Professional Documents
Culture Documents
Financial Accounting and Reporting in Malaysia VOL 2
Financial Accounting and Reporting in Malaysia VOL 2
Reporting in Malaysia
Volume 2
Fourth Edition
TABLE OF CONTENTS
About CCH .......................................................................................................iii
About the Author ............................................................................................. iv
Dedication ........................................................................................................ vi
Preface ............................................................................................................. vii
Index of Referenced Financial Reporting Standards .................................. xvii
Index............................................................................................................. 1285
CHAPTER 7
CONSOLIDATED AND
SEPARATE FINANCIAL
STATEMENTS
7.1 Introduction
In May 2011, the IASB simultaneously issued six IFRSs, five of which
relate to consolidation and one on fair value measurement. The IFRSs related
to consolidation are:
IFRS 10, Consolidated Financial Statements;
IFRS 11, Joint Arrangements;
IFRS 12, Disclosures of Interests in Other Entities;
IAS 27(r), Separate Financial Statements; and
IAS 28(r), Investments in Associates and Joint Ventures.
IFRS 10 replaces the consolidation part of the former IAS 27. IAS 27(r)
deals only with accounting for investments in subsidiaries, joint ventures
and associates in the separate financial statements of an investor (retains
the part on separate financial statements in the former IAS 27). IFRS
11 supersedes the former IAS 31 on accounting for joint arrangements.
Disclosure requirements on subsidiaries, joint arrangements, associates and
involvement in unconsolidated structured entities are prescribed in IFRS 12.
The Flowchart to the Background section of this chapter provides guidance
on the application of the various IFRSs for a reporting entity’s involvement
with other entities.
power and benefits and did not explain how those two components have to be
linked to constitute control. Also, the criterion of “to obtain benefits” tended
to be interpreted as positive returns and related to ownership interest only.
SIC 12, although referring to IAS 27, used a “risks and rewards” model
to identify indicators of control in deciding whether a special purpose entity
(SPE) shall be consolidated. Those indicators did not necessarily identify a
control relationship. Also, SIC 12 appeared to focus primarily on vehicles that
were structured to operate on “auto-pilot” mechanism for specific purpose.
Conceptually, each of the two former IFRSs was based on a different model
and this gave rise to structuring opportunities, inconsistencies and diversity
in practice. The potential conflict was when an investor in applying IAS 27
might consolidate an investee that would not be consolidated in accordance
with SIC 12, or not consolidate an investee that would be consolidated
in accordance with SIC 12. The IASB noted the divergence in practice in
the application of the former IAS 27’s control concept, for example, in the
following circumstances:
(a) when an investor controls an investee but the investor has less than
a majority of the voting rights of the investee (and voting rights are
clearly the basis for control);
(b) involving special purpose entities (where the notion of “economic
substance” in SIC 12 applied);
(c) involving agency relationships; and
(d) involving protective rights.
The global financial crisis which started in 2007 saw the emergence of
newer entities that do not take the conventional form. Assets and liabilities
of reporting entities are transferred to, or securitised in, special purpose
vehicles. Troubled debts of financial institutions are restructured and sold to
structured entities, but a transferor-entity continues to be involved in those
structured entities. Some reporting entities also provide social and financial
support to troubled entities during the financial crisis although the reporting
entities do not have a legal or constructive obligation to do so (they may have
a reputation at stake i.e. a reputational risk rather than a financial risk).
Involvement in those non-conventional entities exposes a reporting entity to
risks, whether financial or reputational.
The former IAS 27 and SIC 12 were unable to provide sufficient guidance
on the accounting for these newer entities, resulting in many resources
(assets) and claims (liabilities and equity) being unrecognised (off-balance
sheet). Users, particularly existing and potential investors and lenders,
have expressed concern that it has become increasingly difficult to analyse
properly an entity’s returns and exposure to risks when those assets and
liabilities were parked in separate vehicles. This created the need for the
IASB to respond to the changing business phenomenon of structured entities.
In response to the impact of the global financial crisis, the IASB was also
asked to consider reputational risk as a basis in deciding whether an investor
should consolidate a special purpose or structured entity which the investor
has sponsored or provided financial and other support, and whether the
consolidation requirements of the then current standards (IAS 27 and SIC 12)
were sufficient for structured entities, as many such newer entities emerged
in the current global financial crisis to cater for financial reorganisation or
reengineering of troubled entities.
The rationale of the single control model for consolidation in IFRS 10 is
based on the view that all assets and liabilities under the control of an investor
shall be consolidated, regardless of how those assets and liabilities have been
structured in other entities. This change in approach is necessary to reflect
properly a group’s financial position (particularly its financial structure in
terms of gearing) and financial performance. It would provide more useful
information to users of financial statements in making economic decisions.
The project on consolidation was initiated by the IASB in April 2002, the
exposure draft ED 10, Consolidated Financial Statements, was issued in
December 2008, and the current IFRS 10 Consolidated Financial Statements,
was published in May 2011. In Malaysia, this IFRS takes the nomenclature
of MFRS 10.
(b) exposure, or rights, to variable returns from its involvement with the
investee (the Returns); and
(c) the ability to use its power over the investee to affect the amount of the
investor’s returns (the Link between Power and Returns)”. [MFRS 10.7]
The diagram below depicts the new control model.
Agency Relationships
An investor needs to assess whether its relationship with other parties is
such that those other parties are acting on the investor’s behalf i.e. they are
“de facto agents”. A party is a de facto agent when the investor has, or those
that direct the activities of the investee have, the ability to direct that party
to act on the investor’s behalf. Thus, an investor can control an investee by
appointing agents to act on its behalf. But if the investor is acting only as an
agent, it does not control the investee.
The MFRS provides examples of such other parties that, by the nature
of their relationship, may act as de facto agents of the investor, and these
include the investor’s related parties, a party that received its interest in
the investee as a contribution or loan from the investor; a party that cannot
finance its operations without subordinated financial support from the
investor; an investee for which the majority of the members of its governing
body or for which its key management personnel is the same as that of the
investor; and a party that has a close business relationship with the investor,
such as the relationship between a professional service provider and one of
its significant clients.
Reassessment of Control
The MFRS requires that an investor shall reassess whether it controls an
investee only if facts and circumstances indicate that there are changes to
one or more of the three elements of control.
A change in power over an investee can occur when there are changes
to decision-making rights, for example, when the relevant activities are no
longer directed through voting rights, but instead by other agreements, such
as a contract, that give another party or parties the current ability to direct
the relevant activities.
An investor may also gain or lose power over an investee without the
investor being involved in that event. For example, an investor can gain
power over an investee because decision-making rights held by another party
or parties that previously prevented the investor from controlling an investee
have lapsed.
Changes to exposure, or rights, to variable returns from its involvement
may also cause an investor to lose control of an investee, for example when the
investor ceases to be entitled to receive returns or to be exposed to obligations,
such as when a contract to receive performance-related fees is terminated.
The new control model would more probably result in some investees
not consolidated under the former FRS 127 meeting the control test, and
henceforth shall be consolidated. For example, the requirements on the
dominant shareholder concept may result in some investees previously
treated as associates becoming subsidiaries under the new control model.
Even if a reporting entity is a passive investor (i.e. have yet to exercise its
voting rights) in such investee, the investor would still need to test whether it
would have that “current and practical ability” to direct the relevant activities
of the investee if it wants to do so.
A reporting entity would also need to reassess its involvement in structured
entities (SEs) as the scope is wider than the guidance on special purpose
entities (SPEs) in SIC 12. The conditions for SPEs in SIC 12 were narrowly
focussed on vehicles established for specific purposes. The requirement on
SEs in MFRS 10 applies to any entity that is not managed by the traditional
means. These may include vehicles created for transfers of assets and
liabilities, entities that an investor sponsors or provides financial (including
guarantees) and other support, and involvement in clubs, trusts and non-
profit organisations.
Although the control model is premised on the three elements of power,
returns and link between power and returns, a reporting entity needs to
consider all relevant facts and circumstances. Significant judgements are
required in deciding whether a reporting entity has the power to direct and
generate returns when the voting rights held are less than a majority, or
when the power to direct the relevant activities are based on contractual
arrangements.
The changes in accounting will probably be in the following four situations:
(a) some current subsidiaries may fail the control test and thus require
deconsolidation;
(b) some current investees may meet the control test and thus require
consolidation;
(c) structured entities that an investor controls shall henceforth be
consolidated; and
(d) “silos” (ringed-fenced assets, liabilities and equity) that an investor
controls shall henceforth be consolidated.
Yes
Has control? Apply MFRS 10,
consolidate investee
No
No Joint
Yes venture?
