Consolidation Noes Financial Accounting Notes

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consolidation noes financial accounting notes
Accounting 102 (University of KwaZulu-Natal)
Studeersnel wordt niet gesponsord of ondersteund door een hogeschool of universiteit

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Financial Accounting II
IFRS 3, IFRS10 and IAS 27
CONSOLIDATED (GROUP) FINANCIAL STATEMENTS
References:
1. IFRS 3 : Business Combinations;
2. IAS 27 : Consolidated and Separate Financial Statements;
3. IFRS 10: Consolidated Financial Statements
4. IAS 1: Presentation of financial statements
5. IAS 40: Investment property
6. IAS 38 : Intangible Assets
7. IAS 37: Provisions, Contingent liabilities and contingent assets
OUTCOMES
The following outcomes will be achieved once the above-mentioned Standards

have been studied in conjunction with the lectures notes provided. Furthermore,
an understanding of the principles will be obtained through the completion of the
tutorials.
The following key is used to identify the professional competencies that are
used to develop the outcomes listed below:
IC1 obtains information
IC4 communicates effectively and efficiently
IC2-2 performs calculations
IC2-4 to IC2-6 evaluates information and ideas
Outcome Financial reporting Professional Focus Tut

competency competency
1. Explain the concept of Identifies the IC 4 & High BC Q1,
control and the purpose appropriate basis of IC 2-4 to BC Q12
of preparing accounting. IC 2-6
consolidating financial
statements.
2. Identify the acquirer and Develops reliable IC 2-4 to 2-6 Low BC Q2
the date of acquisition. information.
3. Calculate and recognize Accounts for the entity’s IC 2-2 & High BC Q5,
various IFRS 3 non-routine IC 2-4 to BC Q6,
acquisition-date transactions. IC 2-6 BC Q7,
adjustments to assets BC Q8,
and liabilities. BC Q9,
BC Q11
4. Explain why a bargain Accounts for the entity’s IC 4 High
purchase gain or non-routine transactions.
goodwill arises.
Consolidations: page 1 of 103

© School of Accountancy, University of the Witwatersrand, 2015

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5. Calculate and recognise Accounts for the entity’s IC 2-2 High BC Q2,
goodwill or bargain non-routine transactions BC Q3,
purchase gain. BC Q4,
BC Q7
6. Calculate and recognise Accounts for the entity’s IC2-2 High BC Q9,
non-controlling interest. non-routine transactions. BC Q10,
BC Q11,
BC Q13
7. Identify and eliminate Accounts for the entity’s IC 2-4 to High BC Q1,
intra-group transactions. non-routine transactions. IC 2-6 BC Q3,
BC Q5,
BC Q7,
BC Q8,
BC Q9
8. Prepare a complete set Accounts for the entity’s IC4 & High BC Q1,
of consolidated financial non-routine transactions. IC 2-2 BC Q3,
statements. Prepares financial BC Q7,
statements using the BC Q8,
identified basis of BC Q10,
accounting. BC Q13


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INTRODUCTION TO CONSOLIDATIONS
Example: Woolworths Holdings Limited (WHL) and David Jones (Australia)
WHL shareholders have approved the takeover of Australian department store,
David Jones for $2.2 billion (R23.4 billion) at a shareholder meeting in Cape Town.
This takeover would form the second largest retail group in the southern hemisphere
with 1151 stores in 16 countries.
(Source:http://www.smh.com.au/business/retail/woolworths-holdings-shareholders-vote-for-david-jones-takeover-
20140617-3ablm.html, accessed on 19 June 2014).
100%
Linking back to the conceptual framework

In the records of WHL, does the investment in David Jones meet the definition and
recognition criteria of an asset? Give reasons for your answer.
In WHL’s separate financial statement the investment in the shares of David Jones
is an asset because ….
_______________________________________________________________
_______________________________________________________________
_______________________________________________________________

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_______________________________________________________________
_______________________________________________________________
_______________________________________________________________
_______________________________________________________________
Assuming that the transaction will take place in cash, what is the journal entry
which WHL will process for the purchase of the David Jones shares?
R’ billion R’ billion
Debit Credit
Dr Investment in David Jone 23.4
Cr Bank 23.4
Purchase of shares in David Jones
According to the conceptual framework, the objective of financial reporting is to

provide financial information about the reporting entity that is useful to existing
and potential investors, lenders and other creditors in making decisions about
providing resources to the entity.
By owning 100% of the shares in David Jones does WHL control the assets and
liabilities of David Jones?
_Yes, because WHL can direct David Jones on how to use its assets and settle its
liabilities. Using the CF, the PPE of David Jones is a RESOURCE OF WHL,
arises from …..
___________________________________________________________
Assume that the trial balances of the 2 companies are as follows after the
purchase of the shares:
WHL David Jones
R’ billion R’ billion R’ billion R’ billion
Debit Credit Debit Credit
Property, plant and equipment 0.5 - 0.2 -
Investment in David Jones 23.4 - - -


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Bank 0.1 - 0.1 -

Equity - 11 - 0.14
Liabilities - 13 - 0.16
Could it be more useful to the users of WHL’s financial reports to show all the
assets and liabilities of David Jones in the financial reports of WHL rather than just
showing the “Investment in David Jones” account?
Extract of the statement of financial position Walmart Group

R’ billion R’ billion
Debit Credit
Property, plant and equipment (0.5 WHL+0.2 DJ) 0.7 -
Investment in David Jones - -
Bank (0.1WHL +0.1 DJ) 0.2 -
Equity - 11
Liabilities (13WHL+0.16 DJ) - 13.16
Replaced by the assets and

liabilities of David Jones
Consolidations involve the combining the financial statements of two companies

where the one company controls the other, into a single set of financial statements,
in order to increase the usefulness of the financial reports. This module will discuss
the requirements and procedures for consolidation.
DEFINITIONS
Acquisition date is the date on which the acquirer obtains control of the
acquiree (IFRS 3 appendix A).
A business is an integrated set of activities (inputs and processes) 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


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inputs and processes applied to those inputs that have the ability to create
outputs (IFRS 3 appendix A).
A business combination is a transaction or other event in which an acquirer

obtains control of one or more businesses (IFRS 3 appendix A).
A contingent consideration is an obligation of the acquirer to transfer additional

assets or equity interests to the former owners of an acquiree as part of the
exchange for control of the acquiree if specified future events occur or conditions
are met. However, contingent consideration also may give the acquirer the right
to the return of previously transferred consideration if specified conditions are
met (IFRS 3 appendix A).
Consolidated financial statements are 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).
Control is when an investor is exposed to or has rights to variable returns from

its involvement with the investee and has the ability to affect those returns
through power over the investee (IFRS 10 appendix A).
Fair value is the price that would be received to sell an asset or paid to transfer a
liability in an orderly transaction between market participants at the measurement
date (exit price) (IFRS 13).
Goodwill is 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).
A group is the parent and its subsidiaries (IFRS 10 appendix A).
Non-controlling interest is the equity in a subsidiary not attributable, directly or

indirectly, to a parent (IFRS 3 appendix A).
A parent is an entity that has one or more entities (IFRS 10 appendix A).
Recognition criteria (per the framework for the preparation and presentation of
financial statements, par. 4.38):
An item that meets the definition of an asset or liability should be recognised if:
(a) it is probable that any future economic benefit associated with the item will
flow to or from the entity; and
(b) the item has a cost or value that can be measured with reliability.


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Relevant activities are the activities that significantly affect the return of the
investee (IFRS 10 appendix A).
Separate financial statements are those presented by a parent (IAS 27 par.4).
A subsidiary is an entity that is controlled by another entity (IFRS 10).
PARENT COMPANY ACCOUNTING (IAS 27)

The financial statements of the parent company reflect the shares held in its
investee as a financial asset (investment). This asset is normally measured at fair
value per IFRS 9, although there is an option to measure it at cost if the parent
holds more than 20% of the shares in the investment (in other words, the
investment is either an associate, a joint venture or a subsidiary). For financial
accounting II purposes, we will assume that the parent company measures its
investments in shares at cost in their separate financial statements.
Example 1: Investment in shares in the separate financial statements
P Limited purchased all the shares in S Limited for R30 when S’s share capital
was R20 and retained earnings were R10.
S Limited declared a dividend of R5 to its shareholder at 31 December 20x1.
The trial balance of S Limited at the end of the current year was as follows:
S LIMITED
STATEMENT OF FINANCIAL POSITION
AT 31 DECEMBER 20X1
Net assets 145
145
Share capital 20
Retained earnings 125
145
You are required to:

1. prepare the journal entry required in the separate financial statements of
P Limited to record the purchase of the shares in S Limited.
Debit Credit
Dr Investment in S Ltd 30
Cr Bank 30
Purchase of shares in S


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2. prepare the journal entry required in the separate financial statements of

P Limited to record the dividend received by S Limited.
Debit Credit
Dr Bank 5
Cr Dividend Income (SoCI)
Dividend received from S
In summary, the separate financial statements reflect an investment in S limited at

R30. P limited has 100% of the voting rights (shares) in S limited, and assuming
that P thereby has power to direct the relevant activities of S, P therefore is able to
control every aspect of S Limited. It can control whether or not S distributes its
profits (through dividends), it controls whether or not S Limited buys or sells its
assets and it can even control whether S Limited remains a going concern or
ceases to exist. Because S is controlled by H, it is called a subsidiary of H.
The disclosure of an investment in shares of R30 in the records of P, does not give
the shareholders of P the full picture of the extent of control that P has over S and
neither does it reflect the growth in S (increase in its profits). For the shareholders
of P to assess the full control that P has over S, it would be necessary to also
show the underlying assets and liabilities of S as well as the increase in its profits
in the financial statements of P. For this reason, a second set of financial
statements (called consolidated (or group) financial statements) must be prepared
by P.
The purpose of consolidated financial statements is to present the financial

statements of a group of companies as those of a single economic entity
(IAS27:4). Consolidation is therefore simply the “adding together” of like items of
assets, liabilities, equity, income and expenses and the reversing of amounts and
transactions that are internal to the group.
The definition of a subsidiary implies control – i.e. control over all the assets and
liabilities of the subsidiary by the parent. As there is full control of assets and
liabilities, 100% of these should be recognised in the consolidated financial
statements.
CONTROL
Requirement for consolidated financial statements
A business combination is defined as a transaction or other event in which an
acquirer obtains control of one or more businesses. When control is obtained,
an additional set of financial statements is required (IFRS 10 par.2a). Such
financial statements are referred to as either consolidated or group financial
statements. Control is the basis for consolidation.
IFRS 10 para 7 tells us that an investor has control over an investee if the
investor is exposed to or has rights to variable returns from its involvement with


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the investee and has the ability to affect those returns through its power over the
investee (IFRS 10, 6)
In other words, the investor must have

 power over the investee;
 exposure or rights to variable returns; AND
 the ability to use that power to affect the amount of the investor’s returns
(IFRS 10, 6-7)
Normally, in determining whether a company has the above-mentioned ability, it

is necessary to determine the voting rights of the shareholders, where those with
a greater shareholding have a greater amount of influence on the strategic future
of the company (IFRS 10 par. 11). As such, control normally exists when a
parent owns more than half of the voting rights. This is not, however, always the
case, as power (and thus control) can also be obtained through other contractual
arrangements (IFRS 10 par. 11). In other words, a parent could still control the
investee even if the parent owns less than 50% of the voting rights (including
potential voting rights) of an investee. This will however be dealt with in detail in
Fin Acc III.
For Financial Accounting II purposes we will assume that where a parent owns
more than 50% of the voting rights in an investee, it has power to direct the
relevant activities; exposure to rights and variable returns and the ability to
use that power to affect the returns of the investee and therefore controls the
investee.
Exemption from presentation of consolidated financial statements
An entity that is a parent is required to present consolidated financial statements

in which it consolidates its investments in subsidiaries, unless one of the
following grounds for exemption applies (IFRS 10, para 4):
1. the parent is itself a wholly-owned subsidiary, or is a partially-owned

subsidiary of another entity and its other owners (non-controlling interests)
do not object to the parent not presenting consolidated financial
statements AND
2. the parent’s debt or equity instruments (shares) are not traded or about to
be traded in a public market (ie. parent is unlisted and is not in the
process of becoming listed) AND
3. the ultimate (or any intermediate parent) of the parent produces
consolidated financial statements available for public use that comply with
International Financial Reporting Standards.
SCOPE OF IAS 27, IFRS 3 and IFRS 10
IAS 27


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This Standard applies to the preparation and presentation separate financial

statements only.
IFRS 3
This Standard deals with the accounting of a business combination transaction.
Note that a business combination does not only refer to the acquisition of shares
in a subsidiary. An entity could acquire a business simply by purchasing all its
assets and liabilities. In that instance, IFRS 3 would also apply to the
measurement of the assets and liabilities acquired.
The recognition and measurement steps required in accounting for a business

combination are discussed below after Example 6.
IFRS 10
This standard gives guidance on what constitutes control and applies to the
preparation and presentation of consolidated financial statements


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CONSOLIDATION PROCEDURES (IFRS 10 par. B86)
Company P
Compan
yS
Adjustment
s
GROUP
As mentioned earlier, the objective of consolidated financial statements is to

present financial information of the group as that of a SINGLE ECONOMIC
ENTITY.
The following procedures are therefore required in the preparation of

consolidated financial statements:
1. addition, on a line by line basis, of like items of assets, liabilities, equity
income and expenses (no journal entry required for this).
2. elimination of the carrying amount of the parent’s investment in each
subsidiary and the parent’s portion of equity of each subsidiary; goodwill is
recognised (by means of an adjusting (pro-forma) journal entry)
3. identification of the non-controlling interests share of equity (pre- and post-
acquisition) (by means of adjusting (pro-forma) journal entries)
4. elimination of all intragroup balances, transactions, income and expenses.
(by means of adjusting (pro-forma) journal entries)
Be aware, the above process refers to the combination (consolidation) of two

separate trial balances to form one new trial balance. The combination
(consolidation) must be repeated at the end of every reporting period as there
are no continual underlying consolidated records (general ledgers). The
underlying records, substantiating the consolidated trial balance, are the
separate general ledgers for each company.


