6 Non-controlling interests (P/L) 370
Non-controlling interests (SFP) 370
Recognition of non-controlling interests in profit
of the subsidiary for the period
285
Chapter 5
P LTD GROUP
CONSOLIDATED STATEMENT OF PROFIT OR LOSS
AND OTHER COMPREHENSIVE INCOME
FOR THE YEAR ENDED 31 DECEMBER 20.19
Revenue (169 000(P) + 60 000(S) – 15 000(J4)) 214 000
Cost of sales (84 500(P) + 30 000(S) – 12 000(J4)) (102 500)
Gross profit 111 500
Other expenses (15 000(P) + 24 500(S) – 200(J2) – 300(J6)) (39 000)
Profit before tax 72 500
Income tax expense (19 500(P) + 1 500(S) + 56(J3) – 840(J5) + 84(J7)) (20 300)
PROFIT FOR THE YEAR 52 200
Other comprehensive income for the year –
TOTAL COMPREHENSIVE INCOME FOR THE YEAR R52 200
Profit attributable to:
Owners of the parent 51 980
Non-controlling interests 220
R52 200
Total comprehensive income attributable to:
Owners of the parent 51 980
Non-controlling interests 220
R52 200
P LTD GROUP
CONSOLIDATED STATEMENT OF CHANGES IN EQUITY
FOR THE YEAR ENDED 31 DECEMBER 20.19
Non-
Share Retained con- Total
Total
capital earnings trolling equity
interests
Balance at 1 January 20.19 100 000 63 334 163 334 7 870 171 204
Changes in equity for 20.19
Total comprehensive
income for the year:
Profit for the year – 51 980 51 980 220 52 200
Balance at 31 December
20.19 R100 000 R115 314 R215 314 R8 090 R223 404
286
Intragroup transactions
Calculations
C1 Analysis of owners’ equity of S Ltd
P Ltd 90%
Total NCI
At Since
i At acquisition (1/1/20.18)
Share capital 50 000 45 000 5 000
Retained earnings 25 000 22 500 2 500
75 000 67 500 7 500
Purchase difference – – –
Consideration and NCI 75 000 R67 500 7 500
ii Since acquisition
• To beginning of current year :
Retained earnings
(30 000 – 25 000 – 1 296(J1)) 3 704 3 334 370
7 870
• Current year :
Profit for the year
(4 000 + 200(J2) – 56(J3) – 15 000 +
12 000(J4) + 840(J5) + 300J6) – 120(J7)) 2 200 1 980 220
R80 904 R5 314 R8 090
287
Chapter 5
Dr Cr
R R
J2 Accumulated depreciation (P)(SFP) 200
Other expenses (Depreciation) (S)(P/L) 200
Realisation of unrealised gain included in
equipment of P Ltd as a result of depreciation
(2 000 × 10%)
J3 Income tax expense (S)(P/L) 56
Deferred tax (S)(SFP) 56
Tax implication of the realisation of unrealised gain
included in equipment of P Ltd as a result of
depreciation (200 × 28%)
J4 Revenue(S)(P/L) 15 000
Cost of sales (S)(P/L) 12 000
Equipment (P)(SFP) 3 000
Elimination of intragroup sales and unrealised gain
included in the equipment of P Ltd (15 000 × 25/125)
J5 Deferred tax (S)(SFP) 840
Income tax expense (S)(P/L) 840
Tax implication of the elimination of the unrealised
gain included in the equipment of P Ltd (3 000 × 28%)
J6 Accumulated depreciation (P)(SFP) 300
Other expenses (Depreciation)(S)(P/L) 300
Realisation of unrealised gain included in
equipment of P Ltd as a result of depreciation
(3 000 × 10%)
J7 Income tax expense (S)(P/L) 84
Deferred tax (S)(SFP) 84
Tax implication of the realisation of unrealised
gain included in equipment of P Ltd as a result
of depreciation (300 × 28%)
J8 Share capital (S)(SCE) 50 000
Retained earnings (S)(SCE) 25 000
Investment in S Ltd (P)(SFP) 67 500
Non-controlling interests (SFP) 7 500
Elimination of owners’ equity at acquisition of S Ltd
J9 Retained earnings – Beginning of year (S)(SCE) 370
Non-controlling interests (SFP) 370
Recognition of non-controlling interests in retained
earnings of the subsidiary for the period since
acquisition until beginning of current reporting
period
J10 Non-controlling interests (P/L) 220
Non-controlling interests (SFP) 220
Recognition of non-controlling interests in profit
of the subsidiary for the period
288
Intragroup transactions
The following are the abridged financial statements of P Ltd and its subsidiary, S Ltd,
for the reporting periods ended 31 December 20.18 and 20.19:
STATEMENTS OF FINANCIAL POSITION AS AT 31 DECEMBER
P Ltd S Ltd
20.18 20.19 20.18 20.19
ASSETS
Investment in S Ltd: 45 000 shares at fair
value (cost: R67 500) 67 500 67 500 – –
Equipment 20 000 40 000 10 000 14 000
Inventories 30 000 40 000 20 000 30 000
Trade receivables 52 500 72 500 60 000 50 000
Total assets R170 000 R220 000 R90 000 R94 000
EQUITY AND LIABILITIES
Share capital (100 000/50 000 shares) 100 000 100 000 50 000 50 000
Retained earnings 60 000 110 000 30 000 34 000
Deferred tax 10 000 10 000 10 000 10 000
Total equity and liabilities R170 000 R220 000 R90 000 R94 000
289
Chapter 5
P Ltd recognised the equity investment in S Ltd in its separate financial records using
the cost price method.
P Ltd elected to measure any non-controlling interests in an acquiree at its proportional
share of the acquiree’s identifiable net assets at acquisition date.
Assume that the identifiable assets acquired and the liabilities assumed at acquisition
date are shown at their acquisition-date fair values, as determined in terms of IFRS 3.
P Ltd obtained its interest in S Ltd on 1 January 20.18 at R67 500.
P Ltd bought items to the value of R10 000 from S Ltd on 1 January 20.18 (cost plus
25%).
P Ltd bought items to the value of R15 000 from S Ltd on 1 January 20.19 (cost plus
25%).
The items are equipment in the records of S Ltd (seller).
The items are equipment in the records of P Ltd (buyer).
Depreciation on equipment is provided at 10% per annum according to the straight-line
method.
Assume a company tax rate of 28%.
Assume that SARS accepts the buyer’s cost price as the new tax cost.
290
Intragroup transactions
The consolidated financial statements of the P Ltd Group for the reporting periods
ended 31 December 20.18 and 31 December 20.19 will be prepared as follows:
Reporting period ended 31 December 20.18
P LTD GROUP
CONSOLIDATED STATEMENT OF FINANCIAL POSITION AS AT 31 DECEMBER 20.18
ASSETS
Non-current assets
Equipment (20 000(P) + 10 000(S) – 2 000(J1) + 200(J3)) 28 200
Current assets
Inventories (30 000(P) + 20 000(S)) 50 000
Trade receivables (52 500(P) + 60 000(S)) 112 500
162 500
Total assets R190 700
EQUITY AND LIABILITIES
Equity attributable to owners of the parent
Share capital 100 000
Retained earnings 63 334
163 334
Non-controlling interests 7 870
Total equity 171 204
Non-current liabilities
Deferred tax (10 000(P) + 10 000(S) – 560(J2) + 56(J4)) 19 496
Total equity and liabilities R190 700
291
Chapter 5
P LTD GROUP
CONSOLIDATED STATEMENT OF PROFIT OR LOSS
AND OTHER COMPREHENSIVE INCOME
FOR THE YEAR ENDED 31 DECEMBER 20.18
Revenue (70 000(P) + 50 000(S)) 120 000
Cost of sales (35 000(P) + 25 000(S)) (60 000)
Gross profit 60 000
Other expenses (14 200(P) + 18 050(S) + 2 000(J1) – 200(J3)) (34 050)
Profit before tax 25 950
Income tax expense (5 800(P) + 1 950(S) – 560(J2) + 56(J4)) (7 246)
PROFIT FOR THE YEAR 18 704
Other comprehensive income for the year –
TOTAL COMPREHENSIVE INCOME FOR THE YEAR R18 704
Profit attributable to:
Owners of the parent 18 334
Non-controlling interests 370
R18 704
Total comprehensive income attributable to:
Owners of the parent 18 334
Non-controlling interests 370
R18 704
P LTD GROUP
CONSOLIDATED STATEMENT OF CHANGES IN EQUITY
FOR THE YEAR ENDED 31 DECEMBER 20.18
Non-
Share Retained con- Total
Total
capital earnings trolling equity
interests
Balance at 1 January 20.18 100 000 45 000 145 000 – 145 000
Changes in equity for 20.18
Total comprehensive
income for the year:
Profit for the year – 18 334 18 334 370 18 704
Acquisition of subsidiary – – – 7 500 7 500
Balance at
31 December 20.18 R100 000 R63 334 R163 334 R7 870 R171 204
292
Intragroup transactions
Calculations
C1 Analysis of owners’ equity of S Ltd
P Ltd 90%
Total NCI
At Since
i At acquisition (1/1/20.18)
Share capital 50 000 45 000 5 000
Retained earnings 25 000 22 500 2 500
75 000 67 500 7 500
Purchase difference – – –
Consideration and NCI 75 000 R67 500 7 500
ii Since acquisition
• To beginning of current year :
None (control acquired on 1/1/20.18) – – –
• Current year :
Profit for the year (5 000 – 2 000(J1) + 560(J2)
+ 200(J3) – 56(J4)) 3 704 3 334 370
R78 704 R3 334 R7 870
continued
293
Chapter 5
Dr Cr
R R
J4 Income tax expense (S)(P/L) 56
Deferred tax (S)(SFP) 56
Tax implications of the realisation of unrealised
gain included in the equipment of P Ltd
as a result of depreciation (200 × 40%)
J5 Share capital (S)(SCE) 50 000
Retained earnings (S)(SCE) 25 000
Investment in S Ltd (P)(SFP) 67 500
Non-controlling interests (SFP) 7 500
Elimination of owners’ equity at acquisition
of S Ltd
J6 Non-controlling interests (P/L) 370
Non-controlling interests (SFP) 370
Recognition of non-controlling interests in profit
of the subsidiary for the period
294
Intragroup transactions
P LTD GROUP
CONSOLIDATED STATEMENT OF PROFIT OR LOSS
AND OTHER COMPREHENSIVE INCOME
FOR THE YEAR ENDED 31 DECEMBER 20.19
Revenue (169 000(P) + 60 000(S)) 229 000
Cost of sales (84 500(P) + 30 000(S)) (114 500)
Gross profit 114 500
Other expenses (15 000(P) + 24 500(S) + 3 000(J4) – 300(J6) – 200(J2)) (42 000)
Profit before tax 72 500
Income tax expense (19 500(P) + 1 500(S) + 56(J3) – 840(J5) + 84(J7)) (20 300)
PROFIT FOR THE YEAR 52 200
Other comprehensive income for the year –
TOTAL COMPREHENSIVE INCOME FOR THE YEAR R52 200
Profit attributable to:
Owners of the parent 51 980
Non-controlling interests 220
R52 200
Total comprehensive income attributable to:
Owners of the parent 51 980
Non-controlling interests 220
R52 200
P LTD GROUP
CONSOLIDATED STATEMENT OF CHANGES IN EQUITY
FOR THE YEAR ENDED 31 DECEMBER 20.19
Non-
Ordinary
Retained con- Total
share Total
earnings trolling equity
capital
interests
Balance at 1 January 20.19 100 000 63 334 163 334 7 870 171 204
Changes in equity for 20.19
Total comprehensive income
for the year:
Profit for the year – 51 980 51 980 220 52 200
Balance at 31 December
20.19 R100 000 R115 334 R215 314 R8 090 R223 404
295
Chapter 5
Calculations
C1 Analysis of owners’ equity of S Ltd
P Ltd 90%
Total NCI
At Since
i At acquisition (1/1/20.18)
Share capital 50 000 45 000 5 000
Retained earnings 25 000 22 500 2 500
75 000 67 500 7 500
Purchase difference – – –
Consideration and NCI 75 000 R67 500 7 500
ii Since acquisition
• To beginning of current year :
Retained earnings
(30 000 – 25 000 – 1 296(J1)) 3 704 3 334 370
7 870
• Current year :
Profit for the year (4 000 – 3 000 + 200(J2)
– 56(J3)) + 840(J5) + 300(J6) – 84(J7) 2 200 1 980 220
R80 904 R5 314 R8 090
continued
296
Intragroup transactions
Dr Cr
R R
J3 Income tax expense (S)(P/L) 56
Deferred tax (S)(SFP) 56
Tax implication of the realisation of unrealised gain
included in equipment of P Ltd as a result of
depreciation (200 × 28%)
J4 Other income (Gain on sale of equipment) (S)(P/L) 3 000
Equipment (P)(SFP) 3 000
Elimination of unrealised gain included in the
equipment of P Ltd (15 000 × 25/125)
J5 Deferred tax (S)(SFP) 840
Income tax expense (S)(P/L) 840
Tax implication of the elimination of the unrealised
gain included in the equipment of P Ltd
(3 000 × 28%)
297
Chapter 5
The parent, P Ltd, sold a plant to a 70% subsidiary on 1 January 20.18 for R20 000.
The original cost price of the plant was R15 000. The subsidiary, S Ltd, classifies the
plant as property, plant and equipment. The parent, P Ltd, classifies the plant as
inventories.
The remaining useful life of the plant was set at five years on 1 January 20.18. S Ltd
sold this plant on 30 June 20.19 for R18 000.
The reporting period of the group ends on 31 December.
Assume a company tax rate of 28%.
Solution 5.18
The pro forma consolidation journal entries for the preparation of the consolidated
financial statements of P Ltd and its subsidiary for the different reporting periods are as
follows:
Reporting period ended 31 December 20.18
Dr Cr
R R
J1 Revenue (P)(P/L) 20 000
Cost of sales (P)(P/L) 15 000
Property, plant and equipment (SFP) 5 000
Elimination of the intragroup sales and the
unrealised gain included in plant of S Ltd
J2 Deferred tax (P)(SFP) 1 400
Income tax expense (P)(P/L) 1 400
Tax implication of the elimination of the unrealised
gain included in the plant of S Ltd
(5 000 × 28%)
J3 Accumulated depreciation (S)(SFP) 1 000
Other expenses (Depreciation) (P)(P/L) 1 000
Realisation of the unrealised gain included in the
plant of S Ltd, through depreciation
(5 000 × 20%)
J4 Income tax expense (P)(P/L) 280
Deferred tax (P)(SFP) 280
Tax implication of the realisation of the unrealised
gain included in the plant of S Ltd through
depreciation (1 000 × 28%)
298
Intragroup transactions
299
Chapter 5
Comment
The deferred tax that is created when the profit is eliminated is the tax effect for the
seller that is deferred to be recognised in future when the profit of the group is
recognised when the asset is sold. The deferred tax is measured with reference to the
tax effect for the seller at the date of sale. As the related asset is inventories in the
records of the seller (P), deferred tax is measured at the current company tax rate
(28%).
The following table shows the relevant figure for the pro forma journals:
S Ltd’s Deferred
Pro forma
separate taxation @ Group
amount
records 28%
Transfer price from P to S 20 000 5 000 (1 400) 15 000
Depreciation for 20.18 (4 000) (1 000) 280 (3 000)
Balance 31/12/20.18 16 000 4 000 (1 120) 12 000
Depreciatiion for 20.19 (2 000) (500) 140 (1 500)
Balance 30/6/20.19 14 000 3 500 (980) 10 500
Selling price to 3rd party 18 000 – – 18 000
Profit 4 000 3 500 980 7 500
300
Intragroup transactions
Self-assessment questions
Question 5.1
On 1 January 20.15 P Ltd purchased 75% of the shares in S Ltd for R90 000. At that
stage S Ltd’s equity consisted of the following:
Share capital R100 000
Retained earnings R20 000
The abridged statements of profit or loss and other comprehensive income of the two
entities for the reporting period ended 31 December 20.18 are as follows:
P Ltd S Ltd
Revenue 400 000 255 000
Cost of sales (240 000) (153 000)
Gross profit 160 000 102 000
Depreciation (20 000) (8 000)
Other expenses (84 500) (52 400)
Profit before tax 55 500 41 600
Income tax expense (15 500) (11 600)
PROFIT FOR THE YEAR 40 000 30 000
Other comprehensive income for the year – –
TOTAL COMPREHENSIVE INCOME FOR THE YEAR R40 000 R30 000
An extract from the abridged statements of changes in equity of the two entities for the
reporting period ended 31 December 20.18 is as follows:
Retained earnings
P Ltd S Ltd
Balance at 1 January 20.18 58 000 50 000
Changes in equity for 20.18
Total comprehensive income for the year:
Profit for the year 40 000 30 000
Ordinary dividend (8 000) –
Balance at 31 December 20.18 R90 000 R80 000
On 31 December 20.18, the following items, inter alia, appeared in the two entities’
statements of financial position:
P Ltd S Ltd
Plant: Cost price 200 000 80 000
Accumulated depreciation (80 000) (32 000)
R120 000 R48 000
Inventories at cost R40 000 R12 000
301
Chapter 5
Additional information
1 Included in S Ltd’s plant is a machine sold on 1 January 20.16 by PLtd to S Ltd.
P Ltd realised a gain of R20 000 on this transaction and the machine was classified
as equipment in P Ltd’s records. Plant and equipment are depreciated at 10% per
year on the straight-line basis.
2 Since May 20.15, P Ltd has purchased all its inventories from S Ltd at the normal
selling prices, determined by S Ltd at cost price plus 25%. Total sales from S Ltd to
P Ltd for the reporting period ended 31 December 20.18 amounted to R164 000.
3 At 31 December 20.17, the inventories on hand of P Ltd were R30 000 (valued at
cost price for P Ltd).
4 P Ltd recognised the equity investment in S Ltd in its separate financial records
using the cost price method.
5 P Ltd elected to measure the non-controlling interests in an acquiree at their
proportionate share of the acquiree’s identifiable net assets at acquisition date.
6 Ignore the tax implications.
Required
(a) Prepare the abridged consolidated statement of profit or loss and other
comprehensive income and consolidated statement of changes in equity of the
P Ltd Group for the reporting period ended 31 December 20.18; and
(b) Present the following items as they shall appear in the consolidated statement of
financial position of the P Ltd Group at 31 December 20.18:
l plant; and
l inventories.
P LTD GROUP
EXTRACT FROM THE CONSOLIDATED STATEMENT OF FINANCIAL POSITION
AS AT 31 DECEMBER 20.18
ASSETS
Non-current assets
Property, plant and equipment (200 000(P) + 80 000(S) – 80 000(P) – 32 000(S) +
2 000(J1) – 20 000(J1) + 2 000(J2)) 152 000
Current assets
Inventories (40 000(P) + 12 000(S) – 8 000(J4)) 44 000
Total assets R196 000
302
Intragroup transactions
P LTD GROUP
CONSOLIDATED STATEMENT OF PROFIT OR LOSS
AND OTHER COMPREHENSIVE INCOME
FOR THE YEAR ENDED 31 DECEMBER 20.18
Revenue (400 000(P) + 255 000(S) – 164 000(J5)) 491 000
Cost of sales
(240 000(P) + 153 000(S) – 164 000(J5) – 6 000(J3) + 8 000(J4)) (231 000)
Gross profit 260 000
Other expenses (84 500(P) + 52 400(S)) (136 900)
Depreciation (20 000(P) + 8 000(S) – 2 000(J2)) (26 000)
Profit before tax 97 100
Income tax expense (15 500(P) + 11 600(S)) (27 100)
PROFIT FOR THE YEAR 70 000
Other comprehensive income for the year –
TOTAL COMPREHENSIVE INCOME FOR THE YEAR R70 000
Profit attributable to:
Owners of the parent 63 000
Non-controlling interests 7 000
R70 000
Total comprehensive income attributable to:
Owners of the parent 63 000
Non-controlling interests 7 000
R70 000
P LTD GROUP
EXTRACT FROM THE CONSOLIDATED STATEMENT OF CHANGES IN EQUITY
FOR THE YEAR ENDED 31 DECEMBER 20.18
Non-
Retained
controlling
earnings
interests
Balance at 1 January 20.18
(58 000(P) + 18 000(S) - 16 000(J1)) 60 000 36 000
Changes in equity for 20.18
Total comprehensive income for the year:
Profit for the year 63 000 7 000
Dividend paid (8 000) –
Balance at 31 December 20.18
(90 000(P) + 39 000(S) - 16 000(J1) + 2 000(J2)) R115 000 R43 000
303
Chapter 5
Comment
As information on P Ltd’s equity is unavailable, only an extract from the statement of
changes in equity is shown.
Take note of the effect of unrealised profit where the parent or the subsidiary sells. If the
parent is the seller, the effect of the unrealised profit on consolidated retained earnings
should be taken into account separately.
Calculations
C1 Analysis of owners’ equity of S Ltd
P Ltd 75%
Total NCI
At Since
i At acquisition (1/7/20.15)
Share capital 100 000 75 000 25 000
Retained earnings 20 000 15 000 5 000
120 000 90 000 30 000
Purchase difference – – –
Consideration and NCI 120 000 R90 000 30 000
ii Since acquisition
• To beginning of current year:
Retained earnings
(50 000 – 20 000 – 6 000(J3)) 24 000 18 000 6 000
36 000
• Current year:
Profit for the year
(30 000 + 6 000(J3) – 8 000(J4)) 28 000 21 000 7 000
R172 000 R39 000 R43 000
304
Intragroup transactions
305
Chapter 5
Question 5.2
The abridged financial statements of P Ltd and S Ltd for the reporting period ended
30 June 20.18 are as follows:
STATEMENTS OF FINANCIAL POSITION AS AT 30 JUNE 20.18
P Ltd S Ltd
ASSETS
Fixed property 140 000 97 000
Plant 12 800 10 000
Gross carrying amount 20 000 25 000
Accumulated depreciation (7 200) (15 000)
Furniture 5 000 3 000
Gross carrying amount 10 000 10 000
Accumulated depreciation (5 000) (7 000)
Investment in S Ltd at fair value: 75 000 shares (cost: 105 000 –
R105 000)
Investment in unlisted shares – 25 000
Current account: S Ltd 20 000 –
Trade receivables 45 000 23 000
Inventories 16 000 28 000
Bank 53 850 63 750
Total assets R397 650 R249 750
EQUITY AND LIABILITIES
Share capital (200 000/100 000 shares) 200 000 100 000
Retained earnings 154 650 98 000
Current account: P Ltd – 8 750
Dividend payable 10 000 15 000
Trade and other payables 33 000 28 000
Total equity and liabilities R397 650 R249 750
306
Intragroup transactions
Additional information
1 P Ltd acquired the interest in S Ltd on 30 June 20.15 when the equity of S Ltd was
as follows:
Share capital R100 000
Retained earnings R35 000
2 On 1 January 20.16, P Ltd sold non-depreciable fixed property with an original cost
price of R50 000 to S Ltd for R57 000. The property is classified as property, plant
and equipment and is still in the possession of S Ltd.
3 On 30 June 20.17, S Ltd sold furniture that cost R12 500 and on which accumulated
depreciation to the amount of R2 500 was recognised, to P Ltd for R10 000. P Ltd
classifies this furniture under property, plant and equipment.
4 S Ltd purchases all its inventories from P Ltd at cost price plus 25%. Total
inventories to the value of R75 000 were sold to S Ltd by P Ltd during the reporting
period. Inventories in the records of S Ltd were R25 000 on 1 July 20.17. At the end
of the reporting period, S Ltd still owed P Ltd R23 000 in respect of the inventories
purchased from P Ltd. These amounts are included in trade receivables and trade
and other payables.
5 On 30 June 20.16, S Ltd sold 2 machines with a carrying amount of R18 000 each
to P Ltd for a total amount of R40 000. P Ltd uses the plant in the production of
inventories. Both companies write off depreciation on plant at 20% per annum on
the diminishing balance method. On 29 June 20.18, P Ltd sold one of the machines
at a slight profit that was set off against other expenses.
6 Assume a company tax rate of 28%.
7 P Ltd recognised the equity investment in S Ltd in its separate financial records
using the cost price method.
8 P Ltd elected to measure any non-controlling interests in an acquiree at their
proportional share of the acquiree’s identifiable net assets at acquisition date.
Required
Prepare the consolidated financial statements of the P Ltd Group for the reporting
period ended 30 June 20.18.
307
Chapter 5
P LTD GROUP
CONSOLIDATED STATEMENT OF FINANCIAL POSITION AS AT 30 JUNE 20.18
ASSETS
Non-current assets
Fixed property (140 000(P) + 97 000(S) – 7 000(J1)) 230 000
Plant: 21 520
Gross carrying amount (20 000(P) + 25 000(S) – 4 000(J9) + 2 000(J12)) 43 000
Accumulated depreciation
(7 200(P) + 15 000(S) – 800(J9) – 640(J10) + 720(J12)) (21 480)
Furniture: 8 000
Gross carrying amount (10 000(P) + 10 000(S) – 2 500(J2)) 17 500
Accumulated depreciation (5 000(P) + 7 000(S) – 2 500(J2)) (9 500)
Goodwill (C2) 3 750
Financial asset 25 000
Deferred tax
(1 568(J5) + 1 400(J6) – 1 400(J7) + 896(J9) – 180(J11) – 358(J13)) 1 926
290 196
Current assets
Inventories (16 000(P) + 28 000(S) – 5 600(J4)) 38 400
Trade receivables (45 000(P) + 23 000(S) – 23 000(J8)) 45 000
Bank (53 850(P) + 63 750(S)) 117 600
201 000
Total assets R491 196
EQUITY AND LIABILITIES
Equity attributable to owners of the parent
Share capital (P) 200 000
Retained earnings 190 176
390 176
Non-controlling interests (C1) 49 270
Total equity 439 446
Current liabilities
Trade and other payables (33 000(P) + 28 000(S) – 23 000(J8)) 38 000
Provision for dividend 10 000
Dividend payable to non-controlling interests 3 750
Total current liabilities 51 750
Total equity and liabilities R491 196
308
Intragroup transactions
P LTD GROUP
CONSOLIDATED STATEMENT OF PROFIT OR LOSS
AND OTHER COMPREHENSIVE INCOME
FOR THE YEAR ENDED 30 JUNE 20.18
Revenue (200 000(P) + 150 000(S) – 75 000(J3)) 275 000
Cost of sales
(110 000(P) + 110 000(S) – 75 000(J3) + 5 600(J4) – 5 000(J6)) (145 600)
Gross profit 129 400
Other expenses (30 150(P) + 9 050(S) – 640(J10) – 1 280(J12)) (37 280)
Interest received (P) 4 800
Dividends received 1 000
Profit before tax 97 920
Income tax expense
(21 250(P) + 8 950(S) – 1 568(J5) + 1 400(J7) + 180(J11) + 358(J13)) (30 570)
PROFIT FOR THE YEAR 67 350
Other comprehensive income for the year –
TOTAL COMPREHENSIVE INCOME FOR THE YEAR R67 350
Profit attributable to:
Owners of the parent 61 254
Non-controlling interests 6 096
R67 350
Total comprehensive income attributable to:
Owners of the parent 61 254
Non-controlling interests 6 096
R67 350
P LTD GROUP
CONSOLIDATED STATEMENT OF CHANGES IN EQUITY
FOR THE YEAR ENDED 30 JUNE 20.18
Non-
Share Retained con- Total
Total
capital earnings trolling equity
interests
Balance at 1 January
@
20.18 200 000 148 922 348 922 46 924 395 846
Changes in equity
for 20.18
Total comprehensive
income for the year:
Profit for the year – 61 254 61 254 6 096 67 350
Dividend paid – (20 000) (20 000) (3 750) (23 750)
Balance at
#
31 December 20.18 R200 000 R190 176 R390 176 R49 270 R439 446
309
Chapter 5
Calculations
C1 Analysis of owners’ equity of S Ltd
P Ltd 75%
Total NCI
At Since
i At acquisition (30/6/20.15)
Share capital 100 000 75 000 25 000
Retained earnings 35 000 26 250 8 750
135 000 101 250 33 750
Equity represented by goodwill – Parent 3 750 3 750 –
Consideration and NCI 138 750 R105 000 33 750
ii Since acquisition
• To beginning of current year:
Retained earnings
(90 000 – 35 000 – 2 304(J9)) 52 696 39 522 13 174
46 924
• Current year:
Profit after tax (23 000 + 640(J10)
– 180(J11) + 1 280(J12) – 358(J13)) 24 382 18 286 6 096
Dividend (15 000) (11 250) (3 750)
R200 828 R46 558 R49 270
310
Intragroup transactions
Dr Cr
R R
J4 Cost of sales (P)(P/L) 5 600
Inventories (S)(SFP) 5 600
Unrealised profit in closing inventories
(28 000 × 25/125)
J5 Deferred tax (P)(SFP) 1 568
Income tax expense (P)(P/L) 1 568
Tax on unrealised profit in closing inventories
(5 600 × 28%)
J6 Deferred tax (P)(SFP)(5 000 × 28%) 1 400
Retained earnings (P)(SCE) (5 000 × 72%) 3 600
Cost of sales (P)(P/L) (25 000 × 25/125) 5 000
Unrealised profit in opening inventories realised
in current reporting period
J7 Income tax expense (P)(P/L) 1 400
Deferred tax (P)(SFP) 1 400
Tax on unrealised profit in opening inventories
(5 000 × 28%)
J8 Trade and other payables (S)(SFP) 23 000
Trade receivables (P)(SFP) 23 000
Elimination of intragroup debt
J9 Retained earnings(S)(SCE) (4 000 × 4/5 × 72%) 2 304
Deferred tax (S)(SFP) (4 000 × 4/5 × 28%) 896
Accumulated depreciation (SFP) (4 000 × 20%) 800
Plant (SFP) (40 000 – 18 000 × 2)) 4 000
Correction of opening balances with unrealised
gain on intragroup plant
J10 Accumulated depreciation (SFP) 640
Depreciation (S)(P/L) 640
Realisation of a portion of the unrealised gain
through the write-off of depreciation on the plant
((4 000 – 800) × 20%)
J11 Income tax expense (S)(P/L) 180
Deferred tax (S)(SFP) 180
Recognition of tax on excessive depreciation
(640 × 40%)
J12 Plant (4 000/2) 2 000
Other income (gain on sale)(S)(P/L) (balancing) 1 280
Accumulated depreciation ((800 + 640)/2) 720
and
J13 Income tax expense (S)(P/L) (1 280 × 40%) 358
Deferred tax (S)(SFP) 358
Realisation of unrealised gain through sale of plant
from the group, remove balances from records
continued
311
Chapter 5
Dr Cr
R R
J14 Share capital (S)(SCE) 100 000
Retained earnings (S)(SCE) 35 000
Goodwill (SFP) 3 750
Investment in S Ltd (P)(SFP) 105 000
Non-controlling interests (SFP) 33 750
Elimination of owners’ equity at acquisition of S Ltd
J15 Retained earnings – Beginning of year (S)(SCE) 13 174
Non-controlling interests (SFP) 13 174
Recognition of non-controlling interests in retained
earnings of the subsidiary for the period since
acquisition until beginning of current year
J16 Non-controlling interests (P/L) 6 096
Non-controlling interests (SFP) 6 096
Recognition of non-controlling interests in profit
for the reporting period
J17 Dividend received (P)(P/L) 11 250
Non-controlling interests (SFP) 3 750
Dividend paid (S)(SCE) 15 000
Elimination of intragroup dividend
Comment
J2 is a combination of the following journals:
In the records of P Ltd
Furniture (SFP) 10 000
Bank (SFP) 10 000
Sale of furniture to S Ltd
In the records of S Ltd:
Accumulated depreciation (SFP) 2 500
Bank (SFP) 10 000
Furniture (SFP) 12 500
Derecognition of furniture sold to S Ltd at carrying amount
312
Intragroup transactions
313
6
Adjustments and sundry aspects
of group statements
315
Chapter 6
Impairment of goodwill
6.6 Significance of goodwill .......................................................................... 350
6.7 Impairment losses ................................................................................... 351
6.8 Losses from the changes in the fair value of the equity investments
of the parent ............................................................................................. 351
6.9 Impairment losses and non-controlling interests .................................... 352
Example 6.9: Impairment of goodwill – Difference between
non-controlling interests measured at proportionate
share of identifiable net assets and non-controlling
interests measured at fair value ...................................... 353
Example 6.10: Impairment of goodwill – Non-controlling interests
measured at proportionate share of identifiable net
assets ............................................................................. 355
Example 6.11: Impairment of goodwill – Non-controlling interests
measured at fair value..................................................... 362
Losses of a subsidiary
6.10 Accumulated losses of subsidiary at acquisition date ............................. 367
Example 6.12: Accumulated losses of a subsidiary at acquisition
date ................................................................................ 367
6.11 Post-acquisition losses of subsidiaries ................................................... 369
Example 6.13: Accumulated losses of a subsidiary since acquisition
date ................................................................................ 370
6.12 Assessed loss of a subsidiary at acquisition date ................................... 372
Example 6.14: Income tax loss (assessed loss) of a subsidiary
at acquisition date .......................................................... 373
Insolvent subsidiaries
6.13 The legal liability of the shareholders of an insolvent subsidiary ............ 376
6.14 Accounting for an insolvent subsidiary ................................................... 377
Preference shares
6.17 Characteristics ........................................................................................ 389
6.18 Liability versus equity .............................................................................. 391
316
Adjustments and sundry aspects of group statements
Self-assessment questions
Question 6.1 ........................................................................................................ 422
Question 6.2 ...................................................................................................................... 429
Question 6.3 ........................................................................................................ 437
317
Adjustments and sundry aspects of group statements
Introduction
In the preceding chapters, the main focus was on the basic consolidation procedures
applicable to the preparation of consolidated financial statements at the acquisition date
and after the acquisition date, both in the case of wholly-owned subsidiaries and non-
wholly-owned subsidiaries. There was also a discussion of intragroup transactions
and how they impact on consolidated financial statements. In the discussion of the
above matters, the set-up of the examples was deliberately kept as simple as
possible with a view to the analysis of the relevant principles and concepts, in order to
facilitate the learning process.