Has significant influence? Apply MFRS 128,
equity accounting
No
Apply MFRS
132, MFRS 139 Apply MFRS 12 for disclosures
and MFRS 7
7.3.2 Objective
The objective of MFRS 10 remains the same as the original FRS 127 in that
it establishes principles for the preparation and presentation of consolidated
financial statements when an entity controls one or more other entities. To
meet the objective, the MFRS:
(a) requires an entity (the parent) that controls one or more other entities
(subsidiaries) to present consolidated financial statements;
(b) defines the principle of control and establishes control as the basis for
consolidation;
(c) sets out how to apply the principle of control to identify whether an
investor controls an investee and therefore must consolidate the
investee; and
(d) sets out the accounting requirements for the preparation of consolidated
financial statements.
7.3.3 Scope
The Standard requires that an entity that is a parent shall present
consolidated financial statements. This MFRS applies to all entities except
for:
(a) a parent need not present consolidated financial statements if it meets
all of the following conditions:
(i) it is a wholly-owned subsidiary, or is a partially-owned subsidiary of
another entity and its other owners, including those not otherwise
entitled to vote, have been informed about, and do not object to, the
parent not presenting consolidated financial statements;
(ii) its debt or equity instruments are not traded in a public market (a
domestic or foreign stock exchange or an over-the-counter market,
including local and regional market);
(iii) it did not file, nor is it in the process of filing, its financial statements
with a securities commission or other regulatory organisation for
the purpose of issuing any class of instruments in a public market;
and
(iv) its ultimate or any intermediate parent of the parent produces
consolidated financial statements available for public use that
comply with MFRSs [MFRS 10.4].
In practice, this exemption is normally only availed when the parent is
itself a wholly-owned subsidiary of another parent (i.e. its immediate
parent). This is because there is no other shareholder, other than its
immediate parent, and the shareholders of its immediate parent would
be better served by consolidating at the immediate parent’s level. For a
It has been argued that for venture capital entities and mutual funds,
the main purpose of their investments in subsidiaries is to achieve wealth
or value creation for those investments. Thus, some commentators have
suggested that the investments in subsidiaries made by such entities should
be measured on the fair value model (for example, in accordance with
MFRS 9), rather than by consolidation. The revised Standard clarifies that
a subsidiary is not excluded from consolidation simply because the investor
is a venture capital organisation, mutual fund, unit trust or similar entity.
Note that in August 2011, the IASB issued Exposure Draft ED/2011/4
Investment Entities, to propose exemption for such investment entities from
the consolidation requirement of IFRS 10 provided their investments in
subsidiaries are measured at fair value through profit or loss.
Thus, for a subsidiary to be excluded from consolidation, the parent must
have lost control. A parent loses control when it loses the power to direct
the relevant activities of the investee or when it ceases to be exposed, or
have rights, to variable returns from the investee. For example, when shares
in a subsidiary are disposed and the parent loses control. Also, the loss of
control can occur with or without a change in absolute or relative ownership
levels. It could occur, for example, when a subsidiary is subject to control
of a government, court, administrator or regulator. It could also occur as a
result of a contractual agreement. For example, an agreement that previously
allowed the entity to gain control in an investee but is not renewed on expiry
of the agreement.
7.3.4 Definitions
In general, consolidated financial statements shall be presented when
there is a group of entities under the control of a parent. A group is defined
in the Standard as “a parent and its subsidiaries”. There must therefore be a
parent-subsidiary relationship for a group to exist. The test of the existence of
a parent-subsidiary relationship rests on the criterion of control. A subsidiary
is defined as “an entity that is controlled by another entity”.
It shall be emphasised that as control is the central criterion, it need not
necessarily be accompanied by an ownership interest in an investee, to qualify
the latter to be a subsidiary. The IFRS defines control of an investee as “an
investor controls an investee when the investor is exposed, or has rights, to
variable returns from its involvement with the investee and has the ability to
affect those returns through its power over the investee.
In a parent-subsidiary relationship, control is exercised with benefits and
risks attached, and this will normally (though not necessarily) arise if the
investor has substantial ownership interest at stake. Thus, when an entity
has the power to direct the relevant activities and policies of another entity
(b) the investor is the single largest shareholder and the other shareholders
are thinly spread out among many investors (the dominant shareholder
concept);
(c) the investor holds potential voting rights that enable it to have the
current ability to direct the relevant activities of an investee; and
(d) by contractual arrangement, such as control of a structured entity
S Bhd S Bhd
P Bhd owns 40% equity shares in S Agreement with Mr. X allows P Bhd to
Bhd and controls it by operation of law. control 51% of the voting rights in S Bhd
Case 1
Entity P holds 40% of the ordinary shares of Entity Q. The next two largest
shareholdings of Entity Q are 10% and 5% respectively and the remaining
ordinary shares are held by thousands of shareholders, none individually more
than 1%. None of the shareholders has any arrangement to consult each other or
to make collective decisions.
In this case, on the basis of the absolute size of its holding and the relative
size of the holdings of other shareholders, Entity P has sufficient dominant voting
rights to meet the power criterion without the need to consider any other evidence
of power.
Case 2
Entity P holds 30% of the ordinary shares of Entity Q and seven other
shareholders each hold 10% of the ordinary shares of Entity Q. A shareholder
agreement between Entity P and all the other shareholders grants Entity P the
right to appoint, remove and set the compensation of management responsible for
the relevant activities of Entity Q. However, Entity P has yet to exercise this right
and chooses to remain as a passive investor.
In this case, considering the absolute size of its holding and the relative size
of the other shareholdings alone is not conclusive to determine that Entity P has
rights sufficient to give it power over Entity Q. However, the fact that Entity P
has the contractual right to appoint, remove and set the compensation of key
management is sufficient to conclude that Entity P has power. The fact that
Entity P has not exercised this right yet or the likelihood of it exercising this
right should not be considered when assessing if it has the power.
Case 3
Entity P holds 40% of the ordinary shares of Entity Q. Three other investors
each hold 20% of the ordinary shares of Entity Q. Entity P has two representations
on the board of directors of Entity Q whilst the other three investors each have
one representation. There are no other arrangements that affect decision-making
policies of Entity Q.
In this case, considering the absolute size of Entity P’s voting right and its
relative size to the other three shareholdings is sufficient to conclude that Entity
P does not have power over Entity Q. This is because only three other investors
would need to cooperate to be able to prevent Entity P from controlling Entity Q
unilaterally.
Case 4
Entity P holds 40% of the ordinary shares of Entity Q. Twelve other investors
each hold 5% of the ordinary shares of Entity Q. None of the other shareholders
has any contractual arrangement to consult each other or to make collective
decisions.
In this case, considering the absolute size of Entity P’s holding and the relative
size of the other shareholdings alone is not conclusive to determine if Entity P has
rights sufficient to give it power over Entity Q. Additional facts and circumstances
that indicate that Entity P has, or does not have power should be considered.
Example 2
X Bhd and Y Bhd each holds a 30% interest in the 100 million ordinary shares
of S Bhd. The remaining shareholders are spread out evenly among the public
investors. X Bhd also holds 50 million warrants of S Bhd, which are exercisable into
50 million new ordinary shares of S Bhd.
In this case, if X Bhd were to exercise the warrants it holds in S Bhd, its effective
ownership in S Bhd would be [30m + 50m]/[100m + 50m] = 53.3%. This would give
X Bhd a voting power of more than half. Thus, with the potential voting rights and
considering all other relevant factors, it is probable that X Bhd would have control
of S Bhd, and should therefore treat S Bhd as a subsidiary.
Example 4
On 1 January 20x0 Setia Bhd, a property development company, creates Damai
Trust for the sole purpose of developing a shopping complex that will be leased to
Jusco Bhd. The cost to develop the shopping complex, including land cost, is estimated
at RM500 million. To provide the necessary financing for the development of the
shopping complex, two banks are invited to each take up a 40% stake in the equity of
Damai Trust and the balance of the 20% stake will be invested by Setia Bhd.
For its 20% stake, Setia Bhd will transfer its land to Damai Trust and undertake
the entire development of the shopping complex. Damai Trust will then enter into
an operating lease arrangement whereby upon completion, the shopping complex
will be leased to Jusco Bhd for a lease period of 20 years at a minimum lease
payment of RM50 million per year. The lease payments received in each year, after
deducting operating expenses of Damai Trust, will be paid out as dividends to the
stakeholders (the bankers and Setia Bhd). The governing board of Damai Trust will
consist of representations from the two bankers and Setia Bhd but its functions are
limited to ensuring that the payments for development are in accordance with the
stage of development, the lease arrangement with Jusco Bhd is set out properly, and
the approval of the annual dividends to the stakeholders.
At the end of year 20, the shopping complex will be taken over by Setia Bhd.
Damai Trust will be dissolved and the initial capital provided by the bankers will
be returned to them.
Required
Explain whether Setia Bhd should consolidate the financial statements of
Damai Trust.