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When the separate financial statements used in the consolidation are drawn up
at different reporting dates, adjustments should be made for the effects of
significant transactions or other events occurring between those dates and the
date of the parent’s financial statements. The difference between reporting dates
should not exceed three months (IFRS 10, par. B92).
Consolidated financial statements should be prepared using uniform accounting

policies for like balances, transactions and other events in similar circumstances.
If a member of the group uses accounting policies other than those adopted in
the consolidated financial statements, appropriate adjustments are made to that
group member’s financial statements in preparing consolidated financial
statements (IFRS 10, par. 19, B87).
The elimination/reversal of intragroup balances and intragroup

transactions
In order to produce consolidated financial statements that reflect the results of

the group as a single entity, all internal transactions (those that have taken place
within the group) should be reversed through pro-forma journal entries*. The
consolidated financial statements should reflect only those transactions that have
taken place with external parties.
*Consolidation journal entries (also known as pro-forma journal entries) are

adjustments subsequently made to the aggregated trial balance in order to
produce consolidated financial statements.
Intra-group purchase of shares (parent company purchased shares in

subsidiary)
At the date of acquisition, the cost of the investment in the subsidiary is reversed
against the subsidiary’s equity at that date. This represents the reversal of an
“internal” transaction from the point of view of the group, as a company cannot
reflect an investment in its own equity.
Example 2: Elimination of investment in subsidiary against equity acquired

in the subsidiary
S LIMITED
AT 31 DECEMBER 20X1
Net assets 30
30
Share capital 20
30


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P LIMITED
AT 31 DECEMBER 20X1
Net assets 150
150
Share capital 100

150
On 1 January 20X2 P Limited acquired 100% of the ordinary share capital of

S Limited by paying in cash for:
(a) R30
(b) R45
(c) R25
The net assets of S Limited consist of inventory, accounts receivable and bank
which are considered to be fairly valued.
You are required to
1. Provide the journal entries processed by P Limited to account for the purchase
of shares for scenarios (a) - (c).
2. Provide the trial balances of P Limited and S Limited after the acquisition for
scenarios (a) - (c).
3. For scenario (a) prepare consolidated trial balances at 1 January 20X2.
4. For scenario (a) prepare the consolidating journal entries as at 1 January 20X2.
Solution
Part 1
Scenario A Scenario B Scenario C

Debit Credit Debit Credit Debit Credit
Investment in S 30 45 25
Bank 30 45 25
Purchase of shares in S


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Part 2
Scenario A Scenario B Scenario C

Trial Balances P S P S P S
Share capital 100 20 100 20 100 20

Retained earnings 50 10 50 10 50 10
150 30 150 30 150 30
Investments in S 30 - 45 0 25 0
Net assets 120 30 105 30 125 30
150 30 150 30 150 30
Part 3
Consolidated worksheet – 1 January 20x2
Aggregated Consolidated Consolidated

Trial Balances P S adjustments trial balances
(P+S) Dr Cr Dr Cr
(a) Share capital 100 20 120 20 100

Retained earnings 50 10 60 10 50
150 30 150
Investments in S 30 - 30 30 - -
Net assets 120 30 150 150
150 30 150
Part 4
Consolidating journal entries– 1 January 20x2
Scenario A Debit Credit

Share capital 20
Investment in S 30
Elimination of investment against equity of S
(“at acquisition” elimination entry)


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Workings
Analysis of equity of S
Represents value of
equity (shares)
At date of acquisition of shares H acquired 100% purchased on transaction
Share capital 20 date. Must therefore be
reversed against
Retained earnings 10 investment in S to
Represents net identifiable assets of S (OE = A-L) 30 eliminate intragroup
Consideration paid (investment in S) 30 transaction
Goodwill 0
Goodwill and bargain purchase gains
Internally generated goodwill does not meet the definition of an intangible asset
because it is not an identifiable resource, (it is not separable nor does it arise
from contractual or other legal rights) controlled by the entity, that can be
measured reliably at cost. For this reason, internally generated goodwill cannot
be recognised as an intangible asset.
However, when goodwill is purchased in a business combination, it may be

recognised as an asset and measured at its cost (see definition below). Although
it remains non-identifiable, its cost is determinable. Goodwill can therefore be
perceived as a residual “left-over” amount paid for in a business combination.
In summary, goodwill is defined (in a business combination) as the future

economic benefits arising from assets that are not capable of being
individually identified and separately recognised (IFRS 3, Appendix A). In
other words, to the extent that the subsidiary’s identifiable assets, liabilities and
contingent liabilities do not satisfy the criteria for separate recognition, this will
affect the amount that is recognised as goodwill, since goodwill is measured as
the residual difference.
In terms of IFRS 3, goodwill is measured as follows:
The sum of:

(i) the consideration transferred (the price paid for the business)
(ii) the amount of any non-controlling interest in the acquiree (will be
discussed later)
(iii) in a business combination achieved in stages, the acquisition-date
fair value of the acquirer’s previously held equity interest in the
acquiree (will be discussed in the financial accounting III syllabus)
LESS the net identifiable assets acquired at acquisition date


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Occasionally, an acquirer will make a bargain purchase, which is a business

combination in which the net identifiable assets acquired exceed the aggregate of
the amounts specified in points (i) to (iii) above. The gain is recognised in profit
and loss in the consolidated statement of comprehensive income.
Example 3: Goodwill and bargain purchase gains
Using the information given in Example 2, answer the following:
You are required to
1. For scenarios (b) and (c), analyse the equity in the subsidiary from the
perspective of the parent.
2. For scenario (b), what does the excess payment for the shares represent
(assuming all the assets and liabilities in the trial balance of S are at fair
value)?
3. For scenario (c), what does the discount on the payment for the shares
represent (assuming all the assets and liabilities in the trial balance of S are at
fair value)?
4. For scenarios (b) and (c), prepare consolidated trial balances at 1 January
20X2
5. For scenarios (b) and (c), prepare the consolidating journal entries as at 1
January 20X2.
Solution
Part 1
Analyses of equity of S (scenario b)

Represents value of
equity (shares)
reversed against
Consideration paid (investment in S) (45) transaction
Difference (15)
Analyses of equity of S (scenario c)

Represents value of
equity (shares)
reversed against
Consideration paid (investment in S) (25) transaction
Difference 5


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Part 2
Goodwill
Part 3
Bargain purchase gain
Part 4
Aggregated Consolidated Consolidated

(P+S) Dr Cr Dr Cr
(b) Share capital 100 20 120 20 100

150 30 150
Investments in S 45 - 45 45 0
Net assets 105 30 135 135
Goodwill - - - 15 15
150 30 150
(c) Share capital 100 20 120 20 100

Bargain purchase gain - - - 5 5
150 30 155
Investment in S 25 - 25 25 0
Net assets 125 30 155 155
150 30 155
Part 5
Scenario B Scenario C
Debit Credit Debit Credit
Share capital 20 20
Retained earnings 10 10
Investment in S 45 25
Goodwill 15
Bargain purchase gain 5
Elimination of investment against equity of S


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CONSOLIDATION AFTER TRANSACTION DATE (ACQUISITION DATE)
IFRS 3 and IFRS 10 require a parent company, as from the date it gains control to
 incorporate into the statement of comprehensive income the income and

expenses of the subsidiary, and
 recognise in the statement of financial position the identifiable assets and
liabilities of the subsidiary and any goodwill arising on acquisition.
Example 4: Consolidation after acquisition
On 1 January 20X2 P Limited acquired 100% of the share capital of S Limited for
R30.
TRIAL BALANCES 31/12/20X2 31/12/20X3

P S P S
Share capital 100 20 100 20

Retained earnings beginning of year 50 10 90 15
Profit for the period 40 5 60 12
190 35 250 47
Investment in S Limited 30 - 30 -
Net assets 160 35 220 47
190 35 250 47
1. prepare the analysis of equity of S and the consolidated trial balance for
20X2
2. prepare the analysis of equity of S and the consolidated trial balance for
20X3
3. complete the consolidated financial statements for 20x3
4. in as far as possible, describe the purpose of the analyses of equity and
determine how it can be used as a tool for the preparation of the financial
statements.


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Solution
Part 1
Analyses of equity of S- 20X2
At date of acquisition of shares H acquired 100%

Share capital 20
Consideration paid (investment in S) 30
Post acquisition to beginning of year

Increase in retained earnings (10 – 10) 0
Current year
Profits for the year 5
P LIMITED GROUP
CONSOLIDATED TRIAL BALANCE
AS AT 31 DECEMBER 20X2
P
Share capital (100 P+20 S- 20) 100

Retained earnings beginning of year (50 P+10 S-10) 50
Profit for the period (40 P+5 S) 45

195
Investment in S Limited (30 P-30) -

Net assets (160 P+35 S) 195
195
Part 2
Analyses of equity of S -20X3
Share capital 20

Current year


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P LIMITED GROUP
CONSOLIDATED TRIAL BALANCE
P
Share capital 100

Retained earnings beginning of year (90 H + 5 S) 95
Profit for the period (60 H + 12 S) 72

267
Investment in S Limited 0
Net assets (220 H + 47 S) 267
267
Part 3
P LIMITED GROUP
CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME
FOR THE YEAR ENDED 31 DECEMBER 20X3
R
Profit for the period
Other comprehensive income 72
Total comprehensive income 72
P LIMITED GROUP
CONSOLIDATED STATEMENT OF CHANGES IN EQUITY
Share Retained
capital earnings
R R
Balance at beginning of year 100 95
Total comprehensive income - 72
Balance at end of year 100 167


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P LIMITED GROUP
CONSOLIDATED STATEMENT OF FINANCIAL POSITION
Net assets 267
267
Share capital 100

267
Part 4:
Purpose of the analyzing the equity of S
To understand what is pre-acquisition, what is at acquisition and what is post-

acquisition. Pre-acquisition profits cannot be in the group books as the parent
didn’t control the subsidiary when those pre-acquisition profits were earned and
therefore shouldn’t be part of the group’s retained earnings.
We need to know what the equity is at acquisition so that we can reverse it out as
part of our at acquisition consolidating J/E
We need to know what is post-acquisition so that we know what was

earned/incurred while under the control of the group and therefore should be part
of the group’s equity.
The analysis of equity is a quick tool to analyse the equity of S from a GROUP
perspective from the date of acquisition of S’s shares to the end of the current
financial year. By using the analysis, one can eliminate the preparation of the
worksheet for purposes of answering tutorial and test questions.
The analysis of equity should be divided into three parts as follows:

1. At the date of acquisition
a. to establish the fair value of the identifiable net assets of the subsidiary
b. to calculate goodwill or bargain purchase option
c. to determine the equity at acquisition that must be reversed by means of
a journal entry (due to an intragroup transaction)
2. The period between the date of acquisition and the beginning of the
current financial year to establish the post-acquisition profits or losses of the
subsidiary attributable to the parent company. These post acquisition
movements in profits (or equity) were not originally purchased and are

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therefore not eliminated. Instead they are have been added to the profits of the
parent in the consolidation process. For purposes of tutorial and test
questions, one can add these profits directly to the correct line item in the
financial statements (eg retained earnings balance at the beginning of the
year).
3. The change in profits during the current financial year. These profits are
added to the profits of the parent in the consolidation process. For purposes of
tutorial and test questions, one can add these profits directly to the correct line
item in the financial statements (e.g. revenue, cost of sales, tax expense in the
statement of comprehensive income).
At the end of this example you should be able to:

1. complete an analysis of equity and explain the reason for splitting profits
into 3 periods
2. use the analysis of equity in the preparation of the financial statements
3. prepare consolidated financial statements
4. prepare the pro-forma journal entry required at acquisition for the reversal of
the intragroup transaction
5. explain why the consolidated procedures and journal entries must be
repeated every year to obtain consolidated financial statements
INTRAGROUP FINANCIAL ASSETS AND LIABILITIES
Intragroup balances such as loans, receivables and payables must be reversed

in the preparation of group financial statements. This is because the group of
companies that are consolidated must be reflected as a single economic entity
and only transactions that are external to the group must be shown.
The financial asset of the one company within the group must therefore be
reversed against the financial liability of the other company within the group. Any
resulting finance charges charged or earned should also be reversed on
consolidation.
It is important to understand that these reversals have no effect on the net asset
value or the profit earned by the group. They are done merely to correct the
disclosure in the group.
Intra-group dividends
Dividends reflected in the statement of changes in equity should be those of the
parent company only. This is because the share capital on the face of the
consolidated statement of financial position is that of the parent company only,
and it therefore makes sense for the dividends to be those payable to the
parent’s shareholders. In addition to this it is essential to reverse these intra-
group dividends for disclosure purposes.