IFRS 3 addresses the methods used to account for business combinations and was
discussed in detail in chapter 2. IFRS 10 establishes principles for the presentation
and preparation of consolidated financial statements and is used to affect the
consolidation process after the acquisition of the business combination. During the
process of consolidating a subsidiary in terms of IFRS 10, IFRS 3 is applied to
determine the following at the acquisition date:
l the fair values of the identifiable assets acquired and liabilities assumed at the
acquisition date;
l the fair value of the consideration of the business combination;
l the recognition and measurement of the non-controlling interests in the acquiree;
and
l the recognition and measurement of the goodwill acquired in the business
combination or the gain from a bargain purchase.
Before proceeding in later chapters with the more complex consolidation problems that
often arise in practice, it is necessary to focus on specific aspects that arise from the
fact that the consideration paid for the acquisition of the shares in the subsidiary is
determined by the parent with reference to the fair value of the identifiable assets and
liabilities of the subsidiary at the acquisition date.
Until now it has been assumed that the fair values of the assets and liabilities of the
subsidiary at the acquisition date were equal to the carrying amounts of the said items
at that date (excluding chapter 2). In this context, it has already been indicated that the
difference between the consideration given (cost price) of the shares in the subsidiary
and the interest of the parent in the fair value of the identifiable assets and liabilities
of the subsidiary is recognised as goodwill or as a gain from a bargain purchase.
This chapter will discuss certain sundry aspects, namely:
l the recognition and measurement of the identifiable assets acquired, liabilities
assumed and contingent liabilities of the subsidiary at their fair values at the
acquisition date;
l the impairment of goodwill;
l any losses incurred by the subsidiary, as well as the procedures to be followed in
the case of an insolvent subsidiary; and
l the consolidation procedures should the equity of the subsidiary include preference
share capital, as well as the treatment of preference dividends paid by the
subsidiary.
319
Chapter 6
It is important to realise that the issue at the acquisition of a subsidiary is the acquisition
of control over the assets, liabilities and operating activities of the subsidiary. An
interest in the net assets of the subsidiary is acquired and as a result of the plough-
back of retained earnings by the subsidiary, the net assets increase. In the preparation
of consolidated financial statements, the analysis of the owners’ interest of the
subsidiary represents the equity side of the basic accounting equation (i.e. the owners’
interest represents the opposite of net assets (Equity = Assets – Liabilities)). The
essential issues in the analysis of owners’ equity are:
l the measurement of the identifiable assets, liabilities and contingent liabilities of the
subsidiary at their fair values at the acquisition date;
l the measurement of goodwill or a gain from a bargain purchase at the acquisition
date;
l the measurement of the non-controlling interests in the net assets of the subsidiary
at the reporting date; and
l the division of the increase in retained earnings and other items of comprehensive
income of the subsidiary arising from the operating activities of the subsidiary,
between the parent and non-controlling interests since acquisition date.
320
Adjustments and sundry aspects of group statements
Comment
a Take note that the pro forma consolidation journal entry is not recorded in the
accounting records of either the parent or the subsidiary.
b The above treatment is in accordance with the principle contained in
IFRS 10.B86(a) that the consolidated financial statements combine like items of
assets, liabilities, equity, income, expenses and cash flows of the parent with
those of its subsidiaries. Therefore the consolidated financial statements present
financial information about the group as that of a single entity.
c After the abovementioned pro forma consolidation journal entry has been
processed, the consolidated statement of financial position will only reflect the
share capital of the parent.
l The difference in the carrying amount of the parent’s investment in each subsidiary
(consideration for the business combination – cost of the shares in the subsidiary)
and the parent’s portion of equity of each subsidiary at acquisition date is
recognised pro forma as goodwill or as a gain from a bargain purchase. However,
it is important to realise that the recognition of goodwill (based on the
measurement of the non-controlling interests at their proportionate share of the
acquiree’s identifiable net assets) or a gain from a bargain purchase only bears
relation to the owners of the parent. As discussed in chapter 2, the non-controlling
interests can be measured at its fair value which affects the calculation of goodwill.
Goodwill thus recognised also bears relation to the non-controlling interests.
l The like items of assets and liabilities of the parent are combined with that of the
subsidiary. The obligation to eliminate intragroup loans/debts does not detract from
this basic combination (discussed in chapter 5).
l Should the parent not own the full issued share capital of the subsidiary, the above
basic combination still applies; however, it is necessary to recognise and show
separately the non-controlling interests in the net assets of the subsidiary (i.e.
separate from the interest of the parent in the equity of subsidiary).
l The following at-acquisition pro forma consolidation journal entry is prepared to
eliminate the parent’s investment in the subsidiary:
Dr Cr
R R
Share capital xxx
Retained earnings xxx
Goodwill (refer to chapter 2) xxx
Investment in S Ltd (partial subsidiary of P Ltd) xxx
Non-controlling interest in subsidiary xxx
l The carrying amount of the assets of the parent are affected (as discussed in
chapter 5) by the elimination of unrealised profits where the subsidiary was the
selling entity and, should the parent be the selling entity, then the carrying amount
of the assets of the subsidiary will be affected.
l The consolidated statement of profit or loss and other comprehensive income is
prepared by combining 100% of the revenue and expenses of the subsidiary on a
line-for-line basis with the corresponding items of the parent. The like items of
321
Chapter 6
income and expenses of the parent are combined with that of the subsidiary. The
dividends received from the subsidiary as reflected in the records of the parent, are
eliminated.
l Subsequently, the non-controlling interests in the profit for the year of the
subsidiary are deducted to obtain the profit for the year of the group attributable to
the shareholders of the parent. The non-controlling interests in profit for the year as
deducted in the consolidated statement of profit or loss and other comprehensive
income are added to the non-controlling interests in the consolidated statement of
financial position.
l Any other movements that have taken place during the current year in other
components of equity of the subsidiary are divided between the parent and non-
controlling interests on the basis of the equity interest of each. The parent’s share
of the other components of equity of the subsidiary is added to the corresponding
other components of equity of the parent, while the portion of the non-controlling
interests is added to the non-controlling interests as reflected in the consolidated
statement of financial position.
l The net movement from the acquisition date up to the beginning of the current
financial year in each of the other components of equity of the subsidiary (the
opposite of the net increase that had occurred in the net assets of the subsidiary
during the year) is divided between the parent and the non-controlling interests on
the basis of the equity interest of each. The share of the parent is added to the
corresponding other components of equity of the parent, while the portion of the
non-controlling interests is added to the non-controlling interests as reflected in the
consolidated statement of financial position.
The contents of the consolidated statement of profit or loss and other comprehensive
income and statement of financial position as well as the basic consolidation procedures
may be summarised as follows:
CONSOLIDATED FINANCIAL STATEMENTS
100% of assets and liabilities of P Ltd which includes:
l loan to S Ltd
but with the omission of:
l the consideration for the S Ltd business combination (cost price of shares
in S Ltd)
100% of assets and liabilities of all S Ltd’s which are subsidiaries at year end which
includes:
l loan from P Ltd (the loan accounts contra on consolidation)
AND bring into account for all S Ltd’s which are subsidiaries at year end:
l non-controlling interests
l goodwill/gain from a bargain purchase
100% of revenue and expenses of P Ltd
but with the omission of:
l dividends received from S Ltd
(the full interest received from S Ltd contras in the disclosable items)
100% of the revenue and expenses of all S Ltd’s for the period that S Ltd’s are
subsidiaries
AND bring into account:
l non-controlling interests in profit for all S Ltd’s for the period that such
S Ltd’s are subsidiaries
322
Adjustments and sundry aspects of group statements
Comment
P = Parent
S = Subsidiary/Subsidiaries
323
Chapter 6
On 1 March 20.18, P Ltd acquired an 80% interest in S Ltd, and the abridged
statements of financial position of the two companies on 28 February 20.19 are as
follows:
STATEMENTS OF FINANCIAL POSITION AS AT 28 FEBRUARY 20.19
P Ltd S Ltd
ASSETS
Land – 50 000
Investment in S Ltd at fair value 34 000 –
Trade receivables 36 000 20 000
Total assets R70 000 R70 000
EQUITY AND LIABILITIES
Share capital (20 000/10 000 shares) 20 000 10 000
Revaluation surplus (25 000 × 81,352% (1)) – 20 338
Retained earnings:
On 1/3/20.18 30 000 7 500
Since acquisition 20 000 27 500
Deferred tax (25 000 × 66,6% × 28%) – 4 662
Total equity and liabilities R70 000 R70 000
On the date on which P Ltd acquired the interest in S Ltd, land of S Ltd with a carrying
amount of R25 000 was valued at R50 000. S Ltd revalued the asset in its accounting
records. Assume that the value of the land has subsequently remained unchanged.
P Ltd classified the equity investment in S Ltd under IFRS 9 in its separate financial
statements and recognised fair value adjustments in a mark-to-market reserve (other
comprehensive income).
P Ltd elected to measure the non-controlling interests at their proportionate share of the
acquiree’s identifiable net assets at the acquisition date.
The company tax rate is 28% and capital gains tax (CGT) is calculated at 66,6%
thereof.
324
Adjustments and sundry aspects of group statements
Solution 6.1
Calculations
C1 Analysis of owners’ equity of S Ltd
P Ltd 80%
Total NCI
At Since
i At acquisition (1/3/20.18)
Share capital 10 000 8 000 2 000
Revaluation surplus 20 338 16 270 4 068
Retained earnings 7 500 6 000 1 500
37 838 30 270 7 568
Equity represented by goodwill – parent 3 730 3 730 –
Consideration and NCI 41 568 R34 000 7 568
ii Since acquisition
• Current year:
Profit for the year 27 500 22 000 5 500
R69 068 R22 000 R13 068
325
Chapter 6
Comment
a The recognition of deferred tax is required by the provisions of the accounting
statement IAS 12 Income Taxes.
b S Ltd recorded the revaluation of land as follows on 1 March 20.18:
Dr Cr
R R
Land (50 000 – 25 000) 25 000
Deferred tax (SFP) (25 000 × 66,6% × 28%) 4 662
Revaluation surplus (OCI) 20 338
Land revalued after valuation on 1/3/20.18
c The fair value of the (only) asset of S Ltd was therefore also taken into consideration
by P Ltd in the determination of the purchase price of the shares in the subsidiary.
Take note that a pro rata portion of the revaluation surplus is apportioned to the non-
controlling interests.
326
Adjustments and sundry aspects of group statements
When an asset is revalued the carrying amount of the asset increases but the tax
base thereof does not. The deferred tax obligation that arises on the revaluation of an
asset is based on the manner in which the entity expects to recover the carrying
amount of the asset (IAS 12 Incomes Taxes). Land being a non-depreciable asset
can only be recovered by means of a sale of the land. The deferred tax raised on the
revaluation surplus of land must therefore reflect the tax consequences of selling the
land. The sale of land results in a capital gain which will attract capital gains tax which
will result in 66,6% of the gain being taxable at the current company tax rate.
On 1 January 20.18, P Ltd acquired an 80% interest in S Ltd. The abridged statements
of financial position of the two companies on 31 December 20.18 were as follows:
STATEMENTS OF FINANCIAL POSITION AS AT 31 DECEMBER 20.18
P Ltd S Ltd
ASSETS
Land and buildings 24 200 25 000
Investment in S Ltd at fair value 48 000 –
Trade receivables 28 800 7 000
Total assets R101 000 R32 000
EQUITY AND LIABILITIES
Share capital (20 000/10 000 shares) 20 000 10 000
Retained earnings:
Balance at 1 January 20.18 61 000 12 000
Profit for the year for 20.18 20 000 10 000
Total equity and liabilities R101 000 R32 000
On the acquisition date, the assets of S Ltd consisted only of land and buildings.
Carrying Fair
amount value
Land R5 000 R22 160
Buildings (factory building) R20 000 R50 000
The value of the land has subsequently remained unchanged.
P Ltd classified the equity investment in S Ltd under IFRS 9 in its separate financial
statements and recognised fair value adjustments in a mark-to-market reserve (other
comprehensive income).
P Ltd elected to measure the non-controlling interests in the acquiree at their fair value
of R12 000 on the acquisition date.
The company tax rate is 28% and capital gains tax (CGT) is calculated at 66,6%
thereof.
327
Chapter 6
Solution 6.2
The consolidated statement of financial position of the P Ltd Group at 31 December
20.18 will be drawn up as follows:
P LTD GROUP
CONSOLIDATED STATEMENT OF FINANCIAL POSITION
AS AT 31 DECEMBER 20.18
ASSETS
Non-current assets
Land and buildings (24 200(P) + 25 000(S) + 17 160(J1) + 30 000(J1)) 96 360
Goodwill 2 440
98 800
Current assets
Trade receivables (28 800(P) + 7 000(S)) 35 800
Total assets R134 600
EQUITY AND LIABILITIES
Equity attributable to owners of the parent
Share capital (P) 20 000
Retained earnings (61 000(P) + 20 000(P) + 8 000(S) 89 000
109 000
Non-controlling interests 14 000
Total equity 123 000
Non-current liabilities
Deferred tax (J1) 11 600
Total equity and liabilities R134 600
Calculations
C1 Analysis of owners’ equity of S Ltd
P Ltd 80%
Total NCI
At Since
i At acquisition (1/1/20.18)
Share capital 10 000 8 000 2 000
Revaluation surplus (1)(J1) 35 560 28 448 7 112
Retained earnings 12 000 9 600 2 400
57 560 46 048 11 512
Equity represented by goodwill
– Parent and NCI 2 440 1 952 488
Consideration and NCI 60 000 R48 000 12 000
ii Since acquisition
• Current year:
Profit for the year 10 000 8 000 2 000
R70 000 R8 000 R14 000
(2) (3)
(1) 81,352% (22 160 – 5 000) + 72% (50 000 – 20 000) = 35 560
(2) 100% – (66,6% × 28%) = 81,352%
(3) 100% – 28% = 72%
328
Adjustments and sundry aspects of group statements
Comment
A part of the surplus, which is derived from the pro forma revaluation, is allocated to
the non-controlling interests. This is in accordance with the principle contained in
IFRS 10.B86(a) that the consolidated financial statements combine like items of assets,
liabilities, equity, income, expenses and cash flows of the parent with those of the
subsidiary. Therefore the consolidated financial statements present financial information
about the group as that of a single entity.
329
Chapter 6
On 1 January 20.17, P Ltd acquired a 60% interest in S Ltd. The abridged statements
of financial position of the two companies on 31 December 20.18 were as follows:
STATEMENTS OF FINANCIAL POSITION AS AT 31 DECEMBER 20.18
P Ltd S Ltd
ASSETS
Land 80 000 110 000
Buildings 130 000 140 000
Equity investments 68 200 133 000
Investment in S Ltd at fair value 190 000 –
Trade receivables 28 800 37 000
Total assets R497 000 R420 000
EQUITY AND LIABILITIES
Share capital (180 000/100 000 shares) 180 000 100 000
Retained earnings:
Balance at 1 January 20.18 140 000 210 000
Profit for the year for 20.18 155 000 95 000
Trade payables 22 000 15 000
Total equity and liabilities R497 000 R420 000
On the acquisition date, the net assets of S Ltd consisted of the following:
Carrying Fair
amount value
Land 80 000 125 045
Buildings (factory building) 92 000 105 000
Equity investments 66 000 86 000
Trade receivables 44 000 35 000
Trade payables (26 000) (26 000)
R256 000 R325 045
The value of the land has subsequently remained unchanged.
The remaining useful life of the building at the acquisition date is 13 years.
P Ltd classified the equity investment in S Ltd under IFRS 9 in its separate financial
statements and recognised fair value adjustments in a mark-to-market reserve (other
comprehensive income).
P Ltd elected to measure the non-controlling interests in the acquiree at their
acquisition date fair value of R125 000.
The company tax rate is 28% and capital gains tax (CGT) is calculated at 66,6%
thereof.
330
Adjustments and sundry aspects of group statements
Solution 6.3
The consolidated statement of financial position and consolidated statement of changes
in equity of the P Ltd Group at 31 December 20.18 will be drawn up as follows:
P LTD GROUP
CONSOLIDATED STATEMENT OF FINANCIAL POSITION
AS AT 31 DECEMBER 20.18
ASSETS
Non-current assets
Land and buildings (80 000(P) + 110 000(S) + 130 000(P) + 140 000(S)
+ 45 045(J1) + 13 000(J1) – 1 000(J5) – 1 000(J7)) 516 045
Equity investments (68 200(P) + 133 000(S) + 20 000(J1)) 221 200
Goodwill 3 205
740 450
Current assets
Trade receivables (28 800(P) + 37 000(S)) 65 800
Total assets R806 250
EQUITY AND LIABILITIES
Equity attributable to owners of the parent
Share capital (P) 180 000
Retained earnings 387 424
567 424
Non-controlling interests 186 616
Total equity 754 040
Non-current liabilities
Deferred tax (15 770(J1) – 2 520(J2) + 2 520(J4) – 280(J5) – 280(J8)) 15 210
Current liabilities
Trade payables (22 000(P) + 15 000(S)) 37 000
Total liabilities 52 210
Total equity and liabilities R806 250
P LTD GROUP
CONSOLIDATED STATEMENT OF CHANGES IN EQUITY
FOR THE YEAR ENDED 31 DECEMBER 20.18
Non-
Share Retained control- Total
Total
capital earnings ling equity
interests
Balance at 1 January 20.18 180 000 *175 856 355 856 148 904 504 760
Changes in equity for 20.18
Total comprehensive income
for the year:
Profit for the year – ^211 568 211 568 37 712 249 280
Balance at 31 December 20.18 R180 000 R387 424 R567 424 R186 616 R754 040
* 140 000(P) + 35 856(S) = 175 856
^ 155 000(P) + 94 280(S) – 37 712(J9) = 211 568
331
Chapter 6
Calculations
C1 Calculation of revaluation surplus and adjustment to retained earnings
at acquisition
Fair Carrying Tax Tax After
Difference
value amount rate effect tax
Land 125 045 80 000 45 045 18,648% (8 400) 36 645
Buildings 105 000 92 000 13 000 28% (3 640) 9 360
Equity investments 86 000 66 000 20 000 18,648% (3 730) 16 270
R316 045 R238 000 R78 045 (R15 770) R62 275
Trade receivables 35 000 44 000 (9 000) 28% R2 520 (R6 480)
Trade payables (26 000) (26 000) – 28% – –
R9 000 R18 000 (R9 000) R2 520 (R6 480)
Net asset value 256 000
Share capital (100 000)
Retained earnings
(at acquisition) R156 000
(1) 325 045(given) – 15 770(J1)(C1) + 2 520(J2)(C1) = 311 795(after deferred tax has been brought
into account)
(2) 311 795 – 100 000 – 62 275 = 149 520 or 156 000(C1) – 6 480(J2) = 149 520
(3) 210 000 – 149 520 – 720(J5) = 59 760 or 210 000 – 156 000(C1) + 6 480(J4) – 720(J5) = 59 760
(4) 95 000 – 1 000(J7) + 280(J8) = 94 280
332
Adjustments and sundry aspects of group statements
333
Chapter 6
Dr Cr
R R
J6 Retained earnings – Beginning of year (S)(SCE) 23 904
Non-controlling interests (S)(SFP) 23 904
Allocation of non-controlling interests' portion of retained
earnings (beginning of year)
J7 Depreciation (S)(P/L) (13 000/13) 1 000
Accumulated depreciation (S)(SFP) 1 000
Additional depreciation for 20.18 due to fair value
adjustment
J8 Deferred tax (S)(SFP) (1 000 × 28%) 280
Income tax expense (S)(P/L) 280
Income tax on additional deprecation for 20.18 due to fair
value adjustment
J9 Non-controlling interests (S)(SCI) 37 712
Non-controlling interests (S)(SFP) 37 712
Allocation of non-controlling interests' portion of current
year's profit ((95 000 – 1 000(J7) + 280(J8)) × 40%)
6.3 Subsequent sale of property, plant and equipment which had been
revalued at acquisition date – Revaluation not recognised in records
of subsidiary
l Should the parent at the acquisition date of the subsidiary, for the purpose of
determining the consideration for the shares, value the land and buildings of the
subsidiary at a higher amount than its carrying amount (and such revaluation is not
recorded in the records of the subsidiary), such revaluation must be taken into
account on a pro forma basis in the annual drafting of the consolidated financial
statements, even if such land and buildings are no longer owned by the subsidiary.
l It also follows that the gain or loss on the sale of the land and buildings will not be
the same for the group as for the subsidiary, because the cost price of the asset for
the group will differ from the cost price of the asset for the subsidiary. The gain or
loss in the hands of the subsidiary is the selling price less the cost price, whilst the
gain or loss for the group will be the selling price less the valuation of the asset at
the acquisition date (being the date of the business combination).
l The pro forma revaluation of property, plant and equipment at the acquisition date
determines the amount of goodwill, and such goodwill is not altered merely
because the subsidiary no longer owns the property, plant and equipment. This
entails that the pro forma revaluation surplus arising from the initial revaluation at
the acquisition date should annually be brought into account on consolidation even
though the subsidiary no longer owns the property, plant and equipment concerned.
l A revaluation surplus is thus credited annually (using the acquisition date as the
effective date) with the increased amount created by the original revaluation. The
corresponding pro forma debit is dealt with as follows:
• The property, plant and equipment concerned is debited as long as it is owned
by the parent.
334
Adjustments and sundry aspects of group statements
• The gain on sale of property, plant and equipment is debited in the year in which
the property, plant and equipment is sold.
• The retained earnings since acquisition of the subsidiary at the beginning of the
reporting period concerned is debited in the year which follows on the financial
year in which the particular property, plant and equipment was sold.
P Ltd paid R360 000 for an 80% interest in S Ltd on 1 January 20.16 when the latter’s
owners’ equity comprised the following:
Share capital (110 000 shares) R110 000
Retained earnings R175 000
On the acquisition date, P Ltd valued the land and buildings of S Ltd, with a carrying
amount of R250 000, at R350 000. This revaluation was not recorded in the books of
S Ltd.
The abridged statements of financial position of P Ltd and S Ltd at 31 December 20.18
are as follows:
STATEMENTS OF FINANCIAL POSITION AS AT 31 DECEMBER 20.18
P Ltd S Ltd
ASSETS
Property, plant and equipment 113 000 562 500
Investment in S Ltd at fair value 380 000 –
Trade receivables 74 000 87 500
Total assets R567 000 R650 000
EQUITY AND LIABILITIES
Share capital (90 000/110 000 shares) 90 000 110 000
Mark-to-market reserve 20 000 –
Retained earnings:
Balance on 1 January 20.18 342 000 290 000
Profit for the year 115 000 100 000
Gain on sale of land and buildings – 150 000
Total equity and liabilities R567 000 R650 000
P Ltd classified the equity investment in S Ltd under IFRS 9 in its separate financial
statements and recognised fair value adjustments in a mark-to-market reserve (other
comprehensive income).
The full fair value adjustment of R20 000 was made in the current year.
P Ltd elected to measure the non-controlling interests in the acquiree at their
proportionate share of the acquiree’s identifiable net assets at the acquisition date.
During 20.18, S Ltd sold the land and buildings referred to above for R400 000.
Ignore all deferred tax implications.
335
Chapter 6
Solution 6.4
The abridged financial statements of the P Ltd Group for the year ended 31 December
20.18 will be compiled as follows:
P LTD GROUP
CONSOLIDATED STATEMENT OF FINANCIAL POSITION
AS AT 31 DECEMBER 20.18
ASSETS
Non-current assets
Property, plant and equipment (113 000(P) + 562 500(S)) 675 500
Goodwill 52 000
727 500
Current assets
Trade receivables (74 000(P) + 87 500(S)) 161 500
Total assets R889 000
EQUITY AND LIABILITIES
Equity attributable to owners of the parent
Share capital (P) 90 000
Retained earnings (342 000(P) + 115 000(P) + 212 000(S)) 669 000
759 000
Non-controlling interests 130 000
Total equity 889 000
Total equity and liabilities R889 000
P LTD GROUP
EXTRACT FROM THE CONSOLIDATED STATEMENT OF PROFIT OR LOSS
AND OTHER COMPREHENSIVE INCOME
FOR THE YEAR ENDED 31 DECEMBER 20.18
PROFIT FOR THE YEAR (1) 265 000
Other comprehensive income for the year –
TOTAL COMPREHENSIVE INCOME FOR THE YEAR R265 000
Total comprehensive income attributable to:
Owners of the parent 235 000
Non-controlling interests 30 000
R265 000
(1) 115 000(P) + 100 000(S) + 150 000(S) – 100 000(J2) = 265 000
336
Adjustments and sundry aspects of group statements
P LTD GROUP
CONSOLIDATED STATEMENT OF CHANGES IN EQUITY
FOR THE YEAR ENDED 31 DECEMBER 20.18
Non-
Share Retained control- Total
Total
capital earnings ling equity
interests
Balance at 1 January 20.18 90 000 *434 000 524 000 100 000 624 000
Changes in equity for 20.18
Total comprehensive income for
the year:
Profit for the year – 235 000 235 000 30 000 265 000
Balance at 31 December 20.18 R90 000 ^R669 000 R759 000 R130 000 R889 000
* 342 000(P) + 92 000(S) = 434 000
^ 342 000(P) + 115 000(P) + 212 000(S) = 669 000
Calculations
C1 Analysis of owners’ equity of S Ltd
P Ltd 80%
Total NCI
At Since
i At acquisition (1/1/20.16)
Share capital 110 000 88 000 22 000
Revaluation surplus (350 000 – 250 000)
(Deferred tax ignored) 100 000 80 000 20 000
Retained earnings 175 000 140 000 35 000
385 000 308 000 77 000
Equity represented by goodwill – Parent 52 000 52 000 –
Consideration (1) and NCI 437 000 R360 000 77 000
ii Since acquisition
• To beginning of current year:
Retained earnings (290 000 – 175 000) 115 000 92 000 23 000
100 000
• Current year:
Profit for the year 150 000 120 000 30 000
(100 000 + (150 000 – 100 000))
R702 000 R212 000 R130 000
(1) 380 000 – 20 000 = 360 000
337
Chapter 6
338
Adjustments and sundry aspects of group statements
C4 Proof of the gain on sale of land and buildings for the group
Gain for
Gain per Pro forma
purposes
P Ltd records consolidation
of the
of S Ltd journal
group
Selling price 400 000
Carrying amount (250 000)
Gain on sale of land and
buildings per trial balance R– R150 000 (R100 000)(J2) R50 000(1)
(1) 400 000(selling price) – 350 000(carrying amount for the group) = 50 000
On 1 July 20.14, P Ltd acquired 80% of the issued ordinary shares of S Ltd.
At that date, the plant of S Ltd, with a cost price of R200 000 and a carrying amount of
R120 000, was revalued at R150 000. At that stage, P Ltd also confirmed the original
estimated useful life of the plant as five years.
S Ltd depreciates the plant at 20% per year on cost price. S Ltd’s depreciation per year
is R200 000 × 20% = R40 000
The expired useful life at 1 July 20.14 is calculated as follows:
Cost of plant 200 000
Carrying amount of plant (120 000)
Accumulated depreciation R80 000
∴ Expired useful life = R80 000 ÷ R40 000 = 2 years
Since the original estimated useful life was confirmed as five years and the number of
years that has expired is two years (as above), the remaining useful life of the plant is
three years.
The revaluation was not recorded in the books of S Ltd.
As at the revaluation date the carrying amount of the plant was equal to the tax base
thereof. The company tax rate is 28%.
339
Chapter 6
The plant of the subsidiary was pro forma revalued upwards on 1 July 20.14 by
R30 000(150 000 – 120 000) to R150 000. In the consolidated financial statements, the
increased carrying amount must be written off as depreciation on a straight-line basis
over the remaining useful life of the plant of three years. It follows that the depreciation
on consolidation is increased annually as from 1 July 20.14 by R10 000 (30 000 ÷
3 years) per year.
Assume that P Ltd had no plant and that the plant as above is the only plant that S Ltd
had.
Solution 6.5
The necessary pro forma consolidation journal entries for the year ended 30 June 20.15
are as follows:
Dr Cr
R R
J1 Plant (S)(SFP) (150 000 – 120 000) 30 000
Deferred tax (S)(SFP) (30 000 × 28%) 8 400
Revaluation surplus (S)(SCE) 21 600
Pro forma revaluation of plant of S Ltd
at acquisition date
J2 Depreciation (S)(P/L) 10 000
Accumulated depreciation (S)(SFP) 10 000
Additional depreciation for the current year (30 000/3)
J3 Deferred tax (S)(SFP) 2 800
Income tax expense (S)(P/L) (10 000 × 28%) 2 800
Tax implication of additional depreciation
for the current year
340
Adjustments and sundry aspects of group statements
The necessary pro forma consolidation journal entries for the year ended
30 June 20.16 (the next year) are as follows:
Dr Cr
R R
J1 Plant (S)(SFP)(150 000 – 120 000) 30 000
Deferred tax (S)(SFP) (30 000 × 28%) 8 400
Revaluation surplus (S)(SCE) 21 600
Pro forma revaluation of plant of S Ltd at date
of acquisition
J2 Retained earnings – Since acquisition (S)(SCE)
(10 000 – 2 800) 7 200
Deferred tax (S)(SFP) (10 000 × 28%) 2 800
Accumulated depreciation (S)(SFP) 10 000
Additional depreciation since acquisition to
beginning of current year (30 000/3)
continued
341
Chapter 6
Dr Cr
R R
J3 Depreciation (S)(P/L) 10 000
Accumulated depreciation (S)(SFP) 10 000
Additional depreciation for the current year
(30 000/3)
J4 Deferred tax (S)(SFP) 2 800
Income tax expense (S)(P/L) (10 000 × 28%) 2 800
Tax implications of additional deprecation
for the current year
The necessary pro forma consolidation journal entries for the year ended
30 June 20.17 (the following year) are as follows:
Dr Cr
R R
J1 Plant (S)(SFP) (150 000 – 120 000) 30 000
Deferred tax (S)(SFP) (30 000 × 28%) 8 400
Revaluation surplus (S)(SCE) 21 600
Pro forma revaluation of plant of S Ltd at date
of acquisition
J2 Retained earnings – Since acquisition (S)(SCE)
(10 000 – 2 800 + 10 000 – 2 800) 14 400
Deferred tax (S)(SFP) (20 000 × 28%) 5 600
Accumulated depreciation (S)(SFP) 20 000
Additional depreciation since acquisition to
beginning of current year (30 000/3 × 2)
J3 Depreciation (S)(P/L) 10 000
Accumulated depreciation (S)(SFP) 10 000
Additional depreciation for the current year
(30 000/3)
J4 Deferred tax (S)(SFP) 2 800
Income tax expense (S)(P/L)(10 000 × 28%) 2 800
Tax implications of additional deprecation
for the current year
The necessary pro forma consolidation journal entries for the year ended
30 June 20.18 and all future years are as follows:
Dr Cr
R R
J1 Plant (S)(SFP)(150 000 – 120 000) 30 000
Deferred tax (S)(SFP) (30 000 × 28%) 8 400
Revaluation surplus (S)(SCE) 21 600
Pro forma revaluation of plant of S Ltd at date
of acquisition
J2 Retained earnings – Since acquisition (S)(SCE) 21 600
Deferred tax (S)(SFP) (30 000 × 28%) 8 400
Accumulated depreciation (S)(SFP) (30 000/3 × 3) 30 000
Additional depreciation since acquisition to
beginning of current year
342
Adjustments and sundry aspects of group statements
However, the above two journals may also be replaced by the following journal:
Dr Cr
R R
J1 Retained earnings – Since acquisition (S)(SCE) 21 600
Revaluation surplus (S)(SCE) (30 000 × (100% – 28%)) 21 600
Pro forma revaluation of plant of S Ltd at date
of acquisition, now fully depreciated
Assume the same information as example 6.5 (the previous example) but add the
following information:
S Ltd sells this plant on 31 December 20.15 for R30 000.