Solution 4
Although Setia Bhd only holds a 20% stake in the equity of Damai Trust, the
substance of the arrangement is that Damai Trust is a structured entity that is
controlled by Setia Bhd. Accordingly, Setia Bhd should consolidate the financial
statements of Damai Trust. Damai Trust operates on an “autopilot” mechanism
whereby its policies are predetermined. The control is evident because Setia Bhd is
the creator of the Trust and it derives economic benefits directly by transferring its
land and undertaking the entire development activities of the shopping complex and
receiving dividend distribution from its 20% equity stake in the Trust. Furthermore,
it bears the residual or ownership risk in that at the end of year 20, the initial capital
provided by the bankers must be returned in their entirety (a form of guarantee for
return of capital) even if the market value of the shopping complex were to fall
substantially below the capital provided by the bankers.
Example 5
On 1 January 20x1, Happy Bhd acquired 75% of the ordinary shares and 30% of
the preference shares of Lucky Bhd. The preference shares are classified as equity
and they carry a cumulative preference dividend of 10% per year. The payment
of dividend is discretionary and conditional on the company achieving sufficient
profits in each year. However, dividends on ordinary shares can only be paid after
all arrears of preference dividends have been paid.
For the year ended 31 December 20x4, Lucky Bhd reported a profit after tax of
RM70 million. Its equity consists of the following components:
RM’000
Cumulative preference shares of RM1 each 100,000
Ordinary shares of RM1 each 200,000
Retained profits brought forward 80,000
Profit after tax for the year 20x4 70,000
450,000
Required
(a) Compute the amount of profit for the year that shall be allocated to non-
controlling interests; and
(b) Determine the amount of non-controlling interest that shall be shown in the
financial position.
Solution 5
(a) Allocation of profit for the year
prevailing at the time the investment was made (i.e. a historical interest
rate). If the bond is classified as an AFS investment, the interest income
shall continue to be based on the effective interest but changes in market
or fair value of the bond shall be taken directly to equity (for example, fair
value reserve). Similarly, if the bond is classified as at fair value through
profit or loss, the interest income is also based on interest received, but
the changes in market or fair value are recognised as gains or losses in the
income statement.
The basic principle of eliminating all intragroup balances and transactions
remains the same for intragroup bond holdings. On consolidation, an
adjustment is required to eliminate the purchaser’s investment in bond
account with the issuer’s bond liability account, leaving only bonds held by
third parties as bond liability in the consolidated financial position. Similarly,
an adjustment is required to eliminate the purchaser’s interest income
with the issuer’s interest expense, with the resulting net interest expense
attributable to bonds held by third parties being reflected in the consolidated
income statement.
Example 6
P Bhd owns a 75% interest in the equity capital of S Bhd. On 1 January 20x7,
S Bhd issued a RM100,000,000 unsecured bond that carries a coupon interest rate
of 6% per annum. The bond was issued at RM848.50 per unit of RM1,000 nominal
value. The effective market interest rate for similar risk class bonds at issue date
was 10%. Interest is payable annually on 31 December. The bond is fully redeemable
at its nominal value after five years.
P Bhd acquired 40% of the total bond issue of S Bhd. Both P Bhd and S Bhd use
the amortised cost method to carry the bond in the accounts.
Required
For the financial year ended 31 December 20x7:
(i) Explain how S Bhd should account for the bond issue and the interest expense;
(ii) Explain how P Bhd should account for its investment in the bond of S Bhd;
and
(iii) Explain the consolidation adjustments required at the P Bhd group level.
Solution 6
(i) On 1 January 20x7, S Bhd should record the issuance of the bond as follows:
RM RM
Dr Bank account 84,850,000
Dr Bond discount – contra to bond account 15,150,000
Cr Bond account – nominal value 100,000,000
On 31 December 20x7, S Bhd should recognise the interest expense, as follows:
RM RM
Dr Interest expense – 10% x 84,850,000 8,485,000
Cr Bank account – coupon interest 6,000,000
Cr Bond discount - amortisation 2,485,000
At 31 December 20x7, the carrying value of the bond liability in the accounts
of S Bhd would be = RM100,000,000 – RM12,665,000 = RM87,335,000.
(ii) On 1 January 20x7, P Bhd should record its investment in the bond of S Bhd
as follows:
RM RM
Dr HTM investment in bond of S Bhd 33,940,000
Cr Bank account (40m x .8485) 33,940,000
On 31 December 20x7, P Bhd should recognise the interest income as follows:
RM RM
Dr Bank account - coupon interest 6% x 40m 2,400,000
Dr HTM investment in bond of S Bhd - accretion 994,000
Cr Effective interest income (10% x 33,940,000) 3,394,000
Note that when transaction costs are involved, the intragroup bond
accounts may not offset each other exactly. Based on FRS 139, transaction
costs are included in the initial measurement of a financial asset or a
financial liability (except when a financial instrument is measured at fair
value through profit or loss, in which case, the transaction costs shall be
expensed). To the issuer, the transaction costs would include underwriting
fees and other charges incurred in the issue. Inclusion of the transaction costs
thus reduces the carrying amount of the liability on its initial measurement.
To the purchaser, transaction costs are mostly commissions paid to brokers.
Inclusion of the transaction costs thus increases the carrying amount of the
asset on initial measurement. For example, an intragroup bond floated in
the market at RM10,000,000 is carried in the issuer’s book at RM9,800,000
net of underwriting fee. The same bond is carried in the purchaser’s book at
RM10,080,000 inclusive of dealers’ or brokers’ commissions. When eliminating
the intragroup bond on consolidation, a debit difference of RM280,000 would
arise. From the viewpoint of the consolidated entity, such intragroup bond
does not exist. Accordingly, the debit difference shall be expensed in the
consolidated income statement.
If the purchaser of an intragroup bond treats it as an AFS investment,
the change in fair value of the bond that is taken to other comprehensive
income in its individual accounts shall be reversed on consolidation. For
example, an intragroup bond in the issuer’s books is carried at amortised
cost of RM9,500,000. In the books of the purchaser, the bond is treated as an
viewpoint of the consolidated entity only, but legally the total bonds are still
outstanding insofar as the issuer is concerned.
Whilst there is a general agreement on the recognition of the gain or loss
on a constructive retirement of intragroup bonds in the consolidated income
statement, there is no general consensus on how the gain or loss should be
allocated between the majority (parent) and non-controlling interests. Past
practices in the USA suggested at least four alternative treatments: (1) that
the entire gain or loss is assigned to the purchasing company; (2) that the
entire gain or loss is assigned to the parent company, (3) that the gain or
loss is allocated ratably between the purchasing company and the issuing
company; and (4) that the entire gain or loss is assigned to the issuing
company.
Assigning the entire gain or loss to the purchasing company appears
to be inconsistent with the principle that a gain or loss cannot arise when
the investment is first acquired. In other words, the purchasing company
records the investment in bonds at its fair value at the date of purchase,
and thus no gain or loss can possibly arise in its accounts at that date.
Accordingly, the consolidation adjustment should not result in the gain or
loss being allocated entirely to the purchasing company. For example, if the
purchasing company is a parent, allocating the entire gain to the parent
would result in the non-controlling interest ? in the subsidiary? not having
a share of that gain. Conversely, if the purchasing company is a partly-
owned subsidiary, allocating the entire gain to the subsidiary would result
in the non-controlling interest in that subsidiary having a share of that
gain. This would over-state the non-controlling interest’s share of net assets
in that subsidiary.
Assigning the entire gain or loss to the parent company (regardless of
whether it is the issuer or the purchaser of the intragroup bonds) is often
argued on the grounds of practical expediency although this treatment is
not supported with any theoretical merits. Allocating the gain or loss ratably
between the purchasing company and the issuing company is supported, on
the grounds that it is consistent with the allocation of unrealised profits or
losses to parent and non-controlling interests arising on other intragroup
transactions. The practical difficulty of this treatment is in deciding on
the ratable allocation, such as, should it be allocated equally or should
it be based on the ownership interests of the parent and non-controlling
shareholders.
Assigning the entire gain or loss to the issuing company is based on the
notion that a constructive retirement of a bond from the group’s viewpoint
is similar, in substance, to an actual retirement of the bond. Thus, if the
issuing company were to actually retire its bond by a repurchase in the open
market, the entire gain or loss would have been recognised in its income
statement. The current thinking on fair value accounting for financial
instruments would appear to lend further support to this treatment. If all
financial assets and liabilities, including bonds, are carried at their fair
values, any changes in fair values would be recognised as gains or losses in
income. Thus, the issuing entity would recognise any change in the market
value of its bond in the income statement. Since its bond is marked to market
value, any purchase by its affiliate would also be at the market value, and
thus no further gain or loss will arise on the constructive retirement in the
consolidation adjustment. The author considers this treatment to be the
most appropriate in the light of the current developments in accounting for
financial instruments.
When the gain or loss is attributed to the issuing entity, in the calculation
of the non-controlling interest’s share of profit for a period, the gain or loss is
attributable to them only if the subsidiary is the issuing entity. In this case,
a ratable portion of the gain or loss recognised at the group level shall be
included in the calculation of the non-controlling interest’s share of profit. In
the case when the bond is issued by the parent, the gain or loss is attributed
to the parent only (as if the parent itself had repurchased the bond or had
fair valued the bond), and thus not included in the calculation of the non-
controlling interest’s share of profit.