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There is another more important reason for reversing dividends received against
those declared by the subsidiary. This is because, on consolidation, 100% of the
“pre-dividend” profits of the subsidiary are aggregated on a line by line basis to
those of the other group companies. If dividends received from the subsidiary
are not reversed, then the profits from the subsidiary will be duplicated in the
consolidated statement of comprehensive income.
The consolidating journal entry for dividends declared is as follows:

Dr Dividend received (SOCI)
Cr Dividends declared/paid (SOCIE)
Dr Shareholders for Dividends (recorded by S)

Cr Dividends Receivable (recorded by H)
Example 5: Elimination of intragroup balances and transactions
TRIAL BALANCES 31 DECEMBER 20X2

P S
Share capital 500 100
Retained earnings 1/1/20X2 260 80
Rent received from S Limited 36 -
Administration fee received from S Limited 12 -
Dividends received - S Limited 50 -
Dividends received - other 97 33
Interest received on loan to S Limited 6 -
Loan by P Limited - 60
Current account P Limited - 37
Trading profit 230 170
1 191 480
Land and buildings 360 -

Investment in S Limited 100 -
Other investments 150 74
Taxation 72 40
Loan to S Limited 60 -
Current account S Limited 37 -
Dividends paid 140 50
Other expenses 104 70
Other assets 168 246
1 191 480
P Limited acquired 100% of the shares in S Limited when it was formed, some
years ago.
[NB: When a company is formed, the COMPANY issues shares. Therefore if P Ltd
purchases all the shares of S Ltd when it is formed, P Ltd paid S Ltd for the shares.]


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Prepare consolidated financial statements for the 20X2 financial year.
Solution:
P LIMITED GROUP
R
Trading profit (36P + 12P +6P +230P +170S -36-12-6) 400
Dividends received (50P + 97P + 33S-50) 130
Expenses(104P + 70S -36-12-6) (120)
Profit before tax 410
Taxation(72P+40S) (112)
Profit for the period 298
Other comprehensive income 0
P LIMITED GROUP
(EXTRACT FROM) CONSOLIDATED STATEMENT OF CHANGES IN EQUITY
Retained
earnings
R
Balance at beginning of year(260P+80S) 340
Dividends (140)
Balance at end of year 498
P LIMITED GROUP
AT 31 DECEMBER 20X2
R
ASSETS
Land & buildings (360P) 360
Other investments (150P+74S) 224
Other assets (168P+246S 414
998
EQUITY
Share capital (500P+100S-100) 500
Retained earnings(260P +80S+298-140 OR 498 SOCI above) 498
998


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Account Dr (R) Cr (R)

Share capital 100
Investment in S 100
At acquisition J/E
Rent income 36
Other expenses 36
Elimination of intragroup transaction
Admin fee income 12

Other expenses 12
Dividend income 50
Dividend paid 50
Interest income 6
Other expenses 6
Loan by P Ltd 60
Loan to S Ltd 60
Elimination of intragroup balance
Current account P Ltd 37

Current account S Ltd 37
Elimination of intragroup balance
For each statement, first add the individual line items for P Ltd and S Ltd together
and then process (by either adding or subtracting) the above journal entries to
each line item in the financial statements – see workings in brackets.
INTRAGROUP TRADING TRANSACTIONS
Intragroup trading (eg inter-company sale of inventory/plant) will require

consolidation adjustments where the goods traded are still owned by one of the
companies in the group, i.e. have not yet been disposed of to an external party.
There are three reasons for the consolidating adjustments required for intragroup
trading:
1. Sales and cost of sales should only include those sales and cost amounts
relating to transactions with external parties.


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2. The cost of the asset in the statement of financial position should reflect
the cost to the group (ie. the amount paid to an external party).
3. Profit on sale of the asset should only be recognised once the asset has
been sold outside the group (ie to an external party). Adjustments are
necessary for any portion of the profits that are unrealised (unearned from
a group perspective) i.e., profits relating to goods that are still owned
within the group.
If the consolidation journal entries were not done, this would result in overstated
sales, cost of sales, inventory, property, plant and equipment and profit/losses on
sale of property, plant and equipment.
Example 6
SCENARIO 1: Intragroup sale of inventory. All inventory on hand at year

end.
P Limited (the parent company) sold R100 inventory to S Limited (subsidiary) for
R150. S Limited has all the inventory on hand at year end.
P Ltd S Ltd
Dr Inventory 100 Dr Inventory 150

Cr Bank 100 Cr Bank 150
(original purchase of inventory from (intra-group purchase of inventory

external company) from parent company)
Dr Cost Of Sales 100

Cr Inventory 100
Dr Bank 150
Cr Sales 150
(intra-group sale of inventory to

Subsidiary company)
1. P Ltd and S Ltd form a GROUP company (single entity) upon

CONSOLIDATION.
2. When consolidating (adding) the two companies together, the GROUP

financial statements would reflect both a sale (by P) and a purchase (by S) of
the same inventory. Essentially, the inventory would remain in the group’s


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statement of financial position, but would have a greater carrying amount than
before. A gross profit would also be reported in the group statement of
comprehensive income in relation to that same inventory.
 Sales and cost of sales (hence gross profit) of the GROUP would increase
(since P reports the sale and cost of sales to S in its statement of
comprehensive income)
 The cost of inventory in the GROUP would increase (since S reports the new
cost of inventory in its statement of financial position).
In the above example, P made a profit of R50 and the inventory increased in
value by R50 (from R100 to R150). Therefore from a GROUP perspective, the
inventory was in effect “revalued” through gross profit in the statement of
comprehensive income. This is an intragroup transaction and is clearly
unacceptable as inventory should always be carried at the lower of cost (to the
group) and net realisable value.
3. It is therefore necessary to reverse the overstated sales and cost of sales, the
unearned profit and any overstated inventory.
FROM A GROUP perspective, only sales to external entities should be reflected.

Therefore the following pro-forma journal entry should be passed when
consolidating (adding) the two companies.
Reversing out intra-group sale AND

Dr Sales of P 150
unearned profit
Cr Cost of Sales of P 100
Cr Inventory of S 50 Reducing “overstated”
inventory in Subsidiary to
reflect GROUP inventory
Alternative entries (same effect as above entry):
Dr Sales 150 Reversing of intra-group sale for

Cr Cost of Sales 150 disclosure purposes
Reversal of unearned profit

Dr Cost of Sales 50 included in “overstated” inventory
Cr Inventory 50 still on hand


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SCENARIO 2: Intragroup sale of inventory. All inventory sold by year end.
P Limited sells to S Limited, who then sells all the inventory to an external entity
before year end.
P Ltd S Ltd

(original purchase of inventory from (intra-group purchase of inventory from

external company) parent company)
Dr Cost Of Sales 100 Dr Cost Of Sales 150

Cr Inventory 100 Cr Inventory 150
Dr Bank 150 Dr Bank 300

Cr Sales 150 Cr Sales 300
(intra-group sale of inventory to (Sale of all of the inventory to an

Subsidiary company) external entity)
MARK-UP ON COST = 50%
FROM A GROUP perspective, only sales to external entities should be reflected.

Therefore the following pro-forma journal entry should be passed when
consolidating (adding) the two companies.
Reversing of intra-group sale for disclosure
Dr Sales of P 150
purposes only. Note, there is no inventory on
Cr Cost of Sales of P 150
hand in the group, therefore no unearned
profit from a group perspective.


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SCENARIO 3: Intragroup sale of inventory. Some inventory is still on hand

at the end of the year.
P Limited sells to S Limited, who sells a part of the inventory to an external entity.
P Ltd S Ltd

(original purchase of inventory from external (intra-group purchase of inventory from

company) parent company)
Dr Cost Of Sales 100 Dr Cost Of Sales 120

Cr Inventory 100 Cr Inventory 120
Dr Bank 150 Dr Bank 210

Cr Sales 150 Cr Sales 210
(intra-group sale of inventory to Subsidiary (Sale of 80% of the inventory to an external

company) entity – therefore R30 inventory still on hand)
MARK-UP ON COST = 50%
FROM A GROUP PERSPECTIVE, only the “EXTERNAL” transactions should be

reflected in the consolidated financial statements. Therefore, from a GROUP
PERSPECTIVE, the original purchase of the inventory and subsequent sale
should appear as follows:
Dr Inventory 100
Cr Bank 100
(Original purchase of inventory from external company)
80% of the inventory was SOLD. The

sale must therefore reflect the reduction
of inventory at the cost to the group (ie
Dr Cost of Sales 80 cost paid to external entity) and not at
Cr Inventory 80 the intra-group cost (S’s costs)
Dr Bank 210
Cr Sales 210
Sale of 80% of the inventory to an external entity.


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On consolidation we simply ADD 2 sets of financial statements (P + S).

By adding the transactions for the sale of inventory of both P and S one would
not achieve a set of records reflecting the sale of inventory from the perspective
of single economic entity. Instead, the sales (sales of P + S), cost of sales (P +
S) and inventory would be overstated.
It is therefore necessary to process a pro-forma in order to achieve the GROUP

VIEW above (perspective of a single economic entity).
The journal entries that should be passed should reverse P’s and S’s entries, and
instead reflect the entries required from a group perspective. When aggregated,
the journal entry required to obtain this perspective, is as follows:
Reversing out intra-group sale AND

Dr Sales 150 unearned profit
Cr Cost of Sales 140
Cr Inventory 10 Reducing “overstated”
inventory in Subsidiary to
reflect GROUP inventory
Due to change in carrying

amount of inventory
Dr Deferred Tax 3
Cr Tax Expense 3
Corresponding decrease in
d tax through statement of
comprehensive income
OR OTHERWISE STATED AS FOLLOWS:
Dr Sales 150
Cr Cost of Sales 150
(Reversal of intra-group sale for disclosure)
Dr Cost of Sales 10
Cr Inventory 10
(Reversal of unearned profit included in “overstated” inventory on hand)
Dr Deferred Tax 3
Cr Tax Expense 3


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 In scenario 1, when all the inventory was still on hand, the unearned profit
in P was R50 and inventory was over-stated by R50
 In scenario 2, none of the inventory was on hand at year end and so there
was no unearned profit in the group. The only journal entry that was
required was one for disclosure.
 In scenario 3, only 80% of the inventory was sold to an external entity,
therefore only 80% of the unearned profit was realised (ie R40 was
realised), the remaining 20% of the inventory was therefore still overstated
by unearned profit.
THEREFORE, IT IS IMPORTANT THAT YOU UNDERSTAND THAT THE

ONLY UNEARNED PROFIT IN THE GROUP IS THAT PROFIT STILL
INCLUDED IN THE INVENTORY AMOUNT ON HAND (ie the inventory that
has not yet been sold).
 This implies that R10 still remains “unearned” and the inventory is
therefore also still overstated by R10.
SCENARIO 4:
 Presume that SCENARIO 3 occurred last year (ie. S had R30 inventory
(bought from P) on hand at the end of the year).
 The R30 of inventory on hand at the end of the year was overstated by
R10 (unearned profit – see scenario 3).
 Therefore P reflected a profit of R10 in its’ financial statements at the end

of last year. From a GROUP perspective, the profit was UNEARNED at
the time and was therefore reversed through a pro-forma.
 The pro-forma journal entries REVERSED these UNEARNED and

OVERSTATED amounts for GROUP purposes.
In the current year, the inventory of R30 was finally sold and therefore from a
GROUP perspective, the profit reflected in P last year, was only EARNED in the
current year.
WHAT TO DO?
Firstly, we should repeat last year’s pro-forma, reversing out last-year’s profit in P
[as this had not been EARNED by the GROUP at the time.]
1. Dr Retained earnings (last year in Cost of Sales) 10

Cr Inventory 10


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Secondly, we should process the journal entry showing that this profit was in fact
EARNED by the GROUP in the current year (through eventual sale of the
inventory on hand).
Dr inventory in this situation to reverse out the

2. Dr Inventory 10 Credit to inventory that was processed above, as
this inventory has been sold and no longer exists
Cr Cost of Sales (Net Income) 10

Inventory on hand (in prior year) was sold,
from a group perspective, in the current
year. Therefore unearned profit in prior
year was actually earned in current year.
ALTERNATIVELY COULD PROCESS 1 PRO-FORMA JOURNAL ENTRY

(combination of the above 2)
Reversal of prior year profits earned by H, but
unearned from a GROUP perspective.
Dr Retained earnings (last year in Cost of Sales) 10
Cr Cost of Sales 10
Inventory on hand (in prior year) was sold,
from a group perspective, in the current
year. Therefore unearned profit in prior year
was actually earned in current year.
The tax entries relating to this movement of profits from last year to this
year ALSO need to be processed.
Dr Tax Expense 3
Cr Retained earnings (last year’s tax expense) 3


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Example 7: Intercompany sale of non-depreciable asset

Sale of land from parent company to subsidiary company (Downstream)
On 1 January 20x1 P Limited sold land costing R20 000 to S Limited for
R30 000. Assume there is no capital gains tax.

