COMPLEX GROUPS [SOFP & SOCI] – Class notes

TYPES OF COMPLEX GROUPS

1. Vertical group

Here a subsidiary [S] of the parent [P] holds controlling interest in another entity (often called sub-
subsidiary [SS]). As a result P controls S as well as SS.

Example:

holds 70% shares

holds 60% shares

SS

2. Mixed group [i.e. D-shaped group]

In addition to S shareholding in SS, P also has a direct holding in SS (which is less than 50%). In this case it
is not necessary that S must hold controlling interest in SS rather P controls SS if combined share of P and
S in SS forms a controlling interest (i.e. more than 50%) even if S holds less than 50% in SS.

P P

holds 70% shares holds 70% shares

S holds 20% shares S holds 25% shares

holds 60% shares holds 40% shares

SS SS

Hence P must consolidate all subsidiaries and sub-subsidiaries.

If A has a subsidiary then it is not considered as a sub-subsidiary for the group

ACQUISITION DATE FOR SUB-SUBSIDIARIES

Acquisition date for SS is the date when P obtains control over SS. In exam questions it may be found as the
later of:
(i) When P acquires shares of S; and
(ii) When S acquires shares of SS

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 COMPLEX GROUPS [SOFP & SOCI] – Class notes

EFFECTIVE SHAREHOLDING %
For calculation of Group and NCI shares in equity items of SS, the effective shareholding % are used. It is
explained with the help of following example:

Example
P holds 60% in S and 10% in SS whereas S holds 80% in SS. Effective shareholding % are calculated as follows:
%
P’s direct holding in SS 10
P’s indirect holding through S [60% + 80%] 48
Effective Group shareholding % 58
Effective NCI% [i.e. 100 – Effective group shareholding] 42

Effective shareholding % are used only for calculation and are NOT used for determining the “control” e.g.
effective group shareholding % in SS may be less than 50%.

GOODWILL IN SS
Goodwill on SS is calculated on acquisition date using following working and added with goodwill in S and
presented as total goodwill on SOFP.

Rs.
P’s prior direct investment in SS (Note) XXX
Investment through S [S’s investment in SS x P’s % in S] XXX
Value of NCI [i.e. Value of effective NCI] XXX
Less: SS’s net assets at acquisition (XXX)
Goodwill at acquisition XXX
Less: Impairment loss (XXX)
Carrying amount of Goodwill XXX

Note – In case of P’s prior direct investment in SS, this investment will be included at its fair value on date of
acquisition of SS in above working. Any resulting change is recognized in P’s profits.

GROUP STATEMENT OF FINANCIAL POSITION

1. Since P controls S and SS both, therefore, assets and liabilities of SS are fully consolidated following same
techniques and adjustments/eliminations as studied for S.
2. In Group other reserves and Group retained earnings workings, effective group shareholding % to post
acquisition reserves of SS.
3. NCI is calculated as follows and total NCI is reported on SOFP:

NCI in S NCI in SS
Value of NCI at acquisition XXX XXX
Add: Other reserves XXX XXX
[Other reserves x NCI%] [Other reserves x effective NCI%]
Add: Retained earnings XXX XXX
[Retained earnings x NCI%] [Retained earnings x effective NCI%]
Less. Investment in SS (XXX) -
[S’s investment in SS x NCI%]
XXX XXX

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 COMPLEX GROUPS [SOFP & SOCI] – Class notes

GROUP STATEMENT OF COMPREHENSIVE INCOME

1. Since P controls S and SS both, therefore, incomes and expenses of SS are fully consolidated following
same techniques and adjustments/eliminations as studied for S.
2. In NCI workings, NCI for both S (using normal NCI%) and SS (using effective NCI%) is calculated and added
together to show total NCI on face of SOCI. While calculating NCI for S, deduct “dividend income”
received from SS from S’s PAT.

Sub associate
If S has an investment in associate, then there is no effective shareholding% in sub-associate and Investment
in sub-associate is shown in SOFP as per equity method using S’% holding in sub-associate on post-acquisition
reserves/retained earnings and that share is added to S column in group reserves/retained earnings
workings.

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