Example 7
Papa Bhd acquired a 60% interest in the equity capital of Mama Bhd on 1
January 20x1 for a consideration of RM20,000,000. At acquisition date, the retained
profits of Mama Bhd were RM10,000,000.
On 1 January 20x4, Mama Bhd issued RM20,000,000 6% unsecured 5-year bond
at a discount and received a net proceed of RM16,970,000. The market interest rate
at the time of issue was 10%. The bond is carried at the amortised cost basis using
the effective interest rate of 10% in its accounts.
On 1 January 20x6, Papa Bhd purchased 50% of Mama Bhd’s outstanding bond
in the open market at a market price of RM7,757,600. On this date, the carrying
value of the total bond in the accounts of Mama Bhd was RM18,013,600. On this
date, the market interest rate of Mama Bhd’s bond was quoted at 16%. Papa Bhd
accounts for the bond as HTM investment and carries the bond at the amortised
cost method using the effective interest rate of 16%.
The summarised accounts of the two companies for the year ended 31 December
20x6 are as follows:
Required
(a) As at the date of the purchase of the intragroup bond by Papa Bhd, calculate
the gain or loss on constructive retirement of the bond.
(b) Prepare the consolidated accounts of Papa Bhd for the financial year of 20x6.
Solution 7
(a) Constructive gain or loss:
RM’000
Cost of investment in bond 7,757.6
Share of carrying value of bond at 1 January 20x6
50% x 18,013,600 9,006.8
Credit difference being gain on constructive retirement 1,249.2
(b)
Papa Bhd
Consolidated Statement of Comprehensive Income & Retained Profits
For the year ended 31 December 20x6
adjust only for that portion of the transaction that relates to the controlling
interest. Adjustments for the whole transaction and the full amount of any
unrealised profit or loss shall be made and allocated suitably between the
controlling interest and the non-controlling interest.
Note that legally, the profits or losses are realised in the accounts of
the selling company and are therefore subject to tax. Thus, when the full
unrealised profits or losses are eliminated on consolidation, their related
tax effects must also be recognised and carried forward until the profits
or losses are realised. The Standard requires that temporary differences
that arise from the elimination of unrealised profits or losses resulting
from intragroup transactions be dealt with in accordance with MFRS 112,
Income Taxes.
Example 8
P Bhd is a parent company with a few subsidiaries. The following intragroup sales
were recorded for the financial years ended 31 December 20x6 and 20x7 respectively:
(i) Year 20x6: Intragroup sales at invoice prices amounted to RM2,000,000 of
which RM800,000 remained in the closing inventories of the buying companies.
(ii) Year 20x7: Intragroup sales at invoice prices amounted to RM3,200,000 of which
RM1,200,000 remained in the closing inventories of the buying companies.
The profit element on intragroup sales to the selling companies was at 20% of
the invoice prices. Income tax rate was at 25% for both financial years.
Required
Show the consolidation adjustments to eliminate the intragroup transactions
and unrealised profits for both financial years 20x6 and 20x7.
Solution 8
Year 20x6:
(i) Dr Sales (of sellers) RM2,000,000
Cr Purchases (of buyers) RM2,000,000
– to eliminate intragroup sales.
(ii) Dr Closing inventories in the trading account RM160,000
Cr Closing inventories in the financial position RM160,000
– to eliminate unrealised profit in closing inventories carried forward.
(iii) Dr Deferred tax liability in the financial position RM40,000
Cr Taxation expense in the income statement RM40,000
– to account for the related tax effect of the profit eliminated.
Year 20x7:
(i) Dr Opening retained profits RM120,000
Dr Taxation expense RM40,000
Cr Opening inventories in the trading account RM160,000
– to reinstate opening retained profits and to account for the
realisation of the profit deferred in the prior year.
(ii) Dr Sales (of sellers) RM3,200,000
Cr Purchases (of buyers) RM3,200,000
– to eliminate intragroup sales.
(iii) Dr Closing inventories in the trading account RM240,000
Cr Closing inventories in the financial position RM240,000
– to eliminate unrealised profit in closing profit carried forward.
(iv) Dr Deferred tax liability in the financial position RM60,000
Cr Taxation expense in the income statement RM60,000
– to account for the related tax effect of the profit eliminated.
Example 9
On 1 January 20x6, H Bhd acquired a 60% interest in the equity capital of S Bhd
for a cash consideration of RM12,000,000. On this date the retained profits of S Bhd
were RM6,000,000. The net assets of S Bhd at the acquisition date were stated in
the accounts at their fair value of RM14,000,000. Based on an income approach, the
fair value of S Bhd as a whole was measured at RM20,000,000 at the acquisition
date.
The summarised accounts of the two companies for the year ended 31 December
20x7 are as follows:
H Bhd S Bhd
RM’000 RM’000
Sales 24,000 12,000
Cost of sales:
Opening inventories (8,000) (5,000)
Purchases (18,000) (9,000)
Closing inventories 10,000 6,000
(16,000) (8,000)
Gross profit 8,000 4,000
Expenses (2,000) (1,000)
Profit before taxation 6,000 3,000
Tax expense (1,800) (900)
Profit after taxation 4,200 2,100
Retained profits brought forward 10,800 8,900
Retained profits carried forward 15,000 11,000
Additional information:
(a) During the year ended 31 December 20x7, S Bhd sold goods to H Bhd for
invoices totalling RM3,000,000. Of these sales, RM800,000 remained in
the closing inventories of B Bhd at 31 December 20x7. The corresponding
intragroup sales and closing inventories for the 20x6 financial year were
RM2,000,000 and RM500,000 respectively. The profit margin to S Bhd was
25% on selling prices.
(b) The group carries goodwill on combination at cost less accumulated impairment
losses. Income tax rate is 30% for both financial years. Non-controlling interest
is measured at acquisition-date fair value.
Required
(i) Show the consolidation adjustments and eliminations required to prepare the
consolidated accounts for the 20x7 financial year; and
(ii) Using a consolidated worksheet, derived the group accounts for the 20x7
financial year.
Solution 9
(i) Consolidation adjustments and eliminations:
RM’000 RM’000
(a) Dr Goodwill on combination (20,000 – 14,000) 6,000
Cr Revaluation reserve 6,000
– to recognise goodwill on combination.
(b) Dr Share capital of S Bhd 4,800
Dr Revaluation reserve – goodwill 3,600
Dr Pre-acquisition profits 3,600
Cr Investment in S Bhd 12,000
– to eliminate cost of investment.
(c) Dr Share capital of S Bhd 3,200
Dr Revaluation reserve - goodwill 2,400
Dr Retained profits brought forward 3,560
Cr Non-controlling interest in financial position 9,160
– to allocate opening net assets and goodwill to NCI.
(d) Dr Retained profits brought forward 52.5
Dr Non-controlling interest in financial position 35.0
Dr Tax expense 37.5
Cr Opening inventories in profit or loss 125
– to restate unrealised profit in opening inventories.
(e) Dr Sales 3,000
Cr Purchases 3,000
– to eliminate intragroup sales for the year.
(f) Dr Closing inventories in financial position 200
Dr Deferred tax in financial position 60
Cr Closing inventories in profit or loss 200
Cr Tax expense in profit or loss 60
– to eliminate unrealised profit in closing inventories.
(g) Dr Non-controlling interest in profit or loss 819
Cr Non-controlling interest in financial position 819
– to allocate profit to NCI (2,100 + 87.5 – 140) x 40%.
Consol. Adjustments
H Bhd S Bhd (Dr) Cr H Group
RM’000 RM’000 RM’000 RM’000 RM’000
Sales 24,000 12,000 (3,000)e 33,000
Cost of sales
Opening inventories (8,000) (5,000) 125d (12,875)
Purchases (18,000) (9,000) 3,000e (24,000)
Closing inventories 10,000 6,000 (200)f 15,800
(16,000) (8,000) (21,705)
Gross profit 8,000 4,000 11,925
Expenses (2,000) (1,000) (3,000)
Profit before taxation 6,000 3,000 8,925
Tax expense (1,800) (900) (37.5)d 60f (2,677.5)
Profit after taxation 4,200 2,100 6,247.5
Non-controlling interest (819)g (819)
Profit attributable to
owners 4,200 2,100 5,428.5
Retained profits b/forward 10,800 8,900 (3,600)b 12,487.5
(3,560)c
(52.5)d
Retained profits c/forward 15,000 11,000 17,916
Share capital 22,000 8,000 (4,800)b 22,000
(3,200)c
Revaluation reserve – – (3,600)b 6,000a –
(2,400)c
Non-controlling interest – – (35)d 9,160c 9,944
819g
Total liabilities 14,000 8,000 (60)f 21,940
Total Equity and
Liabilities 51,000 27,000 71,800
Workings:
(i) Proof of non-controlling interest:
RM’000
Net assets of S Bhd 19,000
Goodwill on combination 6,000
Unrealised profits carried forward (140)
24,860
Non-controlling interest at 40% 9,944
(ii) Proof of consolidated retained profits:
RM’000
Parent’s retained profits 15,000
Share of post-acquisition profits of S Bhd 60% x 5,000 3,000
Share of unrealised profits carried forward (84)
17,916
NCIs’ percent
Subsidiary’s profit after tax
holding in the X
+ Depreciation adjustment
selling subsidiary
Example 10
On 1 January 20x1, Anak Bhd transferred machinery with a net book value of
RM400,000 to its parent company, Bapa Bhd. The transfer price was RM800,000
and the machine had a remaining useful life of 4 years as at the date of the transfer.