Prepare consolidating journal entries to record the above transaction for the
years ended 31 December 20x1 and 20x2 if P Limited owns 100% of the ordinary
shares of S Limited
Solution:
20x1 Dr Cr
Dec 31 Profit on sale of land 10 000
Land 10 000
20x2
Dec 31 Retained earnings 10 000
Land 10 000


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THE BUSINESS COMBINATION TRANSACTION (IFRS 3 par. 4)
There are several steps (referred to as the acquisition method) involved when
accounting for a transaction involving a business combination. These are as
follows:
1. Identifying the acquirer (which entity obtains control)

2. Determining the date of acquisition (date that the parent obtains control)
3. Recognition and measurement of:
a. the identifiable assets acquired and liabilities assumed;
b. any non-controlling interest in the acquiree (subsidiary) and;
c. goodwill acquired in the business combination or a gain from a
bargain purchase
Recognition and Measurement of identifiable assets acquired and liabilities

assumed
6.1. Initial measurement (IFRS 3 para 10 – 12)

Identifiable assets and liabilities should be recognised and measured at their fair
value at the date of acquisition, provided they satisfy the recognition criteria for
assets and liabilities per the “framework for the preparation and presentation of
financial statements”.
Recall the recognition criteria required for assets and liabilities per the framework
(par. 4.38) as follows:
1. it must be probable that there will be an inflow (for assets) and an outflow
(for liabilities) of future economic benefits
2. the cost of the asset or amount to be settled for the liability can be reliably
measured.
At acquisition date, the cost / amount to be settled of the assets acquired and
liabilities assumed is the fair value, as the buyer (investor) pays for the shares (or
assets and liabilities) at fair value.
To the extent that assets or liabilities fail to satisfy the recognition criteria, they
will not be recognised separately and will instead result in a consequent
increase/decrease in the amount of goodwill recognised (see later section on
goodwill). Recall that goodwill is defined per IFRS 3 as the future economic
benefits arising from assets that are not capable of being individually
identified and separately recognised
It frequently happens that the fair values placed on current and non-current assets
and liabilities of the subsidiary by the directors of the parent company will differ
from the values recorded in the accounting records of the subsidiary. The
consequential effects of these differences must be considered in the preparation of


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consolidated financial statements if the revaluations are not incorporated in the

records of the subsidiary.
6.2 Subsequent measurement (IFRS 3, par. 54)

In general, assets acquired and liabilities assumed in a business combination
should subsequently be measured in accordance with applicable IFRSs for those
items.
Example 8: Company purchases only assets and assumes liabilities of a

business.
On 1 January 20X3 P Limited purchased S Limited’s assets and liabilities for an

amount of R210. The fair value of the land & buildings amounted to R350 and
other assets to R25. The fair value of the liabilities was estimated to be R200.

AT 31 DECEMBER 20X2
P Ltd S Ltd
R R
ASSETS
Land & buildings 1 000 300
Other assets 90 20
1 090 320
EQUITY AND LIABILITIES
Other liabilities 100 200
1 090 320
Required:
1. Prepare the journal entry in P Limited’s books to record the

abovementioned transaction.
2. Prepare separate Statement of Financial Position for P Limited directly after
accounting for this transaction.
3. Discuss the effect of the transaction on the group financial statements.
4. In which ways does this transaction differ to an acquisition of shares?


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Part 1
Dr Land & buildings 350

Dr Other assets 25
Cr Liabilities 200
Cr Accounts payable 210
Dr Goodwill 35
Purchase of assets and liabilities of S Limited at fair value
Part 2

AT 31 DECEMBER 20X2
P Ltd
R
ASSETS
Land & buildings 1 000
Other assets 90
1 090
Share capital 800
Other liabilities 100
1 090
AT 1 January 20X3
P Ltd
R
ASSETS
Land & buildings (1000P + 350”S”) 1350
Other assets (90P + 25”S”) 115
Goodwill 35
1500
Share capital (800P) 800
Other liabilities (100P 210 +200”S”) 510
1500
Part 3
As P Ltd purchased actual assets and liabilities, it must recognise them in its
(separate) financial statements. However, as the assets acquired and liabilities
assumed constitute a business, IFRS 3 requires all assets and liabilities to be
measure at fair value and goodwill/bargain purchase gain is considered. There is
goodwill and so that is also recognised.


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It is important to note that had this not been the purchase of a business, the
purchase price would have been allocated to the different assets and liabilities
purchased (as, e.g., IAS 16 requires cost to be used).
Part 4
This transaction represents an actual purchase of assets and liabilities between a
buyer and a seller. BUT, as the business of S has been acquired by P and will be
run by P in future, P will include the assets and liabilities acquired in its own
separate financial statements but in accordance with IFRS 3.
With a purchase of shares, S would continue as a separate legal entity and P

would be the majority shareholder (owner). P would also control the assets and
liabilities but control is obtained through the ownership of shares in such a case. P
would only show an “Investment in S” as an asset in its own separate financial
statements AND present consolidated financial statements which reflect all the
assets and liabilities under the control of the group.


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Example 9: Difference in carrying value and fair value of a subsidiary asset

S Limited.
S LIMITED
STATEMENT OF FINANCIAL POSITION AT 31 DECEMBER 20X1
Land 25
Net assets 5
30
Share capital 20
30
P LIMITED
Land 0
Net assets 150
150
Share capital 100

150
Assume that the consideration paid for the shares in S Limited was as follows:
(a) R30, where the fair value of land is considered to be R25
(b) R45, where the fair value of land is considered to be R40
(c) R25, where the fair value of land is considered to be R20
All other assets acquired and liabilities assumed in S limited are at fair value. . S
Limited intends to recover the land through sale. The CGT inclusion rate is 50%
and the corporate tax rate is 28%.
You are required to
For each scenario:
1. prepare the consolidating journal entries required at acquisition in respect of

points (b) and (c) above
2. prepare the consolidated trial balance at 1 January 20X2.


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Solution
Scenario (a)
1. Consolidating journal entries

Dr Cr
Share capital 20
Investment in S 30
Reversal of intragroup purchase of shares
2. Consolidated trial balance as at 1 January 20X2
Consolidated Consolidated
Dr Cr Dr Cr

Retained earnings 50 10 10 50
150 30 150
Investments in S 30 30 -
Land - 25 25
Net assets 120 5 125
150 30 150
Workings:
Share capital 20
Represents net identifiable assets of S (OE = A-L) 30
Goodwill 0


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Scenario (b)
Dr Cr
Share capital 20
Land 15 J entry normally
processed
Goodwill 2.1
DT 2.1
Investment in S 45
At acquisition J/E
Dr Cr Dr Cr

Retained earnings 50 10 10 50
Deferred tax 2.1 2.1
150 30 152.1
Investments in S 45 45 0 0
Land - 25 15 40
Goodwill - 2.1 2.1
150 30 152.1
Workings:
Share capital 20
Land undervalued 15
Deferred tax on revaluation (2.1)
Represents net identifiable assets of S (OE = A-L) 42.9
Goodwill 2.1


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Scenario (c)
Dr Cr
Share capital 20
Retained earnings 10 J entry normally
Land 5 processed
Bargain purchase gain (P/L) 0.7
DT 0.7
Investment in S 25
At acquisition J/E
Dr Cr Dr Cr
150 30
Investments in S 25
Land - 25
Net assets 125 5
150 30
Workings:
Share capital 20
Land overvalued (5)
Deferred tax on land 0.7
Bargain purchase gain (P&L) 0.7
Example 10: Revaluation of an asset in a subsidiary prior to acquisition date
Same information as in Example 9 scenario (b).


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Assume that the revaluation of the land of S Limited to fair value was processed in
the accounting records of S Limited before acquisition date.
S LIMITED
Land 40
Other assets 5
45
Share capital 20
Revaluation surplus 12.9
Deferred tax 2.1
45
1. prepare the consolidating journal entries required at acquisition

2. prepare the consolidated statement of financial position at 1 January 20X2.
SOLUTION

Dr Cr
Share capital 20
Goodwill 2.1
Investment in S 45
At acquisition consolidating journal entry
2. CONSOLIDATED STATEMENT OF FINANCIAL POSITION AT 1 JANUARY 20X2

R
ASSETS
Land (0P + 40 S) 40
Goodwill 2.1
Other assets (150P + 5S – 45) 110
152.1
Share capital (1000P + 20 S – 20) 100
Retained earnings (50P + 10 S – 10) 50
Revaluation surplus (0P + 12.9S – 12.9) 0
Deferred tax (OP + 2.1S ) 2.1
152.1


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Workings:
Share capital 20
Goodwill 2.1
REVALUATION OF DEPRECIABLE ASSETS
When a depreciable asset of the subsidiary is revalued by the parent company at

acquisition, it is necessary for the parent company to assess the remaining useful
life of the asset and to reflect the depreciation in the consolidated financial
statements based on this estimate. As the subsidiary might not change the asset’s
value in its own records (e.g. if measure the asset on the cost model) the
depreciation charge from the subsidiary will need to be adjusted on consolidation
to reflect the depreciation from the perspective of the group.
The fair value of the asset at the date of acquisition is the cost of the asset to the
group. Consequently, any accumulated depreciation processed before the date of
acquisition by the subsidiary, must be reversed at acquisition.
Example 11A: Revaluation of depreciable assets at acquisition
S LIMITED
Plant 40
Cost 80
Accumulated depreciation 40
Other net assets 110
150
Share capital 100

150


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P LIMITED
Other net assets 460
460
Share capital 300

460
On 1 January 20X2 P Limited acquired 100% of the share capital of S Limited.

Plant was considered to have a fair value at the date of acquisition of R60. The
estimated remaining useful life of the plant was agreed to be five years. This is
also the estimate of the directors of S Limited. The applicable tax rate is 30%.