Solution 6.6
The necessary pro forma consolidation journal entries for the year ended 30 June 20.16
are as follows:
Dr Cr
R R
J1 Plant (S)(SFP) (150 000 – 120 000) 30 000
Deferred tax (S)(SFP) (30 000 × 28%) 8 400
Revaluation surplus (S)(SCE) 21 600
Pro forma revaluation of plant of S Ltd at date
of acquisition
J2 Retained earnings – Since acquisition (S)(SCE) 7 200
Deferred tax (S)(SFP) (10 000 × 28%) 2 800
Accumulated depreciation (S)(SFP) 10 000
Additional depreciation since acquisition to
beginning of current year (30 000/3)
J3 Depreciation (S)(P/L) 5 000
Accumulated depreciation (S)(SFP) 5 000
Additional depreciation for the current year
(30 000/3 × 6/12)
J4 Deferred tax (S)(SFP) 1 400
Income tax expense (S)(P/L)(5 000 × 28%) 1 400
Tax implications of additional depreciation
for the current year
continued
343
Chapter 6
Dr Cr
R R
J5 Deferred tax (S)(SFP) (8 400 – 2 800 – 1 400) 4 200
Accumulated depreciation (S)(SFP)(10 000 + 5 000) 15 000
Loss on sale of plant (S)(P/L)(45 000 – 30 000) 15 000
Income tax expense (S)(P/L)(15 000 × 28%) 4 200
Plant (S)(SFP) 30 000
Adjustment to consolidated loss upon sale of plant
C1 Calculation of loss on sale of plant in the books of S Ltd and for group
purposes
Carrying Revalued
amount amount
1 July 20.14 120 000 1 July 20.14 150 000
Depreciation (200 000/5) (40 000) Depreciation (150 000/3) (50 000)
30 June 20.15 80 000 30 June 20.15 100 000
Depreciation (40 000 × 6/12) (20 000) Depreciation (50 000 × 6/12) (25 000)
31 December 20.15 60 000 31 December 20.15 75 000
Selling price at Selling price at
31 December 20.15 (30 000) 31 December 20.15 (30 000)
Loss in records of subsidiary R30 000 Loss for group purposes R45 000
344
Adjustments and sundry aspects of group statements
On 1 January 20.18, P Ltd purchased 80% of the issued ordinary shares of S Ltd. At
that date, P Ltd placed a value of R5 000 less than its carrying amount on the inventory
of S Ltd. This revaluation was not recorded in the books of S Ltd. The company tax rate
is 28%.
Solution 6.7
The necessary pro forma consolidation journal entries for the year ended 31 December
20.18 are as follows:
Dr Cr
R R
J1 Retained earnings – At acquisition (S)(SCE) 3 600
Deferred tax (S)(SFP) (5 000 × 28%) 1 400
Cost of sales (S)(P/L) 5 000
Pro forma revaluation of S Ltd’s inventory at
acquisition date
J2 Income tax expense (S)(P/L) 1 400
Deferred tax (S)(SFP) 1 400
Tax implication of the profit realisation during the
current year
Comment
J1 can be explained as follows, as it is a combination of the following two pro forma
journals:
At acquisition date the following pro forma journal is performed:
Dr Cr
R R
J1(1) Retained earnings – Beginning of year (S)(SCE) 3 600
Deferred tax (S)(SFP) (5 000 × 28%) 1 400
Inventories (S)(SFP) 5 000
Revaluation of inventory of subsidiary at
acquisition date
Once the inventories are sold by S Ltd the following pro forma journal would be
recorded on the date of sale, to account for the realisation of the profit:
Dr Cr
R R
J1(2) Inventories (S)(SFP) 5 000
Cost of sales (P)(P/L) 5 000
Recognition of profit realisation
Income tax expense (S)(P/L) 1 400
Deferred tax (S)(SFP) (5 000 × 28%) 1 400
Tax implication of the realisation of the profit
during the current year
By the end of the reporting period the pro-forma journal (as shown above (J1)) is
processed instead.
345
Chapter 6
The net effect of the pro forma consolidation journal entries is that retained earnings at
acquisition date is reduced by R3 600 and the subsidiary’s post-acquisition profit is
increased by R3 600 to formalise the view of the parent, namely that the subsidiary in
its own records will incur an after-tax loss of R3 600 after 1 January 20.18 in respect of
which the subsidiary should already have made provision, in the year ending on
31 December 20.17.
The necessary pro forma consolidation journal entry in respect of the year ending
31 December 20.19 and all future years is as follows:
Dr Cr
R R
J1 Retained earnings – At acquisition (S) 3 600
Retained earnings – Since acquisition (S) 3 600
Pro forma revaluation of S Ltd’s inventory
on acquisition date
On 1 January 20.18, P Ltd acquired all the issued shares of S Ltd for R450 000. For the
purpose of determining the purchase price, S Ltd’s inventory was valued at R600 000.
The company tax rate is 28%.
On 31 December 20.18, the abridged financial statements of P Ltd and S Ltd were as
follows:
STATEMENTS OF FINANCIAL POSITION AS AT 31 DECEMBER 20.18
P Ltd S Ltd
ASSETS
Property, plant and equipment 150 000 260 300
Inventory 30 000 20 000
Loan to P Ltd – 15 000
Trade receivables 19 600 13 900
Investment in S Ltd: 50 000 shares at fair value 450 000 –
Total assets R649 600 R309 200
EQUITY AND LIABILITIES
Share capital (60 000/50 000 shares) 60 000 50 000
Retained earnings 574 600 259 200
Loan from S Ltd 15 000 –
Total equity and liabilities R649 600 R309 200
346
Adjustments and sundry aspects of group statements
During 20.18, S Ltd made no inventory purchases and sold 60% of the inventory that
was on hand at 1 January 20.18.
P Ltd elected to measure the non-controlling interests in the acquiree at their
proportionate share of the acquiree’s identifiable net assets at the acquisition date.
347
Chapter 6
Solution 6.8
The consolidated financial statements for the P Ltd Group for the year ended
31 December 20.14 will be drawn up as follows:
P LTD GROUP
CONSOLIDATED STATEMENT OF FINANCIAL POSITION
AS AT 31 DECEMBER 20.18
ASSETS
Non-current assets
Property, plant and equipment (150 000(P) + 260 300(S)) 410 300
Goodwill 4 000
414 300
Current assets
Inventory (30 000(P) + 20 000(S) + 550 000(J1) – 330 000(J2)) 270 000
Trade and other receivables (19 600(P) + 13 900(S)) 33 500
303 500
Total assets R717 800
EQUITY AND LIABILITIES
Share capital (P) 60 000
Retained earnings 596 200
Total equity 656 200
Non-current liabilities
Deferred tax (154 000(J1) – 92 400(J3)) 61 600
Total equity and liabilities R717 800
P LTD GROUP
CONSOLIDATED STATEMENT OF PROFIT OR LOSS
AND OTHER COMPREHENSIVE INCOME
FOR THE YEAR ENDED 31 DECEMBER 20.18
Revenue (80 000(P) + 480 000(S)) 560 000
Cost of sales (40 000(P) + 30 000(S) + 330 000(J2)) (400 000)
Gross profit 160 000
Other expenses (10 000(P) + 90 000(S)) (100 000)
Profit before tax 60 000
Income tax expense (8 400(P) + 100 800(S) – 92 400(J3)) (16 800)
PROFIT FOR THE YEAR 43 200
Other comprehensive income for the year –
TOTAL COMPREHENSIVE INCOME FOR THE YEAR R43 200
348
Adjustments and sundry aspects of group statements
P LTD GROUP
CONSOLIDATED STATEMENT OF CHANGES IN EQUITY
FOR THE YEAR ENDED 31 DECEMBER 20.18
Share Retained
Total
capital earnings
Balance at 1 January 20.18 60 000 553 000 613 000
Changes in equity for 20.18
Total comprehensive income for the year:
Profit for the year – 43 200 43 200
Balance at 31 December 20.18 R60 000 R596 200 R656 200
Calculations
C1 Analysis of owners’ equity of S Ltd
P Ltd 100%
Total
At Since
i At acquisition (1/1/20.18)
Share capital 50 000 50 000
Retained earnings ((600 000 – 50 000) × 72%) 396 000 396 000
446 000 446 000
Equity represented by goodwill – Parent 4 000 4 000
Consideration and NCI 450 000 R450 000
ii Since acquisition
• Current year:
Profit for the year (259 200 – 330 000(J2) + 92 400(J3)) 21 600 21 600
R471 600 R21 600
349
Chapter 6
Comment
S Ltd's closing inventory as per the separate financial statements is R20 000. However,
for the group the inventory value is based on the fair value as at the acquisition date of the
business combination.
As there were no purchases during the current reporting period the inventory on hand at
the end of the financial year is the balance of the inventory that is unsold at the end of the
reporting period.
Therefore the fair value of the inventory at reporting date should be:
R240 000 (R600 000 × 40%(unsold portion)).
This is achieved by processing the above-mentioned pro forma consolidation journal
entries as follows:
R20 000(S) + 550 000(J1) – 330 000(J2) = R240 000
Impairment of goodwill
6.6 Significance of goodwill
Goodwill is defined in IFRS 3 Appendix A as “an asset representing the future
economic benefits arising from other assets acquired in a business combination that
are not individually identified and separately recognised”. This implies that the acquirer
made a payment in the anticipation of earning future economic benefits from assets that
are not individually identified at the time of the acquisition. IAS 38 Intangible Assets
prescribes the accounting treatment for identifiable intangible assets acquired in a
business combination. An intangible asset is defined as an identifiable non-monetary
asset without physical substance (IFRS 3 Appendix A). Goodwill acquired in a business
combination is carried at the amount that was recognised at the acquisition date of the
acquiree less any accumulated impairment losses and is disclosed under “Non-current
assets" in the consolidated statement of financial position.
350
Adjustments and sundry aspects of group statements
6.8 Losses from the changes in the fair value of the equity investments
of the parent
Where a parent has investments in equity instruments, then these are measured at fair
value and any gains or losses on remeasurement are recognised in profit or loss
(FVTPL1) with one exception. For an investment in an equity instrument that is not held
for trading, an entity can choose on an instrument for instrument basis, on initial
recognition, to irrevocably elect to present all fair value changes from the investment in
other comprehensive income (FVTOCI2) (IFRS 9.5.7.5). Amounts presented in other
comprehensive income shall not be subsequently transferred to profit or loss
(IFRS 9.B5.7.1). Dividends on such investments are recognised in profit or loss unless
the dividend clearly represents a recovery of part of the cost of the investment
(IFRS 9.B5.7.1).
________________________
351
Chapter 6
If there has been a decrease in the fair value of the equity investment of the parent and
the parent accounts for equity investments as at FVTPL, then the following journal
would have been processed in the accounting records of the parent:
Dr Cr
R R
J1 Fair value adjustment (P/L) xxx
Investment in S Ltd (SFP) xxx
Decrease in fair value of S Ltd at year end
If there has been a decrease in the fair value of the equity investment of the parent and
the parent accounts for equity investments as at FVTOCI, then the following journal
would have been processed in the accounting records of the parent:
Dr Cr
R R
J1 Mark-to-market reserve (OCI) xxx
Investment in S Ltd (SFP) xxx
Decrease in fair value of S Ltd at year end
In both cases these journal entries would need to be reversed during the preparation of
the consolidated financial statements. On consolidation, any fair value adjustments that
were recognised in the parent's individual accounting records since acquisition must be
reversed to determine the at acquisition date fair value of the consideration (equity
investment).
352
Adjustments and sundry aspects of group statements
of goodwill allocated to the parent. This implies that the carrying amount of the
subsidiary would need to be restated to include the unrecognised non-controlling
interests' portion of goodwill. Please refer to the following illustrative example:
Solution 6.9
353
Chapter 6
The impairment loss will be allocated between the parent and the non-controlling
interests in the profit-sharing ratio.
i.e. 12 500 × 80% = R10 000
If the impairment loss attributable to the non-controlling interests relates to goodwill that
is not recognised in the consolidated financial statements, then such impairment is not
recognised as an impairment loss. In such cases, only the impairment loss relating to
the goodwill that is allocated to the parent is recognised as a goodwill impairment loss
(IAS 36 Appendix C8).
Since the non-controlling interests is measured at the proportionate share of identifiable
net assets at acquisition date, then R2 500 (12 500 × 20%) of the impairment loss will
not be recognised in the consolidated financial statements.
Therefore goodwill will be disclosed in the consolidated statement of financial position
as: 20 000 – 10 000 = R10 000
Dr Cr
R R
J1 Equity at acquisition (S)(SCE) 150 000
Goodwill (SFP) 20 000
Investment in S Ltd (P)(SFP) 140 000
Non-controlling interests (SFP) 30 000
Elimination of owners’ equity at acquisition of S Ltd
J2 Impairment loss (P)(P/L)(12 500 × 80%) 10 000
Accumulated impairment losses for goodwill (P)(SFP) 10 000
Impairment of goodwill as at year end
354
Adjustments and sundry aspects of group statements
Therefore the impairment loss that will be accounted for in the consolidated financial
statements is R17 500.
Goodwill will be disclosed in the consolidated statement of financial position as:
30 000 – 17 500 = R12 500
The impairment loss will be allocated between the parent and the non-controlling
interests in the profit-sharing ratio.
Parent: 17 500 × 80% = R14 000
Non-controlling interests: 17 500 × 20% = R3 500
Dr Cr
R R
J1 Equity at acquisition (S)(SCE) 150 000
Goodwill (SFP) 30 000
Investment in S Ltd (P)(SFP) 140 000
Non-controlling interests (SFP) 40 000
Elimination of owners’ equity at acquisition of S Ltd
J2 Impairment loss (P)(P/L) 17 500
Accumulated impairment losses for goodwill (P)(SFP) 17 500
Impairment of goodwill as at year end
J3 Non-controlling interests (SFP) (17 500 × 20%) 3 500
Non-controlling interests (SCI) 3 500
Recording of non-controlling interests
in impairment loss at year end
The abridged statements of financial position of the two companies on 30 June 20.18
were as follows:
STATEMENTS OF FINANCIAL POSITION AS AT 30 JUNE 20.18
P Ltd S Ltd
ASSETS
Property, plant and equipment 850 000 240 000
Investment in S Ltd at fair value 184 000 –
Trade receivables 48 000 57 000
Total assets R1 082 000 R297 000
EQUITY AND LIABILITIES
Share capital (200 000/100 000 shares) 200 000 100 000
Mark-to-market reserve 19 525 –
Retained earnings 826 000 184 800
Deferred tax 4 475 –
Trade payables 32 000 12 200
Total equity and liabilities R1 082 000 R297 000
355
Chapter 6
Additional information
1 P Ltd acquired 80 000 shares in S Ltd on 1 July 20.16 for R160 000 when the equity
of S Ltd consisted of the following:
Share capital (100 000 shares) 100 000
Retained earnings 85 000
R185 000
2 P Ltd classified the equity investment in S Ltd under IFRS 9 in its separate financial
statements and recognised fair value adjustments in a mark-to-market reserve
(other comprehensive income).
356
Adjustments and sundry aspects of group statements
Comment
The parent's investment in equity instruments is measured at fair value and any gains or
losses on remeasurement are recognised in other comprehensive income (FVTOCI)
and therefore the impairment referred to in point 4 has already been taken into account
in the financial records of the parent by recognising the decline in fair value of the
investment in S Ltd (refer to the “mark-to-market reserve (fair value adjustment on
investment)” in the OCI).
On consolidation the reversal of the fair value adjustments (refer to J1–J3) results in the
effect of the impairment also being reversed.
Solution 6.10
The consolidated financial statements of the P Ltd Group for the year ended
30 June 20.18 will be drawn up as follows:
P LTD GROUP
CONSOLIDATED STATEMENT OF FINANCIAL POSITION
AS AT 30 JUNE 20.18
ASSETS
Non-current assets
Property, plant and equipment (850 000(P) + 240 000(S)) 1 090 000
Goodwill (12 000 – 8 080) 3 920
1 093 920
Current assets
Trade receivables (48 000(P) + 57 000(S)) 105 000
Total assets R1 198 920
EQUITY AND LIABILITIES
Equity attributable to owners of the parent
Share capital (P) 200 000
Retained earnings 897 760
1 097 760
Non-controlling interests 56 960
Total equity 1 154 720
Current liabilities
Trade payables (32 000(P) + 12 200(S)) 44 200
Total equity and liabilities R1 198 920
357
Chapter 6
P LTD GROUP
CONSOLIDATED STATEMENT OF PROFIT OR LOSS AND OTHER COMPREHENSIVE
INCOME FOR THE YEAR ENDED 30 JUNE 20.18
Revenue (800 000(P) + 480 000(S)) 1 280 000
Cost of sales (400 000(P) + 300 000(S)) (700 000)
Gross profit 580 000
Other expenses (100 000(P) + 90 000(S) + 8 080) (198 080)
Profit before tax 381 920
Income tax expense (84 000(P) + 25 200(S)) (109 200)
PROFIT FOR THE YEAR 272 720
Other comprehensive income for the year –
TOTAL COMPREHENSIVE INCOME FOR THE YEAR R272 720
Total comprehensive income attributable to:
Owners of the parent 259 760
Non-controlling interests 12 960
R272 720
P LTD GROUP
CONSOLIDATED STATEMENT OF CHANGES IN EQUITY
FOR THE YEAR ENDED 30 JUNE 20.18
Non-
Share Retained Total
Total controlling
capital earnings equity
interests
Balance at 1 July 20.17 200 000 λ638 000 838 000 44 000 882 000
Changes in equity for 20.18
Total comprehensive
income for the year:
Profit for the year – 259 760 259 760 12 960 272 720
Balance at 30 June 20.18 R200 000 R897 760 R1 097 760 R56 960 R1 154 720
358
Adjustments and sundry aspects of group statements
Calculations
C1 Analysis of owners’ equity of S Ltd
P Ltd 80%
Total NCI
At Since
i At acquisition (1/7/20.16)
Share capital 100 000 80 000 20 000
Retained earnings 85 000 68 000 17 000
185 000 148 000 37 000
Equity represented by goodwill
– Parent 12 000 12 000 –
Consideration and NCI 197 000 R160 000 37 000
ii Since acquisition
• To beginning of current year:
Retained earnings (120 000 – 85 000) 35 000 28 000 7 000
44 000
• Current year:
Profit for the year 64 800 51 840 12 960
Goodwill impairment (1) (8 080) (8 080) –
R288 720 R71 760 R56 960
359
Chapter 6
360
Adjustments and sundry aspects of group statements
Comment
If the subsidiary is regarded as a cash generating unit and goodwill arose as a result of
the business combination, then the cash generating unit, i.e. the subsidiary, should be
tested for impairment at least annually.
In order to test whether any impairment has taken place, the recoverable amount of the
subsidiary must be compared to the carrying amount of the subsidiary and if the carrying
amount exceeds the recoverable amount, then there is an impairment loss. The carrying
amount will include the identifiable net assets of the subsidiary and the unidentified
assets that are not recognised separately (i.e. goodwill).
If the parent has elected to measure the non-controlling interests (in the case of a
partially owned subsidiary) at their proportionate share of the acquiree’s identifiable net
assets at the acquisition date, then the goodwill recognised in the consolidated financial
statements will be attributable to the parent and the goodwill attributable to the non-
controlling interest will not have been recognised.
For there to be a fair comparison between the recoverable amount and the carrying
amount, the carrying amount of the subsidiary should also include the goodwill
attributable to the non-controlling interests. To achieve this the goodwill attributable to
the parent is grossed up to calculate the total goodwill for the subsidiary and this figure
together with the carrying amount of the subsidiary’s net assets will be equal to the
notionally adjusted carrying amount of the subsidiary which can be compared to the
recoverable amount in order to determine the impairment loss.
The goodwill impairment in J7 was calculated as follows:
Impairment loss given (to be allocated to goodwill)
(difference between carrying amount and recoverable amount) R10 100
As S Ltd is a cash generating unit the loss should be allocated in the
profit-sharing ratio between the parent and the non-controlling interests
and only the portion attributable to the parent is recognised. The
impairment loss that relates to the non-controlling interest is not
recognised as the goodwill relating to the non-controlling interests was
not recognised in the consolidated financial statements (10 100 × 80%). R8 080
If the total impairment loss exceeds the notionally adjusted carrying amount of goodwill,
then the excess will be allocated to the other assets in the cash generating unit
(subsidiary) on a pro rata basis (based on the carrying amounts of the assets).
361
Chapter 6
The abridged statements of financial position of P Ltd and S Ltd on 30 June 20.18 are
as follows:
STATEMENTS OF FINANCIAL POSITION AS AT 30 JUNE 20.18
P Ltd S Ltd
ASSETS
Property, plant and equipment 520 000 400 000
Investment in S Ltd at fair value 445 000 –
Trade receivables 12 000 105 000
Total assets R977 000 R505 000
EQUITY AND LIABILITIES
Share capital (100 000/200 000 shares) 100 000 200 000
Mark-to-market reserve 19 525 –
Retained earnings 758 800 291 400
Deferred tax 4 475 –
Trade payables 94 200 13 600
Total equity and liabilities R977 000 R505 000
362
Adjustments and sundry aspects of group statements
Additional information
1 P Ltd acquired 160 000 shares in S Ltd on 1 July 20.16 for R421 000 when the
equity of S Ltd consisted of the following:
Share capital (200 000 shares) 200 000
Retained earnings 102 000
R302 000
On the acquisition date, P Ltd valued land of S Ltd, with a carrying amount of
R250 000, at R500 000. This revaluation was not recognised in the records of S Ltd.
2 P Ltd classified the equity investment in S Ltd under IFRS 9 in its separate financial
statements and recognised fair value adjustments in a mark-to-market reserve
(other comprehensive income).
3 P Ltd elected to measure the non-controlling interests in the acquiree at their fair
value of R108 000 at the acquisition date.
4 The carrying amount of the subsidiary at 30 June 20.18 exceeded the recoverable
amount of the subsidiary by R10 100.
5 The company tax rate is 28% and capital gains tax (CGT) is calculated at 66,6%
thereof.
363
Chapter 6
Solution 6.11
The consolidated financial statements of the P Ltd Group at 30 June 20.18 will be
drawn up as follows:
P LTD GROUP
CONSOLIDATED STATEMENT OF FINANCIAL POSITION AS AT 30 JUNE 20.18
ASSETS
Non-current assets
Property, plant and equipment (520 000(P) + 400 000(S) + 250 000(J3)) 1 170 000
Goodwill (23 620 – 10 100) 13 520
1 183 520
Current assets
Trade receivables (12 000(P) + 105 000(S)) 117 000
Total assets R1 300 520
EQUITY AND LIABILITIES
Equity attributable to owners of the parent
Share capital (P) 100 000
Retained earnings 902 240
1 002 240
Non-controlling interests 143 860
Total equity 1 146 100
Non-current liabilities
Deferred tax (J3) 46 620
Current liabilities
Trade payables (94 200(P) + 13 600(S)) 107 800
Total liabilities 154 420
Total equity and liabilities R1 300 520
P LTD GROUP
CONSOLIDATED STATEMENT OF PROFIT OR LOSS
AND OTHER COMPREHENSIVE INCOME
FOR THE YEAR ENDED 30 JUNE 20.18
Gross profit (480 000(P) + 315 000(S)) 795 000
Other expenses (65 000(P) + 70 000(S) + 10 100(J6)) (145 100)
Profit before tax 649 900
Income tax expense (116 200(P) + 68 600(S)) (184 800)
PROFIT FOR THE YEAR 465 100
Other comprehensive income for the year –
TOTAL COMPREHENSIVE INCOME FOR THE YEAR R465 100
Total comprehensive income attributable to:
Owners of the parent 431 840
Non-controlling interests (35 280(J6) – 2 020(J9)) 33 260
R465 100
364
Adjustments and sundry aspects of group statements
P LTD GROUP
CONSOLIDATED STATEMENT OF CHANGES IN EQUITY
FOR THE YEAR ENDED 30 JUNE 20.18
Non-
Share Retained Total
Total controlling
capital earnings equity
interests
Balance at 1 July 20.17 100 000 λ520 400 620 400 115 600 736 000
Changes in equity
for 20.18
Total comprehensive
income for the year:
Profit for the year – 431 840 431 840 33 260 465 100
Dividends paid (50 000) (50 000) (5 000) (55 000)
Balance at 30 June 20.18 R100 000 R902 240 R1 002 240 R143 860 R1 146 100
Calculations
C1 Analysis of owners’ equity of S Ltd
P Ltd 80%
Total NCI
At Since
i At acquisition (1/7/20.16)
Share capital 200 000 160 000 40 000
Revaluation surplus (1) 203 380 162 704 40 676
Retained earnings 102 000 81 600 20 400
505 380 404 304 101 076
Equity represented by goodwill
– Parent and NCI 23 620 16 696 6 924
Consideration (2) and NCI 529 000 R421 000 108 000
ii Since acquisition
• To beginning of current year:
Retained earnings (140 000 – 102 000) 38 000 30 400 7 600
115 600
• Current year:
Profit for the year 176 400 141 120 35 280
Dividends paid (25 000) (20 000) (5 000)
Impairment of goodwill (10 100) (8 080) (2 020)
R708 300 R143 440 R143 860
365
Chapter 6
366
Adjustments and sundry aspects of group statements
Dr Cr
R R
J8 Impairment loss (P/L) 10 100
Accumulated impairment losses for goodwill (SFP) 10 100
Impairment of goodwill as at 30 June 20.18
J9 Non-controlling interests (SFP) 2 020
Non-controlling interests (P/L) 2 020
Recording of non-controlling interests in
impairment of goodwill as at 30 June 20.18
Losses of a subsidiary
6.10 Accumulated losses of subsidiary at acquisition date
An accumulated loss at the acquisition date of the controlling interest in a subsidiary
forms a negative element in the owners’ interest of the subsidiary at this date. If a
subsidiary has an accumulated loss, it does not necessarily mean that the subsidiary is
insolvent (refer to section 6.13) as the share capital and other components of equity
can exceed the accumulated loss. The existence of such an unfavourable balance
would certainly have influenced the price paid for the shares, and the goodwill or gain
on bargain purchase which would have been determined by taking into account such an
unfavourable balance, would thus be realistic.
The following are the condensed statements of changes in equity of P Ltd and its
subsidiary, S Ltd, for the year ended 31 December 20.18:
EXTRACT FROM THE STATEMENTS OF CHANGES IN EQUITY
FOR THE YEAR ENDED 31 DECEMBER 20.18
Retained earnings
P Ltd S Ltd
Balance at 1 January 20.18 200 000 (50 000)
Changes in equity for 20.18
Total comprehensive income for the year:
Profit for the year 100 000 80 000
Balance at 31 December 20.18 R300 000 R30 000
P Ltd purchased 80% of the issued shares of S Ltd on 2 January 20.14, for R80 000.
The fair value at 31 December 20.18 has not changed. At 2 January 20.14 the owners’
interest of S Ltd was as follows:
Share capital (300 000 shares) R300 000
Accumulated loss (R200 000)
At that date the owners’ interest of P Ltd was as follows:
Share capital (100 000 shares) R100 000
Retained earnings R50 000
367
Chapter 6
P Ltd classified the equity investment in S Ltd under IFRS 9 in its separate financial
statements and recognised fair value adjustments in a mark-to-market reserve (other
comprehensive income).
P Ltd elected to measure the non-controlling interests in the acquiree at their
proportionate share of the acquiree’s identifiable net assets at the acquisition date.
Solution 6.12
The consolidated statement of profit or loss and other comprehensive income and the
consolidated statement of changes in equity of the P Ltd Group will be prepared as
follows:
P LTD GROUP
CONSOLIDATED STATEMENT OF PROFIT OR LOSS
AND OTHER COMPREHENSIVE INCOME
FOR THE YEAR ENDED 31 DECEMBER 20.18
PROFIT FOR THE YEAR (100 000(P) + 80 000(S)) 180 000
Other comprehensive income for the year –
TOTAL COMPREHENSIVE INCOME FOR THE YEAR R180 000
Total comprehensive income attributable to:
Owners of the parent (180 000 – 16 000) 164 000
Non-controlling interests 16 000
R180 000
P LTD GROUP
CONSOLIDATED STATEMENT OF CHANGES IN EQUITY
FOR THE YEAR ENDED 31 DECEMBER 20.18
Non-
Share Retained Total
Total controlling
capital earnings equity
interests
Balance at 1 January 20.18 100 000 # 320 000 420 000 50 000 470 000
Changes in equity for 20.18
Total comprehensive income
for the year:
Profit for the year – 164 000 164 000 16 000 180 000
Balance at 31 December 20.18 R100 000 R484 000 R584 000 R66 000 R650 000
368
Adjustments and sundry aspects of group statements
Calculations
C1 Analysis of owners’ equity of S Ltd
P Ltd 80%
Total NCI
At Since
i At acquisition (2/1/20.14)
Share capital 300 000 240 000 60 000
Accumulated loss (200 000) (160 000) (40 000)
100 000 80 000 20 000
Purchase difference – – –
Consideration and NCI 100 000 R80 000 20 000
ii Since acquisition
• To beginning of current year:
Retained earnings (–50 000 – (–200 000)) 150 000 120 000 30 000
50 000
• Current year:
Profit for the year 80 000 64 000 16 000
R330 000 R184 000 R66 000
369
Chapter 6
A change in the fair value of P Ltd's investment in S Ltd, resulting from post-acquisition
losses incurred by a subsidiary, should be recognised in P Ltd’s separate financial
statements if at the reporting date the decrease in fair value is a reversal of:
(a) a fair value gain previously recognised in profit for the year (FVTPL); or
(b) previously recognised credit to a mark-to-market reserve (FVTOCI).
If there is a remaining net fair value gain after adjusting for the fair value loss, then the
fair value gain should be reversed for the purpose of preparing the consolidated
financial statements of the P Ltd Group.
IAS 36 determines that an entity should assess whether or not there is any indication
that an asset could be impaired at each reporting date. If any such indication exists, the
entity should estimate the recoverable amount of the asset (IAS 36.9). The investment
in the subsidiary is an asset in the parent’s separate financial statements and therefore
the principles of IAS 36.9 also apply to such an investment in the subsidiary.
The parent should therefore assess if there is any indication that the asset (investment
in subsidiary) could be impaired at each reporting date. These indications are fully
explained in IAS 36.10, but IAS 36.11 points out that the list is not exhaustive. An entity
can also identify other signs that the asset could be impaired, and this would also
require the determination of the recoverable amount. The authors are of the opinion that
post-acquisition losses of the subsidiary (as identified in the analysis of the owners’
interest of the subsidiary) could be such a sign. Thus, if the subsidiary has post-
acquisition losses, the recoverable amount of the subsidiary should be determined
according to the requirements of IAS 36.
An impairment loss should be recognised in P Ltd’s separate financial statements if the
carrying amount of the investment in the subsidiary exceeds the recoverable amount of
the investment in the subsidiary.
The impairment loss should, however, be reversed for the purpose of preparing the
consolidated financial statements of the group.
The following is the condensed statement of changes in equity of S Ltd for the year ended
31 December 20.17:
EXTRACT FROM THE STATEMENT OF CHANGES IN EQUITY
FOR THE YEAR ENDED 31 DECEMBER 20.17
Retained
earnings
Balance at 1 January 20.17 150 000
Changes in equity for 20.17
Total comprehensive income for the year:
Loss for 20.17 (200 000)
Balance at 31 December 20.17 (R50 000)
P Ltd purchased 90% of the issued shares of S Ltd for R396 000 on 2 January 20.16.
At that date, S Ltd’s owners’ equity was as follows:
Share capital (300 000 shares) R300 000
Retained earnings R140 000
370
Adjustments and sundry aspects of group statements
Solution 6.13
The analysis of owners’ equity of S Ltd and pro forma consolidation journal entries will
be prepared as follows:
Calculations
C1 Analysis of the owners’ equity of S Ltd
P Ltd 90%
Total NCI
At Since
i At acquisition (2/1/20.16)
Share capital 300 000 270 000 30 000
Retained earnings 140 000 126 000 14 000
440 000 396 000 44 000
Purchase difference – – –
Consideration and NCI 440 000 R396 000 44 000
ii Since acquisition
• To beginning of current year:
Retained earnings (150 000 – 140 000) 10 000 9 000 1 000
45 000
• Current year:
Loss for the year (200 000) (180 000) (20 000)
R250 000 (R171 000) R25 000
371
Chapter 6
Comment
a An impairment loss shall be recognised immediately in profit or loss (IAS 36.60), unless
the asset is carried at a revalued amount in accordance with another standard (e.g., in
accordance with the fair value model of IFRS 9 whereby the carrying amount of the
investment in the subsidiary has been adjusted for any increases in fair value). Any
impairment loss of a revalued asset shall be treated as a decrease in fair value (fair
value adjustment) in accordance with IFRS 9.
b If the carrying amount of the investment in S Ltd is, as in this case, R20 000 and the
original consideration paid for the investment was R396 000, then the amount that has
been written off (recognised in profit or loss) as an impairment loss, is R376 000.
372
Adjustments and sundry aspects of group statements
after the acquisition date of the business combination, but within the measurement
period, that resulted from new information about facts and circumstances that existed at
the acquisition date, will be accounted for as follows:
l A debit to the deferred tax asset and a credit to the carrying amount of any goodwill
related to that acquisition; or
l If the carrying amount of goodwill is zero, any remaining deferred tax benefits shall
be recognised in profit or loss (IAS 12.68(a)).
Comment
S 103(2) of the Income Tax Act 58 of 1962 places a limit on the utilisation of such
assessed losses.
The following are the condensed trial balances of P Ltd and its subsidiary S Ltd for the
year ended 31 December 20.18:
P Ltd S Ltd
R R
Debits
Property, plant and equipment 352 000 120 000
Investment in S Ltd 10 000 –
Current assets 44 000 23 600
Income tax expense 40 600 8 400
446 600 152 000
Credits
Share capital (100 000 and 80 000 shares) 100 000 80 000
Retained earnings – 1 January 20.18 160 000 38 000
Profit before tax 145 000 30 000
Current liabilities 41 600 4 000
446 600 152 000
P Ltd purchased 75% of the issued shares of S Ltd for R10 000 on 1 January 20.16. At
that date, S Ltd’s owners’ equity was as follows:
Share capital (80 000 shares) R80 000
Accumulated loss R220 000
At the acquisition date of S Ltd the identified assets, liabilities and contingent liabilities
were fairly valued except for a deferred tax asset that was not recognised for the carry
forward of unused tax losses. It is probable that future taxable profit will be available
against which the unused tax losses can be utilised.