Depreciation is calculated on the straight line method.
Bapa Bhd holds a 75% equity interest in Anak Bhd. Assume that Anak Bhd’s
profit after tax for each year in the 20x1–20x4 period is RM1,000,000. Income tax
rate is 25%.
Required
(a) Show the consolidation adjustments required in respect of the above intragroup
transfer of property, plant and equipment; and
(b) Calculate the non-controlling interest’s share of profit in each year.
Solution 10
(a) Consolidation adjustments:
RM RM
Year 20x1: Dr Gain on sale of property,
plant and equipment 400,000
Cr Property, plant and equipment, at cost 400,000
to eliminate gain on sale of property, plant and equipment
–
and to restate carrying amount of property, plant and equipment.
Summary of Adjustments
Example 11
On 1 January 20x1, Hati Bhd acquired a 100% interest in the equity capital of
Sagu Bhd paying a consideration of RM400 million. On the acquisition date, the net
assets of Sagu Bhd, stated at their fair value, were RM300 million (consisting of
share capital of RM100m and retained profits of RM200 million).
For the current year ended 31 December 20x1, the total comprehensive income of
Sagu Bhd was RM100 million (consisting of profit of RM40 million and revaluation
surplus of RM60 million). Sagu Bhd declared and paid a dividend of RM200 million
to its parent.
Required
Explain the accounting requirements in the above case.
Solution 11
In the separate financial statements of Hati Bhd, the cost of investment in Sagu
Bhd is recorded at RM400 million. A goodwill on combination of RM100 million
arises on consolidation.
Hati Bhd shall recognise the RM200 million dividend as income when it has
been appropriately authorised i.e. when its right to receive dividend has been
established, such as when the dividend is approved in a shareholders’ meeting.
The payment of dividend by the subsidiary triggers an indication of impairment
of the investment (either the carrying amount of investment being higher than
the carrying amounts of the net assets and goodwill in the consolidated financial
statements, or the total dividend being higher than the total comprehensive income
for the year). Thus, Hati Bhd shall perform an impairment test as follows:
RM’m RM’m
Carrying amount of investment in separate financial
statements 400
Carrying amounts in the consolidated financial statements:
Net assets:
Share capital 100
Pre-acquisition profits 200
Total comprehensive income for the year 100
Dividends paid (200)
200
Goodwill on combination (400 – 300) 100
300
Impairment loss in profit or loss 100
RM’m
Original cost of investment 400
Less: Impairment loss (100)
Revised carrying amount 300
Dividends paid (200)
Net assets:
Share capital 100
Balance in pre-acquisition profits (200 – 100) 100
Adjusted net assets 200
Goodwill on combination 100
Additional information:
(a) During the year ended 31 December 20x4, Harta Bhd sold goods to Setia Bhd
for invoices totalling RM2,000,000. Of this amount, RM500,000 remained in
the closing inventories of Setia Bhd at year end. The corresponding closing
stock amount in the prior year was RM800,000. The profit margin to Harta
Bhd was 20% on selling price.
(b) In the prior year 20x3, Setia Bhd completed the construction of a warehouse
at a cost of RM1,000,000 for the use of Harta Bhd. The transfer price was
RM2,000,000 and this amount was recorded as a property, plant and equipment
by Harta Bhd. The warehouse was depreciated at 10% per annum straight line
basis in accordance with the group’s policy, charging a full year’s depreciation
in the year of purchase.
(c) Harta Bhd provided a loan of RM2 million to Setia Bhd at an interest rate of 8%
per annum. Harta Bhd also let out one of its buildings to Setia Bhd charging a
monthly rental of RM10,000. Also, Harta Bhd provided management services
to Setia Bhd and the agreed management fee was RM60,000 per annum.
(d) Assume an income tax rate of 25%. Non-controlling interest is measured at
acquisition-date fair value.
Required
(i) Calculate the goodwill on combination and show the allocation of goodwill to
parent and non-controlling interest
(ii) Show the consolidation adjustments required to prepare the group accounts of
Harta Bhd.
(iii) Using a consolidation worksheet, derive the group accounts of Harta Bhd.
Solution 12
(i) Goodwill on consolidation:
RM’000
Aggregate of:
Consideration transferred 10,000
Non-controlling interest at fair value (25% x 13,000) 3,250
13,250
Fair value of identifiable net assets 12,000
Goodwill on combination 1,250
Allocated to:
Parent (10,000 – 75% x 12,000) 1,000
Non-controlling interest 250
1,250
(ii) Consolidation adjustments:
RM’000 RM’000
Permanent adjustment
(a) Dr Goodwill on combination 1,250
Cr Revaluation reserve 1,250
– to recognise goodwill on combination.
(b) Dr Share capital of Setia Bhd 7,500
Dr Revaluation reserve – goodwill 1,000
Dr Pre-acquisition profits 1,500
Cr Investment in Setia Bhd 10,000
– to eliminate cost of investment.
Opening adjustments
(c) Dr Share capital of Setia Bhd 2,500
Dr Revaluation reserve – goodwill 250
Dr Retained profits brought forward 1,340
Cr Non-controlling interest in financial position 4,090
– to restate NCI’s share of opening net assets and goodwill.
(d) Dr Retained profits brought forward 120
Dr Deferred tax expense 40
Cr Cost of sales 160
– to restate unrealised profit in opening inventories.
(e) Dr Retained profits brought forward 506
Dr Non-controlling interest in financial position 169
Dr Deferred taxes in financial position 225
Dr Accumulated depreciation of PPE 100
Cr Property, plant and equipment, at cost 1,000
– to restate opening balances relating to transfer of warehouse.
Current year adjustments
(f) Dr Revenue of Harta Bhd 2,000
Cr Cost of sales of Setia Bhd 2,000
– to eliminate intragroup sales.
(g) Dr Cost of sales of Setia Bhd 100
Cr Inventories in financial position 100
Dr Deferred taxes in financial position 25
Cr Deferred tax income in profit or loss 25
– to eliminate unrealised profit in closing inventories.
(h) Dr Accumulated depreciation in financial position 100
Cr Depreciation expense 100
Dr Deferred tax expense 25
Cr Deferred taxes in financial position 25
– to correct for the depreciation over-provided.
(i) Dr Non-controlling interest in profit or loss 824
Cr Dividend payable in equity 525
Cr Non-controlling interest in financial position 299
– to allocate current year profit to NCI.
(j) Dr Dividend income of parent 1,575
Cr Dividend payable in equity 1,575
– to eliminate intragroup dividend.
Retained profits c/
forward 8,760 6,480 11,595
Share capital 20,000 10,000 (7,500)b 20,000
(2,500)c
Revaluation – – (1,000)b 1,250a –
(250)c
Non-controlling – – (169)e 4,090c 4,220
interest 299i
Loan from Harta – 2,000 (2,000)m –
Deferred taxes 2,000 1,000 (225)e 25h 2,775
(25)g
Trade payables 3,135 2,420 5,555
Other payables – 525k 525
Taxation 2,200 1,600 3,800
Dividend payable 2,500 2,100 (2,100)k 2,500
Total Equity and
Liabilities 38,595 25,600 50,970
Example 13
Ajex Bhd prepares its financial statements to 31 December each year. Baja Bhd
prepares its financial statements to 30 September each year.
On 1 January 20x7, Ajex Bhd acquired a 100% interest in the equity capital
of Baja Bhd. Ajex Bhd is in the process of preparing its consolidated financial
statements for the year ended 31 December 20x7 and the summarised individual
financial statements are as follows:
The profits of Baja Bhd accrued evenly in the financial year ended 30 September
20x7. The management accounts of Baja Bhd showed a profit before tax of
RM4,500,000 for the first quarter of its 20x8 financial year.
Required
(a) Explain how the financial statements of Baja Bhd may be consolidated for the
financial year ended 31 December 20x7 and prepare the consolidated financial
statements for the 20x7 financial year; and
(b) Suppose the profit for the first quarter of Baja’s 20x8 financial year included
an exceptional gain of RM2,000,000 on sale of a property, prepare the
consolidated financial statements of Ajex Bhd for the year ended 31 December
20x7, by adjusting for the effects of significant items.