P S P S

Retained earnings beginning of year 185 68 160 50
Profit before tax and depreciation 60 48 40 38
Accumulated depreciation - 56 - 48
545 272 500 236
Plant, cost - 80 - 80
Depreciation - 8 - 8
Taxation 23 16 15 12
Investment in S Limited 164 - 164 -
Other net assets 358 168 321 136
545 272 500 236
a) Prepare the consolidating journal entries for 20X2.

b) Prepare the consolidating journal entries for 20X3.
c) Prepare consolidated financial statements for 20X2 and 20X3


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Solution
Part a
Consolidating journal entries 20X2
Dr Share Capital 100
Dr Retained earnings 50
Dr Plant (FV – carrying value) 20
Cr Deferred Tax 6
Cr Investment in S 164
At acquisition journal
Dr Accumulated depreciation plant 40

Cr Plant 40
Reversal of accumulated depreciation in S at acquisition
Dr Depreciation 4
Cr Accumulated depreciation 4
Additional depreciation on consolidation during the current year
Dr Deferred Tax 1.2
Cr Tax expense 1.2
Related taxation in respect of additional depreciation processed
Part b
Consolidating journal entries 20X3
*The at acquisition journal has been ignored as it is the same as (a)
Dr Depreciation Retained Earnings 4

Cr Accumulated depreciation plant 4
Dr Deferred tax 1.2

Cr Tax expense Retained earnings 1.2
(Write same J/E as last year but replace all income statement line items with
‘retained earnings’
Correction of opening retained earnings as at 1 January 20X3
Dr Accumulated depreciation plant 40

Cr Plant 40
Reversal of accumulated depreciation in S at acquisition
Dr Depreciation 4
Cr Accumulated depreciation plant 4
Additional depreciation on consolidation during the current period
1.2


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Dr Deferred tax
Cr Tax expense 1.2
Related taxation in respect of additional depreciation processed
Part c
CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME FOR THE PERIODS
ENDED
31/12/X3 31/12/X2
Profit before tax (60P + 48S - 8S -4) 96 66

Taxation (23P + 16S - 1.2) (37.8) (25.8)
Total comprehensive income 58.2 40.2

31/12/X3 31/12/X2
ASSETS
Plant at carrying value (0P + (80-40)S + 20 - 8 – 4 -8 -4) 36 48
Net assets (358P + 164P + 168 S – 164) 526 457
562 505
Equity
Share capital (300P + 100S – 100) 300 300
Retained earnings (185P +68S – 50 -4 +1.2 + 58.2 (SOCI)) 258.4 200.2
Non-current liabilities
Deferred tax (-6 +1.2 + 1.2) 3.6 4.8
562 505
Workings
Analysis of equity of S for 31/12/X2
At date of acquisition of shares P acquired 100%

Share capital 100
Plant (FV – carrying value) 20
Deferred tax (20*0.30) (6)
Current year
Profits for the year (38-8) 30
Taxation (12)
Additional depreciation (20/5) (4)
Deferred tax 1.2
15.2


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Analysis of equity of S for 31/12/X3

Share capital 100
Plant 20
-
Post-acquisition to beginning of year

Depreciation (20 / 5)*1yr (4)
Deferred Tax (20 / 5 ) * 30% 1.2
15.2
Current year
Taxation (16)
Depreciation (8 S + 4 extra dep) (12)
Deferred Tax (4)*30% 1.2
21.2
Example 11B: Subsequent sale of depreciable asset
Assume the same information as per Example 9A, however the plant is sold on 1
January 20X4 for
(i) R24; (S Limited did not record any profit on sale, i.e. CA = Proceeds);
(ii) R40 (S Limited recorded a profit on sale of R16)
The retained earning balance for S Limited as at 1 January 20X4 was R90 and
the profit before tax for the year amounted to R60, excluding profit on sale of
plant. Tax rate remains as 30%.
Required
a) prepare the analysis of equity of S for 20x4 for (i)
b) prepare consolidating journal entries for (i) and (ii)
c) prepare the consolidating journal entries for future years, after the plant is
sold.


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SOLUTION
(i) Analysis of equity as at 31/12/X4

Share capital 100
Plant 20
-
Post-acquisition to beginning of year

Increase in retained earnings (90-50) 40
Depreciation (4*2yrs) (8)
Deferred Tax 2.4
34.4
Current year
Profits for the year (60-18 tax) 42
Depreciation (4)
Deferred tax 1.2
39.2
b)
(i) Plant sold on 01/01/X4 for R24
Sub’s value + Adjustment = Group’s value

1/1/20x2 40 /5 20 /5 60 /5
Dep (8) (4) (12)
31/12/20x2 32 /4 16 /4 48 /4
Dep (8) (4) (12)
31/12/20x3 24 /3 12 /3 36 /3
Proceeds on sale (24) (24)
(Profit) / Loss 0 (12) 12
i.e. is a loss from the group perspective as sold for R24 but has a CA of R36.
Notice this loss is equal to the Adjustment column above.


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Share capital 100

Retained Earnings 50
1 Plant 20
Deferred Tax 6
Investment in S 164
2 Accumulated depreciation - plant 40

Plant 40
Retained Earnings 5.6

3 Deferred Tax 2.4
Accumulated depreciation 8
Adjustment of opening retained earnings as at 1 January 20X4
Dr Loss on sale 12
Cr Plant 12
Elimination of at acquisition depreciable asset upon disposal
Dr Deferred tax (12*30%) 3.6

Cr Tax expense 3.6
Deferred tax effects of sale
(ii) Plant sold on 01/01/X4 for R40

Journals 1 to 3 remain the same
Dr Profit on sale 12
Cr Plant 12
Elimination of at acquisition depreciable asset upon disposal and
correction of group profit
Dr Deferred tax 3.6

Cr Tax expense 3.6
Deferred tax effects of sale
S Limited recorded a profit of R16 in their separate financial statements. However

from the group’s perspective the CA before sale is R36 and therefore there is only
a R4 profit from the group perspective. Therefore the profit on sale of R16,
processed by the sub, needs to be reduced to only R4. Notice that the above
schedule’s adjustment column will show the adjustment that needs to be made
(R12).


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c)
Future years (after plant is sold for R40)
Journals 1 and 3 remains the same, even though the asset is no longer present in
the group.
Dr Profit on sale Retained earnings 12
Cr Plant 12
Dr Deferred tax 3.6
Cr Tax expense Retained earnings 3.6
Elimination of at acquisition depreciable asset, correction of opening

retained earnings
INTANGIBLE ASSETS MEASURED AT ACQUISITION DATE
Recognition of intangibles not previously recognised in subsidiary
In terms of IAS 38 par. 8, an intangible asset is an identifiable non-monetary

asset without physical substance.
An asset meets the identifiably criterion per IAS 38 par. 12, when it:
(a) is separable, i.e. is capable of being separated or divided from the entity
and sold, transferred, licensed, rented or exchanged, even if the acquirer
(parent) does not intend to sell, license or otherwise exchange it.; or
(b) arises from contractual or other legal rights, regardless of whether those
rights are transferable or separable from the entity or from other rights
and obligations for example, if a subsidiary owns and operates a nuclear
power plant, the licence to operate that power plant is an intangible
asset that meets the contractual-legal criterion for recognition separately
from goodwill, even if the parent cannot sell or transfer it separately from
the acquired power plant.
Refer to IFRS 3 par. B33 and B34.
Internally generated goodwill therefore is NOT an intangible asset as it is not

separable and it does not arise from a contractual right. Internally generated
goodwill is not identifiable. (IAS 38, para 49).
Examples of intangible assets include trademarks (contractual/legal right),

internet domain names (contractual/legal right), licences (contractual/legal right),
customer lists (separable) and databases (separable).
In terms of the framework for the preparation and presentation of financial

statements, an item that meets the definition of an asset should be recognised if:
(a) it is probable that any future economic benefit associated with the item
will flow to the entity; and


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(b) the item has a cost that can be measured with reliability
In terms of IAS 38, internally generated intangible assets can only be recognised
if the development criteria for intangibles per IAS 38 par. 57 are met. The
reason for this, is that it is only when these criteria are met that the criteria for the
recognition of assets (as stated above) are met.
The fair value of an asset is the price that would be received to sell the asset in
an orderly transaction between market participants at the measurement date
(IFRS 13 par. 9). The fair value of the intangible asset reflects market
expectations about the likelihood (probability) that the future economic benefits
will flow to the entity. In other words, provided that the fair value can be
determined, the usual recognition criterion is always considered to be satisfied
for intangible assets acquired in a business combination (IAS 38 par. 33).
Example 12: Intangible asset developed in a subsidiary
P Ltd acquired 100% of the shares of S Ltd on 1 January 20X3 for R145. S Ltd
was involved in developing a patent, however the recognition criteria for the
patent had not been met and therefore S Ltd had not recognised an intangible
asset. P determined that the fair value of the patent at the date of acquisition
was R30. Assume no amortisation on patent for year ended 31 December 20X2.
SUMMARISED TRIAL BALANCE AS AT 31 DECEMBER 20X3

P Ltd S Ltd
R R
Land & buildings 1 000 300

Other assets 185 30
Share capital (800) (100)
Retained earnings as at 31/12/X2 (190) (20)
Profit for the year (50) (10)
Other liabilities (145) (200)
Required
Prepare the consolidated statement of Financial Position for the year ended
31 December 20X3.


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Solution

AT 31 DECEMBER 20X3
R
ASSETS
Land & buildings ( 1000 P + 300 S) 1 300
Goodwill 4
Patent 30
Other assets (185 P + 30 S - 145) 70
1 404
Share capital ( 800P + 100 S – 100) 800
Retained earnings (190 P + 20 S – 20 +50P + 10 S) 250
Other liabilities (145P + 200 S) 345
Deferred tax 9
1 404
Workings:
Share capital 100
Patent 30
Deferred tax on patent (9)
Goodwill 4
Current year
RECOGNITION OF CONTINGENT LIABILITIES
AS 37 par. 10 defines a contingent liability as:
(a) a possible obligation that arises from past events and whose existence will
be confirmed only by the occurrence or non-occurrence of one or more
uncertain future events not wholly within the control of the entity; or
(b) a present obligation that arises from past events but is not recognised
because:
 it is not probable that an outflow of resources embodying economic
benefits will be required to settle the obligation; or


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 the amount of the obligation cannot be measured with sufficient reliability.
At acquisition date, the acquirer shall recognise a contingent liability assumed in

a business combination if it is a present obligation that arises from past events
and its fair value can be measured reliably (IFRS 3 par. 23). Possible
obligations are not recognised (IFRS 3 BC275) because they do not meet the
definition of a liability.
Contrary to IAS 37, the acquirer recognises a contingent liability assumed in a

business combination at the acquisition date even if it is not probable that an
outflow of resources embodying economic benefits will be required to settle the
obligation. This is because, at acquisition, if the contingent liability is a present
obligation and the fair value of the contingent liability can be determined, the
requirements for recognition are met (see explanation below).
The fair value of a contingent liability is the amount that a third party would
charge to assume the obligation. That amount would reflect all expectations
about possible cash flows and the likelihood of any payment having to be made.
Therefore, the calculation of the fair value takes into account the probability of an
outflow of resources occurring and is thus a reliable measurement of the
obligation (IFRS 3 BC272).
As a result, at acquisition, the contingent liability meets the recognition and

measurement principles of a liability and is therefore recognised separately in a
business combination.
Example 13: Recognition and measurement of contingent liabilities
A Ltd acquired 100% of Z Ltd. At acquisition all identifiable net assets were
considered to be at fair value with the exception of the following:
Z Ltd had two contingent liabilities disclosed in the notes to their separate
financial statements:
1. Z Limited was sued by Mr Dlamini for sale of faulty products. The outcome
of the court hearing will only be established after year end. The lawyers are
confident that Z Limited will win the case. A contingent liability of R40 000
was disclosed.
2. Z Limited was sued by Mr Fitzgerald, a former director, for unlawful
dismissal. According to labour law, Mr Fitzgerald should have been
compensated. The court has not yet decided on the compensation amount,
but Z Limited has disclosed an amount of R30 000. There is an 80%
chance that Z Limited will have to pay the amount disclosed. An insurance
company will charge Z Limited R25 000 to assume the liability.


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Required
Determine (with reasons) how each of the above contingent liabilities should be
measured and disclosed in the group financial statements of A Limited at the
date of acquisition.
Solution:
1. The first contingent liability is not a present obligation (it is a possible
obligation only) as the lawyers are confident that Z Limited will win the case
(IAS 37 para 16). As there is no present obligation, Z Limited will not
recognise this as a separate liability in the group financial statements instead
the contingent liability will continue to be disclosed at R40 000 in the notes to
the consolidated statements.
2. The second contingent liability described above is a present obligation as the
former director was unlawfully dismissed. His dismissal gave rise to the
obligation according to the labour law. However, the amount of the obligation
was uncertain and Z Limited should have recognised a provision. An amount
of R25 000 should be recognised as a liability in the group financial
statements as this represents the fair value of the liability (the amount that a
third party would charge to assume the liability). No further disclosure
relating to the contingent liability would be required. However, the liability
would need to be recognised in terms of IAS 37, par. 84-87 in the
consolidated financial statements.
Question:
Would the contingent liability relating to Mr Dlamini be recognised as a provision
if the lawyers had been of the opinion that Z Limited would lose the case? Refer
to IAS 37 par. 15 and 16.
________________________________________________________________
________________________________________________________________
________________________________________________________________
________________________________________________________________
Solution: If the lawyers had been of the opinion that Z Limited would lose the
case, the contingent liability would have to be recognised on consolidation as in
that case it would be more likely than not that a present obligation existed (IAS
37 para 16).


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Example 14: Recognition and measurement of contingent liabilities

On 1 January 20X1 P Limited purchased 100% of S Limited’s shares for R400.
At acquisition date all net identifiable assets were considered to be fairly valued.
S Limited was in the middle of a legal dispute, the outcome was contingent on a
future court battle scheduled for later in 20X1. S Limited’s lawyers have indicated
that they believe that S Limited will lose the court case and estimated fair value
of the contingent liability at acquisition to be R100.
S Limited as at 31 December 20X0 (extract from SoFP)

Share capital 300
Assume SARS will not grant an allowance for this contingency when/if the
amount is finally settled. The R100 was paid in the following year.
Required
Prepare the ‘at acquisition’ consolidating journal entry
Solution
Dr Share capital 300
Dr Retained earnings 150
Cr Legal provision 100
Cr Investment in S Ltd 400
Dr Goodwill 50
At acquisition consolidation journal
The tax base of the contingent liability is calculated at the carrying amount minus
the amount deductible for taxation in the future. There is no amount deductible in
the future therefore the tax base equals the carrying amount at acquisition.
INVESTMENT PROPERTY
Example 15: Investment Property
P Ltd acquired 100% of S Ltd on 31 December 20X1 for R500 when the share
capital was R300 and the retained earnings in S Ltd was R150. All net
identifiable assets were considered to be at fair value at that date except for an
investment property with a carrying amount of R50 and a fair value of R70. S Ltd
accounts for investment property on the cost model, P Ltd accounts for
investment property on the fair value model.
The remaining useful life of the property on 31 December 20X1 is estimated by S
to be 5 years. The fair value of the property at 31 December 20X3 is R90 (20X2:
R85).
Ignore tax.