P Ltd classified the equity investment in S Ltd under IFRS 9 in its separate financial
statements and recognised fair value adjustments in a mark-to-market reserve (other
comprehensive income).
373
Chapter 6
Solution 6.14
The consolidated financial statements of the P Ltd Group will be prepared as follows:
P LTD GROUP
CONSOLIDATED STATEMENT OF FINANCIAL POSITION
AS AT 31 DECEMBER 20.18
ASSETS
Non-current assets
Property, plant and equipment (352 000(P) + 120 000(S)) 472 000
Goodwill 68 800
540 800
Current assets (44 000(P) + 23 600(S)) 67 600
Total assets R608 400
EQUITY AND LIABILITIES
Equity attributable to owners of the parent
Share capital (P) 100 000
Retained earnings 427 900
527 900
Non-controlling interests 34 900
Total equity 562 800
Current liabilities (41 600(P) + 4 000(S)) 45 600
Total equity and liabilities R608 400
P LTD GROUP
CONSOLIDATED STATEMENT OF PROFIT OR LOSS
AND OTHER COMPREHENSIVE INCOME
FOR THE YEAR ENDED 31 DECEMBER 20.18
Profit before tax (145 000(P) + 30 000(S)) 175 000
Income tax expense (40 600(P) + 8 400(S)) (49 000)
PROFIT FOR THE YEAR 126 000
Other comprehensive income for the year –
TOTAL COMPREHENSIVE INCOME FOR THE YEAR R126 000
Total comprehensive income attributable to:
Owners of the parent (126 000 – 5 400) 120 600
Non-controlling interests 5 400
R126 000
374
Adjustments and sundry aspects of group statements
P LTD GROUP
CONSOLIDATED STATEMENT OF CHANGES IN EQUITY
FOR THE YEAR ENDED 31 DECEMBER 20.18
Non-
Share Retained Total
Total controlling
capital earnings equity
interests
Balance at 1 January 20.18 100 000 # 307 300 407 300 29 500 436 800
Changes in equity for 20.18
Total comprehensive income
for the year:
Profit for the year – 120 600 120 600 5 400 126 000
Balance at 31 December 20.18 R100 000 R427 900 R527 900 R34 900 R562 800
Calculations
C1 Analysis of owners’ equity of S Ltd
P Ltd 75%
Total NCI
At Since
i At acquisition (1/1/20.16)
Share capital 80 000 60 000 20 000
Accumulated loss (–220 000 × 72%) (158 400) (118 800) (39 600)
(78 400) (58 800) (19 600)
Equity represented by goodwill – Parent 68 800 68 800 –
Consideration and NCI (9 600) R10 000 (19 600)
ii Since acquisition
• To beginning of current year:
Retained earnings (38 000 – (–158 400)) 196 400 147 300 49 100
29 500
• Current year:
Profit for the year (30 000 – 8 400) 21 600 16 200 5 400
R208 400 R163 500 R34 900
375
Chapter 6
Insolvent subsidiaries
6.13 The legal liability of the shareholders of an insolvent subsidiary
In terms of Section 4(1) of the Companies Act 71 of 2008 a company will be considered
to be solvent and liquid if at a particular time, considering all reasonably foreseeable
financial circumstances of the company at that time:
l the assets of the company, as fairly valued, equal or exceed the liabilities of the
company as fairly valued; and
l it appears that the company will be able to pay its debts as they become due in the
ordinary course of business for a period of 12 months after the date on which the
liquidity test is performed.
A subsidiary is insolvent when the accumulated deficit (unfavourable balance on the
retained earnings in the statement of changes in equity) exceeds the total equity
interest; under these circumstances, such equity will normally consist of only the total
issued share capital. In other words the total liabilities of the subsidiary exceed the total
assets.
376
Adjustments and sundry aspects of group statements
A company is technically insolvent when its liabilities exceed its assets (i.e. the entity
has a negative net asset value). Technical insolvency may be an indicator of serious
problems that may lead to actual insolvency, or it may be perfectly acceptable as it is
possible to be technically insolvent, while still being able to repay debt. It is also
possible that the entity may be technically solvent but unable to repay its debt. The
reason for this is because technical insolvency is based only on the statement of
financial position and ignores the impact of cash flows. In addition the carrying amounts
of the entity’s assets as reflected in the statement of financial position may be less than
the fair values thereof.
Commercial insolvency means the inability of the entity to pay debts as and when they
become due in the ordinary course of business.
A company with a share capital is a legal persona as a result of its incorporation in
terms of the Companies Act 71 of 2008 (effective date 1 May 2011). As a result, the
shareholders are not legally liable for the debts of the company. From this follows, in
principle, that no shareholder or group of shareholders should lose more than the cost
price of the shares they hold in a specific company should that company become
insolvent. The unsecured creditors will thus have to bear any losses over and above the
total shareholders’ interest.
Under certain circumstances it is, however, possible that some or all of the
shareholders of an insolvent subsidiary will be held responsible for a part of the deficit,
over and above the total shareholders’ interest. These circumstances are as follows:
l where a shareholder (usually the parent) has guaranteed the liabilities or a certain
liability of the insolvent subsidiary; or
l where a shareholder (usually the parent) that is also a creditor subordinates its
claim as creditor until such time that the subsidiary becomes solvent again.
377
Chapter 6
Each of the above situations will be accounted for as follows in the appropriate annual
financial statements:
Situ- Financial statements Consolidated financial Financial statements
ation of parent statements of subsidiary
(a) The investment in the The subsidiary is consolidated Financial statements of
subsidiary is written off. with disclosure in terms of the subsidiary are
Provision is made for any IFRS 5 Non-current Assets prepared on a liquidation
further losses which may Held for Sale and basis.
arise from loans granted Discontinued Operations.
or guarantees issued.
(b) The investment in the The subsidiary is consolidated. The subsidiary is now
subsidiary is written off. Total liabilities and assets of technically solvent.
Provision is made for any the subsidiary are taken up in Financial statements are
further losses which may the consolidated financial prepared on a going-
arise from loans granted statements on a going-concern concern basis with
or guarantees issued. basis. Non-controlling interests explicit reference to the
are shown as a deficit balance. guarantees provided.
(c) The investment in the The subsidiary is consolidated. The subsidiary is now
subsidiary is written off. Total liabilities and assets of technically solvent.
Provision is made for any subsidiary are taken up in the Financial statements are
further losses which may consolidated financial prepared on a going-
arise from loans granted statements on a going-concern concern basis with
or guarantees issued basis. Non-controlling interests explicit reference to the
are allocated its share of the guarantees provided by
losses and shown as a deficit the parent.
balance.
(d) The investment in the The subsidiary is consolidated. The subsidiary is now
subsidiary is written off. Total liabilities and assets of technically solvent.
Provision is made for subsidiary are taken up in the Financial statements are
any further losses which consolidated financial drawn up on a going-
may arise from loans statements on a going- concern basis with
granted. Additional concern basis. Non-controlling explicit reference
disclosure is required interests are allocated its to the subordination
with respect to the share of the losses and shown agreement.
subordination agreement. as a deficit balance.
(e) The loan to the The subsidiary is consolidated. The subsidiary is now
subsidiary is converted to Remaining liabilities and solvent. Financial
shares in the subsidiary. assets of the subsidiary are statements are prepared
The increased taken into the consolidated on a going-concern
investment is then written financial statements on a basis.
off. The amount thus going-concern basis. The
written off will correspond proportional shareholding of
with the total amount the the non-controlling interests is
parent will have to write reduced (diluted).
off under (d) above.
378
Adjustments and sundry aspects of group statements
A closer look at situations (b) to (e) reveals that the specific steps taken in each case
were only to help prevent liquidation of the subsidiary by creditors and the non-
controlling shareholders. The adverse effect that the existence of the insolvent
subsidiary has on the financial statements of the parent, as well as on the consolidated
financial statements, can only be eliminated by:
l managing the subsidiary to profitability;
l obtaining further capital, especially from the non-controlling shareholders.
379
Chapter 6
The following are the condensed financial statements of P Ltd and its subsidiary S Ltd
for the financial year ended 31 December 20.18:
STATEMENTS OF FINANCIAL POSITION AS AT 31 DECEMBER 20.18
P Ltd S Ltd
ASSETS
Property, plant and equipment 300 000 112 000
Investment in S Ltd – 16 000 shares at cost less
impairment losses (Cost – R10 000) – –
Trade receivables 94 000 9 000
Total assets R394 000 R121 000
EQUITY AND LIABILITIES
Share capital (50 000/20 000 shares) 50 000 20 000
Retained earnings 257 000 –
Accumulated loss – (25 000)
Long-term liabilities 55 000 92 000
Trade and other payables 32 000 34 000
Total equity and liabilities R394 000 R121 000
380
Adjustments and sundry aspects of group statements
P Ltd acquired an 80% interest in S Ltd on 1 January 20.17, on which date the
accumulated loss of the latter amounted to R28 000.
P Ltd elected to measure the non-controlling interests of the acquiree at their
proportionate share of the acquiree’s identifiable net assets at the acquisition date.
At the acquisition date, the assets and liabilities of the subsidiary were considered to be
fairly valued and there were no unaccounted for contingent liabilities.
Goodwill was considered to be totally impaired at the end of the reporting period in
which the subsidiary was acquired.
Solution 6.15
The consolidated financial statements of the P Ltd Group for the year ended
31 December 20.18 will be drawn up as follows:
P LTD GROUP
CONSOLIDATED STATEMENT OF FINANCIAL POSITION
AS AT 31 DECEMBER 20.18
ASSETS
Non-current assets
Property, plant and equipment (300 000(P) + 112 000(S)) 412 000
Current assets
Trade receivables (94 000(P) + 9 000(S)) 103 000
Total assets R515 000
EQUITY AND LIABILITIES
Equity attributable to owners of the parent
Share capital (P) 50 000
Retained earnings 253 000
303 000
Non-controlling interests (1 000)
Total equity 302 000
Non-current liabilities
Long-term liabilities (55 000(P) + 92 000(S)) 147 000
Current liabilities
Trade and other payables (32 000(P) + 34 000(S)) 66 000
Total liabilities 213 000
Total equity and liabilities R515 000
381
Chapter 6
P LTD GROUP
EXTRACT FROM THE CONSOLIDATED STATEMENT OF PROFIT OR LOSS
AND OTHER COMPREHENSIVE INCOME
FOR THE YEAR ENDED 31 DECEMBER 20.18
PROFIT FOR THE YEAR (6 000(P) + 2 000(S)) 8 000
Other comprehensive income for the year –
TOTAL COMPREHENSIVE INCOME FOR THE YEAR R8 000
Total comprehensive income attributable to:
Owners of the parent (8 000 – 400) 7 600
Non-controlling interests 400
R8 000
P LTD GROUP
CONSOLIDATED STATEMENT OF CHANGES IN EQUITY
FOR THE YEAR ENDED 31 DECEMBER 20.18
Non-
Share Retained Total
Total controlling
capital earnings equity
interests
Balance at 1 January 20.18 50 000 #248 400 298 400 (1 400) 297 000
Changes in equity for 20.18
Total comprehensive income
for the year:
Profit for the year – 7 600 7 600 400 8 000
Dividend paid – (3 000) (3 000) – (3 000)
Balance at 31 December 20.18 R50 000 R253 000 R303 000 (R1 000) R302 000
# 254 000(P) + 800(S) + 10 000(write back of impairment loss) – 16 400(goodwill) = 248 400
382
Adjustments and sundry aspects of group statements
Calculations
C1 Analysis of owners’ equity of S Ltd
P Ltd 80%
Total NCI
At Since
i At acquisition (1/1/20.17)
Share capital 20 000 16 000 4 000
Accumulated loss (28 000) (22 400) (5 600)
(8 000) (6 400) (1 600)
Equity represented by goodwill – Parent 16 400 16 400 –
Consideration and NCI 8 400 R10 000 (1 600)
ii Since acquisition
• To beginning of current year:
Retained earnings (–27 000 – (–28 000)) 1 000 800 200
(1 400)
• Current year:
Profit for the year 2 000 1 600 400
R11 400 2 400 (R1 000)
Impairment of goodwill:
• To beginning of current year (16 400) (16 400)
R– (R14 000)
Comment
The identifiable liabilities assumed at acquisition are greater than the assets acquired,
which results in a negative net asset situation. The implications of the above calculation
are that the net liabilities are added to the sum of the consideration transferred and the
amount of non-controlling interests (e.g. –(–8 000)).
383
Chapter 6
384
Adjustments and sundry aspects of group statements
However, should the parent be of the opinion that the reversal in the affairs of the
subsidiary is only temporary, or decide on any other grounds to provide such support as
may be necessary in order to prevent the liquidation of the subsidiary, the use of
liquidation values in the preparation of financial statements is not justifiable. As a result,
the going-concern approach must be applied in the preparation of the subsidiary’s
financial statements, as well as the consolidated financial statements.
The following example illustrates the consolidation of the financial statements of a
simple group, where the subsidiary became insolvent after the acquisition date of the
controlling interest by the parent.
The following are the condensed financial statements of P Ltd and its subsidiary S Ltd:
STATEMENTS OF FINANCIAL POSITION AS AT 31 DECEMBER 20.18
P Ltd S Ltd
ASSETS
Property, plant and equipment 609 200 184 000
Investment in S Ltd: 16 000 shares at cost less impairment
losses – –
Loan to S Ltd 132 000 –
Trade receivables 63 300 55 000
Total assets R804 500 R239 000
EQUITY AND LIABILITIES
Share capital (50 000/20 000 shares) 50 000 20 000
Retained earnings/(Accumulated loss) 492 500 (133 000)
Long-term liabilities 230 000 92 000
Trade and other payables 32 000 128 000
Loan from P Ltd – 132 000
Total equity and liabilities R804 500 R239 000
385
Chapter 6
P Ltd acquired an 80% interest in S Ltd on 1 January 20.17 for R64 000, when the
retained earnings of the latter amounted to R45 000. In terms of an agreement, P Ltd
subordinated the loan to S Ltd to rank below the claims of the other creditors.
At the acquisition date, the assets and liabilities of the subsidiary were considered to be
fairly valued and there were no unaccounted for contingent liabilities.
P Ltd elected to measure the non-controlling interests in the acquiree at their fair value
of R17 000 on 1 January 20.17, the acquisition date.
386
Adjustments and sundry aspects of group statements
Solution 6.16
The condensed financial statements of the P Ltd Group for the year ended
31 December 20.18 will be drawn up as follows:
P LTD GROUP
CONSOLIDATED STATEMENT OF FINANCIAL POSITION
AS AT 31 DECEMBER 20.18
ASSETS
Non-current assets
Property, plant and equipment (609 200(P) + 184 000(S)) 793 200
Goodwill 16 000
809 200
Current assets
Trade receivables (63 300(P) + 55 000(S)) 118 300
Total assets R927 500
EQUITY AND LIABILITIES
Equity attributable to owners of the parent
Share capital (P) 50 000
Retained earnings 414 100
464 100
Non-controlling interests (18 600)
Total equity 445 500
Non-current liabilities
Long-term liabilities (230 000(P) + 92 000(S)) 322 000
Current liabilities
Trade and other payables (32 000(P) + 128 000(S)) 160 000
Total liabilities 482 000
Total equity and liabilities R927 500
P LTD GROUP
EXTRACT FROM THE CONSOLIDATED STATEMENT OF PROFIT OR LOSS
AND OTHER COMPREHENSIVE INCOME
FOR THE YEAR ENDED 31 DECEMBER 20.18
PROFIT FOR THE YEAR (326 000(P) + 15 000(S)) 341 000
Other comprehensive income for the year –
TOTAL COMPREHENSIVE INCOME FOR THE YEAR R341 000
Total comprehensive income attributable to:
Owners of the parent 338 000
Non-controlling interests 3 000
R341 000
387
Chapter 6
P LTD GROUP
CONSOLIDATED STATEMENT OF CHANGES IN EQUITY
FOR THE YEAR ENDED 31 DECEMBER 20.18
Non-
Share Retained Total
Total controlling
capital earnings equity
interests
Balance at 1 January 20.18 50 000 #151 100 201 100 (21 600) 179 500
Changes in equity for 20.18
Total comprehensive income
for the year:
Profit for the year 338 000 338 000 3 000 341 000
Dividend paid (75 000) (75 000) – (75 000)
Balance at 31 December 20.18 R50 000 R414 100 R464 100 (R18 600) R445 500
# 241 500(P) – 154 400(S) + 64 000(write back of impairment loss) = 151 100
Calculations
C1 Analysis of owners’ equity of S Ltd
P Ltd 80%
Total NCI
At Since
i At acquisition (1/1/20.17)
Share capital 20 000 16 000 4 000
Retained earnings 45 000 36 000 9 000
65 000 52 000 13 000
Equity represented by goodwill
– Parent and NCI 16 000 12 000 4 000
Consideration and NCI 81 000 R64 000 17 000
ii Since acquisition
• To beginning of current year:
Retained earnings (–148 000 – (+45 000) (193 000) (154 400) (38 600)
(21 600)
• Current year:
Profit for the year 15 000 12 000 3 000
(R97 000) (R142 400) (R18 600)
388
Adjustments and sundry aspects of group statements
Preference shares
6.17 Characteristics
Preference shares can only exist when another class of shares, generally ordinary
shares, exists, in comparison to which the preference shares enjoy certain preferential
rights. These preferential rights can be summarised as follows:
(a) Preferential rights in respect of dividends
For the purposes of the following discussion, this is 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% × R400 000).
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 (shareholders). As in the case of ordinary shares, preference owners
cannot legally lay claim to their share of the profit before a preference dividend has
been declared. If the preference shares are cumulative (see (c) below), ordinary
owners may not receive a dividend in the current reporting period unless a
preference dividend is declared. The preference shares can in essence, for the
purposes of allocation of profit, be regarded as a debt that bears “interest”, of
which the obligation to pay accrues on a time basis.
If this approach is followed, no problems should be experienced with the treatment
of preference dividends on consolidation.
389
Chapter 6
390
Adjustments and sundry aspects of group statements
391
Chapter 6
Comment
This view is substantiated by the definition of non-controlling interests in IFRS 10, which
determines that “non-controlling interests is the equity in a subsidiary not attributable,
directly or indirectly, to a parent” (IFRS 10 Appendix A).
392
Adjustments and sundry aspects of group statements
If the non-controlling interests in the acquiree are not entitled on liquidation of the
acquiree to a proportionate share of the acquiree’s net assets then the non-controlling
interests shall be measured at their acquisition-date fair values (IFRS 3.19).
If the non-controlling interests include preference shares then the measurement of the
preference share capital will be determined as follows:
l the acquiree has issued preference shares and the preference shares give their
holders a right to a preferential dividend in priority to the payment of any dividend
to the holders of ordinary shares and the preference shareholders are only entitled
to receive a repayment of the nominal value of the preference share upon
liquidation of the acquiree.
In this situation the acquirer measures the preference shares at their acquisition-
date fair value,
l the acquiree has issued preference shares and the preference shares give their
holders a right to a preferential dividend in priority to the payment of any dividend
to the holders of ordinary shares and the preference shareholders are entitled to
receive a proportionate share of the net assets available for distribution upon
liquidation of the acquiree.
In this situation the acquirer measures the preference shares at their acquisition-date
fair value or at their proportionate share in the acquiree’s recognised identifiable net
assets. This will be in accordance with the method elected by the parent for the
measuring of the non-controlling interests at acquisition date.
In the analysis of the owners’ equity of the subsidiary, the portion attributable to the
preference owners must be allocated first. The remaining balance is then attributable to
the ordinary owners.
393
Chapter 6
Solution 6.17
The non-controlling interests that relate to S Ltd’s preference shares do not qualify for
the measurement choice in IFRS 3.19 because their holders are not entitled to a
proportionate share of the entity’s net assets in the event of liquidation.
Therefore the preference share capital has to be measured at the acquisition-date fair
value of R40 000.
Analysis of preference owners’ equity of S Ltd at acquisition date
P Ltd 0%
Total NCI
At Since
i At acquisition (1/1/20.18)
Share capital 30 000 – 30 000
Equity represented by goodwill – NCI 10 000 – 10 000
Consideration and NCI R40 000 R– R40 000
Solution 6.18
The non-controlling interests that relate to S Ltd’s preference shares qualify for the
measurement choice in IFRS 3.19 because they entitle their holders to a proportionate
share of the entity’s net assets in the event of liquidation.
Therefore P Ltd can choose to measure the preference shares at their acquisition-date
fair value of R40 000 or at their proportionate share in the acquiree’s recognised
amounts of the identifiable net assets of R50 000.
In this solution assume that P Ltd has elected to measure non-controlling interests at
their proportionate share of the acquiree’s identifiable net assets at the acquisition date.
394
Adjustments and sundry aspects of group statements
A study of the previous section of this work will have highlighted the following points
which deserve attention when consolidating the preference share capital:
l Is the preference share capital classified as equity or as a liability?
l Does the parent hold all the preference shares or is there a non-controlling interest
component?
l What are the rights attached to the preference shares?
l Are any of the dividends payable to the preference shareholders in arrears?
l What is the elected method for measuring the non-controlling interests at
acquisition date?
After taking into consideration the abovementioned pointers apply the relevant
consolidation procedures.
The following information relates to the ordinary and preference share capital of S Ltd:
395
Chapter 6
Additional information
1 P Ltd acquired 32 000 ordinary shares in S Ltd on 1 March 20.15 for R102 000
when the equity of S Ltd consisted of the following:
Share capital: Ordinary (40 000 shares) 40 000
Share capital: 10% Preference (10 000 shares) 10 000
Retained earnings 80 000
R130 000
At the acquisition date, the assets and liabilities were considered to be fairly valued
and there were no unaccounted for contingent liabilities.
2 The preference shareholders have a prior right to their dividend payment and will
receive the return of their investment upon liquidation of the acquiree. All preference
dividends have been paid up to and including 28 February 20.18. The fair value of
the preference shares at acquisition date is R12 000.
3 P Ltd classified the equity investments in S Ltd under IFRS 9 in its separate
financial statements and recognised fair value adjustments in a mark-to-market
reserve (other comprehensive income).
4 P Ltd elected to measure the non-controlling interests in the acquiree at their
proportionate share of the acquiree’s identifiable net assets at the acquisition date.
5 The company tax rate is 28% and capital gains tax (CGT) is calculated at 66,6%
thereof.
Solution 6.19
396
Adjustments and sundry aspects of group statements
Comment
a The analysis of the owners’ equity of S Ltd is expanded to include the analysis of
the preference owners’ equity.
b Since the non-controlling interests that relate to S Ltd’s preference shares do not
qualify for the measurement choice in IFRS 3.19 because they do not entitle their
holders to a proportionate share of the entity’s net assets in the event of liquidation
the preference share capital must be measured at the acquisition-date fair value.
Comment
a As the investment was remeasured (fair value adjustment), the remeasurement
should be reversed on consolidation in order to facilitate the basic elimination journal
entry of the investment. The “Investment in S Ltd” should be eliminated at cost to
ensure the correct calculation of goodwill or gain on bargain purchase at the
acquisition date.
b The consolidated amounts can be obtained either by setting off the pro forma
consolidation journal entries against the combined amounts of the parent and the
subsidiary (in a worksheet), or by merely adding certain amounts in respect of the
subsidiary to that of the parent.
397
Chapter 6
shareholders (i.e. preference dividend) has been taken into account, assuming the
preference shares are cumulative (as discussed in 6.17(c)). An important aspect which
must consequently be kept in mind is that when the non-controlling interests hold both
preference and ordinary shares, the non-controlling interests in the profit for the year
includes the following:
l the pro rata portion of the preference dividend for the current reporting period
attributable to the preference shareholding of the non-controlling interests,
irrespective of whether such preference dividend is paid or declared, or even
where no provision has been made for a preference dividend in the financial
statements of the subsidiary; and
l the pro rata share attributable to the ordinary shareholding of the non-controlling
interests in the current profit for the reporting period which remains after the full
preference dividend for the reporting period has been taken into account.
The following represents the abridged financial statements of P Ltd and its subsidiary
S Ltd on 28 February 20.18:
STATEMENTS OF FINANCIAL POSITION AS AT 28 FEBRUARY 20.18
P Ltd S Ltd
ASSETS
Property, plant and equipment 350 000 266 200
Investment in S Ltd: 32 000 ordinary shares at fair value 122 000 –
Trade receivables 17 040 35 000
Total assets R489 040 R301 200
EQUITY AND LIABILITIES
Share capital: Ordinary shares (100 000/40 000 shares) 100 000 40 000
Share capital: 10% preference shares (20 000/10 000 shares) 20 000 10 000
Mark-to-market reserve (20 000 – 3 730(deferred tax)) 16 270 –
Retained earnings 340 040 219 200
Deferred tax (20 000 × 66,6% × 28%) 3 730 –
Trade and other payables 9 000 32 000
Total equity and liabilities R489 040 R301 200
398
Adjustments and sundry aspects of group statements
Additional information
1 P Ltd acquired 32 000 ordinary shares in S Ltd on 1 March 20.15 for R102 000
when the equity of S Ltd consisted of the following:
Share capital: Ordinary (40 000 shares) 40 000
Share capital: 10% preference (10 000 shares) 10 000
Retained earnings 80 000
R130 000
At the acquisition date, the assets and liabilities were considered to be fairly valued
and there were no unaccounted for contingent liabilities.
399
Chapter 6
2 The preference shareholders have a prior right to their dividend payment and will
receive the return of their investment upon liquidation of the acquiree. All preference
dividends have been paid up to and including 28 February 20.18. The fair value of
the preference shares at acquisition date is R12 000.
3 P Ltd classified the equity investments in S Ltd under IFRS 9 in its separate
financial statements and recognised fair value adjustments in a mark-to-market
reserve (other comprehensive income).
4 P Ltd elected to measure the non-controlling interests in the acquiree at their
proportionate share of the acquiree’s identifiable net assets at the acquisition date.
5 The company tax rate is 28% and capital gains tax (CGT) is calculated at 66,6%
thereof.
Solution 6.20
The consolidated financial statements of the P Ltd Group are prepared as follows:
P LTD GROUP
CONSOLIDATED STATEMENT OF FINANCIAL POSITION
AS AT 28 FEBRUARY 20.18
ASSETS
Non-current assets
Property, plant and equipment (350 000(P) + 266 200(S)) 616 200
Goodwill (6 000(ordinary) + 2 000(preference)) 8 000
624 200
Current assets
Trade receivables (17 040(P) + 35 000(S)) 52 040
Total assets R676 240
EQUITY AND LIABILITIES
Equity attributable to owners of the parent
Share capital (Ordinary) 100 000
Share capital (Preference) 20 000
Retained earnings 451 400
571 400
Non-controlling interests (51 840(ordinary) + 12 000(preference)) 63 840
Total equity 635 240
Current liabilities
Trade and other payables (9 000(P) + 32 000(S)) 41 000
Total equity and liabilities R676 240
400
Adjustments and sundry aspects of group statements
P LTD GROUP
CONSOLIDATED STATEMENT OF PROFIT OR LOSS
AND OTHER COMPREHENSIVE INCOME
FOR THE YEAR ENDED 28 FEBRUARY 20.18
Gross profit (200 100(P) + 140 000(S)) 340 100
Other income (72 900(P) + 20 000(S) – 16 000(dividend received)) 76 900
Profit before tax 417 000
Income tax expense (71 960(P) + 44 800(S)) (116 760)
PROFIT FOR THE YEAR 300 240
Other comprehensive income for the year –
TOTAL COMPREHENSIVE INCOME FOR THE YEAR R300 240
Total comprehensive income attributable to:
Owners of the parent (300 240 – 23 840) 276 400
Non-controlling interests (23 040(C1) + 1 000(C2) – 200(C1)) 23 840
R300 240
P LTD GROUP
CONSOLIDATED STATEMENT OF CHANGES IN EQUITY
FOR THE YEAR ENDED 28 FEBRUARY 20.18
Share Non-
Share
capital – Retained con- Total
capital – Total
Pre- earnings trolling equity
Ordinary
ference interests
Balance at 100 000 20 000 * 200 000 320 000 @45 000 365 000
1 March 20.17
Changes in equity
for 20.18
Total
comprehensive
income for the
year:
Profit for the year – – 276 400 276 400 23 840 300 240
Dividend paid – – (25 000) (25 000) & (5 000) (30 000)
Balance at
28 February 20.18 R100 000 R20 000 R451 400 R571 400 #R63 840 R635 240
401
Chapter 6
Calculations
C1 Analysis of the owners’ equity of S Ltd
P Ltd 80%
Ordinary shares Total NCI
At Since
i At acquisition (1/3/20.15)
Share capital 40 000 32 000 8 000
Retained earnings 80 000 64 000 16 000
120 000 96 000 24 000
Equity represented by goodwill
– Parent 6 000 6 000 –
Consideration and NCI 126 000 R102 000 24 000
ii Since acquisition
• To beginning of current year :
Retained earnings (125 000 – 80 000) 45 000 36 000 9 000
• Current year: 33 000
Profit for the year 115 200 92 160 23 040
Income attributable to preference
shareholders (1 000) (800) (200)
Dividends paid (20 000) (16 000) (4 000)
R265 200 R111 360 R51 840
402
Adjustments and sundry aspects of group statements
403
Chapter 6
The following are the condensed financial statements of S Ltd, a subsidiary of P Ltd, for
the reporting period ended 31 December 20.18:
S LTD
STATEMENT OF FINANCIAL POSITION AS AT 31 DECEMBER 20.18
ASSETS
Non-current assets
Property, plant and equipment 210 000
Total assets R210 000
EQUITY AND LIABILITIES
Equity attributable to owners of the parent
Share capital: Ordinary (100 000 shares) 100 000
Share capital: 8% Preference (50 000 shares) 50 000
Retained earnings 60 000
Total equity 210 000
Total equity and liabilities R210 000
S LTD
EXTRACT FROM THE STATEMENT OF PROFIT OR LOSS
AND OTHER COMPREHENSIVE INCOME
FOR THE YEAR ENDED 31 DECEMBER 20.18
Profit before tax 50 000
Income tax expense (21 000)
PROFIT FOR THE YEAR 29 000
Other comprehensive income for the year –
TOTAL COMPREHENSIVE INCOME FOR THE YEAR R29 000
S LTD
EXTRACT FROM THE STATEMENT OF CHANGES IN EQUITY
FOR THE YEAR ENDED 31 DECEMBER 20.18
Retained
earnings
Balance at 1 January 20.18 45 000
Changes in equity for 20.18
Total comprehensive income for the year:
Profit for the year 29 000
Preference dividend paid (4 000)
Ordinary dividend paid (10 000)
Balance at 31 December 20.18 R60 000
404
Adjustments and sundry aspects of group statements
On 1 January 20.18, P Ltd acquired 80% of the ordinary shares of S Ltd for R120 000,
and 50% of the preference shares of S Ltd for R25 000. There were no arrear
preference dividends at that date. The fair value of P Ltd’s investment in the shares of
S Ltd is equal to the consideration paid therefore, at the end of the reporting period.
The preference shareholders have a preferential right to their dividend payment and will
receive a proportionate share of the net assets available for distribution upon liquidation
of the acquiree. The fair value of the preference shares at acquisition date is R26 000.
At the acquisition date, the assets and liabilities were considered to be fairly valued and
there were no unaccounted for contingent liabilities.
P Ltd elected to measure the non-controlling interests in the acquiree at their
proportionate share of the acquiree’s identifiable net assets at the acquisition date.
Solution 6.21
The non-controlling interests in the profit of S Ltd for the reporting period ended
31 December 20.18 will be calculated as follows:
A pro rata portion of the preference dividend for the current reporting period is
attributable to the preference shareholding of the non-controlling interests (irrespective
of whether the preference dividend has been paid, or declared, or even where no
provision has been made for the preference dividend in the financial statements of the
subsidiary):
Pro rata share of preference dividend: 50% × 4 000 2 000
Pro rata share of profit attributable to ordinary shareholders
attributable to the non-controlling interests: 20% × 25 000 5 000
Non-controlling interests R7 000
Comment
If P Ltd, in the example above, held no preference shares in S Ltd, the non-controlling
interests in profit would have amounted to R9 000 (4 000(preference dividend) +
5 000(C1)).
In the interest of clarity, the treatment of the preference share capital and preference
dividend in the analysis of the owners’ equity of S Ltd is dealt with next. The pro forma
consolidation journal entries are also given.