Solution 13
(a) The first way to consolidate the financial statements of Baja Bhd is to adjust
its financial statements (for consolidation only) so that its year end coincides
with the year end of Ajex Bhd. In this case, the profit for the first quarter of
its 20x7 financial year (i.e. the 1 October 20x6 - 31 December 20x6 period)
shall be deducted while the profit of the first quarter of its 20x8 financial year
(i.e. the 1 October 20x7 - 31 December 20x7 period) shall be added. For the
financial position, however, the assets and liabilities at 30 September 20x7
shall be adjusted individually for their movements to 31 December 20x7 so
that their net increase is equal to the net profit of the first quarter of the 20x8
financial year. In practice, the financial position as at 31 December 20x7 based
on management accounts may also be used for this purpose.
RM’000 RM’000
Profit before taxation
– Ajex Bhd 20,000
– Baja Bhd [12,000 – 3,000 + 4,500] 13,500
33,500
Less: Taxation
– Ajex Bhd 6,000
– Baja Bhd [3,600 – 900 + 1,350] 4,050
10,050
Profit after taxation 23,450
Retained profits brought forward 26,000
Retained profits carried forward 49,450
The other way is to consolidate the financial statements of Baja Bhd as they
stand. The results of Baja Bhd would be included in the consolidated statement
of comprehensive income with effect from 1 January 20x7 to 30 September
20x7. The effects would be as follows:
(b) Using the first way, the effect of any significant item would have been included
in the adjustment and therefore consolidated in the group accounts. Under the
second way, the accounts shall be adjusted for the exceptional gain arising on
the sale of the property as follows:
Agriculture. If the parent and its other subsidiaries all use the fair value
model for biological assets in accordance with MFRS 141, the biological
assets of that foreign subsidiary shall be adjusted from the cost model to the
fair value model before they can be included in the consolidated financial
statements of the parent.
Example 14
Abu Bhd acquired an 80% equity interest in Bakar Bhd and a 75% equity interest
in Cumi Bhd when the accumulated losses of Bakar Bhd were RM2,000,000 and the
retained profits of Cumi Bhd were RM1,000,000. On the acquisition date, the net
assets of Bakar Bhd and Cumi Bhd were valued at RM8,000,000 and RM11,000,000
respectively. However, based on an income approach, the fair values of Bakar Bhd
and Cumi Bhd were measured independently at RM10,000,000 and RM15,000,000
respectively.
The summarised accounts for the three companies for the year ended 31
December 20x8 are as follows:
In the current year, it considers the losses in Cumi Bhd to be permanent and
performs an impairment test. An external party had made an offer and is willing to
pay RM1 to acquire the entire share capital of Cumi Bhd. Based on management’s
budgeted cash flows, the value in use is determined at nil amount.
Non-controlling interest is measured at acquisition-date fair value.
Required
(a) Determine the goodwill on combination and allocate the goodwill to the non-
controlling interest and the parent;
(b) Calculate the impairment loss required in the separate and consolidated
financial statements; and
(c) Using a consolidation worksheet, derive the group accounts of Abu Bhd and its
subsidiaries for the year ended 31 December 20x8.
Solution 14
(a) Goodwill on combination
Bakar Cumi
RM’000 RM’000
Aggregate of:
Consideration transferred 8,000 11,250
Non-controlling interest at fair value 2,000 3,750
Fair value as a whole 10,000 15,000
Fair value of identifiable net assets 8,000 11,000
Goodwill on combination 2,000 4,000
Allocated to:
Parent 1,600 3,000
Non-controlling interest 400 1,000
2,000 4,000
(b) Impairment loss
Company Group
RM’000 RM’000
Carrying amount of investment/goodwill 11,250 4,000
Recoverable amount – –
Impairment loss required 11,250 4,000
Consol.
adjustments
Abu Bakar Cumi (Dr) (Cr) Group
RM’000 RM’000 RM’000 RM’000 RM’000 RM’000
Profit/(loss) before tax 8,000 2,000 (12,000) (2,000)
Impairment loss (11,250) (4,000)j 11,250i (4,000)
Profit/(loss) before tax (3,250) 2,000 (12,000) (6,000)
Taxation (2,000) (800) (2,800)
Profit/(loss) after tax (5,250) 1,200 (12,000) (8,800)
Non-controlling interests – – – (240)d 3,000h 3,760
1,000k
Profit to owners of parent (5,250) 1,200 (12,000) (5,040)
Retained profits b/f 14,350 2,800 (3,000) (560)c 1,600b 15,190
(750)f 750g
Dividends paid (1,000) (1,000)
Retained profits c/f 8,100 4,000 (15,000) 9,150
Share capital 20,000 10,000 10,000 (8,000)b 20,000
(2,000)c
(7,500)f
(2,500)g
Revaluation (1,600)b 2,000a –
(400)c
(3,000)f 4,000e
(1,000)g
Non-controlling interests – – – 2,960c
240d 3,200
(3,000)h 2,750g
(1,000)k (1,250)
Total equity 28,100 14,000 (5,000) 31,100
Retained Non-controlling
Profits Interests
RM’000 RM’000
Balance at 1 January 20x8 15,190 5,710
Loss for the year (5,040) (3,760)
Dividends paid (1,000) –
Balance at 31 December 20x8 9,150 1,950
Workings
1. Proof of Non-Controlling Interest:
Bakar Cumi
RM’000 RM’000
Sundry net assets / (liabilities) 14,000 (5,000)
Goodwill on combination 2,000 –
Total net assets & goodwill 16,000 (5,000)
Non-controlling interest 20% 25%
NCI’s share or net assets / (liabilities) 3,200 (1,250)
2. Proof of Consolidated Retained Profits
Group
RM’000
Parent’s separate profit 8,100
Share of post-acquisition profits in Bakar 80% x 6,000 4,800
Share of post-acquisition losses in Cumi 75% x (16,000) (12,000)
Add: Impairment loss in separate financial statements of parent 11,250
Less: Share of goodwill written off (3,000)
Consolidated retained profits 9,150
Example 15
On 1 January 20x6, A Bhd and B Bhd establish C Bhd. A Bhd’s stake in C Bhd
is 60% and has control of the latter.
C Bhd reports losses since its incorporation. In order for C Bhd to continue
its operations, A Bhd and B Bhd have entered into an agreement with bankers to
guarantee all losses of C Bhd, where B Bhd would inject further cash into C Bhd for
up to 20% of any net deficit in the shareholders’ equity and the balance made good
by A Bhd.
The draft summarised financial statements of A Bhd and C Bhd for the current
financial year ended 31 December 20x9 are as follows:
A Bhd C Bhd
RM’m RM’m
Profit / (loss) before tax 200 (100)
Taxation (52) –
Profit / (loss) after tax 148 (100)
Retained profits / (losses) brought forward 152 (150)
Recoverable from shareholders – 150
Retained profits / (losses) carried forward 300 (100)
Additional information:
(a) The accounts of A Bhd have not recognised any impairment loss on the
investment in C Bhd.
(b) The bankers have demanded that A Bhd and B Bhd should immediately inject
cash into C Bhd to clear the deficit in shareholders’ equity.
Required
(a) Prepare the consolidated financial statements of A Bhd for the financial year
ended 31 December 20x9;
(b) Suppose on 31 December 20x9, A Bhd and B Bhd sell their stakes in C Bhd
for RM1 each to a third party (the RM1 consideration is for the purpose of
legalising the agreement of sale). The agreement provides that both A Bhd
and B Bhd would not have to make good their share of the net deficit in C
Bhd. Calculate the gain or loss on disposal and prepare the primary financial
statements of A Bhd.
Solution 15
(a)
Consolidated Statement of Comprehensive Income
For the year ended 31 December 20x9
RM’m
Profit before tax (200 – 100) 100
Taxation (52)
Profit after tax 48
Attributable to:
Non-controlling interest 40% x (100) (40)
Shareholders of the parent company 88
48
Retained Non-controlling
profits interest
RM’m RM’m
Balance brought forward [152 – 60% (150)] 62 (20)
Profit / (loss) for the year 88 (40)
Balance before contribution 150 (60)
Contribution by shareholders (ratio of 8:2) 120 30
Dilution on contribution (30) 30
Balance carried forward 240 –
Example 16
P Bhd paid RM1,000,000 to acquire a wholly owned subsidiary, S Bhd on
1 January 20x1. The net assets of S Bhd on acquisition date were RM1,000,000
(consisting of share capital of RM500,000 and retained profits of RM500,000).
As at 31 December 20x5, the retained profits of S Bhd were RM1,500,000. P Bhd
accounts for the investment in S Bhd at fair value through profit or loss. As at 31
December 20x5, the fair value of its investment in the subsidiary was determined
using the P/E ratio valuation method at RM3,000,000.
On 1 January 20x6, S Bhd paid a dividend of RM1,000,000 to the parent company.
Required
(a) Explain how the fair value shall be incorporated in the separate financial
statements of P Bhd and show the journal entry required; and
(b) Show the journal entry required in the financial statements of P Bhd in respect
of the dividend paid by S Bhd.