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Trial balance as at 31 December 20X3 P Ltd S Ltd

Credit balances in brackets
Share capital (500) (300)
Retained earnings (200) (250)
Profit for the year (60) (80)
Property, plant and equipment 485 390
Investment property - 30
Other net assets 275 200
Required:
1. Prepare the consolidating journal entries required for the year ended 31
December 20X3.
2. Prepare the consolidated statement of changes in equity for the year
ended 31 December 20X3.
3. Calculate the consolidated profit for the year ended 31 December 20X3.
Solution:
1. Consolidation journal entries
Dr- Share capital 300

Dr- Retained earnings 150
Dr- Investment property 20
Dr- Goodwill 30
Cr- Investment in S 500
2 Dr- Accumulated 10
depreciation on investment
property
Cr- Retained earnings 10
3 Dr- Investment property 15

Cr- Retained earnings 15
Adjustment of investment property to affect
group accounting policy in the prior years
4 Dr- Accumulated 10
depreciation on investment
property
Cr- Depreciation 10
5 Dr- Investment property 5

Cr- FV Adjustment (P&L) 5
Adjustment of investment property to affect


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group accounting policy in the current year
Please note:
The at-acquisition journal entry relating to the set-off of accumulated depreciation
of the investment property against its cost should also be done if sufficient
information is provided.
2. Consolidated statement of changes in equity for the year ended 31 December

20X3
Share capital Retained
earnings
Opening balance 500
* 325
Total comprehensive - ^ 155
income
Closing balance 500 480
* (200P + 125 (working below))
^ (60P + 95 (working below))
3. Consolidated profit for the year:


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Workings:
1. Analysis of equity of S Ltd
At date of acquisition of shares (31/12/01) P acquired

100%
Share capital 300
Investment property (70 – 50) 20
Represents net identifiable assets of S (OE=A-L) from 470
perspective of the group
Consideration paid (Investment in S) 500
Goodwill 30
Post-acquisition to beginning of the year

Retained earnings movement (250-150) 100
Reversal of depreciation processed by S on investment 10
property
FV adjustment of investment property from group perspective 15
125
Current year
Profit for the year 80
Reversal of depreciation processed by S on investment 10
property
FV adjustment of investment property from group perspective 5
95
Example 16: Measuring the consideration transferred in a business

combination
On 1 January 20X7, P acquired 100% of the shares in S when the share capital
was R100 000 and the retained earnings was R50 000.
P paid for the shares with the following consideration:
1. R100 000 immediately in cash

2. Issue of 5 000 “P” shares. The market price of the shares on 1 January 20X7
was R5.40 each.
3. A piece of land with a book value of R20 000, but a fair value on 1 January
20X7 of R35 000.
Ignore taxation
Assume that the shares in S were purchased from outside the group.


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Required
a) calculate the consideration transferred on 1 January 20X7

b) prepare the journal entries on 1 January 20X7 in the separate financial
statements of P
c) prepare the “at acquisition” consolidating journal entry required
Solution
a) Consideration transferred
Cash R100 000

Equity Interests issued (5 000 x R5.40) R27 000
Land R35 000
Total consideration transferred R162 000
b) Journal entries in P Limited’s records
Dr Investment in S Ltd 162 000

Cr Bank 100 000
Cr Share Capital 27 000
Cr Land 20 000
Cr Profit on land 15 000
c) Consolidation “at acquisition” journal entry
Dr Share capital 100 000

Dr Retained earnings 50 000
Dr Goodwill 12 000
Cr Investment in S Ltd 162 000
Will this transaction be reflected in the separate financial statements in S?
_No, as the consideration was transferred to the previous owners of S Ltd (for
example the previous human beings that owned S Ltd before the sale of shares
transaction. This is no different to when P Ltd only pays cash for shares in S Ltd
– who actually holds that cash? The previous shareholders and hence S Ltd is
unaffected by sales of its shares after it has issued them.
__________________________________________________________


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PARTLY OWNED SUBSIDIARIES
When a subsidiary is not controlled entirely by the parent company (or by

subsidiaries of the parent company), the shareholders outside the group are
known as the non-controlling interests. In their role as members of the
subsidiary company, the non-controlling interest have no concern in the
consolidated financial statements, the most important users of which are the
shareholders or potential shareholders of the parent company.
Non-controlling interest is the equity in a subsidiary not attributable, directly or

indirectly, to a parent (IFRS 3 appendix A).
IFRS 10 par. 22 requires non-controlling interests to be presented in the

consolidated statement of financial position within equity, separately from the
equity of the owners of the parent.
The profit or loss for the period as well as each component of other
comprehensive income is attributed to both the parent and the non-controlling
interests (IFRS 10, par. B94).
The non-controlling interest’s share in the equity (net identifiable assets) of the
subsidiary consists of both
 the amount at the date of acquisition and;

 changes in equity since the date of the acquisition.
In other words, they own a percentage of the whole subsidiary’s equity (net
assets).
It is essential to note that non-controlling interests can be measured in one of two

ways at acquisition date, these being (IFRS 3 par. 19):
1. fair value; or
2. the present ownership instruments proportionate share in the recognised
amount of the acquiree’s identifiable net assets
If the non-controlling interests are measured at their proportionate share of

net identifiable assets at acquisition, then the only goodwill that will arise at
acquisition is the goodwill that is paid by the acquirer (the parent company).
If the non-controlling interests are measured at fair value at the date of

acquisition, then the total (100%) goodwill inherent in the subsidiary will be
recognised. The 'full goodwill' option may be elected on a transaction-by-
transaction basis.


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CONSOLIDATION AT ACQUISITION
Example 17: Consolidation at acquisition - Non controlling interest

measured at their proportionate share
S LIMITED
AT 31 DECEMBER 20X1
Net assets 30
30
Share capital (R1 shares) 20

30
P LIMITED
AT 31 DECEMBER 20X1
Net assets 150
150

150

S Limited for
(a) R24
(b) R40
(c) R20
The share capital of S Limited comprises 20 shares.
The net assets of S Limited consists of inventory and accounts receivable which
are considered to be fairly valued.
The non-controlling interests are measured at their proportionate share of the

acquiree’s identifiable net assets.

1. Prepare the at acquisition consolidation journals for (a), (b) and (c).
2. Prepare consolidated statements of financial position at 1 January 20X for
(a), (b) and (c).


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(1) At acquisition consolidation journals
(a)
Dr Share Capital (S) 20
Dr Retained Earnings (S) 10
Cr Investment in S (P) 24
Cr Non-controlling interest 6
(b)
(c)
(2)
P ANS S GROUP
CONSOLIDATED STATEMENTS OF FINANCIAL POSITION
AT 1 JANUARY 20X2
(a) (b) (c)
Share capital 100
Non-controlling interest 6
156
Goodwill -
Net assets 156
156


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Workings:
Analysis of equity
NCI P
Total
(20%) (80%)
At acquisition
a) Share capital 20
30 6 24
Goodwill calculation (as per IFRS 3)

FV of consideration transferred 24
NCI (30 x 20%) 6
30
FV of net assets 30
G/W -
b) Share capital
Retained earnings
Goodwill
Investment in S

FV of consideration transferred
NCI (30 x 20%)
FV of net assets
G/W
c) Share capital
Retained earnings
Bargain purchase gain (P&L)

Investment in S

FV of consideration transferred
NCI (30 x 20%)
FV of net assets


lOMoARcPSD|12066187
Example 18: Consolidation at acquisition - Non controlling interest

measured at fair value
S LIMITED
AT 31 DECEMBER 20X1
Net assets 30
30

30
P LIMITED
AT 31 DECEMBER 20X1
Net assets 150
150

150

S Limited for
(a) R40
(b) R20
The net assets of S Limited consists of inventory and accounts receivable which
are considered to be fairly valued.
The non-controlling interests are measured at fair value at acquisition. The share
price of S Limited’s shares at date of acquisition is R1,80 per share.

1. Prepare the at acquisition consolidation journals for (a) and (b)
2. Prepare consolidated statements of financial position at 1 January 20X2 for
(a) and (b).


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Solution
(1) At acquisition consolidation journals
(a)
Dr Goodwill 17.20
Cr Non-controlling interest 7.2
(b)
*Bargain Purchase gain will be processed to p/l in the year of acquisition. In

subsequent years it will be included in opening retained earnings on the SocIE.
(2)
P ANS S GROUP
AT 01 JANUARY 20X2
(a) (b)
Share capital 100
Non-controlling interest 7.2
157.2
Goodwill 17.2
Net assets 140
157.2


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Workings
Analysis of equity
P
Total NCI (20%)
(80%)
At acquisition
a) Share capital 20
30 6 24
Goodwill 17.20 1.20 16
47.20 7.20 40
Goodwill calculation
FV of consideration 40.00
transferred
NCI (20%x 20sharesx R1.80) 7.20
47.20
FV of net assets 30.00
G/W 17.20
At acquisition
b) Share capital
Retained earnings
Goodwill
FV of consideration
transferred
NCI
FV of net assets


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CONSOLIDATION AFTER ACQUISITION
IFRS 10 par. B88 states that the income and expenses of a subsidiary are
included in full in the consolidated financial statements as from the date when the
investor gains control over the subsidiary.
Paragraph B94 requires non-controlling interests in the profit of consolidated

subsidiaries for the reporting period to be identified and disclosed separately from
the profit attributable to the owners of the parent.
Example 19: Consolidation after acquisition
On 1 January 20X1, P Limited acquired 75% of the shares in S Limited for

R26 000. All the assets were fairly valued.

P S P S
Retained earnings (1 Jan) 22 16 15 12
Profit for the period 18 10 14 8
Dividends received 4,5 - 3 -
94,5 46 82 40
Investment in S Ltd 26 - 26 -
Net assets 56,5 40 46 36
Dividends paid 12 6 10 4
94,5 46 82 40

You are required to

1. Prepare the consolidation journal entries for the years ended 31 December
20X1 and 20X2.
2. Prepare the consolidated financial statements for the year ended
31 December 20X2. Comparatives are required. .


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Solution
(1) Consolidation journal entries
20X1
Dr Goodwill 2
Dr Profit for the year (8 x 25%) 2

NCI Portion of current year’s profit
Dr Dividend received (P) 3

Dr Non controlling interest 1
Cr Dividend paid (S ) 4
Elimination of intragroup transaction and NCI portion
20X2
Correction of opening retained earnings reflecting NCI portion
NCI Portion of current year’s profit
Elimination of intragroup transaction and NCI portion
(2)
20X2 20X1
Other comprehensive income -


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Attributable to:
Owners of the parent 20
Non-controlling interests 2
22

FOR THE YEAR ENDED 31/12/20X2
Attributable
to owners Non-
Share Retained of controlling
capital earnings parent interests Total
Balance at 01/01/X1 50 15 65 - 65
Acquisition of - 8 8
subsidiary
Total comprehensive - 20 20 2 22
income
Dividends - (10) (10) (1) (11)
Balance at 31/12/X1 50 25 75 9 84
Total comprehensive -
income
Dividends -
Balance at 31/12/X2 50

20X2 20X1
ASSETS
Goodwill 2
Net assets 82
84
Equity 84
Share capital 50
Equity attributable to owners of parent 75
84


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Workings:
Analysis of equity of S Limited 31/12/X2

P
Total NCI (25%)
(75%)
At acquisition
a) Share capital 20
32 8 24
Goodwill - - 2
32 8 26
FV of consideration 26
transferred
NCI (32 x 25%) 8
34
FV of net assets 32
Goodwill 2
Post acquisition to beginning of the year

Retained earnings
Current year
Dividends paid


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ELIMINATION OF INTRAGROUP BALANCES AND TRANSACTIONS
The same principles apply to partly owned subsidiaries as to wholly owned

subsidiaries. However, the non-controlling interests’ share of profits is calculated
without eliminating the intragroup transactions. The intragroup transactions are
eliminated when computing group profit for disclosure purposes only, in other
words, the overall profit of the group does not change.
Example 20: Elimination of intragroup transactions
P Limited acquired 80% of the shares in S Limited when it was formed.
TRIAL BALANCES 31 DECEMBER 20X2

P S

Rent received from S Limited 36 -
Administration fee received from S Limited 12 -
Dividends received - S Limited 40 -
Dividends received - other 97 35
Interest received on loan to S Limited 6 -
Loan by P Limited - 58
Current account - P Limited - 37
Trading profit 230 170
1 181 480
Land and buildings 380 -

Investment in S Limited 80 -
Other investments 150 74
Taxation 72 40
Loan to S Limited 58 -
Current account - S Limited 37 -
Dividends paid 140 50
Other expenses 104 70
Other assets 160 246
1 181 480

You are required to
Prepare consolidated financial statements for 20X2.