405
Chapter 6
Calculations
C1 Analysis of owners’ equity of S Ltd
P Ltd 80%
Ordinary shares Total NCI
At Since
i At acquisition (1/1/20.18)
Share capital 100 000 80 000 20 000
Retained earnings 45 000 36 000 9 000
145 000 116 000 29 000
Equity represented by goodwill
– Parent 4 000 4 000 –
Consideration and NCI 149 000 R120 000 29 000
ii Since acquisition
• Current year :
Profit for the year attributable
to ordinary shareholders
(29 000 – 4 000(1)) 25 000 20 000 5 000
Ordinary dividend (10 000) (8 000) (2 000)
R164 000 R12 000 R32 000
(1) 50 000 × 8% = 4 000
406
Adjustments and sundry aspects of group statements
407
Chapter 6
P Ltd purchased 80% of the issued ordinary shares of S Ltd for R47 000 and 60% of
the preference shares for R20 000 on 1 January 20.16. There were no preference
dividends in arrears on that date and the owners’ equity of S Ltd then consisted of the
following:
Share capital: Ordinary (50 000 shares) R50 000
Share capital: 7% Preference (30 000 shares) R30 000
Retained earnings R11 000
The preference shareholders have a preferential right to their dividend payment and will
receive a proportionate share of the net assets available for distribution upon liquidation
of the acquiree. The fair value of the preference shares at acquisition date is R13 000.
P Ltd classified the equity investment in S Ltd under IFRS 9 in its separate financial
statements and recognised fair value adjustments in a mark-to-market reserve (other
comprehensive income). The fair values of P Ltd’s investment in S Ltd at 31 December
20.18 were as follows:
Investment in ordinary shares R52 000
Investment in preference shares R23 000
P Ltd elected to measure the non-controlling interests in the acquiree at their fair value at
the acquisition date. The fair value of the ordinary non-controlling interests at acquisition
is R12 000.
The company tax rate is 28% and capital gains tax (CGT) is calculated at 66,6%
thereof.
At the acquisition date, the assets and liabilities of S Ltd were considered to be fairly
valued. There were no unaccounted for contingent liabilities.
The condensed financial statements of the two companies for the reporting period
ended 31 December 20.19 are as follows:
STATEMENTS OF FINANCIAL POSITION AS AT 31 DECEMBER 20.19
P Ltd S Ltd
ASSETS
Property, plant and equipment 78 900 65 000
Investment in S Ltd at fair value:
40 000 ordinary shares 55 000 –
18 000 7% preference shares 24 000 –
Trade receivables 34 000 32 000
Total assets R191 900 R97 000
EQUITY AND LIABILITIES
Share capital: Ordinary (150 000/50 000 shares) 150 000 50 000
Share capital: 7% Preference (30 000 shares) – 30 000
Mark-to-market reserve (12 000 – (12 000 × 66,6% × 28%)) 9 762 –
Retained earnings 29 900 17 000
Deferred tax (12 000 × 66,6% × 28%) 2 238 –
Total equity and liabilities R191 900 R97 000
408
Adjustments and sundry aspects of group statements
409
Chapter 6
Solution 6.22
The consolidated financial statements of the P Ltd Group for the reporting period ended
31 December 20.19 are as follows:
P LTD GROUP
CONSOLIDATED STATEMENT OF FINANCIAL POSITION
AS AT 31 DECEMBER 20.19
ASSETS
Non-current assets
Property, plant and equipment (78 900(P) + 65 000(S)) 143 900
Goodwill 3 000
146 900
Current assets
Trade receivables (34 000(P) + 32 000(S)) 66 000
Total assets R212 900
EQUITY AND LIABILITIES
Equity attributable to owners of the parent
Share capital (P) 150 000
Retained earnings 36 700
186 700
Non-controlling interests 26 200
Total equity 212 900
Total equity and liabilities R212 900
P LTD GROUP
EXTRACT FROM THE CONSOLIDATED STATEMENT OF PROFIT OR LOSS
AND OTHER COMPREHENSIVE INCOME
FOR THE YEAR ENDED 31 DECEMBER 20.19
Profit before tax (23 240 + 15 400) 38 640
Income tax expense (6 500 + 4 300) (10 800)
PROFIT FOR THE YEAR 27 840
Other comprehensive income for the year –
TOTAL COMPREHENSIVE INCOME FOR THE YEAR R27 840
Total comprehensive income attributable to:
Owners of the parent (27 840 – 2 640) 25 200
Non-controlling interests (1 800(C1) + 840(C2)) 2 640
R27 840
410
Adjustments and sundry aspects of group statements
P LTD GROUP
CONSOLIDATED STATEMENT OF CHANGES IN EQUITY
FOR THE YEAR ENDED 31 DECEMBER 20.19
Non-
Share Retained Total
Total controlling
capital earnings equity
interests
Balance at 1 January 20.19 150 000 * 25 000 175 000 @ 25 300 200 300
Changes in equity for 20.19
Total comprehensive income
for the year:
Profit for the year – 25 200 25 200 2 640 27 840
Dividend paid – (13 500) (13 500) # (1 740) (15 240)
Balance at 31 December 20.19 R150 000 R36 700 R186 700 & R26 200 R212 900
Calculations
C1 Analysis of owners’ equity of S Ltd
P Ltd 80%
Ordinary shares Total NCI
At Since
i At acquisition (1/1/20.16)
Share capital 50 000 40 000 10 000
Retained earnings 11 000 8 800 2 200
61 000 48 800 12 200
Gain from a bargain purchase
– Parent and NCI (2 000) (1 800) (200)
Consideration (55 000 – 8 000) and NCI 59 000 R47 000 12 000
ii Since acquisition
• To beginning of current year:
Retained earnings (12 500 – 11 000) 1 500 1 200 300
12 300
• Current year:
Profit attributable to ordinary
shareholders (11 100 – 2 100(1)) 9 000 7 200 1 800
Ordinary dividend (4 500) (3 600) (900)
R65 000 R4 800 R13 200
411
Chapter 6
Comment
a If the parent, as well as the non-controlling interests, holds preference shares of the
subsidiary, the analysis is still done in the usual way. The elimination of common
items, intragroup balances and the determination of the non-controlling interests are
also done in the usual way.
b If the purchase price paid by the parent for such preference shares differs from the
net asset value of the shares, goodwill or a gain from a bargain purchase is created,
as in the case with the acquisition of ordinary shares.
c If the parent has elected to measure the non-controlling interests at their fair value at
the acquisition date and the fair value of the preference shares is higher than the net
asset value of the shares then goodwill will be created.
412
Adjustments and sundry aspects of group statements
413
Chapter 6
Dr Cr
R R
J8 Gain from a bargain purchase 2 000
Retained earnings – Beginning of year (S)(SCE) 2 000
Recognition of gain from bargain purchase
The consolidated amounts can be obtained by either setting off the pro forma
consolidation journal entries against the combined amounts of the parent and the
subsidiary (in a worksheet), or by merely adding certain amounts in respect of the
subsidiary to that of the parent.
414
Adjustments and sundry aspects of group statements
The following are the condensed statements of financial position and statements of
changes in equity of P Ltd and its subsidiary S Ltd for the reporting period ended
28 February 20.19:
STATEMENTS OF FINANCIAL POSITION AS AT 28 FEBRUARY 20.19
P Ltd S Ltd
ASSETS
Property, plant and equipment 436 100 456 000
Investment in S Ltd at fair value:
105 000 ordinary shares 145 000 –
32 000 preference shares 66 000 –
Trade receivables 44 000 14 000
Total assets R691 100 R470 000
EQUITY AND LIABILITIES
Share capital: Ordinary (200 000/140 000 shares) 200 000 110 000
Share capital: 10% Preference (80 000 shares) – 80 000
Mark-to-market reserve 20 338 –
Retained earnings 452 000 261 000
Deferred tax 4 662 –
Trade payables 14 100 19 000
Total equity and liabilities R691 100 R470 000
P Ltd acquired ownership of both the ordinary shares and the preference shares in
S Ltd on 28 February 20.15, when the retained earnings of S Ltd amounted to R40 000.
P Ltd paid R127 500 for the investment in ordinary shares and R58 500 for the
investment in preference shares. At that date, the preference dividends had been
declared and paid, up to 28 February 20.15.
Provision still has to be made for the preference dividend for the reporting period ended
28 February 20.19 that was declared on 28 February 20.19.
415
Chapter 6
P Ltd classified the equity investments in S Ltd under IFRS 9 in its separate financial
statements and recognised fair value adjustments in a mark-to-market reserve (other
comprehensive income).
At the acquisition date, the assets and liabilities were considered to be fairly valued and
there were no unaccounted for contingent liabilities.
P Ltd elected to measure the non-controlling interests in the acquiree at their
proportionate share of the acquiree’s identifiable net assets at the acquisition date. The
fair values of P Ltd’s investments in S Ltd at 28 February 20.18 were as follows:
Investment in ordinary shares R141 640
Investment in preference shares R64 560
Assume a tax rate of 28% and capital gains tax (CGT) is calculated at 66,6% thereof.
Solution 6.23
The consolidated financial statements of the P Ltd Group for the year ended
28 February 20.19 will be drawn up as follows:
P LTD GROUP
CONSOLIDATED STATEMENT OF FINANCIAL POSITION
AS AT 28 FEBRUARY 20.19
ASSETS
Non-current assets
Property, plant and equipment (436 100(P) + 456 000(S)) 892 100
Goodwill (15 000 + 26 500) 41 500
933 600
Current assets
Trade receivables (44 000(P) + 14 000(S)) 58 000
Total assets R991 600
EQUITY AND LIABILITIES
Equity attributable to owners of the parent
Share capital 200 000
Retained earnings 614 950
814 950
Non-controlling interests (90 750(ordinary) + 48 000(preference)) 138 750
Total equity 953 700
Current liabilities
Trade payables (14 100(P) + 19 000(S)) 33 100
Preference dividend payable (J7) 4 800
37 900
Total equity and liabilities R991 600
416
Adjustments and sundry aspects of group statements
P LTD GROUP
CONSOLIDATED STATEMENT OF PROFIT OR LOSS
AND OTHER COMPREHENSIVE INCOME
FOR THE YEAR ENDED 28 FEBRUARY 20.19
PROFIT FOR THE YEAR (240 000(P) + 116 000(S)) 356 000
Other comprehensive income for the year –
TOTAL COMPREHENSIVE INCOME FOR THE YEAR R356 000
Total comprehensive income attributable to:
Owners of the parent 324 200
Non-controlling interests (27 000(ordinary) + 4 800(preference)) 31 800
R356 000
P LTD GROUP
CONSOLIDATED STATEMENT OF CHANGES IN EQUITY
FOR THE YEAR ENDED 28 FEBRUARY 20.19
Non-
Share Retained Total
Total controlling
capital earnings equity
interests
Balance at 1 March 20.18 200 000 * 290 750 490 750 @ 111 750 602 500
Changes in equity for 20.19
Total comprehensive income
for the year:
Profit for the year – 324 200 324 200 # 31 800 356 000
Dividend payable – – – (4 800) (4 800)
Balance at 28 February 20.19 R200 000 R614 950 R814 950 & R138 750 R953 700
417
Chapter 6
Calculations
C1 Analysis of owners’ equity of S Ltd
P Ltd 75%
Ordinary shares Total NCI
At Since
i At acquisition (28/2/20.15)
Share capital 110 000 82 500 27 500
Retained earnings 40 000 30 000 10 000
150 000 112 500 37 500
Equity represented by goodwill
– Parent 15 000 15 000 –
Consideration and NCI 165 000 R127 500 37 500
ii Since acquisition
• To beginning of current year :
Retained earnings (145 000 – 40 000) 105 000 78 750 26 250
63 750
• Current year :
Profit attributable to ordinary
shareholders (1) 108 000 81 000 27 000
R378 000 R159 750 R90 750
418
Adjustments and sundry aspects of group statements
Comment
• Where a subsidiary has issued preference share capital which is wholly or partially
held by the non-controlling interests, the profit of the subsidiary must, as indicated, be
allocated to the ordinary and preference shareholders of the subsidiary. This
allocation must be made even when the subsidiary has made no provision for the
preference dividend in its separate financial statements.
• Since S Ltd has not yet made provision for the preference dividend and P Ltd has
consequently not yet reacted thereto, it is, on consolidation, merely necessary to
transfer the portion of the preference dividend which is due to the non-controlling
interests from non-controlling interests (SCE) to current liabilities (SFP).
419
Chapter 6
420
Adjustments and sundry aspects of group statements
421
Chapter 6
Self-assessment questions
Question 6.1
The following represents the trial balances of P Ltd and its subsidiary for the year
ended 31 December 20.17:
P Ltd S Ltd
Dr/(Cr) Dr/(Cr)
Share capital (200 000/100 000 shares) (200 000) (100 000)
Retained earnings – 1 January 20.17 (539 200) (483 700)
Equity investments:
Investment in S Ltd at fair value 440 000 –
Investment in Z Ltd at fair value (Cost – R27 000) – 27 000
Loan granted – P Ltd – 300 000
Mark-to-market reserve – 1 January 20.17 (20 338) –
Deferred tax (on mark-to-market reserve: 4 662 + 932) (5 594) –
Tax on fair value adjustment gain on equity investment (OCI) 932
Revenue (800 000) (700 000)
Dividends received (32 000) (2 000)
Interest received – (30 000)
Gain on sale of land (capital gains tax paid) – (70 000)
Fair value adjustment gain on equity investment (OCI) (5 000) –
Cost of sales 400 000 350 000
Other expenses 156 000 150 000
Interest paid 33 800 –
Income tax expense 58 856 74 200
Dividends paid – 31 December 20.17 22 000 40 000
Property, plant and equipment 688 000 270 000
Accumulated depreciation (44 000) (30 000)
Trade receivables 41 000 87 500
Inventories 99 544 65 000
Cash and cash equivalents 86 000 52 000
Long-term loan – ABC Ltd (80 000)
Long-term loan – S Ltd (300 000) –
– –
422
Adjustments and sundry aspects of group statements
P Ltd paid R410 000 for an 80% interest in S Ltd on 1 January 20.16, when the retained
earnings of S Ltd amounted to R300 000. On 1 January 20.16, the assets and liabilities
of S Ltd were considered to be fairly valued except for the assets detailed below:
Fair Carrying
value amount
Land R210 060 R150 000
Plant R48 000 R40 000
There were no unaccounted for contingent liabilities.
S Ltd sold the above-mentioned land during the current reporting period.
P Ltd and S Ltd classified their investments under IFRS 9 as equity investments in the
separate financial statements and recognised any fair value adjustments in the mark-to-
market reserve (other comprehensive income).
P Ltd elected to measure the non-controlling interests in the acquiree at their
proportionate share of the acquiree’s identifiable net assets at the acquisition date.
Goodwill was not considered to be impaired from the time that the investments were
acquired to the end of the current reporting period.
The plant of S Ltd is depreciated at 20% per annum on a straight-line basis. The
remaining useful life of the plant at acquisition date of S Ltd remained unchanged at
four years.
P Ltd purchases inventory from S Ltd at a profit mark-up of 25% on the cost of the
goods. Included in the inventory of P Ltd at 31 December 20.17 is inventory of R50 000
purchased from S Ltd. The total sales from S Ltd to P Ltd during the current reporting
period amounted to R110 000.
The interest received by S Ltd is in respect of the intragroup loan.
The company tax rate is 28% and capital gains tax (CGT) is calculated at 66,6%
thereof.
423
Chapter 6
The consolidated financial statements of the P Ltd Group for the year ended
31 December 20.17 will be drawn up as follows:
P LTD GROUP
CONSOLIDATED STATEMENT OF FINANCIAL POSITION
AS AT 31 DECEMBER 20.17
ASSETS
Non-current assets
Property, plant and equipment 888 000
Goodwill 46 304
Equity investments (S) 27 000
Deferred tax Ȝ 1 680
962 984
Current assets
Cash and cash equivalents (86 000(P) + 52 000(S)) 138 000
Trade receivables (41 000(P) + 87 500(S)) 128 500
Inventories (99 544(P) + 65 000(S) – 10 000(J10)) 154 544
421 044
Total assets R1 384 028
EQUITY AND LIABILITIES
Equity attributable to owners of the parent
Share capital (P) 200 000
Retained earnings 948 992
1 150 592
Non-controlling interest 153 436
Total equity 1 304 028
Non-current liabilities
Long-term loan (300 000(P) + 80 000(P) – 300 000(S(J13)) 80 000
Total equity and liabilities R1 384 028
424
Adjustments and sundry aspects of group statements
P LTD GROUP
CONSOLIDATED STATEMENT OF PROFIT OR LOSS
AND OTHER COMPREHENSIVE INCOME
FOR THE YEAR ENDED 31 DECEMBER 20.17
Revenue (800 000(P) + 700 000(S) – 110 000(J11)(intragroup sales)) 1 390 000
Cost of sales (400 000(P) + 350 000(S) – 110 000(J11) + 10 000(J10)) (650 000)
Gross profit 740 000
Other income ȍ 11 940
Other expenses (156 000(P) + 150 000(S) + 2 000(J9)) (308 000)
Finance costs (33 800(P) – 30 000(J12)) (3 800)
Profit before tax 440 140
Income tax expense & (118 496)
PROFIT FOR THE YEAR 321 644
Other comprehensive income for the year –
TOTAL COMPREHENSIVE INCOME FOR THE YEAR R321 644
Total comprehensive income attributable to:
Owners of the parent (321 644 – 34 060(J14)) 287 584
Non-controlling interests d 34 060
R321 644
P LTD GROUP
CONSOLIDATED STATEMENT OF CHANGES IN EQUITY
FOR THE YEAR ENDED 31 DECEMBER 20.17
Non-
Share Retained Total
Total controlling
capital earnings equity
interests
Balance at 1 January 20.17 200 000 ȍ 685 008 885 008 127 376c 1 012 384
Changes in equity for 20.17
Total comprehensive
income for the year:
Profit for the year 287 584 287 584 34 060d 321 644
Dividend paid (22 000) (22 000) (8 000)e (30 000)
Balance at 31 December 20.17 R200 000 R950 592 R1 150 592 R153 436 R1 304 028
425
Chapter 6
Calculations
C1 Analysis of owners’ equity of S Ltd
P Ltd 80%
Total NCI
At Since
i At acquisition 1/1/20.16
Share capital 100 000 80 000 20 000
Revaluation surplus 54 620 43 696 10 924
Retained earnings 300 000 240 000 60 000
454 620 363 696 90 924
Equity represented by goodwill
– Parent 46 304 46 304 –
Consideration (1) and NCI 500 924 R410 000 90 924
ii Since acquisition
• To beginning of current year:
Retained earnings
(483 700 – 300 000 – 1 440(J8)) 182 260 145 808 a 36 452
127 376 c
• Current year:
Profit for the year (2) 170 300 136 240 34 060 d
Dividends paid (40 000) (32 000)b (8 000)e
f
R813 484 R250 048 R153 436
(1) 440 000 – 20 338 (mark-to-market reserve)(J1) – 4 662 (deferred tax on mark-to-market
reserve)(J1) – 5 000 (fair value adjustment gain (OCI)(J2) = 410 000
(2) Calculation of profit for the year of S Ltd
Revenue 700 000
Cost of sales (350 000)
Gross profit 350 000
Gain on sale of land 70 000
Other income (interest received) 30 000
Other income (dividend received) 2 000
Other expenses (150 000)
302 000
Income tax expense (74 200)
227 800
Reversal of at acquisition revaluation surplus of land (J7) (60 060)
Deferred tax on reversed revaluation surplus (J7) 11 200
Depreciation on revaluation at acquisition (J9) (2 000)
Tax on depreciation on revaluation at acquisition (J9) 560
Unrealised profit in inventory (J10) (10 000)
Tax on unrealised profit in inventory (J10) 2 800
R170 300
426
Adjustments and sundry aspects of group statements
427
Chapter 6
Dr Cr
R R
J8 Retained earnings – Since acquisition (S)(SCE) 1 440
Deferred tax (S)(SFP) (2 000 × 28%) 560
Accumulated depreciation (S)(SFP) (8 000/4) 2 000
Additional depreciation since acquisition to
beginning of year
J9 Depreciation (S)(P/L) (8 000/4) 2 000
Deferred tax (S)(SFP) (2 000 × 28%) 560
Accumulated depreciation (S)(SFP) 2 000
Income tax expense (S)(P/L) 560
Additional depreciation for current year
J10 Cost of sales (P)(P/L) (50 000 × 25/125) 10 000
Deferred tax (P)(SFP) 2 800
Inventory (P)(SFP) 10 000
Income tax expense (P)(P/L) (10 000 × 28%) 2 800
Elimination of unrealised profit included
in inventory
J11 Revenue (S)(P/L) 110 000
Cost of sales (P)(P/L) 110 000
Elimination of intragroup sales
J12 Interest received (S)(P/L) 30 000
Interest paid (P) (P/L) 30 000
Elimination of intragroup interest paid on intragroup
loan
J13 Long-term loan (P)(SFP) 300 000
Loan granted (S)(SFP) 300 000
Elimination of intragroup loans
J14 Non-controlling interests (P/L) 34 060
Non-controlling interests (SFP) 34 060
Recognition of non-controlling interests in current
year's profit for the year of S Ltd
J15 Dividends received (P)(P/L) 32 000
Non-controlling interests (SFP) 8 000
Dividend paid (S)(SCE) 40 000
Elimination of intragroup dividend and recording
of non-controlling interests therein
428
Adjustments and sundry aspects of group statements
Question 6.2
The following are the financial statements of P Ltd and its subsidiary S Ltd for the year
ended 31 December 20.17:
STATEMENTS OF FINANCIAL POSITION AS AT 31 DECEMBER 20.17
P Ltd S Ltd
ASSETS
Land 117 500 146 000
Machinery 211 500 240 000
Cost 352 500 300 000
Accumulated depreciation (141 000) (60 000)
Investment in S Ltd at fair value 164 175 –
45 000 Ordinary shares 119 000 –
39 000 8% Preference shares 45 175 –
Trade receivables 79 000 96 100
Total assets R572 175 R482 100
EQUITY AND LIABILITIES
Share capital: Ordinary (100 000/60 000 shares) 100 000 60 000
Share capital: 8% Preference (130 000 shares) – 130 000
Deferred tax 2 270 –
Mark-to-market reserve 9 905 –
Retained earnings 460 000 292 100
Total equity and liabilities R572 175 R482 100
429
Chapter 6
430
Adjustments and sundry aspects of group statements
Additional information
1 P Ltd purchased the shares on 1 January 20.13, when the retained earnings of
S Ltd was R66 000. P Ltd paid R110 000 for the investment in ordinary shares and
R42 000 for the investment in preference shares.
2 S Ltd purchased all its machinery on 1 January 20.17 from P Ltd. S Ltd depreciates
the machinery over the remaining useful life of the asset of five years.
3 P Ltd sold the machinery at cost price plus 20%, and the machinery was not part of
inventories in the records of P Ltd.
4 P Ltd classified the equity investment in S Ltd under IFRS 9 in the separate financial
statements and recognised any fair value adjustments in the mark-to-market
reserve (other comprehensive income).
5 P Ltd elected to measure the non-controlling interests in the acquiree at their
proportionate share of the acquiree’s identifiable net assets at the acquisition date.
6 The company tax rate is 28% and capital gains tax (CGT) is calculated at 66,6%
thereof.
Required
Prepare the consolidated financial statements of the P Ltd Group for the reporting
period ended 31 December 20.17.
431
Chapter 6
The consolidated financial statements of the P Ltd Group for the year ended
31 December 20.17 will be prepared as follows:
P LTD GROUP
CONSOLIDATED STATEMENT OF FINANCIAL POSITION AS AT 31 DECEMBER
20.17
ASSETS
Non-current assets
Property, plant and equipment (117 500(P) + 146 000(S) + 352 500(P)
+ 300 000(S) – 141 000(P) – 60 000(S) – 50 000(J5) + 10 000(J6)) 675 000
Deferred tax (–2 270(P) + 1 500(J1) + 770(J3) + 14 000(J5) – 2 800(J6)) 11 200
Goodwill (15 500 + 3 000) 18 500
704 700
Current assets
Trade receivables (79 000(P) + 96 100(S)) 175 100
Total assets R879 800
EQUITY AND LIABILITIES
Equity attributable to owners of the parent
Share capital (P) 100 000
Retained earnings 600 775
700 775
Non-controlling interests (88 025(C1) + 91 000(C3)) 179 025
Total equity 879 800
Total equity and liabilities R879 800
P LTD GROUP
CONSOLIDATED STATEMENT OF PROFIT OR LOSS
AND OTHER COMPREHENSIVE INCOME
FOR THE YEAR ENDED 31 DECEMBER 20.17
Revenue (687 124(P) + 520 500(S)) 1 207 624
Cost of sales (291 120(P) + 250 500(S)) (541 620)
Gross profit 666 004
Other expenses (125 000(P) + 53 750(S) + 80 000(P) + 60 000(S) – 10 000(J6)) (308 750)
Profit before tax 357 254
Income tax expense (74 124(P) + 43 750(S) – 14 000(J5) + 2 800(J6)) (106 674)
PROFIT FOR THE YEAR 250 580
Other comprehensive income for the year –
TOTAL COMPREHENSIVE INCOME FOR THE YEAR R250 580
Total comprehensive income attributable to:
Owners of the parent 217 775
Non-controlling interests (25 525(C1) + 7 280(C3)) 32 805
R250 580
432
Adjustments and sundry aspects of group statements
P LTD GROUP
CONSOLIDATED STATEMENT OF CHANGES IN EQUITY
FOR THE YEAR ENDED 31 DECEMBER 20.17
Non-
Share Retained Total
Total controlling
capital earnings equity
interest
Balance at 1 January 20.17 100 000 &438 000 538 000 @168 500 706 500
Changes in equity
for 20.17
Total comprehensive
income for the year:
Profit for the year – 217 775 217 775 32 805 250 580
Dividend paid – (55 000) (55 000) §(22 280) (77 280)
Balance
at 31 December 20.17 R100 000 #R600 775 R700 775 R179 025 R879 800
Comment
In this example P Ltd sold machinery to S Ltd. The profit on the transaction has been
recognised in the accounting records of P Ltd. The pro forma consolidation journal entry
J5 eliminates the unrealised profit on the machinery. The non-controlling interests are not
affected by J5.
The intragroup profit is in the meanwhile recognised by the group (realised) by reducing
the depreciation charge (use of the machine). The profit can also be realised by the sale
of the machine to a third party. The reduction of the depreciation charge as per J6 also
does not affect the non-controlling interests as P Ltd originally made the profit and
therefore the realisation of the profit must also be allocated to P Ltd.
433
Chapter 6
Calculations
C1 Analysis of owners’ equity of S Ltd
P Ltd 75%
Ordinary shares Total NCI
At Since
i At acquisition (1/1/20.13)
Share capital 60 000 45 000 15 000
Retained earnings 66 000 49 500 16 500
126 000 94 500 31 500
Equity represented by goodwill
(Parent) 15 500 15 500 –
Consideration and NCI 141 500 R110 000 31 500
ii Since acquisition
• To beginning of current year:
Retained earnings (1) 184 000 138 000 46 000
77 500
• Current year:
Profit for the year after preference
dividend (2) 102 100 76 575 25 525
Ordinary dividend (60 000) (45 000) (15 000)
R367 600 R169 575 R88 025
434
Adjustments and sundry aspects of group statements
435
Chapter 6
Dr Cr
R R
J3 Deferred tax (P)(SFP) 770
Income tax expense of mark-to-market reserve (OCI) 770
Tax effect on reversal of fair value adjustment on
investment in S Ltd for current year at group level
J4 Ordinary share capital (S)(SCE) 60 000
Preference share capital (S)(SCE) 130 000
Retained earnings (S)(SCE) 66 000
Goodwill (SFP) (15 500 + 3 000) 18 500
Non-controlling interests (SFP) (91 000 + 31 500) 122 500
Investment in S Ltd – Ordinary (P)(SFP) 110 000
Investment in S Ltd – Preference (P)(SFP) 42 000
Elimination of owners’ equity in S Ltd at acquisition
date
J5 Gain on sale of machinery (P)(P/L) (300 000 × 20/120) 50 000
Deferred tax (S)(SFP) (50 000 × 28%) 14 000
Property, plant and equipment (S)(SFP) 50 000
Income tax expense (P)(P/L) 14 000
Elimination of unrealised profit on machinery
J6 Accumulated depreciation (S)(SFP) 10 000
Income tax expense (P)(P/L) 2 800
Depreciation (P)(P/L) (50 000/5) 10 000
Deferred tax (S)(SFP) (10 000 × 28%) 2 800
Depreciation on unrealised profit in machinery
J7 Retained earnings (S)(SCE) 46 000
Non-controlling interests (SFP) 46 000
Recognition of non-controlling interests in since
acquisition retained earnings of subsidiary to
beginning of current year
J8 Non-controlling interests – Preference (P/L) 7 280
Non-controlling interests – Ordinary (P/L) 25 525
Non-controlling interests (SFP) 32 805
Recognition of non-controlling interests in profit
for the year
J9 Dividends received (P)(P/L) (45 000(ordinary)
+ 3 120(preference)) 48 120
Non-controlling interests (SFP) (15 000 + 7 280) 22 280
Preference dividend paid (S)(SCE) 10 400
Ordinary dividend paid (S)(SCE) 60 000
Elimination of intragroup preference and ordinary
dividend and recording of non-controlling interests
in dividends
436
Adjustments and sundry aspects of group statements
Question 6.3
The following are the financial statements of P Ltd and its subsidiary S Ltd for the year
ended 31 December 20.17:
STATEMENTS OF FINANCIAL POSITION AS AT 31 DECEMBER 20.17
P Ltd S Ltd
ASSETS
Property, plant and equipment at carrying amount 110 000 155 000
Land and buildings 50 000 130 000
Machinery 40 000 15 000
Vehicles 20 000 10 000
Investment in S Ltd at fair value 148 000 –
80 000 Ordinary shares 110 000 –
25 000 10% Preference shares 30 000 –
Current account 8 000 –
Inventories 25 000 30 000
Trade receivables 15 000 30 000
Total assets R298 000 R215 000
EQUITY AND LIABILITIES
Share capital: Ordinary (200 000/100 000 shares) 200 000 100 000
Share capital: 10% Preference (50 000 shares) – 50 000
Mark-to-market reserve 13 000 –
Retained earnings 45 000 50 000
Current account – P Ltd – 5 000
Trade and other payables 40 000 10 000
Total equity and liabilities R298 000 R215 000
437
Chapter 6
Additional information
1 P Ltd acquired the share investments in S Ltd on 1 June 20.15, when the retained
earnings of S Ltd was R39 000. At the acquisition date, the assets and liabilities
were considered to be fairly valued and there were no unaccounted for contingent
liabilities. P Ltd paid R100 000 for the investment in ordinary shares and R27 000
for the investment in preference shares.
2 P Ltd classified the equity investment in S Ltd under IFRS 9 in the separate financial
statements and recognised any fair value adjustments in the mark-to-market
438
Adjustments and sundry aspects of group statements
439
Chapter 6
P LTD GROUP
CONSOLIDATED STATEMENT OF PROFIT OR LOSS
AND OTHER COMPREHENSIVE INCOME
FOR THE YEAR ENDED 31 DECEMBER 20.17
Revenue (90 500(P) + 74 000(S) – 18 000(J7)) 146 500
Cost of sales (40 000(P) + 30 000(S) – 18 000(J7) + 1 000(J6)) (53 000)
Gross profit 93 500
Other expenses (5 000(P) + 4 000(S) – 500(S) – 4 000(S)) (4 500)
Profit before tax 89 000
Income tax expense (25 000(P) + 20 000(S)) (45 000)
PROFIT FOR THE YEAR 44 000
Other comprehensive income for the year –
TOTAL COMPREHENSIVE INCOME FOR THE YEAR R44 000
Total comprehensive income attributable to:
Owners of the parent (44 000 – 5 500) 38 500
Non-controlling interests (3 000(C1) + 2 500(C3)) 5 500
R44 000
P LTD GROUP
CONSOLIDATED STATEMENT OF CHANGES IN EQUITY
FOR THE YEAR ENDED 31 DECEMBER 20.17
Non-
Share Retained Total
Total controlling
capital earnings equity
interests
Balance at 1 January 20.17 200 000 ∇ 35 500 235 500 ȍ 53 000 288 500
Changes in equity for 20.17
Total comprehensive income
for the year:
Profit for the year – 38 500 38 500 5 500 44 000
Dividend paid – (10 000) (10 000) &(3 500) (13 500)
Balance at 31 December 20.17 R200 000 λR64 000 R264 000 R55 000 R319 000
440
Adjustments and sundry aspects of group statements
Calculations
C1 Analysis of owners’ equity of S Ltd
P Ltd 80%
Ordinary shares Total NCI
At Since
i At acquisition (1/6/20.15)
Share capital 100 000 80 000 20 000
Retained earnings 39 000 31 200 7 800
139 000 111 200 27 800
Gain from a bargain purchase – (11 200) (11 200) –
Parent
Consideration (1) and NCI 127 800 R100 000 27 800
ii Since acquisition
• To beginning of current year:
Retained earnings (2) 1 000 800 200
28 000
• Current year:
Profit for the year after preference
dividend (3) 15 000 12 000 3 000
Ordinary dividend (5 000) (4 000) (1 000)
R138 800 R8 800 R30 000
C2 Proof of gain from bargain purchase of ordinary shares in terms of IFRS 3.32:
Consideration transferred at acquisition date: IFRS 3.32(a)(i) 100 000
Amount of non-controlling interests: IFRS 3.32(a)(ii) 27 800
127 800
Net of the identifiable assets acquired and liabilities assumed
at acquisition date: IFRS 3.32(b) (139 000)
Gain from a bargain purchase R11 200
441
Chapter 6
442
Adjustments and sundry aspects of group statements
Dr Cr
R R
J3 Share capital – Ordinary (S)(SCE) 100 000
Share capital – Preference (S)(SCE) 50 000
Retained earnings (S)(SCE) 39 000
Goodwill (SFP) 2 000
Investment in S Ltd (P)(SFP) (100 000 + 27 000) 127 000
Non-controlling interests (SFP) (27 800 + 25 000) 52 800
Gain from bargain purchase (SCE) 11 200
Elimination of owners’ equity in S Ltd at acquisition
date
J4 Gain from bargain purchase (SCE) 11 200
Retained earnings – Beginning of year (S)(SCE) 11 200
Recognition of gain from bargain purchase
in retained earnings
J5 Inventories (S)(SFP) 3 000
Current account – P Ltd (S)(SFP) 3 000
Recognition of inventories in transit in S Ltd’s
records
J6 Cost of sales (P)(P/L) 1 000
Inventories (S)(SFP) 1 000
Elimination of unrealised profit in closing
inventories [(1 000 + 3 000) × (33,3/133,3)]
J7 Revenue (P)(P/L) (15 000 + 3 000(J5)) 18 000
Cost of sales (S)(P/L) 18 000
Elimination of intragroup sales
J8 Interest received (P)(P/L) 500
Other expenses (S)(P/L) 500
Elimination of intragroup interest
J9 Management fees (received) (P)(P/L) 4 000
Other expenses (S)(P/L) 4 000
Elimination of intragroup management fees
J10 Retained earnings (S)(SCE) 200
Non-controlling interests (SFP) 200
Recognition of non-controlling interests in since
acquisition retained earnings of subsidiary to
beginning of current reporting period
J11 Non-controlling interests (P/L) (3 000 + 2 500) 5 500
Non-controlling interests (SFP) 5 500
Recognition of non-controlling interests in profit
for the year
J12 Dividends received (P)(P/L) (4 000 + 2 500) 6 500
Non-controlling interests (SFP) (1 000 + 2 500) 3 500
Preference dividend paid (S)(SCE) 5 000
Ordinary dividend paid (S)(SCE) 5 000
Elimination of intragroup ordinary and preference
dividends and recording of non-controlling interests
in dividends
443
7
Consolidation of complex groups
445
Chapter 7
Self-assessment questions
Question 7.1 ........................................................................................................ 498
Question 7.2 ........................................................................................................ 508
446
Consolidation of complex groups
S1 Ltd S2 Ltd
Figure 1
Figure 2 Figure 3
447
Chapter 7
20%
SS1 Ltd
Figure 4 Figure 5
448
Consolidation of complex groups
449
Chapter 7
P Ltd elected to measure the non-controlling interests of the acquiree at their fair value
at the acquisition date.