Solution 16
(a) The fair value of S Bhd at the valuation date was RM3,000,000. Upon valuing
the investment, a gain of RM2,000,000 arose. Thus, P Bhd shall account for
the fair value gain as follows:
Dr Investment in subsidiary RM2,000,000
Cr Fair value gain in profit or loss RM2,000,000
– to incorporate fair value gain of investment in a subsidiary.
The carrying amount of the investment after incorporating the fair value gain
would be RM3,000,000, which is RM1,000,000 higher than the net tangible
assets of the subsidiary. Note that the corresponding post-acquisition profits
consolidated in the group accounts are RM1,000,000, which is lower than the
gain recognised in the separate financial statements of the parent.
(b) On receipt of the dividend from the subsidiary, the following journal entry
shall be made:
Dr Cash account RM1,000,000
Cr Dividend income in profit or loss RM1,000,000
– to record dividend received as income.
Example 17
Assume the same case facts as in the Example above. The financial positions as
at 31 December 20x5 are as follows:
P Bhd S Bhd
RM’000 RM’000
Share capital 2,000 500
Retained profits – 1,500
(i) Fair value gain 2,000 –
(ii) Other profits 2,000 –
6,000 2,000
Investment in S Bhd, at fair value 3,000 –
Sundry net assets 3,000 2,000
5,000 2,000
Required
(i) Show the consolidation adjustments required and prepare the consolidated
financial statements of P Bhd for the 20x5 financial year;
(ii) Prepare the consolidated financial statements immediately after the payment
of dividend on 1 January 20x6; and
(iii) Suppose P Bhd had on 31 December 20x5 issued bonus shares by capitalising
all the fair value gain, show the consolidation adjustments and prepare the
consolidated financial statements of P Bhd for the 20x5 financial year.
Solution 17
Consolidation adjustments:
RM’000 RM’000
(a) Dr Fair value reserve 2,000
Cr Investment in subsidiary 2,000
– to reverse fair value gain on consolidation.
(b) Dr Share capital of S Bhd 500
Dr Pre-acquisition profits 500
Cr Investment in subsidiary 1,000
– to eliminate cost of investment against net assets acquired.
Consolidation adjustments:
RM’000 RM’000
Dr Share capital of S Bhd 500
Dr Pre-acquisition profits 500
Dr Fair value reserve of parent 2,000
Cr Investment in subsidiary 3,000
– to eliminate cost of investment against net assets acquired.
(iii) Fair value reserve capitalised as bonus shares
Consolidation adjustments:
RM’000 RM’000
(a) Dr Share capital of S Bhd 500
Dr Pre-acquisition profit 500
Cr Investment in S Bhd 1,000
– to eliminate the original cost of investment.
(b) Dr Post-acquisition profits 2,000
Cr Investment in S Bhd 2,000
– to eliminate balance of cost of investment.
For example, a stand-alone entity has a net assets value of RM100 million
(share capital of RM40 million and reserves of RM60 million). The fair value
of the entity based on the P/E ratio method of valuation is RM200 million.
The entity establishes a new holding company to be its parent. The new
parent issues equity shares to the original owners of the stand-alone entity
in exchange for existing equity shares of the stand-alone entity.
The analysis below shows the difference on consolidation if the new parent
records the cost of investment at: (i) net asset value and (ii) at fair value:
Example 18
On 1 January 20x1, Q Bhd acquired a 75% equity interest R Bhd for a
consideration of RM225 million. On this date the net assets of R Bhd, measured at
fair value, were RM200 million. The fair value of R Bhd on the acquisition date was
RM300 million.
The summarised statements of financial position of Q Bhd, R Bhd and the Q
Group at 31 December 20x5 are as follows:
Required
(a) Explain how P Bhd shall account for its investment in Q Bhd in its separate
financial statements; and
(b) Prepare the consolidated financial position of the new P Group immediately
after the reorganisation.
Solution 18
(a) In this group reorganisation, P Bhd is the new holding company formed to
be the parent of the Q Group. In substance, there has been no change to the
ownership structure or the assets and liabilities immediately before and after
the reorganisation. Thus, in accordance with MFRS 127.13, P Bhd shall record
its investment in Q Bhd based on the carrying amount of its share of the
equity items shown in the separate financial statements of Q Bhd i.e. at its
net assets value of RM800 million. Consequently no additional goodwill would
arise in this group reorganisation.
Note that if P Bhd had recorded its investment in Q Bhd based on the fair
value of the ordinary shares of Q Bhd, it would have resulted in an additional
goodwill of RM700 million in this group reorganisation. This would not have
reflected fairly the substance of the group reorganisation (it would have
been the equivalent of recognising an inherent goodwill, which is against the
current MFRSs).
(b) P Group - Consolidated Statement of Financial Position (Immediately After)
Example 19
P Bhd acquired a 75% interest in the equity capital of T Bhd on 1 January 20x3
for a consideration of RM15,000,000. On this date, the net assets of T Bhd were
stated in the accounts at their fair value. The share capital and retained profits of T
Bhd on this date were RM8,000,000 and RM4,000,000 respectively.
The statements of financial position of the two companies as at 31 December
20x7 are as follows:
P Bhd T Bhd
RM’000 RM’000
Share capital of RM1 each 40,000 8,000
Retained profits 30,000 10,000
70,000 18,000
Investment in T Bhd, at cost 15,000 –
Sundry net assets 55,000 18,000
50,000 18,000
On 31 December 20x7, P Bhd formed a new company, S Bhd to take over T Bhd.
For this take-over, T Bhd was valued independently at RM30,000,000. S Bhd issued
18,000,000 shares of RM1 each to the existing shareholders of T Bhd in proportion
to their respective ownership interests. This group reorganisation has not been
reflected in the statements of financial position above.
Required
Prepare the consolidated statement of financial position of P Bhd as at 31
December 20x7 after the completion of the group reorganisation.
Solution 19
The original goodwill on combination is calculated as follows:
RM’000
Consideration transferred 15,000
NCI at acquisition-date fair value (15,000/.75) x 25% 5,000
Aggregate 20,000
Fair value of identifiable net assets (8,000 + 4,000) 12,000
Goodwill on combination 8,000
After the reorganisation, the effective ownerships of the parent and the NCI
would be as follows:
S Bhd T Bhd
Parent – direct 75% –
– indirect 75% x 100% – 75%
NCI – direct 25% –
– indirect 25% x 100% – 25%
100% 100%
The parent’s and NCI’s ownership interests in T Bhd remain unchanged at 75%
and 25% respectively (albeit indirectly).
In the separate financial statements of S Bhd, it shall measure the cost of
investment at the net asset value of RM18,000,000 rather than at fair value.
However, in the separate financial statements of P Bhd, it records the consideration
received, i.e., the investment in S Bhd, at fair value of RM22,500,000, derecognises
its investment in T Bhd and recognise a gain on disposal of RM7,500,000
In the group accounts of S Bhd (the sub-group), it may consolidate the accounts
of T Bhd using the normal consolidation procedures and the elimination would be
as follows:
RM’000
Consideration transferred 18,000
Net assets acquired 18,000
Goodwill on combination nil
H Bhd H Bhd
60%
80% 60%
T Bhd R Bhd
Example 20
Ultimate Bhd acquired a 60% interest in the equity capital of Immediate Bhd
on 1 January 20x1 when the net assets of the latter, stated at their fair value, were
RM300 million (consisting of share capital of RM200 million and pre-acquisition
profits of RM100 million). On 1 January 20x2, Immediate Bhd acquired a 75%
interest in the equity capital of Subsist Bhd and the net assets of the latter, stated
at their fair value were RM300 million (consisting of share capital of RM100 million
and pre-acquisition profits of RM200 million).
The draft accounts of the three companies for the year ended 31
December 20x2 are as follows:
Required
(a) If non-controlling interests are measured at acquisition-date fair value,
prepare the consolidated financial statements of Ultimate Bhd using the:
(i) two-stage method; and
(ii) one-stage method.
(b) If non-controlling interests are measured based on their proportionate share
of net assets at the acquisition date, prepare the consolidated financial
statements of Ultimate Bhd using the:
(i) two-stage method; and
(ii) one-stage method
Solution 20
(a) Non-controlling interests measured at acquisition-date fair value:
The goodwill on combination is determined as follows:
RM’m
(i) Immediate Bhd and Subsist Bhd
Consideration transferred 300
Non-controlling interest (300/.75) x 25% 100
400
Fair value of identifiable net assets 300
Goodwill on combination 100
(ii) Ultimate Bhd and Immediate Bhd
Consideration transferred 300
Non-controlling interest (300/.60) x 40% 200
500
Fair value of identifiable net assets 300
Goodwill on combination 200
Total goodwill on combination 300
Two-stage Consolidation
Stage 1
Consolidation adjustments:
RM’m RM’m
(a) Dr Goodwill on combination 100
Cr Revaluation reserve 100
– to recognise goodwill on combination.