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Solution

FOR THE YEAR ENDED 31/12/X2
R
Trading profit (230P+170S) 400
Dividends received (97P+35S) 132
Other expenses (104P+70S-6int paid-12 admin paid-36rent paid) (120)
Profit before tax 412
Income tax expense (72P+40S) (112)
Attributable to
Owners of the parent
Non-controlling interest

Attributable
to owners Non-
capital earnings parent interest Total
Total comprehensive
income
Dividends


lOMoARcPSD|12066187

AT 31/12/X2
R
ASSETS
Land and buildings
Investments
Other net assets

Equity
Share capital
Retained earnings
Equity attributable to owners of parent


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DIVIDENDS
The general requirements of IAS 18 are applied in relation to dividend income

received by a parent from its subsidiary and thus dividends received from
subsidiaries should be recognised in profit or loss when the entity’s right to receive
the dividend is established.
Example 21: Dividends
P Limited acquired 80% of the shares in S Limited on 1 January 20X6 for

R500 000. S Limited declared and paid an interim dividend of R10 000 during
June 20X6. S Limited declared a final dividend of R20 000 at the end of
December 20X6.
TRIAL BALANCE AT 31/12/X6 P Limited S Limited

Dr Cr Dr Cr

Retained earnings (1 Jan) 45 25
Profit for the period 200 100
Dividends income 24
Dividends payable 20
Investment in S Ltd 500
Net assets 553 715
Dividends receivable 16
Dividends declared 30
1 069 1 069 745 745
You are required to
Prepare the pro-forma consolidating journal entries to account for the interim and
final dividend declarations by S Limited.
Solution
Dr Cr
NCI (SOFP) 2 000
Dividend income (P) 8 000
Dividends declared (S) 10 000
Interim dividend declared and paid
Final dividend declared
Final dividend owing


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INTRA-GROUP TRADING TRANSACTIONS
Elimination of unearned profit
Downstream Sales
A downstream sale is a sale from the parent company to its subsidiary. The
parent company has earned the “inter-company” profit. The reversal of the
unearned profit on consolidation does NOT affect the analysis of equity as the
profit was earned by the parent and not by the subsidiary.
Example 22
Intercompany sale of inventory by parent company to partially owned subsidiary
company (Downstream sale)
TRIAL BALANCE 31 DECEMBER

P S
20x1 20x2 20x1 20x2

Share capital (R1 shares) R10 000 R10 000 R5 000 R5 000
Retained earnings at beginning of year 3 000 18 000 - 12 000
Profit before tax 25 000 30 000 20 000 35 000
R38 000 R58 000 R25 000 R52 000
Investment in S Limited (4 000 shares) R4 000 R4 000 - -

Inventory 5 000 16 000 R14 000 R25 000
Other assets 19 000 26 000 3 000 13 000
Taxation at 40% 10 000 12 000 8 000 14 000
R38 000 R58 000 R25 000 R52 000
On 1 January 20x1 S Ltd was formed. P Ltd subscribed for 80% of the share
capital. During 20x1 H Ltd sold inventory to S Ltd for R50 000, being cost to P Ltd
plus 25%. On the same basis sales during 20x2 amounted to R75 000. Included
in S Ltd’s inventory at 31 December 20x1 are purchases from P Ltd of R10 000.
At 31 December 20x2 inventory purchased from P Ltd amounted to R15 000.

Prepare the consolidated journal entries and the consolidated financial
statements for 20x1 and 20x2.


lOMoARcPSD|12066187
WORKINGS:
ANALYSIS OF S LTD AT 31 DECEMBER 20x1
Non-
controlling
Total interests P Ltd
20% 80%
AT DATE OF ACQUISITION (1 JAN 20x1)
Share capital 5,000 1,000 4,000
Retained earnings movement since 0

acquisition
Current Income
Profit before tax 20,000
Taxation -8,000
Non-controlling interest 12,000 2,400 9,600
3400
CONSOLIDATING JOURNAL ENTRIES 20x1

Dr Cr
Share capital 5 000
Non-controlling interest 1 000
Investment in S Ltd 4 000
Sales 50 000
Cost of sales 50 000
Non-controlling interest share of profits 2 400

Profit before tax (Cost of Sales) 2 000

Inventory 2 000
Deferred tax 800

Taxation 800


lOMoARcPSD|12066187
STATEMENT OF COMPREHENSIVE INCOME FOR THE YEAR ENDED

31 DECEMBER 20x1
Revenue [xx – 50 000]

Cost of sales [xx – 50 000+2000]
Profit before tax [25 000 – 2 000 + 20 000] 43 000

Taxation [10 000 – 800 + 8 000] 17 200
Attributable to:
Owners of the parent R23 400
CONSOLIDATED STATEMENT OF CHANGES IN EQUITY FOR THE YEAR

ENDED 31 DECEMBER 20x1
Share Retained Non- Total
capital earnings controlling Equity
interest
Balance 31 December 20x0 10 000 3 000 1 000 14 000

Total comprehensive income for the
period 23 400 2 400 25 800
Balance at 31 December 20x1 R10 000 R26 400 3 400 39 800
CONSOLIDATED STATEMENT OF FINANCIAL POSITION AT 31 DECEMBER 20x1

36 400
Total Equity R39 800
Inventory [5 000 – 2 000 + 14 000] 17 000

Other assets [19 000 + 3 000] 22 000
Deferred tax 800
R39 800


lOMoARcPSD|12066187
ANALYSIS OF S LTD AT 31 DECEMBER 20x2

Total Non- P Ltd
controlling
interests
20% 80%
AT DATE OF ACQUISITION (1 JAN20x1)
Share capital 5,000 1,000 4,000
Retained earnings at beginning of year 12,000 2,400 9,600

less Retained earnings at acquisition -
Current Income
Profit before tax 35,000
Taxation -14,000
Non-controlling interest 21,000 4,200 16,800
7600
CONSOLIDATING JOURNAL ENTRIES 20x2

Dr Cr
Share capital 5 000
Investment in S Ltd 4 000


Taxation 800
Non-controlling interest share of profits 4 200

Sales 75 000
Cost of sales 75 000

Inventory 3 000
Deferred tax 1 200

Taxation 1 200

lOMoARcPSD|12066187
CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME FOR THE

YEAR ENDED 31 DECEMBER 20x2
Profit before tax [30 000 + 2 000 – 3 000 + 35 000] 64 000

Taxation [12 000 + 800 – 1 200 + 14 000] 25 600
Attributable to:
Owners of the parent 34 200
CONSOLIDATED STATEMENT OF CHANGES IN EQUITY FOR THE YEAR

ENDED
31 DECEMBER 20x2
Share Retained Non- Total
capital earnings controlling Equity
interest
Balance at 31 December 20x1
(18 000 – 2 000 + 800 + 9 600) 10 000 26 400 3 400 39 800
Total comprehensive income for 34 200 4 200 38 400
the period
Balance at 31 December 20x2 10 000 R60 600 7 600 R78 200
STATEMENT OF FINANCIAL POSITION AT 31 DECEMBER 20x2

70 600
Total Equity R78 200
Inventory [16 000 - 3 000 + 25 000] 38 000

Other assets [13 000 + 26 000] 39 000
Deferred tax 1 200
R78 200


lOMoARcPSD|12066187
Example 23: Intercompany sale of non-depreciable asset

Sale of land from parent company to subsidiary company (Downstream)
On 1 January 20x1 P Limited sold land costing R20 000 to S Limited for
R30 000. Assume there is no capital gains tax.

Prepare consolidating journal entries to record the above transaction for the
years ended 31 December 20x1 and 20x2 if:
1. P Limited owns 100% of the ordinary shares of S Limited

2. P Limited owns 80% of the ordinary shares of S Limited.
The treatment of the unearned profit on the sale of the land by the parent
company will be the same whether the subsidiary is wholly or partially owned
because this is a downstream sale (no effect on analysis of equity).
20x1 Dr Cr
Dec 31 Profit on sale of land 10 000
Land 10 000
20x2
Dec 31 Retained earnings 10 000
Land 10 000


lOMoARcPSD|12066187
Example 24: Revaluation of non-depreciable asset
S LIMITED
31 DECEMBER 20X1
Land 25
Bank 5
30
Share capital 20
30
P LIMITED
AT 31 DECEMBER 20X1
Net assets 150
150
Share capital 100

150

S Limited for a consideration of:
(a) R24, where the fair value of land is considered to be R25

(b) R40, where the fair value of land is considered to be R40
(c) R20, where the fair value of land is considered to be R20
The CGT inclusion rate is 50% and the corporate tax rate is 28

Prepare the consolidating journal entries and the consolidated statements of

financial position at 1 January 20X2.


lOMoARcPSD|12066187
Solution
Consolidating journal entries
Dr Cr
(a) Share capital 20
Investment in S 24
Non-controlling interest (SOFP) 6
(b)
(c)
P ANS S GROUP
AT 01 JANUARY 20X2
(a) (b) (c)
Share capital 100

Deferred tax -
156
Land and buildings 25

Other net assets 131*
156
* 5S+150P-24paid


lOMoARcPSD|12066187
Workings:
P
Analysis of equity Total NCI (20%)
(80%)
At acquisition
a) Share capital 20
30 6 24
transferred
NCI (30 x 20%) 6
30
FV of net assets 30
G/W -
b) Share capital
Retained earnings
Land
Deferred tax
FV of consideration
transferred
NCI (42.9 X0,20)
FV of net assets
G/W
c) Share capital
Retained earnings
Land
FV of consideration
transferred
NCI (30 X0,20)
FV of net assets


lOMoARcPSD|12066187
Example 25: Revaluation of non-depreciable assets where subsidiary uses

the revaluation model
On 1 January 20X2, P Limited acquired 80% of the ordinary share capital of

S Limited for R40. The retained earnings at acquisition amounted to R10 and all
assets and liabilities were fairly valued except for land which had a fair value of
R15 above its cost of R25.
The summarised trial balances of the two companies at 31 December 20X3 are
as follows:
TRIAL BALANCES AT 31/12/X3 P LIMITED S LIMITED

Dr Cr Dr Cr
Land 50
Bank 149 22
Investment in S 40
Ordinary share capital 100 20
Deferred tax 3.5
Profit for period 24 12
189 189 72 72
S Limited uses the revaluation model in its company accounting records and, at
acquisition, revalued the land to fair value. At 31 December 20X3, S Limited
revalues the land by a further R10.

The corporate tax rate is 28% and the CGT inclusion rate is 50%.
Prepare the consolidated statement of comprehensive income and the

consolidated statement of changes in equity for the year ended 31 December
20X3.


lOMoARcPSD|12066187
Solution
P AND S GROUP
R
Profit for period
Other comprehensive income
Revaluation
Total comprehensive income
Profit for period attributable to

Total comprehensive income attributable to

P AND S GROUP
Ordinary Attributable
share Revaluatio to owners of
capital n surplus RE P NCI Total
R R R R R R
Balance at 100
31/12/X2
TCI -
Balance at 100
31/12/X3


lOMoARcPSD|12066187
Workings
Analysis of equity at 31 December 20X3
NCI P
Total
(20%) (80%)
At acquisition
Share capital 20
42.9 8.58 34.32
Goodwill 4
transferred
NCI (42.9x 20%) 8.58
48.58
FV of net assets 42.9
G/W 5.68
Beginning of year
RE at 1/1/X3
At acquisition
Revaluation surplus at
1/1/X3
At acquisition
Current year
Profit for period
Revaluation surplus


lOMoARcPSD|12066187
REVALUATION OF DEPRECIABLE ASSETS
Example 26: Revaluation of depreciable asset on acquisition
P Ltd acquired 80% of the ordinary shares in S Ltd on 1 March 20X5. Plant was
the only asset not fairly valued at that date and was considered to have a fair value
of R45 500. S Ltd had acquired the plant on 1 March 20X4 when it was
considered that the plant had a useful life of 8 years. P Ltd agreed with the original
estimate of the life of the plant.
TRIAL BALANCE
28 February 20X7 28 February 20X6
P Ltd S Ltd P Ltd S Ltd
Share capital 100 000 40 000 100 000 40 000
Retained earnings 1 March 45 760 11 000 26 560 5 000
Profit before depreciation and tax 42 000 20 000 32 000 16 000
Accumulated depreciation - plant - 18 000 - 12 000
187 760 89 000 158 560 73 000
Plant - 48 000 - 48 000