Goodwill was not considered to be impaired from the time that the investments were
acquired till the end of the current reporting period.
The company tax rate is 28% and CGT is calculated at 66,6% thereof.
Solution 7.1
The abridged consolidated financial statements of the P Ltd Group for the year ended
31 December 20.18 will be drawn up as follows:
P LTD GROUP
CONSOLIDATED STATEMENT OF FINANCIAL POSITION
AS AT 31 DECEMBER 20.18
ASSETS
Non-current assets
Property, plant and equipment (322 600(P) + 115 000(S1) + 365 000(S2)) 802 600
Goodwill (5 000g + 3 000a ) 8 000
810 600
Current assets
Trade receivables (161 200(P) + 233 000(S1) + 145 000(S2)) 539 200
Total assets R1 349 800
EQUITY AND LIABILITIES
Equity attributable to owners of the parent
Share capital 250 000
Retained earnings 799 040
1 049 040
Non-controlling interests (102 240(S1) + 98 400(S2)) 200 640
Total equity 1 249 680
Current liabilities
Trade payables (67 920(P) + 9 200(S1) + 23 000(S2)) 100 120
Total equity and liabilities R1 349 800
P LTD GROUP
CONSOLIDATED STATEMENT OF PROFIT OR LOSS
AND OTHER COMPREHENSIVE INCOME
FOR THE YEAR ENDED 31 DECEMBER 20.18
Profit before tax (244 000(P) + 140 000(S1) + 275 000(S2)) 659 000
Income tax expense (68 320(P) + 39 200(S1) + 77 000(S2)) (184 520)
PROFIT FOR THE YEAR 474 480
Other comprehensive income for the year –
TOTAL COMPREHENSIVE INCOME FOR THE YEAR R474 480
Total comprehensive income attributable to:
Owners of the parent (474 480 – 69 840) 404 640
Non-controlling interests (30 240e + 39 600k) 69 840
R474 480
450
Consolidation of complex groups
P LTD GROUP
CONSOLIDATED STATEMENT OF CHANGES IN EQUITY
FOR THE YEAR ENDED 31 DECEMBER 20.18
Non-
Share Retained control- Total
Total
capital earnings ling equity
interests
Balance at
1 January 20.18 250 000 # 419 400 669 400 & 136 600 806 000
Changes in equity
for 20.18
Total comprehensive
income for the year:
Profit for the year – 404 640 404 640 69 840 474 480
Dividend paid – (25 000) (25 000) ȍ (5 800) (30 800)
Balance at R250 000 R799 040 R1 049 040 R200 640 R1 249 680
31 December 20.18
Calculations
C1 Analysis of owners’ equity of S1 Ltd
P Ltd 70%
Total NCI
At Since
i At acquisition (1/1/20.14)
Share capital 100 000 70 000 30 000
Retained earnings 28 000 19 600 8 400
128 000 89 600 38 400
Equity represented by goodwill
a
– Parent and NCI 3 000 2 400 600
Consideration (1) and NCI 131 000 R92 000 39 000
ii Since acquisition
• To beginning of current year:
Retained earnings (150 000 – 28 000) 122 000 85 400b 36 600
75 600 d
• Current year:
Profit for the year 100 800 70 560 30 240 e
Dividend (12 000) (8 400) (3 600)f
R341 800 R147 560c R102 240
451
Chapter 7
Comment
The calculation C4 above is provided as proof of the calculation of goodwill or the gain
on bargain purchase and is only provided for completeness purposes. Either the
analysis approach or the above calculation can be used to calculate the goodwill or the
gain on bargain purchase on acquisition of a subsidiary.
Another point to remember is that pro forma journals are prepared for consolidation
purposes only and are not recognised in the individual records of either the parent or
the subsidiary. The pro forma journals eliminate common balances.
452
Consolidation of complex groups
453
Chapter 7
Dr Cr
R R
J7 Retained earnings (SCE) 36 600
Non-controlling interests (SFP) 36 600
Recognition of the non-controlling interests in the
since acquisition retained earnings of S1 Ltd until
the beginning of the current year
J8 Non-controlling interests (P/L) 30 240
Non-controlling interests (SFP) 30 240
Recognition of the non-controlling interests in the
profit for the year of S1 Ltd
J9 Non-controlling interests (P/L) 39 600
Non-controlling interests (SFP) 39 600
Recognition of the non-controlling interests in the
profit for the year of S2 Ltd
J10 Dividend received (P)(P/L) 8 400
Non-controlling interests (SFP) 3 600
Dividend paid (S1)(SCE) 12 000
Elimination of intragroup dividends from S1 Ltd and
recording of non-controlling interests in the dividend
J11 Dividend received (P)(P/L) 8 800
Non-controlling interests (SFP) 2 200
Dividend paid (S2)(SCE) 11 000
Elimination of intragroup dividends from S2 Ltd and
recording of non-controlling interests in the dividend
Comment
a The consolidated financial statements can be prepared by using one of the following
two procedures:
l Pro forma consolidation journal entries can be prepared from the above analysis
and then set off against the combined financial statements of P Ltd, S1 Ltd and
S2 Ltd (in a worksheet), resulting in the consolidated amounts.
l The consolidated financial statements are prepared directly from the analysis by
adding the applicable amounts for the subsidiaries to those of the parent.
b The direct preparation of consolidated financial statements (directly from the
individual financial statements of the entities in the group and the analysis of owners’
equity of the subsidiaries) can be formally represented in a worksheet format. When
answering more complex questions, the preparation of consolidated financial
statements in a worksheet format is the most suitable as an examination technique.
c The latter procedure (preparing of the consolidated statements directly) is generally
used in the remainder of this textbook.
454
Consolidation of complex groups
for the partially-owned subsidiary and the sub-subsidiaries, and a further set for the
group as a whole. In the latter instance there will be at least two groups of non-
controlling shareholders: those of the sub-subsidiary(ies) and those of the partially-
owned subsidiary who will indirectly share in the profit or loss and the net assets of the
sub-subsidiaries.
The effective interest of the parent in the sub-subsidiaries can be less than 50%. If, for
example, the partially-owned subsidiary S Ltd is 60% owned by the parent and if S Ltd,
in turn, holds a 75% interest in the equity share capital of a sub-subsidiary, SS Ltd, the
effective interest of the parent in the sub-subsidiary is only 45% (60% × 75%). Hence,
the non-controlling interests can be a material amount.
455
Chapter 7
The abridged financial statements of P Ltd and the abridged consolidated financial
statements of the S Ltd Group as at 31 December 20.18 were as follows:
STATEMENTS OF FINANCIAL POSITION AS AT 31 DECEMBER 20.16
S Ltd
P Ltd
Group
ASSETS
Property, plant and equipment 403 000 1 273 000
Goodwill – 2 600
Bank and trade receivables 200 000 150 000
Investment in S Ltd at fair value: 270 000 shares 500 000 –
Total assets R1 103 000 R1 425 600
EQUITY AND LIABILITIES
Share capital (500 000/300 000 shares) 500 000 300 000
Mark-to-market reserve 26 847 –
Retained earnings 431 000 812 000
Non-controlling interests – 141 600
Deferred tax 6 153 –
Trade and other payables 139 000 172 000
Total equity and liabilities R1 103 000 R1 425 600
456
Consolidation of complex groups
P Ltd acquired a 90% interest in S Ltd on 1 January 20.16 for R467 000. At this date,
the retained earnings of S Ltd amounted to R200 000. P Ltd had control over S Ltd as
per the definition of control in terms of IFRS 10 from the acquisition date.
S Ltd paid R217 000 for an 80% interest in SS Ltd on 1 January 20.15. At this date the
retained earnings of SS Ltd amounted to R148 000. S Ltd had control over SS Ltd as
per the definition of control in terms of IFRS 10 from the acquisition date.
At the acquisition dates, the assets and liabilities of both subsidiaries were considered
to be fairly valued and there were no unaccounted for contingent liabilities.
A dividend of R18 000 received from S Ltd is included in the profit for the year of P Ltd.
The equity investments in S Ltd and SS Ltd are classified under IFRS 9 in the separate
financial statements and the fair value adjustments are recognised in a mark-to-market
reserve (other comprehensive income).
P Ltd elected to measure the non-controlling interests of the acquiree at their
proportionate share of the acquiree’s identifiable net assets at the acquisition date.
Goodwill was not considered to be impaired from the time that the investments were
acquired to the end of the current reporting period.
The company tax rate is 28% and CGT is calculated at 66,6% thereof.
457
Chapter 7
Solution 7.2
The consolidated financial statements for the P Ltd Group for the year ended
31 December 20.15 will be prepared as follows.
P LTD GROUP
CONSOLIDATED STATEMENT OF FINANCIAL POSITION
AS AT 31 DECEMBER 20.18
ASSETS
Non-current assets
Property, plant and equipment (403 000(P) + 1 273 000(S)) 1 676 000
Goodwill 19 340
1 695 340
Current assets
Trade receivables (200 000(P) + 150 000(S)) 350 000
Total assets R2 045 340
EQUITY AND LIABILITIES
Equity attributable to owners of the parent
Share capital 500 000
Retained earnings 981 800
1 481 800
Non-controlling interests 252 540
Total equity 1 734 340
Current liabilities
Trade and other payables (139 000(P) + 172 000(S)) 311 000
Total equity and liabilities R2 045 340
P LTD GROUP
EXTRACT FROM THE CONSOLIDATED STATEMENT OF PROFIT OR LOSS
AND OTHER COMPREHENSIVE INCOME
FOR THE YEAR ENDED 31 DECEMBER 20.18
PROFIT FOR THE YEAR (136 000(P) – 18 000(dividend received) + 429 000 (S)) 547 000
Other comprehensive income for the year –
TOTAL COMPREHENSIVE INCOME FOR THE YEAR R547 000
Total comprehensive income attributable to:
Owners of the parent 443 800
Non-controlling interests (67 000(NCI of SS) + 36 200(analysis)) 103 200
R547 000
458
Consolidation of complex groups
P LTD GROUP
CONSOLIDATED STATEMENT OF CHANGES IN EQUITY
FOR THE YEAR ENDED 31 DECEMBER 20.18
Non-
Share Retained Total
Total controlling
capital earnings equity
interests
Balance at 1 January 20.18 500 000 568 000 1 068 000 &160 340 1 228 340
Changes in equity
for 20.18
Total comprehensive income
for the year:
Profit for the year – 443 800 443 800 103 200 547 000
Dividend paid – (30 000) (30 000) # (11 000) (41 000)
Balance at
31 December 20.18 R500 000 ɛR981 800 R1 481 800 Ȝ R252 540 R1 734 340
Calculations
C1 Analysis of consolidated owners’ equity of S Ltd Group
P Ltd 90%
Total NCI
At Since
i At acquisition (1/1/20.16)
Share capital 300 000 270 000 30 000
Retained earnings 200 000 180 000 20 000
Goodwill of S Ltd Group absorbed into
equity at acquisition (2 600) (2 340) (260)
497 400 447 660 49 740
Equity represented by goodwill
– Parent 19 340 19 340 –
Consideration (1) and NCI 516 740 R467 000 49 740
ii Since acquisition
To beginning of current year:
Consolidated retained earnings (2) 270 000 243 000 27 000
76 740
• Current year:
Consolidated profit for the year 362 000 325 800 36 200
Dividend (20 000) (18 000) (2 000)
R1 128 740 R550 800 R110 940
459
Chapter 7
Comment
P Ltd elected to measure its investment in S Ltd in terms of IFRS 9 i.e. at fair value
through other comprehensive income. Therefore at initial recognition P Ltd measures
the investment in S Ltd at its fair value of R467 000 (generally being the consideration
given). P Ltd subsequently measures the investment in S Ltd at fair value. Any fair value
adjustments are recognised in OCI and accumulated in equity through the mark-to-
market reserve. Deferred tax is provided for on the mark-to-market reserve at the capital
gains tax %. In the above example the deferred tax for the current year on the mark-to-
market reserve was calculated as R3 000 × 66,6% × 28% = R559.
On consolidation, any fair value adjustments recognised in the separate financial
statements of the parent (P Ltd) on its investment in the subsidiary (S Ltd) since
acquisition must be reversed to start at cost. The pro forma journals will be as follows:
Pro forma journals
Dr Cr
R R
J1 Mark-to-market reserve (S)(OCI) 3 000
Deferred tax (S)(SFP) 559
Investment in SS Ltd (S)(SFP) 3 000
Income tax expense on mark-to-market reserve 559
(P)(OCI)
Reversal of fair value adjustments on equity
investment in S Ltd for current year at group level
J2 Mark-to-market reserve (P)(SCE) (26 847 – 2 441) 24 406
Deferred tax (6 153 – 559) 5 594
Investment in S Ltd (P)(SFP) (24 406 + 5 594) 30 000
Reversal of fair value adjustments on equity
investment in S Ltd at beginning of year at group
level
460
Consolidation of complex groups
P Ltd paid R467 000 for a 90% interest in the issued equity share capital of S Ltd on
1 January 20.16. At this date, the retained earnings of S Ltd amounted to R200 000. On
1 January 20.15, S Ltd acquired an 80% interest in the issued equity share capital of
SS Ltd when the retained earnings amounted to R148 000 and paid R217 000 for the
investment. At the acquisition date, the assets and liabilities of both subsidiaries were
considered to be fairly valued and there were no unaccounted for contingent liabilities.
The equity investments in the subsidiaries are classified under IFRS 9 in the separate
financial statements and the fair value adjustments recognised in a mark-to-market
reserve (other comprehensive income).
P Ltd elected to measure the non-controlling interests of the acquiree at their
proportionate share of the acquiree’s identifiable net assets at the acquisition date.
Goodwill was not considered to be impaired from the time that the investments were
acquired to the end of the current reporting period.
The dividends received from the respective investments in the subsidiaries are included
in the profit for the year of P Ltd and S Ltd.
The company tax rate is 28% and CGT is calculated at 66,6% thereof.
The abridged financial statements of the group of companies at 31 December 20.18
were as follows:
STATEMENTS OF FINANCIAL POSITION AS AT 31 DECEMBER 20.18
P Ltd S Ltd SS Ltd
ASSETS
Property, plant and equipment 403 000 571 000 702 000
Trade receivables 200 000 90 000 60 000
Investment in S Ltd at fair value:
270 000 shares 500 000 – –
Investment in SS Ltd at fair value:
96 000 shares – 225 000 –
Total assets R1 103 000 R886 000 R762 000
EQUITY AND LIABILITIES
Share capital
(500 000/300 000/120 000 shares) 500 000 300 000 120 000
Mark-to-market reserve 26 847 6 508 –
Retained earnings 431 000 460 000 588 000
Deferred tax 6 153 1 492 –
Trade and other payables 139 000 118 000 54 000
Total equity and liabilities R1 103 000 R886 000 R762 000
461
Chapter 7
The consolidated financial statements for the year ended 31 December 20.18 must be
prepared for the P Ltd Group.
Example 7.3 deals with exactly the same group as example 7.2, as well as for the same
accounting period. However, in example 7.3, the individual abridged financial
statements of the entities in the group are given.
462
Consolidation of complex groups
Solution 7.3
The interest of S Ltd in SS Ltd is analysed first, after which certain information from the
analysis is used to analyse P Ltd’s interest in S Ltd’s consolidated owners’ equity.
The consolidated financial statements of the P Ltd Group for the year ended
31 December 20.18 will be prepared as follows:
P LTD GROUP
CONSOLIDATED STATEMENT OF FINANCIAL POSITION
AS AT 31 DECEMBER 20.18
ASSETS
Non-current assets
Property, plant and equipment (403 000(P) + 571 000(S) + 702 000(SS)) 1 676 000
Goodwill 19 340
1 695 340
Current assets
Trade receivables (200 000(P) + 90 000(S) + 60 000(SS)) 350 000
Total assets R2 045 340
EQUITY AND LIABILITIES
Equity attributable to owners of the parent
Share capital (P) 500 000
Retained earnings 981 800
g b
1 481 800
Non-controlling interests (110 940 + 141 600 ) 252 540
Total equity 1 734 340
Current liabilities
Trade and other payables (139 000(P) + 118 000(S) + 54 000(SS)) 311 000
Total equity and liabilities R2 045 340
P LTD GROUP
EXTRACT FROM THE CONSOLIDATED STATEMENT OF PROFIT OR LOSS
AND OTHER COMPREHENSIVE INCOME
FOR THE YEAR ENDED 31 DECEMBER 20.18
PROFIT FOR THE YEAR (1) 547 000
Other comprehensive income for the year –
TOTAL COMPREHENSIVE INCOME FOR THE YEAR R547 000
Total comprehensive income attributable to:
Owners of the parent (547 000 – 103 200) 443 800
Non-controlling interests (67 000a + 13 000e + 23 200f ) 103 200
R547 000
(136 000(P) – 36 000j(dividend received) + 130 000(S) + 335 000(SS)) = 547 000
463
Chapter 7
P LTD GROUP
EXTRACT FROM THE CONSOLIDATED STATEMENT OF CHANGES IN EQUITY
FOR THE YEAR ENDED 31 DECEMBER 20.18
Non-
Share Retained Total
Total controlling
capital earnings equity
interests
Balance at 1 January 20.18 500 000 ȍ 568 000 887 800 160 340 1 228 340
Changes in equity
for 20.18
Total comprehensive
income for the year
Profit for the year – 443 800 443 800 103 200 547 000
Dividend paid – (30 000) (30 000) (11 000) (41 000)
Balance at
31 December 20.18 R500 000 R981 800 R1 481 800 &R252 540 R1 734 340
c
ȍ 325 000(P) + 243 000(S) = 568 000
h i
83 600(SS) + 76 740(S) = 160 340
431 000(P) + 550 800(S)k = 981 800
b g
& 141 600(SS) + 110 940(S) = 252 540
Calculations
C1 Analysis of owners’ equity of SS Ltd
S Ltd 80%
Total NCI
At Since
i At acquisition (1/1/20.15)
Share capital 120 000 96 000 24 000
Retained earnings 148 000 118 400 29 600
268 000 214 400 53 600
Equity represented by goodwill
– Parent 2 600 2 600 –
Consideration (1) and NCI 270 600 R217 000 53 600
ii Since acquisition
• To beginning of current year:
Retained earnings (2) 150 000 120 000 30 000
83 600h
• Current year:
Profit for the year 335 000 268 000 67 000a
Dividends paid (45 000) (36 000)j (9 000)
R710 600 R352 000 R141 600b
464
Consolidation of complex groups
Comment
By using the above analysis, the consolidated financial statements of the S Ltd Group
can be prepared. As the question only requires the consolidated financial statements of
the P Ltd Group, certain information from the above analysis of equity is used to
analyse S Ltd’s consolidated owners’ equity.
465
Chapter 7
Comment
The above analyses result in exactly the same figures as those in example 7.2, where
the consolidated owners’ equity in S Ltd was given and analysed.
466
Consolidation of complex groups
Dr Cr
R R
J5 Share capital (S)(SCE) 300 000
Retained earnings (S)(SCE) 200 000
Goodwill (SFP) 19 340
Goodwill – SS Ltd 2 600
Non-controlling interests (SFP) 49 740
Investment in S Ltd (P)(SFP) 467 000
Elimination of owners’ interest of S Ltd at date
of acquisition
J6 Retained earnings (SS)(SCE) 30 000
Non-controlling interests (SFP) 30 000
Recognition of the non-controlling interests in the
since-acquisition retained earnings of SS Ltd until
beginning of current year
J7 Retained earnings (S)(SCE) 12 000
Retained earnings (SS)(SCE) 15 000
Non-controlling interests (SFP) 27 000
Recognition of the non-controlling interests in the
since-acquisition retained earnings of S Ltd until
beginning of current year
J8 Non-controlling interests (P/L) 67 000
Non-controlling interests (SFP) 67 000
Recognition of the non-controlling interests in the
profit for the year of SS Ltd
J9 Non-controlling interests (S)(P/L) 13 000
Non-controlling interests (SS)(P/L) 23 200
Non-controlling interests (SFP) 36 200
Recognition of the non-controlling interests in the
profit for the year of S Ltd
J10 Dividend received (P)(P/L) 18 000
Non-controlling interests (SFP) 2 000
Dividend paid (S)( SCE) 20 000
Elimination of intragroup dividends from S Ltd and
recording of non-controlling interests in the dividend
J11 Dividend received (S)( P/L) 36 000
Non-controlling interests (SFP) 9 000
Dividend paid (SS)(SCE) 45 000
Elimination of intragroup dividends from SS Ltd and
recording of non-controlling interests in the dividend
467
Chapter 7
468
Consolidation of complex groups
P Ltd paid R129 600 for an interest in S Ltd on 2 January 20.15, when the retained
earnings of S Ltd amounted to R62 000. S Ltd paid R285 200 for an interest in SS Ltd
on 2 January 20.17, when the retained earnings of SS Ltd amounted to R210 000. At
the dates of acquisition, the assets and liabilities of both subsidiaries were considered
to be fairly valued and there were no unaccounted for contingent liabilities.
The investments in S Ltd and SS Ltd are classified as equity investments under IFRS 9
in their separate financial statements and all fair value adjustments are recognised in a
mark-to-market reserve (other comprehensive income).
P Ltd elected to measure the non-controlling interests of the acquiree at their
proportionate share of the acquiree’s identifiable net assets at the acquisition date.
Goodwill was not considered to be impaired from the time that the investments were
acquired to the end of the current reporting period.
Ignore deferred tax implications.
469
Chapter 7
Solution 7.4
The abridged consolidated financial statements of the P Ltd Group for the year ended
31 December 20.18 will be drawn up as follows:
P LTD GROUP
CONSOLIDATED STATEMENT OF FINANCIAL POSITION
AS AT 31 DECEMBER 20.18
ASSETS
Non-current assets
Property, plant and equipment (426 400(P) + 237 800(S) + 674 000(SS)) 1 338 200
Goodwillh (5 200(J3) – 1 040(J7)) 4 160
1 342 360
Current assets
Trade receivables (109 000(P) + 50 000(S) + 40 000(SS)) 199 000
Total assets R1 541 360
EQUITY AND LIABILITIES
Equity attributable to owners of the parent
Share capital 100 000
Retained earnings 1 055 360
1 155 360
Non-controlling interests (135 800i + 160 200j ) 296 000
Total equity 1 451 360
Current liabilities
Trade and other payables (25 000(P) + 30 000(S) + 35 000(SS)) 90 000
Total equity and liabilities R1 541 360
P LTD GROUP
EXTRACT FROM THE CONSOLIDATED STATEMENT OF PROFIT OR LOSS
AND OTHER COMPREHENSIVE INCOME
FOR THE YEAR ENDED 31 DECEMBER 20.18
PROFIT FOR THE YEAR (1) 480 200
Other comprehensive income for the year –
TOTAL COMPREHENSIVE INCOME FOR THE YEAR R480 200
Total comprehensive income attributable to:
Owners of the parent (480 200 – 76 440) 403 760
Non-controlling interests (23 000e + 53 440f ) 76 440
R480 200
470
Consolidation of complex groups
P LTD GROUP
CONSOLIDATED STATEMENT OF CHANGES IN EQUITY
FOR THE YEAR ENDED 31 DECEMBER 20.18
Non-
Share Retained Total
Total controlling
capital earnings equity
interests
Balance at
1 January 20.18 100 000 701 600 801 600 # 227 760 1 029 360
Changes in equity
for 20.18
Total comprehensive
income for the year:
Profit for the year – 403 760 403 760 76 440 480 200
Dividend paid (50 000) (50 000) (8 200) (58 200)
Balance at
31 December 20.18 R100 000 ȍR1 055 360 R1 155 360 R296 000 R1 451 360
380 000(P) + 313 600g + 8 000(gain from bargain purchase) = 701 600
# 111 760(S) + 116 000(SS) = 227 760
ȍ 540 000(P) + 507 360(S) + 8 000(J12) = 1 055 360
Calculations
C1 Analysis of owners’ equity of SS Ltd
S Ltd 80%
Total NCI
At Since
i At acquisition (2/1/20.17)
Share capital 140 000 112 000 28 000
Retained earnings 210 000 168 000 42 000
350 000 280 000 70 000
Equity represented by goodwill
– Parent 5 200 5 200a –
Consideration (1) and NCI 355 200 R285 200 70 000
ii Since acquisition
• To beginning of current year:
Retained earnings (440 000 – 210 000) 230 000 184 000c 46 000
116 000
• Current year:
Profit for the year 115 000 92 000d 23 000e
Dividend paid (16 000) (12 800) (3 200)
R684 200 R263 200b R135 800i
471
Chapter 7
Comment
In the consolidated statements of S Ltd and subsidiary SS Ltd, there is goodwill of
R5 200. This amount represents, in essence, a correction of the equity of S Ltd, as
S Ltd paid R285 200 for an investment of which the underlying net asset value
amounted to only R280 000.
The consolidated owners’ equity of S Ltd can now be determined and analysed by
adding the amounts in the above “Since” column (184 000c and 92 000d) to the
reserves of S Ltd for the corresponding periods. There is, however, a further amount
appearing in the above analysis which must be taken into account in the calculation and
analysis of S Ltd’s consolidated owners’ equity, i.e. the goodwill of R5 200. The
goodwill, on consolidation, represents a downward revaluation of the investment in
SS Ltd to the underlying value of the net assets attributable to S Ltd’s interest in SS Ltd
at the acquisition date.
C3 Analysis of consolidated owners’ equity of S Ltd
P Ltd 80%
Total NCI
At Since
i At acquisition (2/1/20.15)
Share capital 110 000 88 000 22 000
Retained earnings 62 000 49 600 12 400
172 000 137 600 34 400
Gain from a bargain purchase –
Parent (8 000) (8 000) –
Consideration (1) and NCI 164 000 R129 600 34 400
ii Since acquisition
• To beginning of current year:
Retained earnings: 392 000 313 600g 78 400
S Ltd (270 000 – 62 000) 208 000
SS Ltd 184 000c
Goodwill – SS Ltd (5 200)a (4 160)h (1 040)
117 760
• Current year:
Profit for the year: 267 200 213 760 53 440f
S Ltd (188 000 – 12 800) 175 200
SS Ltd 92 000d
Dividend paid (25 000) (20 000) (5 000)
R793 000 (R4 160) R507 360 R160 200j
(1) 139 600 – 5 000(j1) – 5 000(J2) = 129 600
472
Consolidation of complex groups
473
Chapter 7
Dr Cr
R R
J6 Retained earnings (S)(SCE) 78 400
Non-controlling interests (SFP) 78 400
Recognition of the non-controlling interests in the
since acquisition retained earnings of S Ltd until
beginning of current year
J7 Non-controlling interests (SFP) 1 040
Goodwill (SFP) 1 040
Recognition of downward valuation of S Ltd’s net
asset value arising from goodwill in investment of
S Ltd in SS Ltd
J8 Non-controlling interests (P/L) 23 000
Non-controlling interests (SFP) 23 000
Recognition of the non-controlling interests in the
profit for the year of SS Ltd
J9 Non-controlling interests (P/L) 53 440
Non-controlling interests (SFP) 53 440
Recognition of the non-controlling interests in the
profit for the year of S Ltd
J10 Dividend received (P)(P/L) 20 000
Non-controlling interests (SFP) 5 000
Dividend paid (S)( SCE) 25 000
Elimination of intragroup dividend of S Ltd
J11 Dividend received (S)( P/L) 12 800
Non-controlling interests (SFP) 3 200
Dividend paid (SS)(SCE) 16 000
Elimination of intragroup dividend of SS Ltd
J12 Gain from bargain purchase (SCE) 8 000
Retained earnings – Beginning of year (S)(SCE) 8 000
Recognition of gain from bargain purchase in retained
earnings
Comment
In the consolidated financial statements of P Ltd Group there will be goodwill resulting
from the acquisition of subsidiary S Ltd of sub-subsidiary SS Ltd. In S Ltd’s consolidation
this goodwill amounted to R5 200. In the consolidation of P Ltd Group it is necessary to
compare the fair value of the investment of the ultimate parent (in the case of a vertical
group the intermediate subsidiary has made the investment) with the fair value of the sub-
subsidiary’s net assets. To incorporate the effect of the investment being made by the
intermediate subsidiary and that P Ltd’s effective investment in SS Ltd is 80% of S Ltd’s
80% investment in SS Ltd, the goodwill amount must be adjusted to reflect it from the
point of view of the parent. Goodwill will therefore be shown at R5 200 × 80% = R4 160 in
the consolidated statement of financial position (or R5 200 – R1 040(J7) = R4 160).
474
Consolidation of complex groups
The abridged financial statements of P Ltd, S Ltd and SS Ltd at 31 December 20.18 are
as follows:
STATEMENTS OF FINANCIAL POSITION AS AT 31 DECEMBER 20.18
P Ltd S Ltd SS Ltd
ASSETS
Property, plant and equipment 400 400 337 000 674 000
Investments in subsidiaries at fair value:
24 000 shares in S Ltd 229 600 – –
16 000 shares in SS Ltd – 190 000 –
Trade receivables 85 000 51 000 40 000
Total assets R715 000 R578 000 R714 000
EQUITY AND LIABILITIES
Share capital (50 000/30 000/20 000 shares) 100 000 110 000 140 000
Mark-to-market reserve 10 000 5 000 –
Retained earnings 530 000 433 000 539 000
Trade and other payables 75 000 30 000 35 000
Total equity and liabilities R715 000 R578 000 R714 000
475
Chapter 7
P Ltd paid R219 600 for an interest in S Ltd on 2 January 20.17, when the retained
earnings of S Ltd were R62 000 and those of SS Ltd were R210 000. S Ltd paid
R185 000 for an interest in SS Ltd on 2 January 20.15, when the retained earnings of
SS Ltd were R80 000. At the acquisition date, the assets and liabilities of both
subsidiaries were considered to be fairly valued and there were no unaccounted for
contingent liabilities.
The equity investments in S Ltd and SS Ltd are classified under IFRS 9 in the separate
financial statements and all fair value adjustments are recognised in a mark-to-market
reserve (other comprehensive income).
P Ltd elected to measure the non-controlling interests of the acquiree at their
proportionate share of the acquiree’s identifiable net assets at the acquisition date.
Goodwill was not considered to be impaired from the time that the investments were
acquired to the end of the current reporting period.
Ignore tax implications.
Solution 7.5
If only the consolidated financial statements of the S Ltd Group are to be prepared, the
owners’ equity of SS Ltd will be analysed with the acquisition date being
2 January 20.15. However, SS Ltd only became a subsidiary of P Ltd on 2 January
20.17, i.e. the date when P Ltd acquired the controlling interest in S Ltd. Hence, the
consolidated financial statements of the S Ltd Group cannot be used to prepare the
consolidated financial statements of the P Ltd Group. In the consolidated financial
statements of the S Ltd Group, the increase in the reserves of SS Ltd during the period
2 January 20.15 to 2 January 20.17, represent a since-acquisition increase. However,
from P Ltd’s viewpoint, these reserves form part of at-acquisition reserves. Since the
consolidated financial statements of the P Ltd Group are to be prepared, the owners’
equity of SS Ltd is analysed with 2 January 20.17 as the acquisition date.