(b) Dr Share capital of Subsist Bhd 75
Dr Revaluation reserve – goodwill 75
Dr Pre-acquisition profits 150
Cr Investment in Subsist Bhd 300
– to eliminate cost of investment.
(c) Dr Share capital of Subsist Bhd 25
Dr Revaluation reserve – goodwill 25
Dr Pre-acquisition profits 50
Cr Non-controlling interest in financial position 100
– to recognise NCI at acquisition-date fair value.
(d) Dr Non-controlling interest in profit or loss 25
Cr Non-controlling interest in financial position 25
– to allocate current year profit to NCI.
Stage 2
Consolidation adjustments:
RM’m RM’m
(a) Dr Goodwill on combination 200
Cr Revaluation reserve 200
– to recognise goodwill on combination.
(b) Dr Share capital of Immediate 120
Dr Revaluation reserve – goodwill 120
Dr Pre-acquisition profits 60
Cr Investment in Immediate 300
– to eliminate cost of investment.
(c) Dr Share capital of Immediate 80
Dr Revaluation reserve – goodwill 80
Dr Retained profits brought forward 80
Cr Non-controlling interest in financial position 240
– to allocate opening net assets and goodwill to NCI.
(d) Dr Non-controlling interest in profit of loss 70
Cr Non-controlling interest in financial position 70
– to allocate current year profit to NCI (40% x 175)
One-stage Consolidation
The effective ownership:
Immediate Subsist
Parent’s interest – direct 60% –
indirect – .60 x 75% – 45%
Non-controlling interest – direct 40% 25%
indirect – .40 x 75% – 30%
100% 100%
Consolidation Worksheet
RM’m
Goodwill on combination of Immediate 120
Parent’s share of goodwill on combination of Subsist 60% x 75 45
Goodwill on combination 165
Stage 1
Stage 2
P Bhd P Bhd
60% 30%
Q Bhd R Bhd S Bhd T Bhd
In applying MFRS 3, the critical criterion for the consolidation of the group
structures above is the control criterion that determines when an acquisition
occurs. For example, in the Group Structure A above, if Q Bhd with its 60%
ownership already controls R Bhd at the acquisition date, the additional 15%
direct investment made by P Bhd in R Bhd on a later date shall be treated as
an equity transaction in accordance with MFRS 3. Conversely, if P Bhd’s 15%
direct investment in R Bhd was purchased on an earlier date (and treated
as an AFS investment), a remeasurement of the investment to fair value is
required and changes in fair value, including those previously recognised in
other comprehensive income, shall be reclassified to profit or loss on the date
when Q Bhd acquires R Bhd.
In the Group Structure B above, a step-acquisition occurs if P Bhd’s 30%
stake and S Bhd’s 30% stake in T Bhd are purchased on different dates. In
this case, it is necessary to fair value the carrying amount of the earlier 30%
purchased stake on the date when an acquisition occurs (i.e. the date the
later 30% purchased stake occurs). In accordance with MFRS 3, a change in
the fair value is recognised in profit or loss on that date when the acquisition
occurs.
The consolidation technique for direct and indirect interests is exactly the
same as the technique used for consolidating indirect interest in a subsidiary.
The important point to consider is whether or not goodwill on combination
is attributable to non-controlling interest, and this is an issue of accounting
policy choice.
Example 21
On 1 January 20x1, X Bhd acquired a 60% interest in the equity capital of Y Bhd
paying a consideration of RM8 million, which reflected 60% of the fair value of Y
Bhd. On this date, the pre-acquisition profits of Y Bhd were RM2 million.
On the same date, X Bhd purchased a 30% interest in the equity capital of Z
Bhd, paying a consideration of RM4.7 million. The pre-acquisition profits of Z Bhd
on that date were RM4 million. X Bhd was represented on the Board of Directors of
Z Bhd and treated the investment as an associate.
On 1 January 20x2 of the current financial year, Y Bhd acquired a 40% interest
in the equity capital of Z Bhd, paying a consideration of RM7.4 million. The retained
profits of Z Bhd on that date were RM6,000,000. On that date, the X Group assumed
control of Z Bhd. The fair value of the ordinary shares of Z Bhd on acquisition date
was determined at RM1.85 per share
The draft financial positions of the three companies as at 31 December 20x2
were as follows:
Required
(a) Calculate the goodwill on combination
(b) Using a consolidation worksheet, derived the consolidated statement of
financial position of X Bhd as at 31 December 20x2.
Solution 21
(a) Goodwill on combination:
(i) Acquisition of Y Bhd
RM’000
Aggregate of:
Consideration transferred 8,000
Non-controlling interest at acquisition-date
fair value (8,000/.60) x 40% 5,333
Fair value of Y Bhd as a whole 13,333
Fair value of identifiable net assets (10,000 + 2,000) 12,000
Goodwill on combination 1,333
Allocated to parent (60%) 800
Allocated to non-controlling interest (40%) 533
1,333
Consolidation Worksheet:
Proof of NCI:
Y Bhd Z Bhd Total NCI
RM’000 RM’000 RM’000
Owners’ equity 15,000 18,000
Less: Investment in Z ltd (7,400) –
Sundry net assets 7,600 18,000
Goodwill on combination 1,333 2,500
Total sundry net assets and goodwill 8,933 20,500
Effective NCI% 40% 46%
NCI’ share 3,573 9,430 13,003
Example 22
U Bhd acquired a 75% interest in the equity capital of M Bhd on 1 January 20x1
for a consideration of RM53,500,000. On this date the share premium and retained
profits of M Bhd were RM10,000,000 and RM8,000,000 respectively.
On the same day, M Bhd acquired a 60% interest in the equity capital of S Bhd
for a consideration of RM23,600,000. The share premium and retained profits of S
Bhd on this date were RM5,000,000 and RM6,000,000 respectively.
On 1 January 20x2, the beginning of the current year ended 31 December 20x2,
U Bhd acquired a 20% interest in the equity capital of S Bhd for a consideration of
RM8,080,000.
The summarised accounts of the three companies for the current year ended 31
December 20x2 are as follows:
Statements of Comprehensive Income
At the acquisition dates of M Bhd and S Bhd, their net assets were stated in
the accounts at fair values. There were no intragroup transactions during the year
ended 31 December 20x2. At the respective acquisition dates, the considerations
paid by the parents are based on the fair values of the subsidiaries as a whole. Non-
controlling interests are measured at acquisition-date fair value.
Required
(a) Using the two-stage method, firstly, prepare the consolidated accounts of
sub-group M Bhd and then prepare the consolidated accounts of the ultimate
group U Bhd.
(b) Using the one-stage method, prepare the consolidated accounts of the ultimate
group U Bhd.
Solution 22
(a) Goodwill on combination
(i) M Bhd and S Bhd:
RM’000
Consideration transferred 23,600
Non-controlling interest at acquisition date
fair value (23,600/.6) x 40% 15,733
Fair value of S Bhd as a whole 39,333
Fair value of identifiable net assets (20,000 + 5,000 + 6,000) 31,000
Goodwill on combination 8,333
Allocated to Parent (60%) 5,000
Allocated to non-controlling interest 3,333
8,333
(ii) U Bhd and M Bhd:
RM’000
Consideration transferred 53,500
Non-controlling interest at acquisition-date
fair value (53,500/.75) x 25% 17,833
Fair value of M Bhd as a whole 71,833
Fair value of identifiable net assets (40,000 +10,000 + 8,000) 58,000
Goodwill on combination 13,333
Allocated to Parent (75%) 10,000
Non-controlling interest (25%) 3,333
13,333
Two-stage Consolidation
Stage 1 – M Bhd and S Bhd
Consolidation adjustments:
RM’000 RM’000
(a) Dr Goodwill on combination 8,333
Cr Revaluation reserve 8,333
– to recognise goodwill on combination.
(b) Dr Share capital of S Bhd 12,000
Dr Share premium of S Bhd 3,000
Dr Revaluation reserve – goodwill 5,000
Dr Pre-acquisition profits 3,600
Cr Investment in S Bhd 23,600
– to eliminate cost of investment.
(c) Dr Share capital of S Bhd 8,000
Dr Share premium of S Bhd 2,000
Dr Revaluation reserve – goodwill 3,333
Dr Retained profits brought forward 4,160
Cr Non-controlling interest in financial position 17,493
– to allocate opening net assets and goodwill to NCI.
(d) Dr Non-controlling interest in profit or loss 2,240
Cr Non-controlling interest in financial position 2,240
– to allocate current year profit to NCI.
One-stage Consolidation
Proof of NCI
M Bhd S Bhd Total NCI
RM’000 RM’000 RM’000
Owners’ equity 73,000 41,000
Less: Investment in S Bhd (23,600) –
Sundry net assets 49,400 41,000
Goodwill on combination 13,333 8,333
Net assets and goodwill 62,733 49,333
Effective NCI % 25% 35%
NCI’s share 15,683 17,267 32,950