Investment in S Ltd 37 960 - 37 960 -
Net current assets 133 000 29 400 107 800 15 000
Taxation 16 800 5 600 12 800 4 000
Depreciation – plant - 6 000 - 6 000
187 760 89 000 158 560 73 000

Assume a tax rate of 30%.
You are required to
Prepare the consolidated annual financial statements of the P and S Group for the
years ended 28 February 20X6 and 28 February 20X7.


lOMoARcPSD|12066187
Solution
P AND S GROUP
FOR THE YEAR ENDED 28/02/X7
20X7 20X6
Profit before tax 41 500*
Income tax expense (16 650)#
Total comprehensive income 24 850
Attributable to
Owners of the parent 23 720
Non-controlling interests 1 130
24 850
*32 000P+16 000S-6 000S-500 depr

# 12 800P+4 000S-150 tax on depr

Attributable Non-
Share Retained to owners of controlling
Balance at 01/03/X5 100 000 26 560 126 560 - 126 560
Acquisition of - - - 9 490 9 490
subsidiary
Total comprehensive - 23 720 23 720 1 130 24 850
income
Balance at 28/02/X6 100 000
Total comprehensive -
income
100 000


lOMoARcPSD|12066187
P AND S GROUP
CONSOLIDATED STATEMENT OF FINANCIAL POSITION AT 31 DECEMBER
20X7 20X6
ASSETS
Plant 39 000
- cost 45 500
- accumulated depreciation (6 500)
Net current assets 122 800
161 800
Equity 160 900
Equity attributable to owners of parent 150 280
Non-controlling interests 10 620
Non-current liabilities
Deferred tax 900
161 800
Workings:
Analysis of equity 20X6
Total NCI (20%) P (80%)
At acquisition
Plant 3 500
Deferred tax (1 050)
47 450 9 490 37 960
FV of consideration transferred 37 960
NCI (47 450x 20%) 9 490
47 450
FV of net assets 47 450
Goodwill/ BPG -
Current year
Profit before tax 16 000
Depreciation (6 000)
Taxation (4 000)
Extra depreciation (500)
Deferred tax 150
5 650 1 130 4 520
10 620


lOMoARcPSD|12066187
Analysis of equity 20X7
Total NCI (20%) P (80%)

At acquisition
Plant 3 500
Deferred tax (1 050)
47 450 9 490 37 960
Beginning of year
1/3/x6
- at acquisition
Group depreciation
Deferred tax
Current year
Profit before tax
Depreciation
Taxation
Group depreciation
Deferred tax


lOMoARcPSD|12066187
LOSSES INCURRED BY SUBSIDIARY
Where a subsidiary has incurred losses since acquisition, the parent company may
impair the investment if the impairment indicators suggest that the investment is
impaired.
In order to impair the investment, the parent company must decrease its own
profits, by means of processing the following journal entry in its separate financial
statements:
Dr Impairment loss
Cr Investment in S
On consolidation however, the results of the subsidiary are combined with those of
the parent company and the actual loss is combined with the parent company’s
profit. This will result in a double accounting of the loss unless the impairment in
the parent company’s records is reversed back to income.
Example 27: Losses incurred by subsidiary
P Limited purchased 80% of S Limited on formation on 1 January 20X1 for

R20 000.
The following is an extract from the trial balances of P Limited and S Limited at 31
December 20X2:
P S
Retained earnings 50 000 (5 000)
Profit / (loss) for the period 3 600 (8 000)
At 31 December 20X1, there were indications that the investment was impaired
and the recoverable amount was assessed to be R16 000. At 31 December 20X2,
there are also indications that the carrying amount of the investment is impaired
and the recoverable amount is assessed to be R9 600.
NCI is accounted for on the proportionate basis.
Required:
a) Prepare the necessary consolidating journal entries
b) Prepare the consolidated statement of comprehensive income and consolidated

statement of changes in equity for the year ended 31 December 20X2.


lOMoARcPSD|12066187
Solution 27
Consolidating journal entries
Dr Cr
1. Share capital 25 000
Non-controlling interest (SOFP) 5 000
2. Non-controlling interest (SOFP) 1 000

3. Non-controlling interest (SOFP) 1 600

*Profit for the period 1 600
4. Investment in S 10 400
Workings
Total NCI (20%) P (80%)
At acquisition
Share capital 25
Retained earnings -
25 5 20
NCI 5
25
FV of net assets 25
G/W 0

Increase in retained earnings
Current year
Profit for the year


lOMoARcPSD|12066187

R
Attributable to:
*Non-controlling interest

Attributable
to equity Non-
Share Retained holders of controlling
Balance at 01/01/X2 100 000
Balance at 31/12/X2 100 000


lOMoARcPSD|12066187
INVESTMENT PROPERTY
Example 28
P Limited purchased 80% of S Limited on 1 January 20X1 for R20 000 when the
retained earnings of S Limited was R5 000. All net identifiable assets were
considered to be at fair value at that date, including investment property with a
carrying amount of R4 000. The remaining useful life of the property on
1 January 20X1 was estimated to be 20 years.
Since 1 January 20X1 S Limited leased its investment property to P Limited.

Annual rental income amounted to R1 000 (for both X1 and X2), which was
included in profit for the period.
S Limited accounts for investment property on the fair value model.

P Limited accounts for PPE on the cost model.
The following is an extract from the trial balances of P Limited and S Limited at
31 December 20X2:
Trial balance as at 31 December 20X2 P Ltd S Ltd

Credit balances in brackets
Share capital (100 000) (25 000)
Retained earnings (50 000) (15 000)
Profit for the year (3 600) (8 000)
Property, plant and equipment at carrying amount 10 000 -
Investment property at fair value - 6 000
Investment in S 20 000 -
Included in the profit for the period of S Limited is a fair value adjustment on
investment property of R1 000.
Non-controlling interest is accounted for on the proportionate basis.
Ignore tax.
Required:
1. Prepare the consolidating journal entries required for the year ended
31 December 20X2.
2. Prepare the consolidated statement of financial position and the
consolidated statement of comprehensive income for the year ended
31 December 20X2.


lOMoARcPSD|12066187
Solution:
Debit Credit
Share capital 25
Retained earnings 5
Non controlling interest (SOFP) 6
Investment in S 20
Reclassification of investment property as

property, plant and equipment at acquisition
Prior years’ reversal of fair value adjustment

and accounting for depreciation
Non- controlling interest in prior years profits
Current years’ reversal of fair value

adjustment and accounting for depreciation
Non- controlling interest in current year profits
Elimination of intragroup rent


lOMoARcPSD|12066187
2. Extract from consolidated statement of financial position at

31 December 20X2
R
ASSETS
Property, plant and equipment
Investment property
Investment in S

Share capital
Retained earnings
Non- controlling interest
2. Extract from consolidated statement of comprehensive income for

the year ended 31 December 20X2
R
Other comprehensive income
Attributable to:


lOMoARcPSD|12066187
Workings:
Analysis of equity of S Ltd

At date of acquisition of shares (01/01/X1) Total% NCI (20%) P (80%)
Share capital 25
Retained earnings 5
Total net assets 30 6 24
Calculation of goodwill
NCI 6
26
Total net assets 30
Post acquisition to beginning of the year

Retained earnings
Fair value adjustment (p&l)
Depreciation
Current year
Fair value adjustment (p&l)
Depreciation


lOMoARcPSD|12066187
COMPLEX GROUPS
Example 29
P Ltd acquired
 100% of S1 Ltd on 1 January 20X1 for R140

At the respective dates of acquisition the trial balances of the companies were
as follows:
S1 S2 S3
Share capital 100 50 40
Retained earnings 20 10 15
120 60 55
The following are the trial balances of the companies at 31 December 20X5:
P S1 S2 S3
Retained earnings 1 January 20X5 300 70 30 10
Profit before tax 250 50 25
Dividends received 23
1 073 220 105 50
Investment in subsidiaries 220

Net assets 673 185 85 45
Taxation 100 20 10
Dividends paid 80 15 10
Operating loss 5
1 073 220 105 50

You are required to
Prepare the consolidated statement of financial position as at 31 December 20X5.


lOMoARcPSD|12066187
Solution:
P GROUP
CONSOLIDATED STATEMENT OF FINANCIAL POSITION AT 31 DECEMBER
20X5
ASSETS
Net assets
Goodwill
Investment in subsidiaries

Equity
Share capital
Retained earnings
Non-controlling interests


lOMoARcPSD|12066187
PREFERENCE SHARE CAPITAL
In the calculation of non- controlling interest and the parent’s interest in subsidiary
profits, a subsidiary’s cumulative preference share dividends should be deducted
in full, even though such dividend might not have been declared.
The preference dividend is not attributable to ordinary shareholders and thus this
treatment will ensure that profit relating to preference shares is not erroneously
allocated to ordinary shareholders (parent and non-controlling interest.
Example 30: Preference share capital
S LIMITED
AT 31 DECEMBER 20X1
Net assets 180
180
Ordinary share capital 100

Preference share capital 50
180
P LIMITED
AT 31 DECEMBER 20X1
Net assets 850
850
Ordinary share capital 700

850

S Limited for R104 and 40% of the preference share capital of S Limited for R20.


lOMoARcPSD|12066187
TRIAL BALANCES
31 DECEMBER 20X2
P S
Ordinary share capital 700 100
Preference share capital - 50
1 090 240
Investment in S Limited - ordinary shares 104 -
Investment in S Limited - preference shares 20 -
Net assets 831 209
Dividends paid - ordinary shares 135 25
Dividends paid - preference shares - 6
1 090 240
You are required to
Prepare consolidated financial statements for 20X2.


lOMoARcPSD|12066187
Solution:

R
Attributable to:
Owners of parent

FOR THE YEAR ENDED 31DECEMBER 20X2
Attributable
to owners
Non-
Balance at 01/01/X2 700 000
Acquisition of -
subsidiary
Profit for the period -
Dividends -
Balance at 31/12/X2 700 000

AT 31 DECEMBER 20X2
ASSETS
Net assets

Equity
Ordinary share capital
Retained earnings


lOMoARcPSD|12066187
Workings
Analysis of equity of S-ordinary share capital
Total NCI (20%) P (80%)
At acquisition
Share capital 100
130 26 104
NCI 26
130
FV of net assets 130
G/W 0
Current year
Profit for the year 60
Preference dividend (6)
54 10.8 43.2
Dividend declared (25) (5) (20)
31.8
Analysis of equity of S-preference share capital

Total NCI (60%) P (40%)
At acquisition
Share capital
Investment in S
Current year
Profit for the year
Dividend declared


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consolidation noes financial accounting notes

Accounting 102 (University of KwaZulu-Natal)

Studeersnel wordt niet gesponsord of ondersteund door een hogeschool of universiteit

CONSOLIDATED (GROUP) FINANCIAL STATEMENTS

The following outcomes will be achieved once the above-mentioned Standards

Outcome Financial reporting Professional Focus Tut

Consolidations: page 1 of 103

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Consolidations: page 2 of 103

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Linking back to the conceptual framework

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According to the conceptual framework, the objective of financial reporting is to

Consolidations: page 4 of 103

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Bank 0.1 - 0.1 -

Extract of the statement of financial position Walmart Group

Replaced by the assets and

Consolidations involve the combining the financial statements of two companies

A business is an integrated set of activities (inputs and processes) and assets

Consolidations: page 5 of 103

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A business combination is a transaction or other event in which an acquirer

A contingent consideration is an obligation of the acquirer to transfer additional

Consolidated financial statements are the financial statements of a group in

Control is when an investor is exposed to or has rights to variable returns from

Goodwill is an asset representing the future economic benefits arising from

A group is the parent and its subsidiaries (IFRS 10 appendix A).

Non-controlling interest is the equity in a subsidiary not attributable, directly or

Consolidations: page 6 of 103

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Separate financial statements are those presented by a parent (IAS 27 par.4).

A subsidiary is an entity that is controlled by another entity (IFRS 10).

PARENT COMPANY ACCOUNTING (IAS 27)

Example 1: Investment in shares in the separate financial statements

S Limited declared a dividend of R5 to its shareholder at 31 December 20x1.

You are required to:

Consolidations: page 7 of 103

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2. prepare the journal entry required in the separate financial statements of

In summary, the separate financial statements reflect an investment in S limited at

The purpose of consolidated financial statements is to present the financial

Consolidations: page 8 of 103

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In other words, the investor must have

Normally, in determining whether a company has the above-mentioned ability, it

Exemption from presentation of consolidated financial statements

An entity that is a parent is required to present consolidated financial statements

1. the parent is itself a wholly-owned subsidiary, or is a partially-owned

SCOPE OF IAS 27, IFRS 3 and IFRS 10

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This Standard applies to the preparation and presentation separate financial

The recognition and measurement steps required in accounting for a business

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CONSOLIDATION PROCEDURES (IFRS 10 par. B86)