476
Consolidation of complex groups
The consolidated financial statements of the P Ltd Group for the year ended
31 December 20.18 will be prepared as follows:
P LTD GROUP
CONSOLIDATED STATEMENT OF FINANCIAL POSITION
AS AT 31 DECEMBER 20.18
ASSETS
Non-current assets
Property, plant and equipment (400 400(P) + 337 000(S) + 674 000(SS)) 1 411 400
Goodwill 6 000
1 417 400
Current assets
Trade receivables (85 000(P) + 51 000(S) + 40 000(SS)) 176 000
Total assets R1 593 400
EQUITY AND LIABILITIES
Equity attributable to owners of the parent
Share capital 100 000
Retained earnings 1 037 360
1 137 360
Non-controlling interests (135 800c + 180 240d) 316 040
Total equity 1 453 400
Current liabilities
Trade and other payables (75 000(P) + 30 000(S) + 35 000(SS)) 140 000
Total equity and liabilities R1 593 400
P LTD GROUP
EXTRACT FROM THE CONSOLIDATED STATEMENT OF PROFIT OR LOSS
AND OTHER COMPREHENSIVE INCOME
FOR THE YEAR ENDED 31 DECEMBER 20.18
PROFIT FOR THE YEAR (1) 470 200
Other comprehensive income for the year –
TOTAL COMPREHENSIVE INCOME FOR THE YEAR R470 200
Total comprehensive income attributable to:
Owners of the parent (470 200 – 76 440) 393 760
Non-controlling interests (23 000a + 53 440b ) 76 440
R470 200
(1) (200 000(P) + 188 000(S) + 115 000(SS) – 20 000(dividend)(S) – 12 800(dividend)(SS)) = 470 200
477
Chapter 7
P LTD GROUP
CONSOLIDATED STATEMENT OF CHANGES IN EQUITY
FOR THE YEAR ENDED 31 DECEMBER 20.18
Non-
Share Retained Total
Total controlling
capital earnings equity
interests
Balance at
1 January 20.18 100 000 693 600 793 600 # 247 800 1 041 400
Changes in equity
for 20.18
Total comprehensive
income for the year:
Profit for the year – 393 760 393 760 & 76 440 470 200
Dividend paid (50 000) (50 000) @ (8 200) (58 200)
Balance at
31 December 20.18 R100 000 ȍ R1 037 360 R1 137 360 ɛ R316 040 R1 453 400
Calculations
C1 Analysis of owners’ equity of SS Ltd
S Ltd 80%
Total NCI
At Since
i At acquisition (2/1/20.17)
Share capital 140 000 112 000 28 000
Retained earnings 210 000 168 000 42 000
350 000 280 000 70 000
Gain from a bargain purchase – Parent (95 000) (95 000) –
Consideration (1) and NCI 255 000 R185 000 70 000
ii Since acquisition
• To beginning of current year:
Retained earnings (440 000 – 210 000) 230 000 184 000 46 000
116 000
• Current year:
Profit for the year 115 000 92 000 23 000a
Dividend paid (16 000) (12 800) (3 200)
R584 000 R263 200 R135 800c
478
Consolidation of complex groups
479
Chapter 7
480
Consolidation of complex groups
Dr Cr
R R
J7 Non-controlling interests (P/L) 23 000
Non-controlling interests (SFP) 23 000
Recognition of the non-controlling interests
in the profit for the year of SS Ltd
J8 Non-controlling interests (P/L) 53 440
Non-controlling interests (SFP) 53 440
Recognition of the non-controlling interests
in the profit for the year of S Ltd
The following analysis reflects, by implication, the adjustments that have to be made, if,
in the case under consideration, the consolidated statements of the S Ltd Group were
given instead of the individual financial statements of S Ltd and SS Ltd.
Calculations
C1 Analysis of owners’ equity of SS Ltd
S Ltd 80%
Total NCI
At Since
i At acquisition (2/1/20.15)
Share capital 140 000 112 000 28 000
Retained earnings 80 000 64 000 16 000
220 000 176 000 44 000
Equity represented by goodwill
– Parent 9 000 9 000 –
Consideration (1) and NCI 229 000 R185 000 44 000
ii Since acquisition
• To beginning of current year:
Retained earnings
To 2/1/20.17 (210 000 – 80 000) 130 000 104 000 26 000
To 31/12/20.17 (440 000 – 210 000) 230 000 184 000 46 000
116 000
• Current year:
Profit for the year 115 000 92 000 23 000a
Dividend paid (16 000) (12 800) (3 200)
R688 000 R367 200 R135 800
481
Chapter 7
482
Consolidation of complex groups
483
Chapter 7
484
Consolidation of complex groups
P Ltd paid R227 100 for an interest in S Ltd on 1 July 20.15, when the equity of the
latter was as follows:
Share capital R120 000
Retained earnings R160 000
On 1 July 20.16, when S Ltd paid R119 000 for an interest in SS Ltd, the latter had an
accumulated loss of R52 000.
485
Chapter 7
As from 1 July 20.17, SS Ltd acquired its entire inventory from S Ltd. The latter makes
a profit of 10% on the cost price of such inventory. On 30 June 20.18, goods invoiced at
R2 420 were in transit between S Ltd and SS Ltd. Total sales from S Ltd to SS Ltd
amounted to R30 000 for the current year.
The equity investments in S Ltd and SS Ltd are classified under IFRS 9 in the separate
financial statements and fair value adjustments are recognised in a mark-to-market
reserve (other comprehensive income).
At the acquisition date, the assets and liabilities of both subsidiaries were considered to
be fairly valued and there were no unaccounted for contingent liabilities.
P Ltd elected to measure the non-controlling interests of the acquiree at their
proportionate share of the acquiree’s identifiable net assets at the acquisition date.
Goodwill was not considered to be impaired from the time that the investments were
acquired to the end of the current reporting period.
The company tax rate is 28% and CGT is calculated at 66,6% thereof.
Solution 7.6
The consolidated financial statements of the P Ltd Group for the year ended 30 June
20.18 will be drawn up as follows:
P LTD GROUP
CONSOLIDATED STATEMENT OF FINANCIAL POSITION AS AT 30 JUNE 20.18
ASSETS
Non-current assets
Property, plant and equipment (324 010(P) + 183 000(S) + 333 608(SS)) 840 618
Goodwill (17 100(J4) + 3 800(J5) – 950(J15)) 19 950
Deferred tax 356
860 924
Current assets
Inventory (24 000(P) + 14 580(S) + 11 550(SS) + 2 420 – 1 270) 51 280
Trade receivables (42 900(P) + 39 400(S) + 53 200(SS)) 135 500
Bank (16 900(P) + 5 100(S) – 10 000(SS)) 12 000
198 780
Total assets R1 059 704
EQUITY AND LIABILITIES
Equity attributable to owners of the parent
Share capital (P) 250 000
Retained earnings 515 965
765 965
Non-controlling interests (35 181b + 133 768d) 168 949
Total equity 934 914
Current liabilities
Trade and other payables (73 400(P) + 22 800(S) + 28 590(SS)) 124 790
Total equity and liabilities R1 059 704
486
Consolidation of complex groups
P LTD GROUP
CONSOLIDATED STATEMENT OF PROFIT OR LOSS
AND OTHER COMPREHENSIVE INCOME
FOR THE YEAR ENDED 30 JUNE 20.18
Revenue (300 000(P) + 250 000(S) + 202 400(SS) – 30 000) 722 400
Cost of sales
(197 000(P) + 166 000(S) + 112 000(SS) – 30 000 + 1 270(13 970 × 10/110)) (446 270)
Gross profit 276 130
Other expenses (55 000(P) + 51 000(S) + 49 000(SS)) (155 000)
Profit before tax 121 130
Income tax expense (13 440(P) + 9 240(S) + 11 592(SS) – 356(1 270 × 28%)) (33 916)
PROFIT FOR THE YEAR 87 214
Other comprehensive income for the year –
TOTAL COMPREHENSIVE INCOME FOR THE YEAR R87 214
Total comprehensive income attributable to:
Owners of the parent 71 815
Non-controlling interests (2 981a + 12 418c) 15 399
R87 214
P LTD GROUP
CONSOLIDATED STATEMENT OF CHANGES IN EQUITY
FOR THE YEAR ENDED 30 JUNE 20.18
Non-
Share Retained Total
Total controlling
capital earnings equity
interests
Balance at 1 July 20.17 250 000 476 150 726 150 & 159 700 885 850
Changes in equity
for 20.18
Total comprehensive
income for the year:
Profit for the year – 71 815 71 815 15 399 87 214
Dividend paid – (32 000) (32 000) ȍ (6 150) (38 150)
Balance at 30 June 20.18 R250 000 # R515 965 R765 965 $ R168 949 R934 914
487
Chapter 7
Calculations
C1 Analysis of owners’ equity of SS Ltd
S Ltd 90%
Total NCI
At Since
i At acquisition (1/7/20.16)
Share capital 180 000 162 000 18 000
Accumulated loss (52 000) (46 800) (5 200)
128 000 115 200 12 800
Equity represented by goodwill – Parent 3 800 3 800 –
Consideration (1) and NCI 131 800 119 000 12 800
ii Since acquisition
• To beginning of current year:
Retained earnings (2) 208 000 187 200 20 800
339 800 33 600
• Current year:
Profit for the year 29 808 26 827 2 981a
Dividend paid (14 000) (12 600) (1 400)
R355 608 R201 427 R35 181b
488
Consolidation of complex groups
C5 Journal entries
(a) In the records of SS Ltd (entry to balance current accounts)
Dr Cr
R R
J1 Inventory 2 420
Current account: S Ltd 2 420
Recognition of inventory in transit
The current accounts between S Ltd and SS Ltd will now contra at R10 380.
489
Chapter 7
490
Consolidation of complex groups
Dr Cr
R R
J6 Revenue (S)(P/L) 30 000
Cost of sales (SS)(P/L) 30 000
Elimination of total intragroup sales
J7 Cost of sales (S)(P/L) 1 270
Inventory (SS)(SFP) 1 270
Elimination of unrealised profit included in the
closing inventory of SS Ltd ((11 550 + 2 420) × 10/110)
J8 Income tax expense (S)(P/L) 356
Deferred tax (SFP) 356
Tax on unrealised profit included in inventory
of SS Ltd (1 270 × 28%)
J9 Dividend received (P)(P/L) 14 250
Non-controlling interests (SFP) 4 750
Dividend paid (S)(SCE) 19 000
Elimination of intragroup dividend of S Ltd
J10 Dividend received (S)(P/L) 12 600
Non-controlling interests (SFP) 1 400
Dividend paid (SS)(SCE) 14 000
Elimination of intragroup dividend of SS Ltd
J11 Retained earnings – Beginning of year (S)(SCE)
(41 000 × 25%) 10 250
Retained earnings – Beginning of year (SS)(SCE)
(187 200 × 25%) 46 800
Non-controlling interests (SFP) 57 050
Recognition of non-controlling interests in retained
earnings beginning of the year of S Ltd
J12 Retained earnings – Beginning of year (SS)(SCE) 20 800
Non-controlling interests (SFP) 20 800
Recognition of non-controlling interests in retained
earnings beginning of the year of SS Ltd
J13 Non-controlling interests (P/L) (22 846 × 25%) 5 712
Non-controlling interests (P/L) (26 827 × 25%) 6 707
Non-controlling interests (SFP) 12 419
Recognition of non-controlling interests in profit
for the year of S Ltd
J14 Non-controlling interests (P/L) 2 981
Non-controlling interests (SFP) 2 981
Recognition of non-controlling interests in profit
for the year of SS Ltd
J15 Non-controlling interests (P/L) 950
Goodwill (SFP) 950
Recognition of downward valuation of S Ltd’s net
asset value arising from goodwill in investment of
S Ltd in SS Ltd
491
Chapter 7
The statements of financial position of P Ltd, S Ltd and SS Ltd were as follows at
31 December 20.18:
STATEMENTS OF FINANCIAL POSITION AS AT 31 DECEMBER 20.18
P Ltd S Ltd SS Ltd
ASSETS
Property, plant and equipment 324 000 195 000 305 000
Investments in subsidiaries at fair value:
120 000 shares in SS Ltd – 180 000 –
60 000 shares in SS Ltd 85 500 – –
60 000 shares in S Ltd 135 000 – –
Trade receivables 160 500 35 000 145 000
Dividend paid 20 000 15 000 10 000
Total assets R725 000 R425 000 R460 000
EQUITY AND LIABILITIES
Share capital
(300 000/100 000/200 000 shares) 300 000 100 000 200 000
Retained earnings: 31 December 20.17 225 000 135 000 150 000
Total comprehensive income for the year 200 000 190 000 110 000
Total equity and liabilities R725 000 R425 000 R460 000
P Ltd acquired an interest in SS Ltd on 1 January 20.17, when the retained earnings of
SS Ltd were R55 000. The fair value of the non-controlling interests of the acquiree on
this date was R35 000. S Ltd acquired 120 000 shares in SS Ltd on the same date.
P Ltd acquired a 60% interest in S Ltd on 1 January 20.16 when the retained earnings
of S Ltd were R65 000. The fair value of the non-controlling interests of the acquiree on
this date was R70 000.
The equity investments in subsidiaries are classified under IFRS 9 in the separate
financial statements and fair value adjustments are recognised in a mark-to-market
reserve (other comprehensive income).
P Ltd elected to measure the non-controlling interests of the acquiree at their fair value
at the acquisition date.
Goodwill was not considered to be impaired from the time that the investments were
acquired to the end of the current reporting period.
492
Consolidation of complex groups
Solution 7.7
The consolidated financial statements of the P Ltd Group will be drawn up as follows as
at 31 December 20.18:
P LTD GROUP
CONSOLIDATED STATEMENT OF FINANCIAL POSITION
AS AT 31 DECEMBER 20.18
ASSETS
Non-current assets
Property, plant and equipment (324 000(P) + 195 000(S) + 305 000(SS)) 824 000
Goodwill (40 000 + 16 200 + 9 000 + 9 500) OR 74 700
(45 500(J1) + 40 000(J2) – 10 800(J3))
898 700
Current assets
Trade receivables (160 500(P) + 35 000(S) + 145 000(SS)) 340 500
Total assets R1 239 200
EQUITY AND LIABILITIES
Equity attributable to owners of the parent
Share capital 300 000
Retained earnings 680 700
980 700
Non-controlling interests (204 000d + 54 500c) 258 500
Total equity 1 239 200
Total equity and liabilities R1 239 200
P LTD GROUP
EXTRACT FROM THE CONSOLIDATED STATEMENT OF PROFIT OR LOSS
AND OTHER COMPREHENSIVE INCOME
FOR THE YEAR ENDED 31 DECEMBER 20.18
PROFIT FOR THE YEAR (1) 482 000
Other comprehensive income for the year –
TOTAL COMPREHENSIVE INCOME FOR THE YEAR R482 000
Total comprehensive income attributable to:
Owners of the parent 371 000
Non-controlling interests (11 000a + 100 000b) 111 000
R482 000
(1) 200 000(P) + 190 000(S) + 110 000(SS) – 9 000(J9) – 6 000(J8) – 3 000(J8) = 482 000
493
Chapter 7
P LTD GROUP
CONSOLIDATED STATEMENT OF CHANGES IN EQUITY
FOR THE YEAR ENDED 31 DECEMBER 20.18
Non-
Share Retained Total
Total controlling
capital earnings equity
interests
Balance at 1 January 20.18 300 000 329 700 629 700 # 154 500 784 200
Changes in equity for
20.18
Total comprehensive
income for the year:
Profit for the year – 371 000 371 000 111 000 482 000
Dividend paid – (20 000) (20 000) ũ(7 000) (27 000)
Balance at
31 December 20.18 R300 000 R680 700 R980 700 ȍ R258 500 R1 239 200
Calculations
Comment
Take note of the group’s policy in terms of the measurement of non-controlling interests
(NCI). In this case, it is mentioned in the information that the NCI is measured at fair
value and it is given that the fair value of the NCI of SS Ltd was R35 000 when P Ltd
acquired its investment in SS Ltd and the fair value of the NCI of S Ltd was R70 000
when P Ltd acquired this investment. This information affects the preparation of the
analysis of owners’ equity.
494
Consolidation of complex groups
495
Chapter 7
496
Consolidation of complex groups
497
Chapter 7
Dr Cr
R R
J9 Dividend received (P)(P/L) 9 000
Non-controlling interests (SFP) 6 000
Dividend paid (S)(SCE) 15 000
Elimination of intragroup dividend and recording
of dividend paid to non-controlling
Self-assessment questions
Question 7.1
The following are the trial balances of the companies within the P Ltd Group for the
year ended 31 December 20.18:
P Ltd S1 Ltd S2 Ltd S3 Ltd
Dr/(Cr) Dr/(Cr) Dr/(Cr) Dr/(Cr)
R R R R
Property, plant and equipment 534 200 390 900 253 100 268 400
Investment in S1 Ltd at fair value 190 000 – – –
Investment in S2 Ltd at fair value – 60 000 – –
Investment in S2 Ltd at fair value – – – 100 000
Investment in S3 Ltd at fair value 212 000 – – –
Loan to P Ltd – – – 200 000
Trade receivables 165 000 24 000 9 000 85 500
Inventories 142 500 40 000 15 000 65 300
Cash and cash equivalents 102 500 (33 000) 13 000 52 800
Share capital – Shares
– 200 000 and 100 000 shares (200 000) (100 000) – –
– 90 000 and 150 000 shares – – (90 000) (150 000)
Retained earnings – 1 January 20.18 (474 000) (116 000) (94 000) (369 400)
Mark-to-market reserve
(Only investment in S1 Ltd) (24 406) – – –
Fair value gain on equity investment (5 000) – – –
Tax on fair value gain (OCI) 932 – – –
Gross profit (352 400) (410 000) (148 000) (108 300)
Other income (70 000) (7 500) (40 000) (22 000)
Other expenses 44 500 148 000 24 000 15 500
Income tax expense 98 000 73 000 45 900 26 000
Finance costs 15 300 – – 8 700
Dividend paid 25 000 15 000 30 000 –
Deferred tax (on mark-to-market reserve:
5 594 + 932) (6 526) – – –
Long-term borrowings (365 000) – – (122 000)
Trade and other payables (32 600) (84 400) (18 000) (50 500)
R– R– R– R–
498
Consolidation of complex groups
Additional information
1 P Ltd acquired 80 000 shares in S1 Ltd on 1 October 20.17 when the retained
earnings amounted to R68 000. Land that was reflected in the accounting records of
S1 Ltd at R120 000 was valued at R165 000 for purposes of the acquisition. The
remaining assets and liabilities were considered to be fairly valued and there were
no unaccounted for contingent liabilities.
2 P Ltd acquired a 55% interest in S3 Ltd on 1 March 20.15 when the retained
earnings of S3 Ltd amounted to R225 000.
3 S1 Ltd acquired 22 500 shares in S2 Ltd on 1 January 20.18.
4 S3 Ltd acquired 36 000 shares in S2 Ltd on 1 January 20.18.
5 For the acquisitions of both the interest in S2 Ltd and the interest in S3 Ltd there
were no unidentified assets, liabilities or contingent liabilities, and the assets and
liabilities were considered to be fairly valued.
6 P Ltd, S1 Ltd, and S3 Ltd classified their equity investments under IFRS 9 in the
separate financial statements and recognised any fair value adjustments in a mark-
to-market reserve (other comprehensive income).
7 P Ltd elected to measure the non-controlling interests of the acquiree at their
proportionate share of the acquiree’s identifiable net assets at the acquisition date.
8 Goodwill was not considered to be impaired from the time that the investments were
acquired to the end of the current reporting period.
9 The following intragroup transactions took place within the group during the year
ended 31 December 20.18:
9.1 From 1 July 20.16 P Ltd purchased inventories from S3 Ltd at cost plus 25%.
Included in the closing inventories of P Ltd on 31 December 20.18 were
inventories of R40 000 (31 December 20.17: R70 000) that were purchased
from S3 Ltd.
9.2 S3 Ltd made a loan of R200 000 to P Ltd on 1 July 20.18. The loan is
repayable in five equal instalments from 1 July 20.19. S3 Ltd charges 10%
interest on the loan per annum. Included in finance costs of P Ltd is interest
paid of R10 000 to S3 Ltd for the period 1 July 20.18 to 31 December 20.18.
9.3 P Ltd charges its subsidiary, S1 Ltd, a management fee of R4 000 per month.
9.4 S2 Ltd sold machinery with a carrying amount of R150 000 to S1 Ltd on
1 April 20.18. The selling price was R190 000. The useful life of the machinery
of five years has remained unchanged. The companies within the group
depreciate machinery on the straight-line method over the useful life of the
asset. The machinery was originally purchased on 1 April 20.15.
9.5 P Ltd has guaranteed the bank overdraft of S1 Ltd.
10 The company tax rate is 28% and CGT is calculated at 66,6% thereof.
Required
Prepare the consolidated financial statements of the P Ltd Group for the year ended
31 December 20.18.
499
Chapter 7
The consolidated financial statements of the P Ltd Group will be drawn up as follows as
at 31 December 20.18:
P LTD GROUP
CONSOLIDATED STATEMENT OF FINANCIAL POSITION
AS AT 31 DECEMBER 20.18
ASSETS
Non-current assets
Property, plant and equipment (1) 1 466 600
Goodwill (11 200(S1 analysis) + 14 520(S3 analysis) + 5 750(S1)) 31 470
Deferred tax (2) 848
1 498 918
Current assets
Trade receivables (165 000(P) + 24 000(S1) + 9 000(S2) + 85 500(S3)) 283 500
Inventories (3) 254 800
Cash and cash equivalents (102 500(P) – 33 000(S1) + 13 000(S2) + 52 800(S3)) 135 300
673 600
Total assets R2 172 518
EQUITY AND LIABILITIES
Equity attributable to owners of the parent
Share capital 200 000
Retained earnings 1 051 099
1 251 099
Non-controlling interests (87 527(S1) + 88 935(S2) + 267 921(S3)) 444 383
Total equity 1 695 482
Long-term liabilities
Long-term borrowings (365 000(P) + 122 000(S3) – 200 000(J14)) 287 000
Current liabilities
Trade and other payables (32 600(P) + 84 400(S1) + 18 000(S2) + 50 500(S3)) 185 500
Total liabilities 472 500
Total equity and liabilities R2 172 518
(1) 534 200(P) + 390 900(S1) + 253 100(S2) + 268 400(S3) + 45 000(J3) – 40 000(J7) + 15 000(J8) =
1 466 600
(2) –6 526(P) + 5 594(J1) + 932(J2) + 2 240(J11) + 11 200(J7) – 4 200(J8) – 8 392(J3) = 848
(3) 142 500(P) + 40 000(S1) + 15 000(S2) + 65 300(S3) – 8 000(J10) = 254 800
500
Consolidation of complex groups
P LTD GROUP
CONSOLIDATED STATEMENT OF PROFIT OR LOSS AND OTHER
COMPREHENSIVE INCOME FOR THE YEAR ENDED 31 DECEMBER 20.18
Gross profit (1) 1 024 700
Other income (2) 10 000
Other expenses (3) (169 000)
Finance charges (15 300(P) + 8 700(S3) – 10 000(J15)) (14 000)
Profit before tax 851 700
Income tax expense (4) (237 580)
PROFIT FOR THE YEAR 614 120
Other comprehensive income for the year –
TOTAL COMPREHENSIVE INCOME FOR THE YEAR R614 120
Total comprehensive income attributable to:
Owners of the parent 485 673
Non-controlling interests (5) 128 447
R614 120
(1) 352 400(P) + 148 000(S2) + 410 000(S1) + 108 300(S3) + 14 000(J9) – 8 000(J10) = 1 024 700
(2) 70 000(P) – 12 000(J13) – 48 000(J16) + 7 500(S2) – 7 500(J12) + 22 000(S3) – 10 000(J15) –
12 000(J12) + 40 000(S2) – 40 000(J7) = 10 000
(3) 44 500(P) + 148 000(S1) – 48 000(J16) – 15 000(J8) + 24 000(S2) + 15 500(S3) = 169 000
(4) 98 000(P) + 73 000(S1) + 45 900(S2) + 26 000(S3) – 11 200(J7) + 4 200(J8) + 3 920(J9) –
2 240(J11) = 237 580
(5) 42 805(J21) + 35 035(J23) + 50 607(J22) = 128 447
P LTD GROUP
CONSOLIDATED STATEMENT OF CHANGES IN EQUITY FOR THE YEAR ENDED
31 DECEMBER 20.18
Non-
Share Retained Total
Total controlling
capital earnings equity
interests
Balance at 200 000 594 962 794 962 # 344 116 1 139 078
1 January 20.18
Changes in equity for
20.18
Total comprehensive
income for the year:
Profit for the year – 485 673 485 673 128 447 614 120
Non-controlling interests
share of goodwill of S2 Ltd – – – (14 680) (14 680)
Dividend paid – (25 000) (25 000) @(13 500) (38 500)
Balance at
31 December 20.18 R200 000 R1 055 635 R1 255 635 ũR444 383 R1 700 018
474 000(P) + 38 400(S1) + 73 876(S3) + 8 686(gain from a bargain purchase) = 594 962
# 50 522(S1) + 64 400(S2) + 229 194(S3) = 344 116
ũ 87 527(S1) + 88 935(S2) + 267 921(S3) = 444 383
11 880(J21) + 2 800(J20) = 14 680
@ 10 500(S2) + 3 000(S1) = 13 500
501
Chapter 7
Calculations
C1 Schematic diagram of group structure
P Ltd
80% 55%
1 Oct 20.17 1 Mar 20.15
S1 Ltd S3 Ltd
1 Jan 20.18
1 Jan 20.18
25% 40%
S2 Ltd
(1) 148 000 + 40 000 – 24 000 – 45 900 – 28 800(J7) + 10 800(J8) = 100 100
502
Consolidation of complex groups
503
Chapter 7
504
Consolidation of complex groups
505
Chapter 7
Dr Cr
R R
J7 Gain on sale of machinery (Other income)(S2)(P/L)
(190 000 – 150 000) 40 000
Deferred tax (P)(SFP) 11 200
Property, plant and equipment (P)(SFP) 40 000
Income tax expense (S2)(P/L) (40 000 × 28%) 11 200
Reversal of intragroup sale of machinery in current
reporting period (S Ltd to P Ltd)
J8 Accumulated depreciation (S3)(SFP) ((40 000/2) × 9/12) 15 000
Income tax expense (S2)(P/L) (15 000 × 28%) 4 200
Depreciation (S2)(P/L) 15 000
Deferred tax (S3)(SFP) 4 200
Recognition of a portion of the unrealised
intragroup profit which realises through
depreciation and tax effect thereof for current year
J9 Retained earnings – Beginning of year (S3)(SCE) 10 080
Income tax expense (S3)(P/L) (14 000 × 28%) 3 920
Cost of sales (S3)((P/L) (70 000 × 25/125) 14 000
Elimination of unrealised profit included in opening
inventory of P Ltd
J10 Cost of sales (S3)((P/L) 8 000
Inventory (P)(SFP) 8 000
Elimination of unrealised profit included
in the closing inventory of P Ltd (40 000 × 25/125)
J11 Deferred tax (P)(SFP) 2 240
Income tax expense (S3)(P/L) 2 240
Tax on unrealised profit included in closing
inventory of P Ltd (8 000 × 28%)
J12 Dividend received (S1)(P/L) 7 500
Dividend received (S3)(P/L) 12 000
Non-controlling interests (SFP) 10 500
Dividend paid (S2)(SCE) 30 000
Elimination of intragroup dividend and recording
of dividend paid to non-controlling interests
J13 Dividend received (P)(P/L) 12 000
Non-controlling interests (SFP) 3 000
Dividend paid (S1)(SCE) 15 000
Elimination of intragroup dividend and recording
of dividend paid to non-controlling interests
J14 Long-term borrowings (P)(SFP) 200 000
Loan to P Ltd (S3)(SFP) 200 000
Elimination of intragroup long-term loan accounts
continued
506
Consolidation of complex groups
Dr Cr
R R
J15 Interest received (S3)(P/L) 10 000
Interest paid (P)(P/L) 10 000
Elimination of interest charged on intragroup
long-term loan accounts
J16 Management fees received (P)(P/L) 48 000
Management fees paid (S1)(P/L) 48 000
Elimination of intragroup management fees
J17 Retained earnings (S1)(SCE) 9 600
Non-controlling interests (SFP) 9 600
Recognition of the non-controlling interests
in the since-acquisition retained earnings of S1 Ltd
J18 Retained earnings (S3)(SCE) 64 980
Non-controlling interests (SFP) 64 980
Recognition of the non-controlling interests
in the since acquisition retained earnings of S3 Ltd
J19 Non-controlling interests (SFP) 2 800
Goodwill (SFP) 2 800
Recognition of non-controlling interests in goodwill
of S2 Ltd
J20 Non-controlling interests (SFP) 11 880
Goodwill (SFP) 11 880
Recognition of non-controlling interests in goodwill
of S2 Ltd
J21 Non-controlling interests (P/L) 42 805
Non-controlling interests (SFP) 42 805
Recognition of the non-controlling interests
in the profit for the year of S1 Ltd and S2 Ltd
J22 Non-controlling interests (P/L) 50 607
Non-controlling interests (SFP) 50 607
Recognition of the non-controlling interests
in the profit for the year of S3 Ltd and S2 Ltd
J23 Non-controlling interests (P/L) 35 035
Non-controlling interests (SFP) 35 035
Recognition of the non-controlling interests
in the profit for the year of S2 Ltd
507
Chapter 7
Question 7.2
The following are the trial balances of the companies within the P Ltd Group for the
year ended 31 December 20.18:
P Ltd S1 Ltd S2 Ltd S3 Ltd
Dr/(Cr) Dr/(Cr) Dr/(Cr) Dr/(Cr)
R R R R
Credits
Share capital 300 000 200 000 100 000 150 000
Fair value adjustment OCI (S1 Ltd) 4 000 – – –
Retained earnings – 1 January 20.18 367 100 189 800 270 000 175 000
Gross profit 222 000 90 000 132 000 110 000
Dividends received 30 000 – – 20 000
Interest received 8 000 – – –
Gain on sale of plant 90 000 35 000 – –
Deferred tax 30 000 20 000 – –
Long-term loan 60 000 20 000 80 000 –
Bank overdraft – – – 40 000
Trade payables 60 000 24 000 21 000 12 000
1 171 100 578 800 603 000 507 000
Debits
Property plant and equipment 329 000 232 700 383 200 200 500
Equity investments:
Investment in S1 Ltd 260 000 – – –
Investment in S2 Ltd – 196 000 – –
Investment in S3 Ltd 220 000 – – –
Sundry investments – – – 155 000
Loan granted to S2 Ltd 80 000 – – –
Inventory and trade receivables 81 440 36 000 54 000 97 000
Cash and cash equivalents 17 214 19 900 90 800 –
Other expenses 66 000 17 000 42 000 33 000
Finance costs 5 600 2 200 8 000 1 500
Income tax expense 61 100 35 000 25 000 20 000
Income tax expense (OCI) (S1 Ltd) 746 – – –
Dividends paid – 31 December 20.18 50 000 40 000 – –
1 171 100 578 800 603 000 507 000
Additional information
1 Share capital
P Ltd (150 000 shares) R300 000
S1 Ltd (200 000 shares) R200 000
S2 Ltd (100 000 shares) R100 000
S3 Ltd (150 000 shares) R150 000
2 P Ltd
P Ltd sold machinery with a carrying amount of R150 000 to S3 Ltd on 1 April 20.18.
The selling price was R240 000. The useful life of the machinery of five years has
remained unchanged. The companies within the group depreciate machinery on the
straight-line method over the useful life of the asset. The machinery was originally
purchased on 1 January 20.18.
508
Consolidation of complex groups
P Ltd granted a loan to S2 Ltd on 1 January 2018. The loan is repayable from
1 January 20.19. P Ltd charged S2 Ltd interest of 10% per year on the outstanding
loan.
3 Investment in S1 Ltd
P Ltd acquired 150 000 shares in S1 Ltd for R256 000 on 1 January 20.17 when
S1 Ltd's retained earnings amounted to R90 000. At that date the inventory in
S1 Ltd was valued at R12 000 more than its carrying amount and its plant R45 444
more than carrying amount. The remaining useful life of the plant at that date was
five years. S1 Ltd sold the plant on 30 June 20.18.
4 Investment in S2 Ltd
On 1 July 20.15, S1 Ltd acquired 65% of the shares in S2 Ltd for R196 000. S2 Ltd
had retained earnings of R110 000 on the acquisition date of S2 Ltd and on
1 January 20.17 the retained earnings were R190 000.
For the acquisition of the interest in S2 Ltd there were no unidentified assets,
liabilities or contingent liabilities and the assets and liabilities were considered to be
fairly valued.
5 Investment in S3 Ltd
P Ltd acquired 90 000 shares in S3 Ltd for R220 000 on 1 April 20.18.
The income and expenses of S3 Ltd were earned evenly during the year ended
31 December 20.18 except for the dividends received from equity investments
which were earned as follows:
1 January 20.18 to 31 March 20.18 2 125
1 April 20.18 to 31 December 20.18 17 875
R20 000
For the acquisition of the interest in S3 Ltd there were no unidentified assets,
liabilities or contingent liabilities and the assets and liabilities were considered to be
fairly valued.
P Ltd elected to measure the non-controlling interests in the acquiree at their fair
value at the acquisition date. The fair value of the non-controlling interests was
R158 000 at acquisition date.
6 P Ltd and S Ltd classified their equity investments under IFRS 9 in the separate
financial statements and recognised any fair value adjustments in a mark-to-market
reserve (other comprehensive income).
7 For the investments other than its investment in S3 Ltd, P Ltd elected to measure
the non-controlling interests in the acquiree at their proportionate share of the
acquiree’s identifiable net assets at the acquisition date.
8 The company tax rate is 28% and CGT is calculated at 66,6% thereof.
Required
Prepare the consolidated financial statements of the P Ltd Group for the year ended
31 December 20.18.
509
Chapter 7
The consolidated financial statements of the P Ltd Group will be drawn up as follows as
at 31 December 20.18:
P LTD GROUP
CONSOLIDATED STATEMENT OF FINANCIAL POSITION
AS AT 31 DECEMBER 20.18
ASSETS
Non-current assets
Property, plant and equipment (1) 1 074 835
Equity investments 155 000
Goodwill (13 105(S1 analysis) + 37 000(S3 analysis)) 50 105
1 279 940
Current assets
Inventories and trade receivables 268 440
(81 440(P) + 36 000(S1) + 54 000(S2) + 97 000(S3))
Cash and cash equivalents (17 214(P) + 19 900(S1) + 90 800(S2)) 127 914
396 354
Total assets R1 676 294
EQUITY AND LIABILITIES
Equity attributable to owners of the parent
Share capital 300 000
Retained earnings 652 070
952 070
Non-controlling interests (126 478(S1) + 149 450(S2) + 181 800(S3)) 457 728
Total equity 1 409 798
Non-current liabilities
Deferred tax (2) 29 496
Long-term borrowings (60 000(P) + 20 000(S1) + 80 000(S2) – 80 000(J14)) 80 000
109 496
Current liabilities
Trade and other payables (60 000(P) + 24 000(S1) + 21 000(S2) + 12 000(S3)) 117 000
Bank overdraft 40 000
157 000
Total liabilities 266 496
Total equity and liabilities R1 676 294
(1) 329 000(P) + 232 700(S1) + 383 200(S2) + 200 500(S3) + 45 444(J2) – 90 000(J8) + 14 211(J9) –
8 044(J10) – 4 022(J11) – 40 220(J12) + 12 066(J12) = 1 069 611
(2) 30 000(P) + 20 000(S1) – 746(J1) + 12 724(J2) + 3 360(J3) – 25 200(J8) + 3 979(J9) – 2 252(J10)
– 1 126(J11) – 7 883(J12) – 3 360(J16) = 29 496
510
Consolidation of complex groups
P LTD GROUP
CONSOLIDATED STATEMENT OF PROFIT OR LOSS
AND OTHER COMPREHENSIVE INCOME
FOR THE YEAR ENDED 31 DECEMBER 20.18
Gross profit (1) 526 500
Other income (2) 24 721
Other expenses (3) (139 561)
Finance costs (4) (8 925)
Profit before tax 402 735
Income tax expense (5) (105 870)
PROFIT FOR THE YEAR 296 865
Other comprehensive income for the year –
TOTAL COMPREHENSIVE INCOME FOR THE YEAR R296 865
Total comprehensive income attributable to:
Owners of the parent 231 944
Non-controlling interests (6) 64 921
R296 865
(1) 222 000(P) + 90 000(S2) + 132 000(S1) + 82 500(110 000 × 9/12)(S3) = 526 500
(2) 30 000(P) + 8 000(P) + 90 000(P) + 35 000(S1) + 17 875(S3)(or 20 000 – 2 125) – 30 000(J13) –
8 000(J15) – 90 000(J8) – 28 154 (J12) = 24 721
(3) 66 000(P) + 17 000(S1) + 42 000(S2) + 24 750(33 000 × 9/12)(S3) – 14 211(J9) – 4 022(J11) =
131 539
(4) 5 600(P) + 2 200(S1) + 8 000(S2) + 1 125(1 500 × 9/12)(S3) – 8 000(J15) = 8 925
(5) 61 100(P) + 35 000(S1) + 25 000(S2) + 15 000(20 000 × 9/12)(S3) – 25 200(J8) + 3 979(J9) –
7 883(J12) – 1 126(J11) = 105 870
(6) 21 171(J19) + 19 950(J20) + 23 800(J19) = 64 921
P LTD GROUP
CONSOLIDATED STATEMENT OF CHANGES IN EQUITY
FOR THE YEAR ENDED 31 DECEMBER 20.18
Non-
Share Retained Total
Total controlling
capital earnings equity
interests
Balance at 1 January 20.18 300 000 470 126 770 126 # 244 807 1 014 933
Changes in equity for 20.18
Acquisition of subsidiary – – – 158 000 158 000
Total comprehensive income
for the year:
Profit for the year – 231 944 231 944 64 921 296 865
Dividend paid – (50 000) (50 000) (10 000) (60 000)
Balance at 31 December 20.18 R300 000 R652 070 R952 070 ȍR457 728 R1 409 798
511
Chapter 7
Calculations
C1 Schematic diagram of group structure
P Ltd
75% 60%
1 January 20.17 1 April 20.18
S1 Ltd S3 Ltd
1 July 20.15
65%
S2 Ltd
512
Consolidation of complex groups
513
Chapter 7
514
Consolidation of complex groups
Dr Cr
R R
J3 Inventory (S1)(SFP) 12 000
Retained earnings (S1)(SCE) 8 640
Deferred tax (S1)(SFP) (12 000 × 28%) 3 360
Revaluation of inventory at acquisition date
of S1 Ltd
J4 Share capital (S2)(SCE) 100 000
Retained earnings (S2)(SCE) 190 000
Goodwill (SFP) 7 500
Non-controlling interests (SFP) 101 500
Investment in S2 Ltd (S1)(SFP) 196 000
Elimination of owners’ interest of S2 Ltd at acquisition
date
J5 Gross income (S3)(P/L) (110 000 × 3/12) 27 500
Other income (S3)(P/L) (dividend received) 2 125
Other expenses (S3)(P/L) (33 000 × 3/12) 8 250
Finance costs (S3)(P/L) (1 500 × 3/12) 375
Income tax expense (S3)(SCE) (20 000 × 3/12) 5 000
Retained earnings – at acquisition 16 000
Allocation of current years’ profit or loss items
between at and since acquisition earnings. S3 Ltd
acquired on 1 April 20.14
J6 Share capital (S3)(SCE) 150 000
Retained earnings (S3)(SCE) (175 000 + 16 000(J5) 191 000
Goodwill (SFP) 37 000
Non-controlling interests (SFP) 158 000
Investment in S3 Ltd (P)(SCE) 220 000
Elimination of owners’ interest of S3 Ltd
at acquisition date
J7 Share capital (S1)(SCE) 200 000
Revaluation surplus (S1)(SCE) 32 720
Retained earnings (S1)(SCE) (90 000 + 8 640) 98 640
Goodwill S1 Ltd (SFP) 13 105
Goodwill (S2)(SFP) 7 500
Non-controlling interests (SFP) 80 965
Investment in S1 Ltd (P)(SCE) 256 000
Elimination of owners’ interest of S1 Ltd
at acquisition date
J8 Gain on sale of machinery (Other income)(P)(P/L) 90 000
(240 000 – 150 000)
Deferred tax (S3)(SFP) 25 200
Property, plant and equipment (S3)(SFP) 90 000
Income tax expense (P)(P/L) (90 000 × 28%) 25 200
Reversal of intragroup sale of machinery in current
reporting period (P Ltd to S3 Ltd)
continued
515
Chapter 7
Dr Cr
R R
J9 Accumulated depreciation (S3)(SFP) 14 211
Income tax expense (P)(P/L) 3 979
Depreciation (P)(P/L) ((90 000/57) × 9) 14 211
Deferred tax (S3)(SFP) (14 211 × 28%) 3 979
Recognition of a portion of the unrealised
intragroup profit which realises through
depreciation and tax effect thereof for current year
J10 Retained earnings – Beginning of year (S1)(SCE) 5 792
Deferred tax (S1)(SFP) (8 044 × 28%) 2 252
Accumulated depreciation (S1)(SFP) (40 220/5) 8 044
Recognition of deprecation on plant revalued
at acquisition of S1 Ltd
J11 Depreciation (S1)((P/L) (40 220/5 × 6/12) 4 022
Accumulated depreciation (S1)(SFP) 4 022
Deferred tax (S1)(SFP) (4 022 × 28%) 1 126
Income tax expense (S1)(P/L) 1 126
Recognition of deprecation on plant revalued
at acquisition of S1 Ltd for current year
J12 Accumulated depreciation (S1)(SFP) 12 066
(8 044(J10) + 4 022(J11))
Plant (S1)(SFP) 40 220
Gain on sale of plant (S1)(P/L) (40 220 – 12 066) 28 154
Deferred tax (S1)(SFP) (28 154 × 28%) 7 883
Income tax expense (S1)(P/L) 7 883
Plant of S1 Ltd revalued at acquisition sold during
current year
J13 Dividend received (P)(P/L) 30 000
Non-controlling interests (SFP) 10 000
Dividend paid (S1)(SCE) 40 000
Elimination of intragroup dividend and recording
of dividend paid to non-controlling interests
J14 Long-term borrowings (S2)(SFP) 80 000
Loan to S2 Ltd (P)(SFP) 80 000
Elimination of intragroup long-term loan
J15 Interest received (P)(P/L) 8 000
Interest paid (S2)(P/L) 8 000
Elimination of interest charged on intragroup
long-term loan
J16 Retained earnings (S1)(SCE) 8 640
Deferred tax (S1)(SFP) 3 360
Inventory (S1)(SFP) 12 000
Inventory of S1 Ltd revalued at acquisition realised
after acquisition
continued
516
Consolidation of complex groups
Dr Cr
R R
J17 Retained earnings (S1)(SCE) 21 350
Retained earnings (S2)(SCE) 13 000
Non-controlling interests (SFP) 34 350
Recognition of the non-controlling interests in the
since acquisition retained earnings of S1 Ltd
J18 Retained earnings (S2)(SCE) 28 000
Non-controlling interests (SFP) 28 000
Recognition of the non-controlling interests in the
since acquisition retained earnings of S2 Ltd
J19 Non-controlling interests (P/L) 21 171
Non-controlling interests (SFP) 21 171
Recognition of the non-controlling interests
in the profit for the year of S1 Ltd and S2 Ltd
J20 Non-controlling interests (P/L) 19 950
Non-controlling interests (SFP) 19 950
Recognition of the non-controlling interests
in the profit for the year of S2 Ltd
J21 Non-controlling interests (P/L) 23 800
Non-controlling interests (SFP) 23 800
Recognition of the non-controlling interests
in the profit for the year of S3 Ltd
517
8
Interim acquisition of an interest
in a subsidiary
Introduction
8.1 Interim acquisition of an interest in a subsidiary compared to the
acquisition at reporting date of a subsidiary ........................................... 521
Self-assessment question
Question 8.1 ..................................................................................................... 538
519
Interim acquisition of an interest in a subsidiary
Introduction
8.1 Interim acquisition of an interest in a subsidiary compared
to the acquisition at reporting date of a subsidiary
In the preceding chapters, the acquisition date of an interest in a subsidiary by the
parent was consistently taken to be the first day of the subsidiary’s relevant reporting
period. The purchase of an interest in a subsidiary at a date which is later than the first
day of the subsidiary’s current reporting period is known as an “interim acquisition of an
interest in a subsidiary”. In the event of an interim acquisition, the profit or loss for the
year of the specific reporting period during which the interest was acquired must be
allocated between pre-acquisition and post-acquisition profit and losses. If it is feasible,
financial statements must be drawn up at the acquisition date of the interest in the
subsidiary concerned. Should this be done, the consolidation process would not differ
materially from a case in which the interest is acquired at the beginning of the reporting
period.
521
Chapter 8
l Interest paid may change because new loans are raised or existing loans have
been paid off.
l Income or expenses related to leases will be allocated on a time basis, taking into
account the starting date of a new lease agreement or the termination date of a
lease that has ended.
l Normal tax of the subsidiary for the current year should be apportioned in the ratio
of the taxable income for the periods before and since acquisition.
522
Interim acquisition of an interest in a subsidiary
523
Chapter 8
This current profit or loss consists of revenue, cost of sales, other income, etc.
Therefore, in the main elimination journal entry at the acquisition date of S Ltd, the pro
forma consolidation journals would need to include entries to remove, from the
statement of profit or loss and other comprehensive income line items, the portion
attributable to the parent before the subsidiary was acquired. This principle is illustrated
in the following example.
P Ltd acquired all the shares of S Ltd on 1 October 20.18 for R310 000. The group’s
reporting date is 31 December.
S Ltd entered into a loan with ABC Bank on 1 July 20.18 for R180 000 at 12%. After
P Ltd acquired the interest in S Ltd, P Ltd charged S Ltd a management fee of R7 500
per month.
On 1 October 20.18 S Ltd had the following reserves:
Share capital R25 000
Retained earnings – Beginning of year R175 000
524
Interim acquisition of an interest in a subsidiary
The following are the trial balances of P Ltd and S Ltd at 30 June 20.18:
P Ltd S Ltd
Dr Cr Dr Cr
Share capital
(100 000/80 000 shares) 100 000 80 000
Retained earnings: 1/7/20.17 350 150 145 000
Trade and other payables 28 640 39 296
Long-term finance lease liability – 266 680
Property, plant and equipment
at cost price 338 000 572 500
Accumulated depreciation: 30/6/20.18 112 000 46 000
Inventory on hand: 30/6/20.17 45 000 13 700
Trade receivables 76 600 55 300
Cash in bank 28 400 6 536
Investment in S Ltd at fair value:
60 000 shares 218 000 –
Sales 825 000 390 000
Dividend received 11 250 –
Purchases 454 000 163 900
Depreciation 30 000 41 700
Other expenses 153 000 48 000
Interest paid on lease agreement – 13 800
Income tax expense 54 040 36 540
Dividend paid 30 000 15 000
R1 427 040 R1 427 040 R966 976 R966 976
525
Chapter 8
P Ltd acquired its interest in S Ltd on 1 March 20.18. The average monthly sales of
S Ltd have increased by 25% during the period since P Ltd acquired the controlling
interest. Other expenses have accrued uniformly during the year.
Included in property, plant and equipment of S Ltd is plant with a cost of R258 000 that
was acquired under a finance lease agreement. The lease was entered into on
1 January 20.18 and the plant has a useful life of 10 years.
The group provides for depreciation on plant on the straight-line basis over the useful
life of the asset.
Inventory on hand at 30 June 20.18:
P Ltd R50 000
S Ltd R21 600
The company tax rate is 28% and CGT is calculated at 66,6% thereof.
P Ltd classified the investment in S Ltd under IFRS 9 in its separate financial
statements and fair value adjustments are recognised in a mark-to-market reserve
(other comprehensive income).
P Ltd elected to measure the non-controlling interests of the acquiree at their fair value
of R72 000 at the acquisition date.
Goodwill was not considered to be impaired from the time that the investment was
acquired to the end of the reporting period.
526
Interim acquisition of an interest in a subsidiary
Solution 8.2
The consolidated financial statements of the P Ltd Group in respect of the year ended
30 June 20.18, will be drawn up as follows:
P LTD GROUP
CONSOLIDATED STATEMENT OF FINANCIAL POSITION AS AT 30 JUNE 20.18
ASSETS
Non-current assets
Property, plant and equipment
(338 000(P) + 572 500(S) – 112 000(P) – 46 000(S)) 752 500
Goodwill 4 592
757 092
Current assets
Inventory (50 000(P) + 21 600(S)) 71 600
Trade receivables (76 600(P) + 55 300(S)) 131 900
Bank (28 400(P) + 6 536(S)) 34 936
238 436
Total assets R995 528
EQUITY AND LIABILITIES
Equity attributable to owners of the parent
Share capital 100 000
Retained earnings (SCE) 485 952
585 952
Non-controlling interests (analysis or SCE) 74 960
Total equity 660 912
Non-current liabilities
Long-term liability 266 680
Current liabilities
Trade and other payables (28 640(P) + 39 296(S)) 67 936
Total liabilities 334 616
Total equity and liabilities R995 528
527
Chapter 8
P LTD GROUP
CONSOLIDATED STATEMENT OF PROFIT OR LOSS
AND OTHER COMPREHENSIVE INCOME
FOR THE YEAR ENDED 30 JUNE 20.18
Revenue (825 000(P) + 150 000(S)) 975 000
Cost of sales (45 000(P) + 454 000(P) – 50 000(P) + 60 000(S)) (509 000)
Gross profit 466 000
Other expenses (153 000(P) + 16 000(S) + 30 000(P) + 8 600(S) + 9 600(S)) (217 200)
Finance costs (S) (9 200)
Profit before tax 239 600
Income tax expense (54 040(P) + 13 048(S)) (67 088)
PROFIT FOR THE YEAR 172 512
Other comprehensive income for the year –
TOTAL COMPREHENSIVE INCOME FOR THE YEAR R172 512
Total comprehensive income attributable to:
Owners of the parent (172 512 – 6 710) 165 802
Non-controlling interests ((b)Ȝ) 6 710
R172 512
Comment
The above method of presentation complies with International Financial Reporting
Standards (IFRS) in that the income of subsidiaries on consolidation is included only
from the effective acquisition date.
528
Interim acquisition of an interest in a subsidiary
Should the alternative method of presentation be used (refer to paragraph 8.6), the
statement of profit or loss and other comprehensive income would be as follows:
Alternative presentation of the statement of profit or loss and other
comprehensive income
P LTD GROUP
CONSOLIDATED STATEMENT OF PROFIT OR LOSS
AND OTHER COMPREHENSIVE INCOME
FOR THE YEAR ENDED 30 JUNE 20.18
Revenue (825 000(P) + 390 000(S)) 1 215 000
Cost of sales (45 000(P) + 454 000(P) – 50 000(P) + 156 000(S)) (605 000)
Gross profit 610 000
Other expenses (153 000(P) + 48 000(S) + 30 000(P) + 41 700(S)) (272 700)
Finance costs (S) (13 800)
Profit 323 500
Profit earned by subsidiary for eight months before acquisition
of controlling interest ((a)&) (83 900)
Profit before tax 239 600
Income tax expense (54 040(P) + 13 048(S)) (67 088)
PROFIT FOR THE YEAR 172 512
Other comprehensive income for the year –
TOTAL COMPREHENSIVE INCOME FOR THE YEAR R172 512
Total comprehensive income attributable to:
Owners of the parent (172 512 – 6 710) 165 802
Non-controlling interests ((b)Ȝ) 6 710
R172 512
P LTD GROUP
CONSOLIDATED STATEMENT OF CHANGES IN EQUITY
FOR THE YEAR ENDED 30 JUNE 20.18
Non-
Share Retained Total
Total controlling
capital earnings equity
interests
Balance at 1 July 20.17 100 000 # 350 150 450 150 – 450 150
Changes in equity for 20.18
Acquisition of subsidiary 72 000 72 000
Total comprehensive income
for the year
Profit for the year 165 802 165 802 Ȝ 6 710 172 512
Dividend (30 000) (30 000) ĭ (3 750) (33 750)
Balance at 30 June 20.18 R100 000 &R485 952 R585 952 R74 960 R660 912
# 350 150(P)
& (350 150(P) + 825 000 – 449 000(C2) – 153 000(P) – 30 000(P) – 30 000(P) + 11 250(dividend
received from S Ltd) – 54 040(P) + 15 592(C3) = 485 952 (proof) (to SFP)
J1 or (b)
Ȝ J2 or (b)Ȝ or SCI
ĭ J3 or (b)ĭ
529
Chapter 8
Calculations
C1 Allocation of statement of profit or loss and other comprehensive income
items
1/7/20.17 1/3/20.18
to to
Total 28/2/20.18 30/6/20.18
8 months 4 months
Sales (see calculation below) 390 000 240 000 150 000
Inventory: 30/6/20.17 13 700
Purchases 163 900
177 600
Inventory: 30/6/20.18 (21 600)
Cost of sales (= 40% of sales) (156 000) (96 000) (60 000)
Gross profit (= 60% of sales) 234 000 144 000 90 000
Finance costs (1) (13 800) (4 600) (9 200)
Other expenses (89 700) (55 500) (34 200)
Other expenses (2) (48 000) (32 000) (16 000)
Depreciation – Finance lease (3)(4) (12 900) (4 300) (8 600)
Depreciation (5) (28 800) (19 200) (9 600)
Comment
Allocation of sales
Say S Ltd’s sales to 1 March 20.18 were Ry per month.
Then: 8y + (4 × 1,25y) = 390 000
8y + 5y = 390 000
13y = 390 000
∴y = 30 000
Sales 1/7/20.17 – 28/2/20.18 (8 × 30 000) R240 000
Sales 1/3/20.18 – 30/6/20.18 (4 × 1,25 × 30 000) R150 000
530
Interim acquisition of an interest in a subsidiary
531
Chapter 8
532
Interim acquisition of an interest in a subsidiary
533
Chapter 8
IFRS 12 is effective for entities with annual periods beginning on or after 1 January
2013 (IFRAS 12.C1 & .C2).
IFRS Disclosure requirements
Significant judgements and assumptions
12.7 The reporting entity must disclose information about significant judgements
and assumptions it has made in determining:
• that it has control over another entity; or
• that it has joint control of an arrangement or significant influence over
another entity.
12.8 Significant judgements and assumptions referred to in IFRS 12.7 would
include those made by the entity when coming to a conclusion whether it has
control, joint control or significant influence over another entity.
12.9 In particular to comply with IFRS 12.7 an entity shall disclose the significant
judgements and assumptions made in determining whether:
• it holds more than half of the voting rights of another entity where it does
not have control;
• it holds less than half of the voting rights of another entity where it has
control; or
• it is an agent or principal with respect to another entity
Interests in subsidiaries
12.10 IFRS 12 requires the reporting entity to disclose information that enables
users of the consolidated financial statements to understand or evaluate
.10(a)(i) • the composition of the group (i.e. the parent and its subsidiaries);
.10(a)(ii) • the interest that the NCI has in the group’s activities and cash flows;
.10(b)(i) • the nature and extent of significant restrictions on the parent’s ability to
access or use assets or settle liabilities of the subsidiaries in the group;
.10(b)(iii) • the consequences of changes in its ownership interest that do not result in
a loss of control (Volume 2 of Group Statements);
.10(b)(iv) • the consequences of losing control during the reporting period. (Volume 2
of Group Statements).
12.12 IFRS 12 requires reporting entities to disclose additional information for each
of an entity’s subsidiaries that have material non-controlling interests as
follows:
.12(a) • the subsidiary’s name;
.12(b) • its principal place of business (and country of incorporation, if different;
.12(c) • the proportion of ownership interests held by non-controlling interests;
.12(d) • the proportion of voting rights held by non-controlling interests, if different
from the proportion of ownership interests held;
continued
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Interim acquisition of an interest in a subsidiary
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Chapter 8
The following are notes (illustrative) that are required as a result of having to comply
with IFRS 12 when preparing consolidated financial statements for P Ltd Group:
P LTD GROUP
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR
ENDED 31 DECEMBER 20.15 (extract)
10 Financial assets and financial liabilities (included under this note) IFRS
1. Holding more than 50% of voting rights without control 12.7,.9(a)
IFRS 12 Disclosure of Interests in Other Entities requires
disclosure of the reasons why the ownership, directly or indirectly
through subsidiaries, of more than half of the voting or potential voting
power of an investee does not constitute control.
8. Interests in other entities
(a) Material subsidiaries
The groups principal subsidiaries as at 31 December 20.15 are set out 12.10(a)
below. Unless otherwise stated the share capital of the subsidiaries
consists of ordinary shares and these shares are held directly by members
of the group. The voting rights held by the group are representative of the
group’s ownership interests. The country of incorporation or registration is
also their principal place of business. 12(a)–(d)
Ownership 12.10(a)(i)
Ownership
Place of interest held by
Name of interest held Principal 12.10(a)(ii)
business/ non-controlling
entity by the group activities
incorporation interests
20.15 20.14 20.15 20.14
S Ltd RSA 100% 100% 0% 0% Marketing and
selling of
marine
products
S1 Ltd RSA 45% 45% 55% 55% Marine craft
boatbuilding
S2 Ltd Germany 70% 70% 30% 30% Marine craft
engineering
SS Ltd Landout 100% 100% 0% 0% Marine
(Note (1) & (2) Materials and
Leatherworks
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Interim acquisition of an interest in a subsidiary
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Chapter 8
Comment
The above method of presentation complies with the requirements of IFRS 12. If the
financial statements of one of the subsidiaries used in the preparation of the
consolidated financial statements had been for a date for a different period to that of the
consolidated financial statements, this would have been needed to be mentioned in
terms of IFRS 12.11.
The IFRS 12 disclosures that have been discussed in this section are relevant to
Volume 1 of Group Statements. IFRS 12 also includes disclosure requirements
applicable to associates and joint ventures as well as the interest that non-controlling
interests have in the cash flows of the subsidiary. In addition there are specific
disclosure requirements for the risks associated with an entity’s interests in consolidated
structured entities and changes in a parent’s ownership. These aspects are not part of
the scope of this volume of Group Statements.
Self-assessment question
Question 8.1
The financial statements of P Ltd and its subsidiary, S Ltd, for the year ended
31 December 20.18 are given below. P Ltd paid R430 000 to acquire 75% of the issued
shares of S Ltd. It was agreed that the acquisition will become effective from 1 October
20.18.
S Ltd appointed management personnel in an attempt to improve the profitability of
S Ltd. The management fee for the period October to December amounted to a total of
R35 000. Profit of S Ltd for 20.18 accrued evenly throughout the year.
The following abridged financial statements must still be adjusted to provide for the
management fee:
STATEMENTS OF FINANCIAL POSITION AS AT 31 DECEMBER 20.18
P Ltd S Ltd
ASSETS
Property, plant and equipment 902 000 540 000
Investment in S Ltd at fair value 430 000 –
Other investments 188 000 –
Loan to S Ltd 30 000 –
Inventory 10 400 50 250
Trade receivables 59 500 141 000
Total assets R1 619 900 R731 250
EQUITY AND LIABILITIES
Share capital (160 000/150 000 ordinary shares) 160 000 150 000
Share capital (100 000 8% preference shares) 100 000 –
Retained earnings 989 900 357 380
Long-term liabilities 370 000 130 000
Tax payable – 93 870
Total equity and liabilities R1 619 900 R731 250
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Interim acquisition of an interest in a subsidiary
Additional information
1 S Ltd paid the dividend on 20 December 20.18 and P Ltd paid the preference
dividend and the ordinary dividend on 30 June 20.18.
2 The details of the property, plant and equipment of S Ltd on 1 October 20.18 were
as follows:
Carrying Fair
amount value
Land R152 500 R247 500
Other property, plant and equipment R240 000 R240 000
There were no other liabilities other than deferred tax which originated from the
revaluation of land at 1 October 20.18. The carrying amount of trade receivables
made up the difference of the net assets and liabilities acquired at acquisition.
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Chapter 8
3 P Ltd elected to measure the non-controlling interests of the acquiree at its fair
value of R142 000 on the acquisition date.
4 P Ltd classified the investment in S Ltd under IFRS 9 in its separate financial
statements and fair value adjustments are recognised in a mark-to-market reserve
(other comprehensive income).
5 Goodwill has not been subject to any impairment.
6 The company tax rate is 28% and CGT is calculated at 66,6% thereof.
Required
(a) Prepare the consolidated statement of financial position, statement of profit or loss
and other comprehensive income and an extract from the consolidated statement
of changes in equity (retained earnings and non-controlling interests) of the P Ltd
Group for the year ended 31 December 20.18.
(b) Disclose the acquisition of the subsidiary in the notes to the annual financial
statements of the P Ltd Group for the reporting period ended 31 December 20.18.
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Interim acquisition of an interest in a subsidiary
The consolidated financial statements of the P Ltd Group in respect of the year ended
31 December 20.18, will be drawn up as follows:
P LTD GROUP
CONSOLIDATED STATEMENT OF FINANCIAL POSITION
AS AT 31 DECEMBER 20.18
ASSETS
Non-current assets
Property, plant and equipment (902 000(P) + 540 000(S) + 95 000(J1)) 1 537 000
Goodwill (C3) 45 501
Other investments 188 000
1 770 501
Current assets
Inventory (10 400(P) + 50 250(S)) 60 650
Trade receivables (59 500(P) + 141 000(S)) 200 500
261 150
Total assets R2 231 651
EQUITY AND LIABILITIES
Equity attributable to owners of the parent
Share capital – Ordinary shares 160 000
– Preference shares 100 000
Retained earnings 1 016 772
1 276 772
Non-controlling interests (C3) 148 093
Total equity 1 424 865
Non-current liabilities
Long-term liabilities (370 000(P) + 130 000(S) – 30 000 (J5)) 470 000
Deferred tax (J1) 17 716
487 716
Current liabilities
Trade payables (J3) 35 000
Tax payable (93 870(S) – 9 800(J3)) 84 070
119 070
Total liabilities 606 786
Total equity and liabilities R2 231 651
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Chapter 8
P LTD GROUP
CONSOLIDATED STATEMENT OF PROFIT OR LOSS
AND OTHER COMPREHENSIVE INCOME
FOR THE YEAR ENDED 31 DECEMBER 20.18
Revenue (1 295 000(P) + 205 000(C1)) 1 500 000
Cost of sales (815 500(P) + 100 000(C1)) (915 500)
Gross profit 584 500
Other expenses (120 000(P) + 18 000(C1)) (138 000)
Administrative costs (8 750(P) + 35 000(J3)) (43 750)
Other income (P) 9 500
Finance costs (41 000(P) + 3 000(S)) (44 000)
Profit before tax 368 250
Income tax expense (89 600(P) + 15 085(S) – 9 800(J3)) (94 885)
PROFIT FOR THE YEAR 273 365
Other comprehensive income for the year –
TOTAL COMPREHENSIVE INCOME FOR THE YEAR R273 365
Total comprehensive income attributable to:
Owners of the parent 264 772
Non-controlling interests 8 593
R273 365
P LTD GROUP
EXTRACT FROM THE CONSOLIDATED STATEMENT OF CHANGES IN EQUITY
FOR THE YEAR ENDED 31 DECEMBER 20.18
Non-
Retained
controlling
earnings
Interest
Balance at 1 January 20.18 (P) 810 000 –
Changes in equity for 20.18
Acquisition of subsidiary − 142 000
Total comprehensive income for the year:
Profit for the year 264 772 8 593
Preference dividend paid (8 000) –
Ordinary dividend paid (50 000) (2 500)
Balance at 31 December 20.18 R1 016 772 R148 093
P LTD GROUP
NOTES FOR THE YEAR ENDED 31 DECEMBER 20.18
2. Acquisition of subsidiary
On 1 October 20.18 P Ltd acquired 75% of the outstanding ordinary shares of S Ltd
and obtained control of S Ltd. S Ltd is operational in the telecommunications sector
and as a result of the acquisition the P Ltd Group will be a leading provider of these
services in the market.
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Interim acquisition of an interest in a subsidiary
The goodwill of R45 501 arising from the acquisition results mainly from the
synergies expected from combining the operations of P Ltd and S Ltd.
The following table summarises the consideration paid for S Ltd and the amounts of
the assets acquired and liabilities assumed at the acquisition date, as well as the
fair value of the non-controlling interests in S Ltd.
Total consideration transferred – Cash R430 000
Acquisition-related costs 8 750
Recognised amounts of the identifiable assets acquired
and liabilities assumed
Property, plant and equipment (240 000 + 247 500) 487 500
Trade receivables (balancing figure) 56 715
Deferred tax (17 716)
Total identifiable net assets 526 499
Non-controlling interests in S Ltd (142 000)
Goodwill 45 501
R430 000
The fair value of the non-controlling interests in S Ltd, an unlisted company, was
estimated by applying a market approach and an income approach . . . (detail of
measurement basis of the non-controlling interests as per requirements of
IFRS 3.B64(o)).
The revenue included in the consolidated statement of profit or loss and other
comprehensive income since 1 October 20.18 contributed by S Ltd was
R205 000(C1). S Ltd also contributed profit of R48 250(C1) over the same period.
Had S Ltd been consolidated from 1 January 20.18, the consolidated statement of
profit or loss and other comprehensive income would have included revenue of
R820 000(C1) and profit of R300 250(C1).
Calculations
C1 Allocation of S Ltd’s profit
1/1–30/9 1/10–31/12
Total 9 months 3 months
Revenue 820 000 615 000 205 000
Cost of sales (400 000) (300 000) (100 000)
Gross profit 420 000 315 000 105 000
Other expenses (72 000) (54 000) (18 000)
Interest paid
P Ltd (750) – (750)
Other (12 000) (9 000) (3 000)
Management fee (arose only after acquisition) (35 000) – (35 000)
Profit before tax 300 250 252 000 48 250
Income tax expense (93 870) (78 785) (15 085)
Income tax expense (35 000 × 28%) 9 800 – 9 800
Profit for the year R216 180 R173 215 R42 965
# 252 000/300 250 × 93 870 = 78 785
& 48 250/300 250 × 93 870 = 15 085
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Chapter 8
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Interim acquisition of an interest in a subsidiary
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